Enerpac Tool Group Corp (EPAC) 2005 Q4 法說會逐字稿

Welcome to Actuant Corporation's fourth-quarter fiscal 2005 earnings conference call. Today's speakers are Bob Arzbaecher, President and Chief Executive Officer, and Andy Lampereur, Executive Vice President and Chief Financial Officer.

We're using presentation slides in conjunction with the audio conference. (OPERATOR INSTRUCTIONS).

As a reminder, this call contains forward-looking statements that are subject to the Safe Harbor language in Actuant's press release issued today and in Actuant's filings with the SEC. 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, September 29, 2005.

It is now my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Thank you, operator, and good morning.

Today's earnings call marks the fifth anniversary of reporting the results of Actuant -- (technical difficulty) -- proud to announce that, in 2005, we generated record sales, EBITDA, EPS and cash flow.

Today, we're going to discuss the fourth quarter with you, the full-year 2005 results, our outlook for 2006, and we're going to provide some color on some important initiatives were working on at Actuant.

With that, I will turn it over to Andy to go through the numbers. Andy?

Thanks, Bob. Good morning, everyone.

Given all the negative news lately with hurricanes and fuel prices, I'm glad to report some good news this morning. Actuant had another strong quarter, as you can see on this slide. Sales were up 44% over last year to approximately $269 million. The majority of this was from acquisitions, with some nice organic growth in Tools & Supplies offset by declines in our automotive and RV markets, which was expected.

Our operating profit grew 45%, which was a touch higher than sales growth, (indiscernible) we had profit margin expansion this quarter. As you can see on this slide, our operating profit margin increased 20 basis points from a year ago to 13.1%, despite the inclusion of about $1 million of stock option expense for the first time since we adopted a new stock option accounting rule this quarter.

Due to borrowings for current-year acquisitions as well as higher interest rates, our financing costs also increased year-over-year. Now, when you factor all this in, our fourth-quarter EPS was $0.63 in fiscal '05, a 19% improvement over the $0.53 from the fourth quarter of last year. Last year's number excluded both the bond buyback charge and a large discontinued operations gain. If you factor out the $0.02 a share EPS drag this quarter from the adoption of new stock option accounting rule, you'd be comparing an EPS of $0.65 compared to $0.53 a year ago, or a real increase of 23% year-over-year.

Now, a number of things went well in the quarter -- topline growth, margin expansion, and the 17th consecutive quarter of year-over-year growth, but the best news definitely was the cash flow. We generated $41 million of cash flow in the quarter and reduced our net debt down to $432 million, and our leverage sits at a comfortable 2.5 times EBITDA.

Our fourth-quarter sales to the RV -- let me back up here -- from a full-year perspective, 2005 was a breakout year for Actuant. We delivered 34% topline growth, driven primarily by acquisitions. It was also our fifth consecutive year of double-digit EPS earnings growth. Our market capitalization and sales run rates both exceeded $1 billion for the first time, the result of our acquisitions during the year. Diversification from a geographic and end market standpoint also improved on account of these acquisitions.

This slide shows Actuant's current market profile. As a frame of reference, our sales run-rate giving full-year benefit for this year's acquisitions is at about $1.1 billion. Industrial Tools, consisting of our Enerpac and bolting businesses is now our largest served market, becoming for about a quarter of our total sales.

We increased our exposure to the electrical markets with decomponents (ph) in the Sperry acquisitions this year. Our exposure to truck also increased in fiscal '05, due to both Yvelle (ph) and the KCI acquisitions, in particular the gifts business within Key Components. However, exposure to the convertible top and RV market both declined during the year because of lower sales in those markets but more importantly the impact of acquisitions outside of those markets. Despite the fact that these markets continue to generate 75% of the inbound investor questions to Actuant, in aggregate, they comprise only 16% of our sales and generate 13% of our total profits. Last year in aggregate, they generated almost 30% of our revenue, so our exposure to these two markets has been cut nearly in half.

Now, let's turn back to the fourth quarter's results and I will talk about how we did in each of our major markets.

This chart compares year-over-year growth, excluding currency, in all of our businesses, whether we own those businesses for the full twelve months or whether they were acquired during the year. As you can see, we had some markets that had greater than 10% increases and others that had big declines. Overall, excluding the impact of currency, our year-over-year sales in all businesses was down 2%. Of the 44% sales growth during the quarter, about 1% of it was from the weaker dollar relative to the euro. Without the benefit of year-over-year growth and acquisitions, our sales declined 5%, excluding currency, which was a modest sequential improvement from last quarter. Similar to the last two quarters, it was both the RV and the convertible tops sales trends that drove sales comps into negative territory.

Automotive convertible top sales were down about 35% year-over-year. While this is worse than the third quarter, it was expected and does not change our view on this market in 2006. Our outlook for convertibles remains very 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 new Volkswagen Cabrio and the Volvo. Our fiscal 2006 full-year convertible top sales will be north of 15% above 2005 but will start out negative, be flat or maybe a little better in the second quarter when the new platforms are launched, and strengthen significantly in the second half of the year when our production accelerates.

The chart that you see now illustrates the peaks and valleys we've experienced in this market over the last two years and what we are expecting for this year. Obviously, it would have been easier to explain to deliver 12 straight quarters of 25% year-over-year growth instead of some quarters at 70% growth and the most recent quarter of down 30%, but we can't control that. We are at the mercy of our customers. While you may not currently be excited about the market, looking at -35, we are confident that your enthusiasm for convertibles tops will match others today once you see the 2006 launches start rolling out.

Our fourth-quarter sales to the RV market were also down 35% year-over-year, roughly in line with what we saw the last two quarters. Again, the decline was not a surprise, as we advised you this last quarter, that many of our OEM motorhome customers were cutting back to reduce excess inventory.

Progress was made in the inventory reduction front during the quarter, but the current challenge facing RV is lower motorhome retail sell-throughs due to lower consumer confidence. We believe that's the combination of rising interest rates, higher fuel prices, and the impact of the hurricanes. We're not expecting our RV business to benefit from the one-time RV orders that we're all hearing about which FEMA is placing with some of the OEMs. These are being used for Hurricane Katrina recovery, but most of these are for travel trailers and our RV business is primarily tied in with motorhomes. Inventory levels have definitely improved during the summer, but the retail sales are weak so we're not forecasting a near-term recovery in the first quarter.

Now, if we step aside and exclude RV and automotive, to give some perspective on the total growth on the rest of Actuant, our sales growth at all other businesses in the last quarter was up 6%, excluding currency year-over-year. Again, that's excluding RV and automotive. This was a sequential improvement from last quarter and was driven by a continued strength in Enerpac as well as our bolting businesses and retail electrical. Enerpac has been strong all year and continued in the fourth quarter with solid growth in all geographic regions. Our two bolting businesses had a great quarter, being Hedley Purvis and Hydratight Sweeney, and are midway through their peak service season and should continue to grow as we go forward on account of strong oil and gas demand.

In total, our bolting platform is a $90 million business that is very closely tied to the trends in the oil and gas market. So while rising fuel prices are not good news for the RV market and may give you indigestion, they are positively impacting our bolting businesses.

Elsewhere in Tools & Supplies, our do-it-yourself electrical sales were a nice surprise this quarter, after a week third quarter. The U.S. and Europe are benefiting from the recent resets at Lowe's and Praxis (ph) with solid growth at both of these accounts as well as at others.

Turning to Engineered Solutions, truck sales growth slowed during the quarter in the U.S., driven by a one-time contract a year ago. Truck sales in Europe were still positive but moderated relative to prior quarters.

Sales in all the rest of our markets are pretty much in line with what we expected. When you step back and look our sales growth by segment, excluding the impact of currency, which you will see in the supplemental schedules we provided on our Web site, you'll see two distinct pictures. Tools & Supplies grew 10% year-over-year on a core basis, driven by the strength in bolting, Enerpac and do-it-yourself electrical. Meanwhile, our Engineered Solutions segment declined 19%, driven by auto and RV market results. If you exclude these two markets again, sales were up in Engineered Solutions year-over-year.

Stepping back from it all, in summary, we saw a lot of puts and takes across our portfolio. Some markets are doing well, others are not. We expect this to again be the case in the first quarter of 2006. RV and automotive will be negative, driving down our overall sales results. However, as we will be covering shortly, despite this forecasted topline weakness, we expect to generate first-quarter earnings growth nonetheless. We expect our overall core sales trend to turn positive again in our second fiscal quarter.

Our 44% increase in sales during the quarter lead to a 45% increase in operating profit. As I indicated earlier, our margins were impacted by the adoption of a new stock option accounting rule. Excluding the approximate 1.1 million quarterly expense for the options, our fourth-quarter operating margins would have been 13.5% in total, which is a 60 basis point expansion from a year ago. All of the improvement from Tools & Supplies was from acquisitions and sales mix. Engineered Solutions' margins declined year-over-year on account of lower sales in auto and RV and the resulting lower fixed-cost absorption in these businesses.

It's important to note that due to the ramp up in convertible top production at the end of the calendar year, or at the end of the calendar year which we are seeing right now, our overhead costs have actually increased in the auto business, which further exacerbated the margin issue in Engineered Solutions. If we excluding these two markets again in Engineered Solutions, our margins were in line with last year.

Now, shifting away from the income statement and talking cash flow, as I stated earlier, we just had a huge cash flow quarter. Our net debt declined to $432 million, benefiting from 41 million of cash flow in the quarter. Part of the strong cash flow was from seasonal working capital reductions, part from favorable tax planning, and the balance from strong earnings to cash flow conversion. For the full year, we generated $86 million of cash flow, which was somewhat hidden by the incremental borrowings to fund this year's acquisitions. We love the cash flow and think our 120% cash flow to net income conversion stacks up very well against peers. We are projecting -- (technical difficulty) -- about $100 million in '06, which could drive leverage to below 2 times debt-to-EBITDA, assuming no further acquisitions. Couple this with our current borrowing availability of over $200 million today, our capital structure and liquidity are looking great.

Bob, back to you.

Thank you, Andy.

As you can probably tell, we are pleased with our record results we achieved in 2005. Adjusting for the two accounting changes we made this year for our convertible bond and our stock option, these results exceeded both our original 2005 guidance and our upwardly raised guidance in the first quarter. These results were accomplished in what turned in to be a very difficult second half of the year in a number of our end markets, namely RV, auto and European DIY.

When I look at how we accomplished these results, I reflect on four items. First, the diversity of the Actuant end markets is a great attribute for you, the investor. I know investors get nervous about RV and auto and in 2005, they had good reason. But Actuant is made up of so much diversity, market diversity, geographic, customer diversity; these diversities allow us to offset markets that, for whatever reason, are not in phases, and you certainly saw this in extremes in 2005.

Second, we had a great last 18 months of acquisitions, and these added sales growth, earnings growth and expansion of our end markets. All of these acquisitions in 2005 were accretive to earnings. We're proud that we have a management team and an integration process that can create shareholder value through margin expansion and asset efficiency.

Third, we continue to expand a number of our growth initiatives within our existing service (ph) market. We started about a year ago working on a number of key growth initiatives, and these started to bear fruit late into fiscal 2005 and I think will be more visible to you as we proceed in 2006.

Lastly, we had a management team that stayed focused. We knew we were facing some tough conditions in a number of our end-user markets, and we stayed focused on the priorities that allowed us to meet and exceed our full-year earnings commitments.

Ultimately, it's about delivering financial results. As this chart shows, we are delivering superior financial results both annually and over our five years in existence. These results stack up well with any peer group of industrial companies you want to compare us with.

While we are proud of these results, the one that really pulls it all together is our cash flow. As Andy generated, we generated 86 million of cash flow for the year, which was 120% conversion of earnings, and we generated 41 million of cash flow in the fourth quarter alone. This is a strong testament to Actuant's focus on improving returns on invested capital. Look for us to continue this in '06 as we anticipate generating at $100 million of free cash flow.

Before moving onto earnings guidance, let me update you on a couple of markets. The first is Industrial Tools, which includes both the Enerpac business and the new bolting businesses we acquired. These businesses had a very strong year, driven by market share gains, the benefit of what we believe was the late-cycle recovery in North America, and very strong seasonal growth in the bolting service product line. The year got stronger as it went along and we left the fourth quarter with a lot of momentum.

Second, the electrical business -- Electrical had a GDP-type year with stronger growth in the professional and specialty markets and weaker growth in the DIY markets, particularly in Europe. A number of key resets of customers, mainly Lowe's and Praxis, should lead a way to a stronger 2006.

We also did a number of organizational consolidations within Electrical, as we leveraged synergies across business units. We consolidated our Anchor and our Marinco business under a single strategy; we consolidated manufacturing of our Acme Toroidal transformer business into a single facility in Mexico; we combined to Sperry warehouse and logistics and sourcing within the Gardner Bender system, and lastly, we combined a number of support functions on our Comp and Dresco businesses in Europe. Much of the improvements of these consolidations and changes will be felt in 2006.

Moving to Engineered Solutions, the first market to discuss is the RV market. What to say? We had a weak year due to production cutbacks at motorhome OEMs. I visited our RV business in Mishawaka, Indiana recently and I think the employees have done a good job of limiting margin deterioration in a very difficult sales environment. Based on both public and private statements made by major motorhome OEMs, we feel, by calendar year end, we will see the end of the inventory imbalance and will again see growth in our RV business, and this has been factored into our guidance.

Fiscal 2005 was an extremely tough year, but it has done nothing to dampen our enthusiasm for the RV market long-term and our position as the actuation leader in this market. Louisville is a big RV show that happens right after Thanksgiving, and we will certainly be able to give you a much clearer outlook on our first-quarter conference call.

While automotive was down 7% in 2005, it was much weaker in the second half of the year than the first half of the year. Two things that accounted for the fourth quarter weakness. First, the comparisons against 2004 were very high. We were up 70% in the fourth quarter, as Andy's chart earlier showed, and this was due to the fact that we had a handful of major program launches in 2004, and these did not repeat in 2005. Second, we returned to our normal cycle of summer shutdowns of European car companies in July and August. This did not occur in 2004 due to new program launches and higher production levels. While the first quarter will also be fighting a tough comparison in the prior year, as of this year's first quarter '05, we were up 40%. We will see auto have a big year in 2006. With the production increasing and, as you see on this slide, four major new programs beginning to shift. There's actually three more programs that will also be shipping but they are later in the year and are probably more impact to '07. As Andy highlighted, it should be a year where growth resumes in the second quarter and accelerates off there.

We did have a breakthrough at BMW this quarter. We were awarded a contract with Carmen, the roof maker, on the new 1 Series BMW. This is going to be an entry-level car. It's our first program with this customer and we're very excited about it. It will begin shipping in late calendar 2007, so it will not have any impact during fiscal '06 and probably very little impact to 2007.

Our truck business had a strong year, both in the emissions and cab-tilt business. We did forecast a slowing of trucks, and we saw it in the fourth quarter. In 2006, we conservatively forecasted -- are forecasting a low single digit growth, with some up-growth in China and Europe being partially offset by a modest decline in the U.S.

The big story in our truck business is the emissions control product line, which have some exciting growth initiatives that could add some incremental sales in the back half of '06 and future value in '07. We are driving these initiatives very hard but will wait until we actually get this business awarded before we give you much more detail.

With this update on the major markets, let's move to our guidance for fiscal 2006. We are reaffirming our guidance we gave you last quarter, namely sales of 1.15 billion to 1.175 billion on EPS of 2.75 to $3 per diluted share.

Since last quarter, we've not seen a lot of changes. We are maybe a little more optimistic on our growth in Industrial Tools and a little less confident of our timing of when RV is going to turn positive. Similar to what we told you last quarter, we view this as a range, meaning we believe there's an equal probability of hitting the low end and the higher end of this range. Provided we meet the midpoint, it will be our fifth consecutive year of meeting or exceeding our EPS target of 15 to 20%.

As we have communicated to you consistently during the last few quarters, 2006 will be back-end loaded. Our first-quarter guidance is for sales of 270 to 280 million with EPS of $0.62 to $0.67 a share. When you compare this to the EPS of the first quarter of '05 -- and I apologize as I'm going to have to walk you through this -- but keep in mind that we restated the first quarter; we restated the first-quarter EPS figure twice, first to reduce it for $0.07 for adopting the CoCo accounting rule, and the second time to reduce it by $0.02 for the new stock option rule.

On a restated basis, we had $0.62 of EPS in the first quarter of 2005. However, it's worth noting that of that $0.62, $0.05 was a gain associated with a spinoff related to the APW tax settlement, which will not be repeated.

Our first-quarter guidance predicts that both RV and auto will still be negative comparable against the prior year, offset by both Industrial Tools and DIY markets being up. We're targeting free cash flow, as I mentioned earlier, of $100 million in '06, up 15 to 20% from '05 and at about 115% of net income. We expect there will be acquisitions during the year; our pipeline is quite full right now. We would expect some of these to have incremental sales and earnings during 2006.

With that, operator, I will turn it over to you -- back to you for the participants' questions.

Sure. (OPERATOR INSTRUCTIONS). Deane Dray from Goldman Sachs.

Good morning Bob and Andy.

Just if we could follow up on your thoughts on RV, one of the points in your guidance, you said you are a little bit less confident about RV than where you were last quarter. Just a couple points here -- first, is it too early -- you have to wait until the Louisville show to give a sense of what the range might be in the comparison next quarter? Just remind us of why visibility in RV is more difficult versus, let's say, automotive, where you get production schedules with a little more precision.

Okay. Well, the first part of your question, what kind of variability are we talking about? Probably 3 million in sales from peak to trough, Deane, against that guidance for the first quarter. So, you're talking about a running rate that is something like 20 million with a 10% range around that, maybe a 15% range. So, that quantifies, I think, the kind of range delta we could be talking about. (multiple speakers)

The reason you don't get any visibility has a lot to do with a couple of factors. The first is there is inventory collected both at the OEM level -- so that means they have not shifted to the dealers yet -- and at the dealer level. These are all independent dealers, so the visibility of what's exactly happening in the channel, the OEMs get a lot of that data but I think it's a very dynamic situation.

The other thing I think, at this particular point in time to try to figure out, is what is gas doing to it? You guys have listened to me for a number of years. The historical evidence is that gas does not affect the RV purchase decision. But I don't think we've ever seen a doubling of gas in a 12-month period of time, either. So we are really in uncharted water in terms of the kind of increase that fuel has had. I don't think anybody, including the people in the industry, are extremely comfortable being able to quantify what that means.

So, I hope those two answered your questions, Deane.

They do. Just one follow-up, Bob, if I could, on the RV side? I know you downplayed the whole FEMA initiative on getting some trailers into the Gulf area. There was a article today in USA TODAY the talked about a big push to get RV rentals going on, a big boom in the RV rental market into that area, and that's certainly not FEMA. How do you think this has an impact in terms of the inventory in the channel and in the dealer markets?

Well, let me describe the RV market a little bit. There's two pieces of RVs; there's travel trailers and there's motorhomes. Today, you do about 60,000 motorhomes -- a little over 60,000 motorhomes on an annual basis, and you do about 300 to 350,000 travel trailers, okay?

Travel trailers is what they are using in Katrina, and it should be obvious to you; it's not moving; it's going to get there and it's going to be parked, and people are going to live in it. Okay? So the travel trailer side, both on the rental and the sale, the FEMA things we're talking about, is where we think most of the hurricane activity is going to happen. They are not going to pay the additional money and rent the additional capability to have a motorhomes that can move around when you are really going to stay at a campsite.

Our business is predominantly motorhome; it's something like 85% motorhome. That's what's driving our feeling that it's not going to have as much effect on us. It certainly will affect the people who provide travel trailers to that part of the market.

Deane, I think I saw the article you referenced as well with regard to this, that motorhomes, some of the rental fleet, as an example, is being shifted out of California, out of Alaska, down into the Gulf area as a stopgap measure here for some of the relief workers and the press and what not. I guess our view on that is I think it's soaking up some absorption right now in the rental fleet, but we're not hearing any kind of feedback from the OEMs right now that they are producing more motorhomes on this right now. It appears to be something that's benefiting the rental group right now.

But it is early, Deane. I mean, we are less than 60 days from these hurricanes, and it's really too early to try to see whether there will be motorhome upside. I certainly don't feel like Katrina will create any downside. It's just a question of whether motorhome gets a piece of that travel trailer temporary living space.

That's very helpful. Thank you.

Wendy Caplan from Wachovia Securities.

It's actually Julie LaPunzina for Wendy Caplan.

Can you help us understand Europe a little better, particularly COP (ph)? Specifically, does new management there signal a change in strategy in any way? Have the issues been related to end markets, materials, management or something else?

The new management was somewhat of an orderly succession plan that we had. Gus Boel, who many of you know is a director of the Company, took on the COP assignment at the time we acquired that business. It was always envisioned that he would be replaced by permanent management. So that change itself is not a signal of any change in strategy; Gus is playing a role, as are all of us at looking at the European business.

COP had a better fourth quarter than it did a third. Some of that was due to some new program launches that happened. You're also starting to get into a little heavier season in the DIY market. They have a very different cycle here in Europe than they do in the U.S., and we have a strong cycle that starts in kind of August and moves through December. We saw the benefit of that in the fourth quarter. That made COP look a little better.

Thank you.

Scott Graham from Bear Stearns.

Good morning, guys. I was just curious about the integration of KCI. How is it going? I assume it's at least on track with plan. Then also with respect to Hydratight Sweeney and the Purvis business, could you kind of tell us where their thrust is right now and how they are doing, and this whole pulling the product through, the service piece -- how is that going? Could you just sort of give us an update on those acquisitions?

Sure, I will (indiscernible) -- (technical difficulty) -- deal and I'll have Bob take the bolting business.

From our standpoint, integration has gone very well in Key Components. The biggest cost items that we had on our list prior to buying this business as far as synergy opportunities, I think we've pretty much nailed the ones we expected to hit in the first year -- for example, closing the corporate office, getting freight savings out of -- by putting (indiscernible) volume on top of our freight contracts -- insurance, audit fees, benefits, those sorts of things clearly are coming through our run-rate. I think you are seeing, in the fourth quarter and even before, so -- but we are pretty pleased with that.

Now, beyond that, clearly, there are some other things we are working on from a synergy standpoint that take longer time, such as rolling out the whole lead toolbox philosophy into these businesses. That stuff doesn't happen overnight, just when we've taken them through training. We've brought the key purchasing guys to our China sourcing operation to show them what our capabilities are. They are building a funnel right now to drive savings through there, but this is stuff that you're going to see savings start in '06 and continue on into '07 with that, so that's longer term.

But in terms of what we wanted to get, where we thought we would be at year-end versus where we are, I think we are very satisfied overall with that piece of it. I think, longer term, there's a lot of growth initiatives that are being worked on that are still coming. You will see those -- like some of things we talked about, what can we bring to their business because we have a good placement in RV, what can we do because we're dominant? I shouldn't say dominant but we have a nice position in Europe with truck; we can make some introductions (indiscernible) and what not. That stuff has certainly been launched. It's going to take a little bit longer before I think you see benefit out of it, but we're feeling good about that.

The last item is management and just overall the employees within KCI. We're really very pleased with the group that we inherited in this business. The managers are strong and the employees really seem excited to be part of Actuant.

So summing up, I don't think we could be any happier with the deal than where we are at right now.

Just to add what Andy said to KCI, we view KCI as integrated. Now, obviously, there's activity still going on but as you know, Scott, we have this aim process as a funnel of integration activity; it's normally a 100-day cycle; KCI ran a little bit longer than that, but at this point, we view those as fully functioning Actuant businesses. We've owned them for about eight months now and they are fully integrated on our financial systems. All the reporting, all of the cultural things that we were trying to get done are behind us.

Moving to bolting, which came a little bit later and is more dynamic right now in terms of the integration thing, we had two major reports out on bolting, one happened in Europe and the other happened here in the U.S. You know, we are very pleased with the progress we're making. I think we went into the Hedley Purvis/Hydratight Sweeney a little concerned that these two had been fairly big competitors against each other and culturally were going to the harder to align. We did not find that to be the case. We found that both of their strategies were very similar, and that has gone better than I guess we would've expected.

One of the big issues we're spending time on is branding. Which brand name should we use? How are we going go to market? Do you go to market with different brand names per business. We do a lot of that. We've done that with a Gardner Bender and Enerpac for years, and I think that strategy is working well and is close to getting completed.

We have a major effort going on to create a standard product line for Enerpac, and we've already started that process. Enerpac does have some Headly and Hydratight wrenches that they sell now through distribution. Some of that's getting launched next week and at a worldwide sales meeting that's going on in Orlando. We have a pump strategy that's coming the other way, where Enerpac is going to create a new torque wrench pump for the bolting businesses, and that's going on as we speak.

How to service OEM accounts is a very big issue. When you really look at it, there's only a limited number of pipeline owners and providers for both natural gas and for oil/petroleum, so it's more of an OEM business than a distribution business with those big accounts and how you service them. Headly and Hydratight have done a great job of just marrying that strategy across (inaudible).

We have a couple of minor consolidations going on. We've consolidated our support and rental and service center in Houston. We've done the same thing in Aberdeen. Those happened fairly quickly, and most of the team is still in place. It was just a question of housing them all in the same facilities.

So while bolting is not to a point where I would say it's integrated -- it's completely integrated and done, I think the progress we've made has been substantial. It's leading us to start getting a little hungrier for future acquisitions. We don't feel like the team of people who are working on bolting will be freeing up some resources that can then work on other acquisitions.

Very good. Thanks for that.

Curt Woodworth from JP Morgan.

I have a question on some of the marketshare dynamics going on in your RV and automotive business. You mentioned the BMW win this quarter, which I think is the first time you've gotten on that platform. Can you talk a little bit about do you see any marketshare shifts going on, either in your auto business or RV? Also on RV, and I guess auto as well, can you comment on kind of content per unit? Do you see a kind of secular trend to more, higher ASP units?

Okay. Well, let's start with auto. If you know this market and have listened to us for awhile, it's really two major providers, ourselves and a company called Hoiberger (ph) in southern Germany. I wouldn't say there's been any major shifts. Yes, we broke into BMW, but they broke into Carmen on Chrysler Sebring a year ago. So I think what you've got going on at the top-stack (ph) guys are looking at the supplier base and are allocating programs across a couple of suppliers. I wouldn't say there's been any shift there.

As for the content per unit, that varies broadly. The BMW is a small system. That's going to be more similar to our PT Cruiser or our Volkswagen Beetle system. It's not a retractable hardtop that have a lot of functionality.

On other programs like the G6 that's coming out -- is a very sophisticated program, and has little flapper doors and it has a Trenaud (ph) cover and there's lots of actuation. I would say, in general, if you'd total up all our business, the cost per unit is increasing a little bit. That's due to the phenomenon of the retractable hardtop; it's also due to the phenomena where we are also starting to do latching, so you're getting content on that.

We make about the same margins whether it's a low system or a big system. So it will affect the sales line; I don't think it's going to affect the mix of profitability on that.

Moving to RV, again, not much changed over the last, I would say, nine months. We've had wins; we've had losses. On a net/net basis, some data that I looked at recently said we were modestly ahead of our marketshare than we were a year ago. So again, very focused on motorhomes -- that's a part of the market that we really service. I wouldn't say there's any dynamic shifts going on there.

Okay, thank you. Then just the last question on the bolting market -- can you quantify the size of this market, or your addressable market in this segment? A year from now, how big do you think you can get in the bolting market? I know you're at about 90 million right now -- just to get a sense for how much room you have to run here. Thanks.

It's 90 today; we think it's about $1 billion today as a served market. Quite frankly, that could be low as you start getting into some tentacles that are associated with LNG and some of the other ancillary areas that probably are not in that number we are talking about.

Can we grow that? Absolutely. Of that 90 million, we are now the largest player in that served space. It's about equal between service and product, and we have competitors that are probably larger on each of those individually but in total, being able to serve the customer, nobody is bigger than us.

It's a market that I think will grow internally just on the strength of oil and gas. There was a major article yesterday talking about some of the dilemmas associated with somebody who owns a pipeline, whether you should shut it down to do routine maintenance or you keep flowing the oil because it's valuable right now. These are exactly the kind of discussions that we are seeing and having with customers. So, we're very optimistic that this is a great place to deploy capital, as we have over the last year.

I think there will be some more bolt-on acquisitions to do that -- pardon the pun -- but there are some served geographic areas that we are not large in. There is additional competency and capabilities in terms of product that we'd like to add. You know, the team is starting to work on that, although they are focused more on the integration right now than the acquisitions.

I hope that answered your questions.

Yes, it does. Thank you very much.

Charlie Brady from Harris Nesbitt.

On the truck segment, can you just talk a little bit about your expectations in '06? When you talk about the U.S. being down modestly in '06, (indiscernible) you are looking at the (indiscernible) business, given what's going on with the build rates and the Class A trucks and from the emission standard. Is that business expected to still see a pretty strong growth rate? Is it just an effect of some of the European business flattening out a little bit?

No, it's really the other way around. The Europe business we expect will grow a little bit this year; China will obviously grow this year. The U.S. will be down. Now, again, GITS (ph) is going to report probably a year this year an '06 that is down over '05. Again, we only owned it for eight months of the '05 year. The reason for that is they did an emissions program for one of their major customers that basically they always knew was incremental business. A competitor of theirs had developed and actuation system that ended up failing in the field and GITS, in a very hurry-up method, filled that gap with a different product line. We always knew that was a short-term window of business that we did. It was somewhat substantial; it was about a $5 million chunk of business. So, that's the piece that is not repeating. It doesn't have anything to do with marketshare or pre-buy or anything like that; it has to do with a piece of incremental business that GITS taken on a 1.5 years ago to really solve a customer issue.

So excluding that one-time piece of business then, that GITS business would be seeing year-over-year growth?

Absolutely.

That's correct. I think our excitement on this market, Charlie, is beyond '06. I mean, you've read all of the articles I have as far as the expectation that there's going to be a boom here this year and then it's going to fall off. Our goal and our view is we have the opportunity, if things go right, to grow right through this with new wins at other customers. Bob alluded to that with some of the emission stuff we're working on for the '07 standard and the 2010 standard. So that's a lot of what we are focused on right now, is picking up some wins there.

The technology is very unique. The more I've learned about it, the more I understand that creating actuation systems in the hostile environments of turbochargers and diesel engines, where the temperatures are enormous and the vibration is enormous -- there's just not a lot of people who are good at this, and GITS is good at this. The opportunities are quite large or as large as any opportunities we have in Actuant. I don't think we will win them all, but we're talking about some very large contracts. As I said, I think we will give you more communication on these once we win them. I really don't want to set the expectations, until we start winning them, that we will incorporate them into the numbers.

So, it's going to feel a lot I think like convertible tops to you guys. You know, five years ago, we were talking about the world in love with convertibles, more models coming, retractable hardtops. I feel like GITS is in that same kind of early spot and hopefully it follows that same track because obviously that's been successful for Actuant.

Okay. Just on the bolting side, given that your quarter ended August in relation to what's going on in the wake of the hurricanes, have you seen any significant indications or indications for additional work as a result of destruction from the hurricanes, or are you still -- are companies sort of still in kind of a planning mode and not still -- still kind of putting together what they're going to do as far as repair and maintenance work in the wake of that?

It's too early for us to tell. Most of our bolting business is either subsea or, you know, it's not as much of a refinery-type issue. If you follow what's going on in the Gulf, they really don't know what the subsea looks like. It's just too early to understand how much damage was done and what's happening there.

We are working with a lot of customers. We're getting a lot of inquiries about manpower and how fast could we react. Clearly, being a leader in this market, we feel pretty good about that.

Now, I want to caution everybody's enthusiasm. Today, of that $90 million of running rate, you've only got 4.5 to 5.5 million of actual sales or actual service in the Houston Gulf area. Most of our business is in the oilpatch and in the North Sea. So, I don't want your enthusiasm to run away with you in terms of what hurricanes could mean to us because, today, it's not the biggest piece of the bolting business.

Thanks. Just one final question -- looking at the Turner Electric, which you got out of KCI, which is obviously a small piece of the overall business, but given that (indiscernible) has going on with transmission distribution infrastructure upgrades, sort of what your feeling is on the outlook in that? Are you hearing any sort of indications of how that business might grow over the next two, three years?

We are excited about Turner. Obviously, you are correct; it's 1% of the total Actuant family, so if it doubles -- and we think it probably has got that capability -- it might move to 2%, so I want to caution the growth. But we are excited about what they do. Basically, they make pull-top switching for substations and for moving power from the generation through the system. Obviously, the North American grid issues that are going on, that's one of the major issues. How do you move power between geographies when you have brown-outs and other conditions like that?

Turner has a number of new products -- PMX, Andy, is that the brand-name that hit the market -- and that product has been doing quite well.

The big news at Turner, and I think we talked about this in New York, was the adoption of leads out there. We've really been able to improve that operation, both from an asset efficiency and a margin efficiency, by getting after some of the leads. Out of the six KCI businesses, I would say those guys enthusiastically jumped on the lead faster than others. That's just great to see because that is stuff that we've got the resources within Actuant to really help businesses. It adds value to acquisitions that you didn't pay the seller for. What we use the for it is to really bid down the price we pay for businesses by getting those improvements as fast as you can.

Robert McCarthy from Robert W. Baird.

Andy, what organic sales growth rate, or what range of organic sales growth do you have incorporated in that first-quarter sales estimate?

Down -- I would say organic here. This would be our definition of core, which is all businesses year-over-year. We would be looking at something in the range of -1 to -4, some of that type of range.

I would tell you, because of where we are right now, the internal range, meaning business that we've owned 12 months versus that, would probably not be significantly different. As you saw this quarter and the fourth quarter, it wasn't significant different.

Right, right. Given outlook for the businesses that are responsible for those being negative numbers, I assume you have a comparable positive range embedded in the full-year outlook.

Yes. Overall, you know, our overall number year-over-year ex-currency is probably in the 4 to 6 type of range, maybe a hair. All depends on where currency ends up, but that's kind of what's embedded right now in our overall piece. So you're going to see much better growth on the back half of the year than in the front half.

Recognizing that it's a very fluid situation and difficult to forecast, I think I heard you, Bob, say that you do expect to see some growth in the RV components business during fiscal '06.

Absolutely. Yes, okay.

Do you have any businesses where you've seen any material impact on your supply chain from the weather problems that they've had in the South?

No.

We had to rejigger (ph) a little bit from a freight and logistics standpoint, but very immaterial impact on our business, almost nothing.

Okay, and no reason to expect that to change going forward, right?

No, I think the cost of energy is sneaking up on all corporations, whether it's your heating bill or processing plastic, or any of these kinds of things. I think 2005 was the steel and copper year; I think 2006 is going to turn into the petroleum-based year. But I think we've proven and certainly you guys have watched us; we are the middleman in this chain, and we pass that stuff along if it relates to -- rather than get caught in the middle of that. So, we will be aggressive in price increases where we can to offset that. We will be using our lead process and our global sourcing to offset that. I think it's going to be a similar year to '05, where we managed through that probably as good as most companies.

I would agree with that.

Bob, you talked about good momentum building in the tool business, in the industrial tool business in the fourth quarter, where you generated above 10% growth. Is that your way of saying that you think you can sustain that kind of a growth rate for at least another quarter or two?

Yes. I want to be a little careful giving you too much granularity there, but you know the Enerpac business. We get it. It's very global, so it comes from a lot of different places on the globe, and it would be difficult for any one thing to kind of change our momentum. Said another way, you tend to see the warning signs of Enerpac little further out than you do some of our other businesses. Even though it is a hand-to-mouth business, it's from so many different sources that it tends not to turn on a dime.

But that's also, Bob -- correct me if I'm wrong, but that's also a way of saying that you didn't have any unusually large positive contributors to the growth that you generated in the first quarter.

Yes, we made our first billing on Nancone (ph), which is that big roof system in China. You know, that was worth maybe 1% of growth or something like that. But I agree with your statement; there was nothing materially one-time in nature about Enerpac's results.

I'm sorry, one more and then I will let somebody else go. Did I understand you correctly when you -- I got a little confused about whether we were talking about '05 versus '04 or '06 versus '05, when you were talking about GITS. You are expecting -- it was down in '05 from '04; you're expecting '06 to be down from '05. Is the decline in '06 also explained by this one-time unusual piece of business that they had won?

Let me go back through that with you and Andy, chime in if it sounds like I didn't do it right the first time.

'05 was a growth year over '04. We're talking August-to-August fiscal year. If we look at (indiscernible), they were significantly higher '05 to '04. It declined in the back half of that year, based on the fact that the new truck came out that replaced those incremental sales I was talking about. Okay? So, we saw that growth rate slow in the fourth quarter from the third quarter and from the third quarter to the second quarter.

'06, we're saying that it's actually going to go negative, and it's due to the fact you've got the full-year effect of that $5 million of incremental business. If you excluded that, it would be up '06 versus '05.

Now I got it. Thanks a lot. That helped.

One last thing, to go back to your question on industrial growth, and I think it's important. Industrial growth includes the bolting business now, which is 40% of the total, maybe 35% of the total industrial business. That is more seasonal, and we have a large amount of that that is rental and service-related. When you're working on pipelines and things, you're doing that in the summer months, not in the winter months. We have another good quarter coming of that service side, but that's going to create a little bit of a different seasonal pattern for Enerpac than you guys have seen in the past. I just want to comment on that. It's not a downside; it's not something I'm getting any guidance on. I'm just recognizing that there's a seasonal pattern that you're going to have to get used to, and it's really a summer/fall strong sales quarter for theirs, and then it gets slower in the winter time.

Was there a big difference between this year versus last year, same quarter in the traditional Enerpac versus the bolting businesses?

No, both had excellent year-over-year quarters. I guess I'm just talking more about the topline, the absolute topline numbers.

Okay, I got it.

Just on that, just one further point, when you guys are putting your models together, what Bob talked about is even exacerbated more from a margin standpoint, because the big rental season is in the summer, in the fall. That is a very profitable business. At that point, when you get into the winter months, because we're just not renting the stuff, there's no absorption so you see a falloff there. So you're going to see that pattern hitting as well.

That would then affect the first couple quarters of the fiscal year?

Of the calendar year. (multiple speakers)

I got it.

(OPERATOR INSTRUCTIONS). Mike Hamilton from RBC Dain Rauscher.

One big question and then a few details -- just for clarification on Enerpac, if the strike out the bolting side, is your view that Enerpac momentum has peaked for the current cycle?

No.

Fair enough.

On the detail, if you could give some thought on gross margin in the quarter, and obviously you touched on the bolting side. Was what we saw an improvement basically mix, or are there some other things going on there?

Within tools and -- I guess I will comment on within Tools & Supplies, Mike. It was mix due to acquisitions and it was mix excluding acquisitions as well, I mean, Enerpac, relative to our electrical businesses, and then bolting overall relative to the overall group. So it's probably more a mix issue than it was other operational improvements in the quarter.

Anything in SAE (ph) that is one-time in the quarter, or again, is that basically mix laying in?

Pretty much mix -- I mean, nothing real unusual. Obviously, it popped up from the third quarter to the fourth, overall, but that -- just on an absolute dollar basis, but that was a full-quarter impact of the Hydratight Sweeney acquisition coming through more than anything else.

We do have a fairly -- our SAE tends to be more of a fixed cost. You do have a lot of vacation and stuff that happens in Europe, so it's not unusual for that percent to go up in the fourth quarter. I don't think there's anything unusual in there, or it's signaling any change in trend.

Fair enough. Anything you can comment on in pricing and RV and auto? Typically at this phase of the cycle, what's tough gets even tougher. Are you seeing that, or are the new platforms enough that you are able to carry past that?

No, I think it's accurate. It's a tough time for both of those industries in terms a pricing. We've been doing more with Asian sourcing; we've been doing more to augment that but it is tough pricing.

Just a couple of other small pieces -- Andy, if you could comment on tax rate outlook within your thinking and also CapEx?

I will do them in inverse order. CapEx next year, probably looking in the range of $20 million or so; D&A against that 27 to $28 million, so we are clearly on the right side of the curve on that one from a cash-flow standpoint.

From a tax-rate standpoint, as you know, we brought down our rate pretty consistently over time. Part of that has to do with where we're doing business; part of it is statutory declines in some countries, like Holland as an example. The bigger part is just tax planning, things we are doing there. We ended the year here in the low 33 from a tax rate standpoint. Next year, I think I would be disappointed if I wasn't 50 to 100 basis points lower than that; it could be even more, further reduction, but it's that kind of magnitude.

Really nice '05. Thanks very much.

(OPERATOR INSTRUCTIONS). Steven Fisher from UBS.

Just a couple of quick clarifications -- on bolting, is the end market exposure there 100% to oil and gas? If so, are there any other opportunities to move to other applications?

No, of the 90 million -- and these are going to be rough numbers but -- we think about 40% to 45% oil and gas, another 20% to power generation, and the remainder to other maintenance and repair-type industries.

Okay, great. Then just you talked about some of the cash flow items just now. Any major changes expected in working capital?

No. I mean, obviously, if our sales grow a little bit, there will be some pressure on working capital decline. We are hoping we can keep that at bay. If we can, that might be upside to the 100 million we have out there from a guidance standpoint, but no significant changes on a percentage basis.

Okay, great. Thank you.

Mr. Arzbaecher, there are no further questions from the phone lines.

All right, thank you, operator.

Well, we appreciate your participation on the call, your interest in Actuant. If you have any follow-up questions for today's call, give Andy and I a call. We are around for the balance of the week, so 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 a good day.