Enerpac Tool Group Corp (EPAC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you standing by and welcome to the Actuant Corporation third-quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, June 16, 2005.

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, variations (indiscernible) 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 risks due to competitive pricing and operating efficiency, supply chain risks, 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, we are conducting an e-meeting to coincide with the audio conference. If you'd like to view the presentation online, please log onto www. themeetingison.com and go to join as participants and enter meeting number 711569536. (Operator repeats instructions.)

I would now like to turn the conference over to Mr. Robert Arzbaecher, President and Chief Executive Officer of Actuant Corporation. Please go ahead, sir.

Thank you, operator, and good morning to everyone. We are pleased with the third quarter's performance, where we achieved record sales, EBITDA and earnings per share, and we accomplished this with a number of headwinds in a number of our serve markets, namely RV, automotive, and DIY in Europe.

As you will hear, the highlight of the quarter was $28 million of free cash flow, or 135% of net income. The bottom line of EPS was $0.60 a share, up 28% over the prior year and slightly above our guidance. Andy is going to walk you through the third-quarter results and then I will come back and give you a business update and some guidance for the fourth quarter and a first look at fiscal 2006. Andy?

Thanks, Bob. Good morning, everyone.

Actuant had another good quarter, as you can see from this slide. Sales increased 38% over last year to approximately $272 million. This included a full quarter's results from both the key components and Hedley Purvis acquisitions, as well as a few weeks' worth of sales from Hydratight Sweeney.

Given the magnitude of the year-over-year sales declines in auto and RV and overall weakness in Europe, our sales growth as businesses we have owned for over a year ,excluding currency, were down 7%, while year-over-year sales growth at all businesses, excluding currency, was down 1%. This points to the solid growth at current-year acquisitions.

Our operating profit grew 39%, which was slightly better than sales. Our operating profit margin increased 10 basis points from year ago to about 12.9% and EBITDA margins were up 50 basis points. I will provide a little bit more color on margins later on the call.

Our financing costs increased year-over-year as we saw the first full quarter of interest expense under borrowings for the KCI and Hedley Purvis acquisitions. Factoring it all in, our second-quarter diluted EPS was $0.68, which is a 28% improvement over the $0.53 EPS from the third quarter of last year, which excluded last year's bond buyback charge.

The $0.68 for the quarter was a little bit above the high end of our guidance and resulted from slightly higher sales, margins and a lower effective tax rate. The favorable sales variance resulted from strong industrial tool and truck sales as well as the benefit of our few weeks of Hydratight Sweeney sales in the May.

Our margins were favorable due to favorable sales mix. Margins in our industrial tool business, where we had strong growth, are above our overall average.

Our effective tax rate came down this quarter to about 31%, which is in part due to some changes in mix, lower statutory tax rates in Holland, where we have our biggest base outside of the U.S., a lower than average 30% tax rate in the UK, where both of our new bolting businesses are based, the benefit of some NOLs and a downward adjustment of our fiscal 2005 full-year effective tax rate after filing our 2004 return back in May. Relative to last year, our effective tax rate will continue to decline in the fourth quarter, as well as in fiscal 2006, bringing our annual effective tax rate into the 33% zip code.

As you may have noticed stated in our press release but I wanted to call out the fact that we will be adopting the new stock option accounting rule in the fourth quarter of this fiscal year. To clarify, our third-quarter results do not include the hit from adopting the new standard. Our fourth-quarter results will and at the time, we will be restating the prior three quarters. The estimated impact of the new rule is a $0.09 EPS reduction for 2005, which runs down or equates to $0.02 per quarter. Next year, it will be $0.11 for the full year for the guidance we're providing today for the fourth quarter and all of 2005 as well as 2006 has the forecasted dilution from the new stock option rule.

Before digging into specifics on the quarter, I thought it would make sense to back away from the detail and take a view of Actuant from 30,000 feet. Given the acquisitions this year, our profile has changed quite a bit. These two pie charts reflect sales mix for all of our businesses we own today as if they had been owned for the entire year. The charts show that Actuant continues to have great diversity, both geographically and in end markets. Over the past years, our industrial tool exposure has increased from about 20% of sales to 25% of total sales because of the creation of the bolting platform, while our collective exposure to automotive and RV markets has declined from 30% to 16% of sales.

Our sales to the other market category you see on the pie chart, which is all engineered solutions by the way, includes flexible shafts, utility, aerospace, agriculture, medical and other markets and has grown from 4% of sales to 8% of sales.

Now, let's look at how we did in each of these same markets in the third quarter. This chart is comparing year-over-year growth, excluding currency in all businesses, whether owned for 12 months or not. As you can see, we had some markets that had greater than 10% growth and others that had big declines. Overall, excluding currency, our year-over-year sales at all of our businesses declined 1%. Without the benefit of the year-over-year growth in acquired businesses, sales declined 7%, excluding currency. The two markets that drove sales constance in the negative territory was the same as last quarter, automotive and RV. I will provide a little bit more color on each of these, as well as a few others.

Our automotive convertible comp sales were down 20% year-over-year in the quarter, which had been forecasted. We are up against tough comps from a year ago, when the OEMs were filling dealer lots with many of the new convertible top models that were being launched last year. Remember that first-year volumes are typically higher than subsequent years on a result or on account of this pipeline fill, and that's really what we are up against today.

Despite weak consumer confidence in the U.S. and abroad that may be hurting our global auto sales, our outlook for convertible comps is bullish. We have a number of new platforms that will be launched at the end of this calendar year, including the new Pontiac G6, the Volkswagen Cabriole and the Volvo that will generate 15% growth in fiscal '06, relative to '05. Bob will be providing more comments and color on this market a little bit later.

Our third-quarter sales to the RV market were down 30% year-over-year, which is slightly better than last quarter's 34% decline, but obviously it's still challenging. The decline was not a surprise per our discussion last quarter. OEM production and shipments continue to significantly lag retail sales for both Class A and Class C motorhomes, which is a target market for our RV businesses. There's no good data source to monitor how much inventory is still in the pipeline, but we are forecasting another weak RV sales quarters (sic) in this fourth quarter, based on OEM production schedules. Unlike past year, most motorhomes OEMs are taking the Fourth of July holiday week off and some are even taking a full two weeks off. Until the inventory glut moves its way through the system, we continue to closely manage costs. The silver lining with RV right now is that these declines cannot continue if our year-to-date retail sales base continues or dealers simply will run out of inventory. We are expecting a rebound in our RV sales but it probably won't be until the end of the calendar year.

Now, if we exclude RV and auto from our sales comparison, our third-quarter sales, excluding currency for just the businesses we have owned for at least 12 months, increased about 1.5%, or it would have been higher if you consider the current-year acquisition contribution as well.

Offsetting auto and RV were the industrial tools and truck markets. If you have a good memory, this is a repeat of last quarter. Enerpac, Hedley Purvis, Power-Packer truck, Gits, and Novelle (ph) all posted double-digit growth over last year. These are later-cycled businesses that are benefiting from the economic recovery and also benefiting from other cycles such as oil and gas and truck emissions.

A couple other comments on sales -- we saw very good results in our specialty and professional electrical channels, which are primarily North American-driven. We had a mixed bag in retail DIY; the U.S. was pretty good, but Europe was pretty weak. This mirrors the general trend we're seeing overall. Europe is weaker than the U.S.

In summary, as we saw and are continuing to see a lot of puts and takes across our businesses. Some markets are doing well; others are not. This is a testament to Actuant's end market diversity. We had a few weak markets yet we still delivered our consolidated results.

Our 38% second-quarter sales growth led to a 39% increase in operating profit, resulting in a 10% expansion of our margins. Sequentially, our margins were up 100 basis points from the second quarter on account of normal seasonality in our businesses. Overall, the margins were in line with what our forecasts were internally. Third-quarter Tools & Supplies margins declined year-over-year on account of buyback and reset costs within Gardner Bender for the big Lowe's reset. Acquisition mix and year-over-year margin declines at top (ph) also reduced margins. If we exclude the acquisitions and the buyback costs, our margins in Tools & Supplies were up slightly from last year. Conversely, engineered solutions margins were favorably impacted by acquisition mix, which more than offset lower margins from RV, given the sales decline there.

One last note on margins -- overall margins again were adversely impacted by recognizing the amortization of inventory write-ups and purchase accounted for this year's acquisitions. The impact for the quarter would've been about $1 million, which is in line with last quarter, and it will repeat again in the fourth quarter of this year.

A shifting away from earnings to cash flow, we have a great quarter, generating about $28 million of cash flow. This included the reduction of some of the working capital build we saw earlier this fiscal year. Debt-to-EBITDA leverage at quarter end, pro forma for the acquisitions on a trailing basis was approximately 2.7 times compared to 2.4 times EBITDA at the beginning of the quarter. These increases reflect the Hydratight acquisition funding. Based on our fourth-quarter forecast, I would expect our year-end debt to be in the range of 445 to $450 million and our leverage to be 2.5 times trailing EBITDA. This puts us right smack in the middle of our 2 to 3 times long-term leverage range. Liquidity remains strong at over $170 million available on our revolver.

On that note, I will turn it back to Bob.

Thank you, Andy.

Before going into guidance, let me give you a little color on some of our key markets. Andy reviewed the present situation in our convertible tops. We have been communicating since the first quarter that convertible tops were going to be negative in the back half of this year, as we compare against some very high comparable in the prior year.

Just to put this in context, our auto business was up 55% last year with the third and fourth quarter being up over 70% each. As Andy told you, our automotive business was down 20% from the prior year in the third quarter, and we expect it to remain negative through the first quarter of next year. This is the result of major line fills last year of the PT Cruiser, the Chrysler Crossfire, Renault Magan and Peugeot 307.

While we are navigating these short-term issues within automotive, I can tell you we continue to see above-average growth at automotive when you look on the longer cycle of five to ten-year period and with a fairly big growth in fiscal 2006. This is not just Actuant's opinion. In fact, there was a convertible top conference in Germany this quarter hosted by a major top stack company. A top stack is the actual roof of the convertible top, thus the Tier 1 customers we sell to. The data presented at the conference show that the number of convertibles produced annually is expected to go from 825,000 systems in 2005 to approximately 1.45 million systems by 2015. This would equate to a 6% compounded annual growth rate over the next ten-year period and this is after a very high kager over the last five years.

One of reasons for this is the retractable hardtop phenomena, which you will seem visibly in 2006, and what you see on this slide, the launches of the Pontiac G6, the Volkswagen Cabriole and the Volvo C40. These vehicles are all retractable hardtops and should drive our revenue growth to 15% in fiscal of '06 for Actuant.

Retractable hardtops have some important aspects for Actuant. First, the actuation systems are heavier -- need to be heavier and are more complex than soft tops. That usually requires more cylinders, valves and electronics to operate. The second is that the latching of a retractable hardtop is more sophisticated, and many times needs its own system of actuation. In June of this year, we increased our state of our CPS joint venture and are launching our first latch in the U.S. market to go with the two latches we've already won on the Europe market. More and more, we see the latching indistinguishable from the convertible top system.

So in summary for automotive, we are seeing is a lot of code (ph) activity ,both in convertible top, in latching and liftgate actuation. This is going to effect model years 2007 and beyond, and we're very excited about our continued growth opportunity in this market.

Next is the Europe DIY market. As you probably read in most publicly available data, the Europe retail market is weak and the electrical aisle is no exception. Our Europe DIY sales are down 8% year-to-date and worse than that in the third quarter. We don't believe any of the decline is market-share-driven. In fact, we've won a new plumbing launch in Holland and an RF, or radiofrequency, launch across a number of test markets going on in Germany.

While we believe that our comparables will get better due to these marketshare wins, we don't have a lot of optimism about same-store sales with the European retailers going positive anytime in the foreseeable future. This is factored into guidance for 2006 that I will provide with you shortly.

What to tell you about RV? Well, what I can tell you is that Marty Palmer and the rest of the RV management team have done a great job in a very difficult market situation by balancing our short-term costs with the development of new technology and applications for the future. A good example of this is shown on the slide right now as the full wall slide-out system 23-foot slide out for Fleetwood that was introduced recently. Stay tuned; we expect RV to have a pretty big year in 2006.

Moving to Enerpac, we also had some big wins this quarter. The first one was the national soccer stadium in Nanpong, China. This retractable roof will be powered using our computerized control hydraulic system, similar to the technology we used on the Millau viaduct in France a few years back. The stadium is expected to be operational in calendar year 2006. The second one and the one on the left-hand side of this slide, you New Yorkers are going to be able to watch. Enerpac has won a major supply contract for the construction of the bright One Bryant Park building in Midtown Manhattan. While these large projects represent only 15% or so of Enerpac's sales, these highly visible programs have a way of feeding other business, and we hope to see the same this time.

Next is the DIY electrical business in the U.S. While this business has been relatively flat over the last two years, a number of new initiatives should lead to growth in the future. The first one is pictured here -- is the Lowe's aisle. As many of you know, we started resetting the electrical aisle in nine of the ten regions of Lowe's in the third quarter. While we already have -- had most of this business, the reset creates visibility and velocity of turn. The early indications are that same-store sales are up appreciably due to the news sets, so we are off to a great start.

Another DIY win was the Father's Day promos that we are supplying to Home Depot with our newest electrical tool, the Armor Edge wire stripper with an integrated circuit alert tool. This tool allows you to check if the wire is hot before you work with it. It's a perfect tool for both the professional and the DIY user and is being launched across a number of customers.

Now let's move to a new, exciting initiative for Actuant, namely industrial bolting. Within the last six months, we acquired Hedley Purvis and Hydratight Sweeney. On a combined basis, we now have about 90 million of revenue in bolting-related product and services.

There are many reasons we get excited about bolting. First, we substantially increased our market position in our strongest business area, industrial tools. The acquisitions allow us to broaden our product portfolio under the Enerpac-branded products, and we believe cross-selling the bolting products with our existing high-force hydraulic tools is going to be a substantial opportunity for Actuant. By acquiring Hedly and Hydratight, we now have what we believe is the most complete product and service capability globally in the bolting industry. Products include hydraulic torque wrenches and pumps, torque multipliers, bolt tensioners, subsea products, just to name a few.

From a service point of view, we offer equipment rental, manpower to actually tighten the bolts, consultant feel associated with joint integrity situations, lead testing and recertification, and software to keep track of joint integrity.

One of the real emerging trends in oil and gas is joint integrity. The integrity of the joint where two pipes connect is a safety issue, and the oil and gas industry is moving towards regulation of joint integrity and maintenance. The other reason outside of safety is the astronomical cost of a pipeline or a turbine generator being out of commission. Managers of these assets are willing to invest in joint integrity programs to make sure nothing goes wrong, and both Hedly and Hydratight are leaders in this area. Over time, we believe joint and safety and joint maintenance will become more important to the owners of these assets and they will increasingly look for suppliers like Actuant to be a complete service provider. We are very well-positioned for this.

Lastly, oil, gas and power generation make up over 50% of the current serve market of both Hedley and Hydratight. When I think about markets that Actuant can deploy capital in, these markets come close to the top of my list. We really believe these markets will have above-average industrial growth for the foreseeable future.

With that, let's move on to earnings guidance. We've updated our outlook for the fourth quarter of fiscal '05 to take into account the completion of the Hydratight Sweeney acquisition and the adoption of the stock option rule that Andy went through, along with the stronger U.S. dollar and current business trends. Our updated guidance is as follows -- sales of between 258 and 268 million, an increase of approximately 40% over the prior year, due to acquisitions.

Given our European exposure, which is about 40% of our total sales, our fourth quarter is seasonably weaker than our third quarter. This is a result of vacation and holiday patterns in Europe and the fact that are trucking convertible top customers use the holidays to retool their plants. We're not expecting a rebound, in the short-term outlook, of auto and RV, so poor sales comparisons are again expected to be negative in the fourth quarter.

Based on these sales, EPS should be in the $0.58 to $0.63 range, up 10 to 18% over fiscal 2004. This includes approximately $0.02 of dilution associated with the expensing of options that is not in the comparable prior-year period. Given the fact that the full-year option expense impact is $0.09 and will be included in the restatement of the first three quarters, our full-year fiscal '05 EPS should be in the range of $2.36 to $2.41, up about 30% over the prior year.

Moving to our guidance for fiscal 2006, we are projecting sales of between 1.15 billion and 1.175 billion, or up about 20% from the prior year. Our assumptions on this guidance are as follows -- the euro to U.S. exchange rate will be between 1.2 and 1.25, which is in line with today's rate but below the fiscal 2005 average. A 1 point move exchange rate impacts our annual sales by about $3 million.

Had we owned all of the acquired assets the first day of fiscal '05, sales of our full year would have been about 135 million higher than the 965 to 975 we are forecasting for the year. So taking that as the base, we are expecting 4 to 5% core sales growth off this adjusted 2005 running rate, excluding FX. We are expecting sales in Tools & Supplies segment to be in the 685 to $700 million range. This assumes the full-year effect of our 2005 acquisitions, plus mid single digit growth in Enerpac, the bolting acquisitions and specialty electrical. We would expect low single digits in the U.S. DIY and flat sales in Europe electrical.

For Engineered Solutions, we are expecting sales volume of 460 to 475 million. This also includes the full-year effect of the 2005 acquisitions. Specifically, we are expecting about 10% growth in RV, a combination of new products and a better balance between OEM production and retail sales. Our assumption is that motorhome retail sales will be flat to up 2% for our fiscal year September through August. This growth will be back-end loaded.

We are expecting automotive to grow about 15%. This is also back-end loaded as we begin the production of four new models that -- the Volkswagen Cabriole, the Pontiac G6, the Ford Focus and the Volvo C40 -- around the end of the calendar year.

Finally, we are forecasting low single digit growth in trucks, as lower sales -- as slower growth is expected in the U.S. and Europe, but it will be offset somewhat by the higher growth in China.

If you take this revenue guidance and convert it into EPS, we are expecting EPS of 2.75 to $3 per share on a fully diluted basis. This guidance assumes EBITDA margin expansion of 30 to 100 basis points, interest expense of 23 to 24 million based on slightly higher rates than exist today, a tax rate of around 33%, free cash flow of about 100 million resulting in off-debt at August of '06 of about 350 million and a debt leverage at the same point of less than 2 times debt to EBITDA, the low end of our range.

From a calendarization point of view, given the RV and auto situation, sales and earnings growth will be back-end loaded for fiscal '06. First-quarter sales will be flat to down 5%, followed by an accelerating growth thereafter. We expect diluted EPS to grow year-over-year in each quarter with the first quarter being more modest, given our sales projections.

This guidance for 2006 assumes no future acquisitions, which is probably not a realistic assumption, given our diversified business model and our strategy to add acquisitions to our base business platforms. But we don't want to try to predict this outcome; we are all just going to have to wait together and see how this develops as we go through the year.

One final comment on guidance -- in the past, investors have come to expect Actuant would hit the high end of our guidance range and even exceed these ranges. In most quarters over the last three years, this has indeed been the case. For fiscal '06, we want investors to recognize that our guidance range is 2.75 to $3 is just that; it's a range. We believe that, at this point, two months before the start of the fiscal year, based on all the data we have, there's an equal probability of the low end of the range as there is the high end of the range. Said another way, we would expect (indiscernible) expectations of this range to vary around a normal bell curve around the middle of the range. The difference between the high end and the low end of the range will largely be due to your outlook on the various end-user markets we serve and your optimism with those markets. Provided we meet this guidance, we will be delivering our fifth consecutive year of 15 to 20% earnings growth or more. We think that's a very impressive track record, and we expect to continue it.

Operator, I would like to turn it back over to you for the participants' questions.

Thank you. (OPERATOR INSTRUCTIONS). Curt Woodworth from JP Morgan.

It's actually Alex Johnson for Curt this morning. You talked about the buyback and reset costs that impacted Tools & Supplies segment margins. Do any of those flow into the fourth quarter? Then just in general, what should we look for going forward for margins in that segment?

They will continue into the fourth quarter. We reset about 650 or so of the 900 Lowe's stores that we're resetting during the quarter, and the balance of those will be reset in the fourth quarter. In addition to that, the majority of the reset of -- or the buyback, the Praxis (ph) stores for the plumbing launch in Europe is taking place in the fourth quarter. So, you know, it was a couple of million dollars impact in the quarter, and I would expect a similar impact next quarter as well.

Okay, thanks. Could you talk about margins at top a little bit? Obviously, the Europe business is weak, but specifically for top?

Yes, we really are trying to get away from talking about individual businesses. Particularly in Europe, you have to combine top (ph) and Dresco because that's the way the business is managed and you look at that.

We have been on record with you guys that we wanted to get to double-digit margins, EBITDA margins, within that Europe electrical business. That is one that we haven't met that objective and quite frankly, we probably aren't going to meet it in 2006.

While a little discouraging, I want to mention a few things. Number one, we are moving out on a number of additional initiatives there in terms of global sourcing, in terms of bringing some product from the U.S. over there relating to tools and some testers, relating to the plumbing launches that we've got going on. So it's not all dire. We do believe we've got a very nice business model there. If you recollect, we didn't paid much for either Kupp (ph) or Dresco and as far as our return on invested capital, pretty good returns. But the margins this quarter were particularly bad due to the reset of some of the stores or some buyback costs associated with taking back inventory from customers. That normally is a good thing, because you've got a reset that's associated with that. Therefore, you protected the market going forward, but you do eat the cost in the current quarter.

One of the items that's been impacting margins in Europe, electrical in general, more so than in the States has been commodity price increases, copper in particular.

The retailers over they're have not been taking increases on copper because the competitors have not been doing it, so fundamentally what we need to do and we acknowledge this shift more of the sourcing of products out of Europe and into China. That isn't something that happens overnight, so that's why we're talking -- we don't think it's going to be '06 when we see reasonable margins in this business.

Last question for me -- in terms of accretion, you've been on record with a $0.36 estimate for accretion from KCI in the first 12 months. Where do you see accretion now for calendar '05? Also, on an aggregated basis for all of the acquisitions, what do you see this year?

Well, we're not going to get specific on individual deal accretion. We've never done that, and it's difficult to do, so we're not going to go there. What we will tell you and I think you can see it in the way of our prepared remarks is acquisitions are doing better than expectations. The RV and auto are worse and the acquisitions have been offsetting that. So I think you can translate that and certainly KCI being the biggest piece, you can translate that into meaning that we are ahead of that $0.36 accretion that we talked about. That's about as far as I want to go with that comment.

Dean Dray from Goldman Sachs.

Could you give us an update on the raw material cost pricing dynamic for Actuant by segment? Any kind of color there would be helpful.

All right, why don't I start, Andy, and you can come in behind me?

You know, we have, I think, have had a fairly robust process to manage raw material price increases. This quarter, we didn't see anything necessarily that was outside of what we've seen in the earlier quarters. I think our guidance in the prior period was that it could cost us 1 million a quarter; that was pre-KCI. I think what we seeing is we're still in that neighborhood; we would be farther ahead if it wasn't for KCI, who was a little behind in that.

We have been raising prices in a number of markets. The professional electrical market has gotten a price increase this quarter; Enerpac got a price increase last quarter. It's not across the board, Deane. It's probably less than a few million dollars impact for the quarter.

But the net is still a $1 million per quarter headwind?

Yes, correct.

Okay. Where do you see that changing? Are you going to catch up on the pricing side when you look at fiscal '06h?

I wouldn't say I'm expecting we're going to make it up there. I think what we do is we make up that $1 million through other cost reductions, through global sourcing, through freight, through changing the design of the product. So we offset that drag in other places.

The reality is a lot of the markets we serve, it's just difficult to get pricing. You know we get where we can; we are aggressive where we can. I think the $1 million, when you get to that level, that small of a level on the side of our business, you're down in the noise level and we are really offset in other places.

Okay, that's fair.

Switch to RV for a moment. When you talk about visibility with the OEMs, I know that you'll set up a program but you don't really get your marching orders, it seems, until it's a week ahead. So, it's very, very short cycle, short visibility. Is that part of the issue where, a quarter ago, you thought you could cut that from (indiscernible) 34% to something in the teens, but you're still behind there in a 30% negative comparison? Is it visibility is part of the issue?

Absolutely, Deane. You give us a week, I think sometimes we get the call on a Friday -- don't ship. I mean, it can be that kind of a relationship that you have with a customer.

Where we do start getting comfort that we're coming out the back, Deane, and I think Andy covered this, is there's only -- you know, as long as the retail sell-through continues to happen flat to up a few to down a few, which is what you saw in the slide, there's no way these production levels can stay where they are at. They are just going to run out of inventory. That's what gives us confidence that 2006 is a turnaround year. Now, it isn't going to come in the next 90 days or probably 120 days; it's probably as you're getting to Christmas and you getting ready for kind of the 2006 spring season where a lot of RVs get sold. That's where I think you're going to see a fair amount of this turn.

The last question goes back to your comments about acquisitions, and understanding you are still looking in the bolt-on, strategic bolt-on opportunities literally and figuratively. But also, how about divestitures? Are there still some items that perhaps came in in the KCI group that might not been strategic long-termers?

You know, we have a few of those, Deane; we've always had a few of those. We don't have any present plans for divestiture at this point. I think you could monetize them. The only thing I will tell you is -- and we've proven this in the past -- we will monetize things when we believe that they are not going to meet our return on invested capital levels, or that they don't have some kind of a growth profile to continue to meet that.

If you took a business like Acne Aerospace and said, gee, that doesn't fit anything else, I would tell you that that absolutely fits out growth profile. The Triple 7 is a great program; we're doing the spare -- we are just starting to get into the spare cycle on that. We are doing the number of things defense-related that are good programs, and I like that business. So, we have a few of these things. If you ask what they are, there's about 60 million in total sales at Nielsen Session (ph), Milwaukee Cylinder, Acne Electric, Turner Engineering. You know, these four are probably the ones that are outside of the base strategy, but we don't have any intention to monetize any of these at this point.

There's nothing there that's significantly below your cost of capital?

Correct.

Wendy Caplan from Wachovia Securities.

Bob, can you talk a little bit more about the European DIY -- electrical DIY market? It's been a laggard for a while, particularly Kupp (ph) and I know you like to talk about it with Dresco, but have we seen any change in strategy here? Are we still trying to downsize the business? Are we still trying to move production out of Germany and Western Europe? Can you talk a little bit about that and what we should expect going forward over the next 12 months or so?

Sure. Let me start with some discussion of the industry itself. The DIY industry, or the home center industry in Europe, I believe is probably ten years behind the U.S. What I mean by that is you still have eight or ten players and you have three or four fairly big players and then a lot of smaller players. Not all that different than some of the Builders Square type players that you had ten years ago here in the U.S. That is affecting the industry because there's too much capacity. The sales per square footage in these stores is less than the U.S. comparable, and there's a fairly big difference between the have and have-nots in that area. So, I think you've got some consolidation coming in this industry and that, I think, is going to happen sooner than later. I think it's something that we kind of look forward to because we saw the same thing exist in the U.S. Once you kind of circle (indiscernible) the Home Depot, the Lowe's, the Menards (ph), the Ace, the Tru-Serve, things got a lot more predictable in terms of that.

All of these stores have negative same-store sales right now going on, and that's the same inflationary issues in lumber and things that you've got going on in the U.S. So, the consumer in Germany just is not spending money, and that is affecting these. When stores have negative comps like that, they are coming back to the vendors very aggressively; they are looking at resets all the time, looking at shrinking square footage, looking at different ways to do things. Kupp (ph) is holding its own to gain in some in that. We've got great brand position there, and we've been adding market share, not losing it, at a time where it's tough.

Now, to get to some of your other questions about the industry, absolutely we've had a strategy, really since we bought Kupp, to try to move some of the labor to lower-cost places. We have a plant in Tunisia; we have a plant in Czechoslovakia. We are starting to get more involved in our global sourcing operations out of China. All that is tied around trying to variabilize the cost more than what we inherited when we bought it. We did a sale leaseback, if you recollect, on the facility; we are selling some idle land that was attached to it; we've been shrinking the outside warehouses -- again, all trying to focus on getting the cost more variable and more typical to Actuant. That will continue, Wendy. I don't expect huge dollars associated with that and if they do, it's probably just going to flow through the P&L, as it does today, not a one-time type thing but more flowing through the P&L.

Our strategy -- where it shifted on Kupp, our strategy is to bring out new products. That is the piece that I think, in a few first few years, we were really focused on cost reduction, get the working capital down; that allowed us to pay off the investment. Now we're focused on some of the growth. Let me give you a couple of examples. One, and it's more of a Dresco and a Kupp example is the plumbing. We've gone into the aftermarket plumbing product, repackaging it and reconfiguring it similar to a wall in electrical. That is working very well with a couple of the big Dutch OEMs and probably has some potential in Germany.

The second would be RF. Radiofrequency controls an important attribute in the aftermarket in Europe. Because of the masonry nature of the buildings, there's no conduit, so it's hard to move things around. We have developed a product line relating to RF that we are test-marketing with a customer in Europe, and the early results look pretty good. This is not material in terms of sales today, but we are pretty excited about that kind of opportunity.

We are in the process of bringing a couple of tools from the Gardner Bender thing into the Europe market, and we've got some customers agreeing to accept some of those tools. So, our focus where it shifted is not really on the cost side; it's really shifted on the growth side, trying to get more of kind of a new product feel to that.

Did that answer all your questions in that area?

That was very helpful, thank you. Also, moving to the bolting business, you talked about the joint integrity issue. This is fairly new to us, so you mentioned something about regulation. Should we anticipate some regulatory driver of demand for the products going forward?

Well, I'm new to it, too, Wendy, so recognize the comments I'm going to give you are about 90 days of knowledge, so I want the investors to recognize the nature of the comments I'm giving you. But what's happened is a big issue in terms of oil and gas exploration -- due to the volatility and explosive nature of the products that they produce. Safety is a huge issue. What they've done is they've done an analysis, over the last few years, and have determined a fair amount of the hydrocarbon releases or explosions or things that have gone wrong in an oil rig or an oil platform have been related to the joint. That makes sense. The joint is always what gives away; the joint is always the thing that somebody didn't get the right sealing in there or the bolts somehow came loose, and that's where the problem is.

Hedley and Hydratight, kind of on separate paths, have been tackling this issue for the better part of a decade, and they are really the leaders in this. In fact, there is probably some regulation coming within kind of the OSHA equivalent for oil and gas markets and that regulate -- we are sitting on the committees that are helping try to draft and understand the issues that are creating the issues and getting involved. So, that is joint integrity.

What we are seeing is, as the requirements and as the analysis and the understanding that the joint is the problem, you've got large customers like BP and others saying, "We don't even want to have our service crews touching this any more. We want to outsource the whole thing to people who understand joint integrity." Again, that outsourcing trend, we believe, is going to increase our visibility as the full-service provider in this industry.

One last question -- those of us in New York, when will we see the Enerpac sign above Bryant Park?

Well, we're going to have to get Raymond Shaw from China involved in that; he's the only one who seems to get those free billboards!

Good luck!

Charlie Brady from Harris Nesbitt.

Can you talk a little bit about the truck market, particularly I guess more so in the U.S., given what's coming with in the diesel desulfurization regulations in '07.? You're saying '06 looking like it's going to be single digits. Is that a result of -- how much of the sort of prebuy anticipation he's factoring into your guidance on truck, particularly in the U.S.?

I think our comments overall on truck, we said low single digits; that was a global statement. What we're seeing in Europe right now is the OEMs are telling us to expect flat next year, so that part of it is 60% or 65%, say about 60% of our total truck business right now. So we're looking at flat there.

In the U.S., we've been going gangbusters actually with our Gits business, which has been up very healthy double digits for the last 12 months and with some business they won in that time. That pace will continue with the exception of a certain block of business that they have which is kind of an engineered-out tied into this emissions -- (multiple speakers).

It's a turbocharger. It's not an EGR (indiscernible).

Right. We had some incremental sales on it this year that we won't see next year, so that is somewhat tempering the growth that we are seeing overall in this business.

Now, when you look at those two markets kind of going the other way, certainly not at the same scale but going to other way would be China. We've got a little, maybe $1.5 million of sales coming out of China in truck, up from nothing going into this year. That is expected to grow nicely next year as well, so that is kind of our overall view as to what's going on. We definitely do believe that truck will slow, you know, once you get beyond just (indiscernible) heavy-duty build is going to slow once you get past the midpoint of next year.

Yes, we do expect somewhat of a prebuy but -- (multiple speakers) -- we are not expecting it to be wild, so I mean, again we are fairly new to the North American diesel engine market, so we expect there to be some prebuy in '06 and then for it to moderate in '07.

The interesting thing about Gits and the truck business that I think is exciting to us and it's probably more towards the 2010 standard, is we really have some very unique technology that relates to valving, relates to actuation control in some very hostile parts of the diesel engine, or the turbocharger. Gits really has a very interesting position there. I think, long-term, you're going to find that this is one of our strongest assets going forward.

Great, thanks. Just on the convertible top market with the three platforms you discussed coming out, I'm assuming those are all going to start on a production basis around the same time. Is there any variance of significance between the three platforms as sort of expectations per-units go out the door?

That is part of the (indiscernible) first question you had. The three primary ones do start within a couple months of one another. We're talking, you know, November/December, maybe October time frame with those. The two bigger platforms out of the four that we talked about today would be the Volkswagen Cabriole and the Pontiac G6. Now, both of these are brand-new cars, but in terms of the volumes that OEMs provide us, those are the bigger of the platforms.

The G6 includes the latch; it was the latch we won here in the U.S., so that is one of the -- that will probably even have a bigger impact of the two.

Thanks very much.

(OPERATOR INSTRUCTIONS). Scott Graham from Bear Stearns.

Good morning, Guys. Both of my questions have been answered; I'm good. (LAUGHTER). Thanks anyway. Have a good day!

Scott Mackie (ph) from Robert W. Baird.

Good morning, gentlemen. Just a quick follow-up on the two big projects for Enerpac -- I thought I caught somewhere in there you said that those two would be 15% of FY '06 Enerpac sales. Was that correct?

No, what we were saying is large, integrated solution projects, so big infrastructure-type projects, represent about 15% of our total. The rest is really more MRO, general maintenance, ship building, bridge, forestry, other industry. So what we're saying is about 15% of the total comes from programs like that. These two will be the two that come on this year that are the most visible.

We're also doing some work on the George Washington -- I'm sorry, the George Bush aircraft carrier. There's a number of other ones that are also in that same category.

For those two large projects, how long will those projects last?

Both of them should -- I mean, in terms of our product that goes into them, again, we are supplying product in them -- both that we should supply all of the product for those two in fiscal '06, by the end of '06. Now, it's possible there's a little bit of rollover of add-on type stuff the following year, but what we're looking at now is '06.

Okay, that's all I had. Thank you.

There are no further questions at this time. Please continue with your presentation or closing remarks.

Well, I think that's because we numbed you guys with 35 minutes of talking at the front end, but I do have some closing remarks, which I haven't had in the past. Before signing off, I'd like to alert you of an investor day we're having in New York City. It's being done in conjunction with the five-year anniversary of the Actuant spinoff in August of this year. As you see on this slide, August 4 is the date. What we're expecting -- and it will be in Midtown. What we're expecting is planning a late lunch that will go through the afternoon, and we certainly hope the East Coast investors can make that.

When you look at this slide, it's really hard to believe this is the same company that existed at the spinoff in 2000. Through a combination of great cash flow, internal growth in selective markets, acquisitions and access to the debt and equity capital markets, we've really fundamentally changed the complexion of Actuant. None of this would have happened without the great management team below me. We've worked hard to improve the organizational capability and it's safe to say that we've been very successful at that and now have the building blocks that we can build on for the future.

What gets me excited is the next five years. When you look at the ability for Actuant business units to create free cash flow and our track record for redeploying this cash flow into growth opportunities, I think it's going to be a very exciting future. I look forward to discussing it with you in future quarters and years ahead. 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 lines. Have of great day, everybody!