Enerpac Tool Group Corp (EPAC) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation second-quarter fiscal 2006 earnings conference call. Today's speakers are Bob Arzbaecher, President and CEO, and Andy Lampereur, Executive Vice President and CFO.

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. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details.

(Operator Instructions). As a reminder, this conference is being recorded Wednesday, March 22, 2006. It is now my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Thank you, operator, and good morning. We're pleased with Actuant's performance for the second quarter. Similar to the first quarter, we delivered the high end of our sales and earnings guidance and we did it in a quarter where we still had some challenges in a few of our end markets. The key highlights for the quarter -- first, sales were 276 million, a record for our second quarter. Sales growth excluding acquisitions and currency rose 8% for the quarter, while our core sales growth which we define as both acquisitions and owned business growth grew 6%. This was a marked improvement from the first quarter, where core sales were essentially flat.

EBITDA margins were 14.9%, an increase of 100 basis points over the second quarter last year, with operating margin growth even stronger at 120 basis points. This helped drive net income up 27% versus last year, resulting in EPS growth of 21%, moving from $0.52 a share to $0.63 a share.

Now, I will turn the call over to Andy to go through the details of the quarter and come back later to discuss a number of key business initiatives with you. Andy?

Thanks, Bob. Good morning, everyone. As Bob mentioned, we had a pretty good second quarter. It came together pretty much as we had hoped with automotive sales picking up nicely, a new platform launches and with continued strength in tools and supplies.

Sales increased 17% over last year to about 276 million, which is down sequentially as we had expected on account of normal seasonality at Actuant. As Bob mentioned, core sales growth was much improved at 6%, again representing year-over-year growth at both acquired and our base businesses.

Operating profit grew 29%, which is higher than the sales growth, meaning we once again had margin expansion. Similar to last quarter, our borrowing costs also were up sharply due to borrowings from last year's acquisition as well as a 200 basis point net increase in interest rates over the last 12 months.

The combination of all this was a 21% year-over-year increase in EPS from $0.52 to $0.63 a share. This was at the high end of our earnings guidance, reflecting stronger sales and margin expansion. The 21% increase understates the real improvement that we see when you take into account the $0.02 a share EPS drag versus a year ago just due to changes in exchange rates.

Results for the second quarter similar to the first reflected the benefit of last year's acquisitions, including AW Sperry, KCI, Hedley Purvis, and Hydratight Sweeney. Given the timing of the KCI acquisition, midway through the second quarter last year, our acquisitions had a much larger impact on our first-quarter results than those of the second. With two quarters under our belts or the midpoints through 2006, Actuant has generated a 29% increase in year-to-date sales as well as operating profit margin expansion and an 18% increase in diluted EPS. We delivered $1.33 of EPS this year versus $1.13 last year in the first half, and we are on track to meet our full-year guidance.

Now, back to the second quarter. Sales for the quarter of 276 million came in just above our previous 270 to $275 million sales guidance for the quarter. We generated 8% growth from our base businesses, added 14% from acquisitions, and overcame a negative 5% impact from currency to report the 17% top-line growth. Not unexpectedly, most of the growth came from the tools and supply segment with engineered solutions growth being negatively impacted by year-over-year declines in RV sales.

This chart is the summary of year-over-year sales growth, excluding currency in all of our businesses, not just the base businesses. So, this is core growth. As you can see and consistent with last quarter, both industrial tools and DIY electrical led the way in sales growth, while the automotive sales year-over-year rate of change moved into positive territory as we had expected. As you may have noticed, our base business sales were up 8% year over year compared to 6% up year over year in all of our businesses. We have provided both of these sales growth metrics to you in each of the last four quarters, given the significant impact of acquisitions on our results during this timeframe as well as the sizable impact of the sales declines we are experiencing in our RV and automotive businesses. Since we have lapped the majority of the acquisitions and the two metrics are very close to one another, we're going to revert to just reporting the traditional sales growth metric of sales growth excluding acquisitions in future quarters.

I wanted to spend a little more time on the RV market and brief you on what we're seeing there. About 90% of our RV revenues come from the motorhome segment of the market with the majority of that coming from Class A motorhomes. Unfortunately, this has been the part of the market that has been hit the hardest by weaker consumer confidence and excess dealer inventory versus last year. Our RV sales were down 14% in the second quarter, an improvement compared to the 25% decline in the first quarter. While it was an improvement, it was a disappointment as the RVIA forecast for calendar '06 had called for a 5% annual decline in motorhomes. However, things didn't rebound the way we expected during the second quarter. For the last 3 months, our Class A motorhome shipments by OEMs to dealers, which is wholesale shipments, declined anywhere from 15 to 31% for the three most recent reported months, while Class A retail sales being to the end customer declined anywhere from 18 to 29% during the same month as you can see on this slide.

Based on the feedback we're getting from our customers, which are the RV OEMs, they are being very cautious not to build any excess 2006 model year inventory that could potentially be leftover on dealer lots when model year changes take place at the end of the summer. This coupled with weak retail demand has many OEMs working reduced workweeks again. Similarly, the updated University of Michigan 2006 RV survey now forecasts a 10% decline in the calendar year Class A motorhomes in calendar '06 compared to a -5% in the prior forecast.

While this is not positive news for Actuant and it is one of the reasons we didn't take up our guidance for the balance of '06, I need to emphasize that RV was just 6% of our sales in the quarter. We've been able to deliver our targeted earnings this year despite the headwind in this market on account of strength elsewhere, including industrial tools, which we're going to talk about next.

Industrial tools means our Enerpac and Hydratight businesses, which have been posting nice sales and earnings growth for the last several quarters. Enerpac generated its highest year-over-year sales growth in the second quarter on account of continued strong global demand as well as a few large individual shipments. The first of these was a Nantong Stadium project in China, which Bob will discuss later on the call. The second was $1 million plus shipment of bolting product to an existing Enerpac customer, which really gets us excited and confirms our belief that there are sale synergies between Hydratight and Enerpac.

Another highlight during the quarter for Enerpac was it receiving Grainger's Partners and Performance Supplier Award, which recognized it as a top two supplier to Grainger, which is a growing customer for us.

Another continued area of strength for Actuant has been do-it-yourself electrical and North American electrical. We continue to see strong year-over-year growth in the US, beyond the impact of the Lowe's we set last year. Similarly, retail DIY demand in Europe was a little stronger than we had anticipated with sales growth 5% up from a year ago.

The Hydratight business also had a good quarter despite being sequentially down from the first quarter on account of low service revenues during the winter months. We are encouraged by the continued strong demand from our oil and gas customers for our bolting and joint integrity solutions.

Before moving off our sales comments, I wanted to spend a little bit of time in automotive convertible top. This is a market that has seen some big year-over-year sales changes over the past few years on account of new platform launches. We started shipments in the second quarter in the US. The Pontiac G6 and the Mitsubishi Eclipse have ramped up production in Europe on both the Volkswagen Eos and the Volvo C70, resulting in our first quarter of sales growth in the year in automotive. Sequentially, we moved from -29% year-over-year sales decline in the first quarter to positive 5% this quarter. As you can see on this chart, we expect this growth to accelerate over the next two quarters significantly. This will drive Actuant's overall core sales growth higher over the same timeframe.

So, in summary, for sales with the exception of a weaker-than-anticipated RV market, we're very happy with sales for the second quarter. We saw continued strength in industrial tools and electrical and saw the automotive inflection point that we had predicted for sometime. We expect the acceleration of convertible top shipments as well as weaker RV comps and continued healthy demand in our industrial tools and North American electrical markets to drive accelerating organic growth in the back half of the year.

Now, let's shift to margins. Our overall operating profit margins expanded 120 basis points year over year to 12.6%, despite increasing components and raw material pricing pressure we're seeing. While down sequentially due to normal seasonal trends, our margins were slightly better than we had forecasted on account of favorable sales mix, increased low-cost country sourcing of components as well as SAE and four-wall cost control. Year over year, our margins also benefited from favorable acquisition mix with higher-than-average margins coming in from both the Hydratight and KCI acquisitions. Excluding these acquisitions though, our year-over-year operating margins were up over 100 basis points in the aggregate in our base businesses, so things are definitely on the right track. From a segment standpoint, you can see much of the improvement came from tools and supplies, which benefited from top-line growth in some of our more profitable business units.

On the engineered solutions front, our margins were down a modest 20 basis points. But that was not a surprise, given the normal startup inefficiencies with the convertible top ramp-up as well as lower RV production volumes.

We're at the midpoint of the year. Our operating profit margins year to date are an even 13% compared to 12.3% for the comparable period last year. This is a 70 basis point improvement, and it's near the high end of the 40 to 80 basis point margin expansion target we had set going into the year. So, things are on track. We expect our margins in the back half of the year to be up 50 to 100 basis points per quarter, reflecting higher low-cost country sourcing, improved efficiency in automotive, as well as favorable sales mix.

Wrapping up my comments now on cash flow, our second quarter was dead on our internal target. As mentioned in this morning's press release, we generated net debt reduction of $1 million to 417 million of net debt. But we used 9 million of cash during the quarter to fund both the BEP acquisition and some earnouts on past deals. Our working capital at the end of February was about $20 million higher than at the beginning of the fiscal year on account of normal seasonality as well as business growth, but we expect to get a big portion of this back in the second half. We are on track for the 100 million of free cash flow forecast we've targeted for the full fiscal year. That cash will be used to reduce borrowings and to fund future acquisitions. Debt leverage and borrowing availability are both in great shape and provide plenty of room to fund our growth initiatives. Bob, I will turn it back to you.

Thank you, Andy. Before discussing guidance, let me go through a couple of the key businesses and their impact in the quarter. First is automotive. As Andy stated, automotive sales increased 5% during the quarter as we began production in earnest on the four new models -- the Pontiac G6, the Volkswagen Eos, the Mitsubishi Eclipse, and the Volvo C70. This growth will accelerate in the third and fourth quarter, as these models begin to reach full production and they are up against relatively easy comparables in the prior year, while we remain very excited about the retractable hardtop phenomenon, including the G6, the Eos and the C70. While retractable hardtops have been in the mainstream car scene in Europe since 2002, in North America, they are new at the $30,000 price point. We are excited what this technology could mean to the convertible top marketplace for the foreseeable future. Convertibles represent a high-growth niche segment in the automotive marketplace.

Speaking of retractable hardtops, I would be remiss if I didn't discuss our largest retractable hardtop, the Nantong's National Sports Stadium in China, about 2 hours northwest of Shanghai. I was able to visit this stadium 2 weeks ago and watched one-half of the roof retract -- truly an architectural wonder, given the curved roof surface design that resembles an eye lid. This sliding roof is actuated using an Enerpac system of cylinders, pumps, sensors, cable, switches and electronics. The revenue from this project is approximately $5 million, making it the largest single project in Enerpac's history. We started recognizing revenue on this program in the fourth quarter of last year, and the revenue stream is largely completed by the end of the second quarter. The program now goes through a fairly intensive testing stage with the first sporting event in September of 2006.

Next is the RV market. As Andy stated, RV sales for the quarter were down 14%, a significant improvement from the first quarter but nevertheless weaker than our expectation. While Andy covered this market in significant detail, I want to reiterate our long-term view of the growth nature of the RV market. RVs continue to be a large market in the North America with an estimated 8% of the households owning an RV. Peak buying age for an RV is between 50 and 55 years of age and represents a growing portion of the population due to the baby boomers. Our expectation is that Actuant sales to the RV market through a combination of increased content per vehicle and unit growth in the market itself will grow two to three times GDP for the decade. As I've said many times, this growth will not be a straight line and will test the quarterly nature of some of our shareholders. I just remind you that this quarter, RV represented less than 6% of Actuant's total revenue. So, don't lose too much sleep if you don't share my enthusiasm for this market.

Now, let's move to acquisitions. While we did not complete any acquisitions this quarter, it was not for lack of ideas or effort. We had a few deals get delayed for a variety of reasons that were out of our control. We have a full funnel of ideas that are -- that we're looking at, including a few that are pretty far along. The businesses we're targeting are core strategies of industrial tools, electrical tools and actuation systems.

I think it's worthwhile to review our acquisition strategy for you. As this slide shows, we want to grow our revenue through a combination of internal/organic growth and acquisitions. Over the last 3 years, we have significantly increased our focus on internal growth initiatives and feel we've made good progress in this area. And I think you are seeing that in the core sales growth this quarter.

Our current acquisition strategy is to focus on tuck-in acquisitions that fit our core markets of industrial tools, electrical tools, and actuation systems. We would like to close on 100 to $150 million of tuck-in acquisitions for these markets each year. That would be maybe four to five deals in the 20 to $50 million neighborhood.

We also spent sometime this quarter on a large acquisition outside of these current markets. Ultimately, we were not successful due to valuation. The reason I mention this to you is that over time, we probably will expand beyond our base platforms. While it hasn't happened yet, we don't want you to be surprised when it does.

Before discussing guidance, let me discuss our Europe electrical restructuring initiatives. We have nothing new to update you on from the first-quarter call. We're still in negotiations with the Workers Council in Germany, and these negotiations are not at a point where we can quantify and communicate the magnitude of our restructuring efforts. But, nothing has changed in the second quarter from our view that we need to lower the cost structure in Europe. We're going to do this with a combination of transferring work from Germany to existing facilities in Czech Republic and Tunisia through low-cost country sourcing initiatives from China and through a significant SKU reduction program using 80/20 Parado analysis. We hope to provide you guidance of all these initiatives in the third quarter when the restructuring becomes clear, and this restructuring is likely to begin in the fourth quarter and last through 2007.

Now, let's talk about our guidance for the third and fourth quarter. As our press release described, we are expecting sales in the third quarter of 300 to 310 million, an increase of 10 to 14% over the prior year. This represents stronger core growth than the 6% in the second quarter, driven by continued strength in industrial tools and North American electrical and sizable growth due to the automotive programs we discussed earlier.

Going the other way, we expect continued negative comparables in RV, although probably not at the second-quarter level. We expect currency to continue to be negative year over year, similar to the second quarter, and we expect continued weak results from the Europe electrical business.

The EPS guidance corresponding to the sales estimate is in the range of $0.73 to $0.78 per share, with operating margin expansion of 50 to 100 basis points. While this forecasted EPS growth of 11 to 18% is a little lower than the rate we just completed in the second quarter, we want to remind you of a couple of things that are driving this. First, we have lapped the KCI acquisition. So, the initial earnings accretion from this important acquisition is behind us. Second, between a tax reserve adjustment last year and higher interest rates this year along with a weaker euro, we have an additional $0.04 to $0.05 drag in EPS headwind against the third quarter of last year. We would expect fourth quarter to be slightly stronger in terms of earnings than the third quarter. For the full year, we've raised the low end of our guidance by a nickel to the range of $2.80 to $3.00 per share. We expect sales of 1.155 billion to 1.175 billion to go with this earnings per share. This guidance does not include the benefits or costs contemplated in the Europe restructuring initiative and includes no more acquisitions. We continue to expect free cash flow in the neighborhood of 100 million or north of $3 a share. Providing we reach these earnings targets, it will represent Actuant's fifth consecutive year of meeting or exceeding our EPS growth target of 15 to 20%.

Operator, with that, I would like to turn it back to you to take the investors' questions.

(Operator Instructions). Deane Dray, Goldman Sachs.

Just a clarification on the guidance for the third quarter. You said sales growth 10 to 14. What's the organic assumption for the quarter and then for the year?

Well, just to put the backdrop, we have the two definitions that we have -- the core sales growth, which was up 6, and the excluding acquisitions entirely, which was up 8. What we are expecting is the core to be a couple 100 basis points better than that 6% it was in the second quarter, somewhere between 6 and 8% core growth. That will translate into probably a similar growth to the 8 excluding acquisitions because KCI will then come into the fold.

Then going forward, you said you would go back to the definition that excludes acquisitions. That's correct?

Correct.

Then how about for the year?

I think the growth rate we gave you for the year was 4 to 6% internal growth. What we are seeing is that we're getting that for the top end of that. So, 6 to 7% for the year -- what it would blend out to.

Then two follow-up questions. I'm getting a little bit of an echo here. One for Andy, just give us a sense of in the quarter, the dynamics between pricing and raw material costs. Then for Bob, I am trying to come back on the deal that was outside of your core businesses that you passed on valuation -- a question on that.

We definitely had some of both in terms of the pricing of raw material increase. I would say the increases -- the raw material increase is a component -- increases one out during the quarter in terms of we had a net drag of probably a couple $1 million during the quarter. Areas that we're seeing it in particular would be copper again and specialty electrical steel, both of those in the electrical businesses -- also, starting to see more in terms of corrugated and transportation costs. We definitely had price increases along the way. But, we're not getting them in every single business enough to cover those. So, it was a net drag during the quarter.

Just to add a little color to that, I think in selected commodities, we're seeing north of 10% price increases in a lot of different areas. I think we have been successful at passing along a majority of that through the channels, not all and certainly not across the board when you look at the diverse nature of the Actuant business unit. So, 2 million of drag as Andy said, not a -- it's kind of in line with what we expected (multiple speakers). But, it's at a time where it's pretty brutal in terms of the inflationary pressures that exist in some of these commodities.

When you say the 2 million drag, that includes some of the benefits of productivity increases offsetting (multiple speakers) positive?

No. What that would be is just the net between price increases and cost increases on the commodities. We then have offset that with other productivity increases, and that's what led to the 100 basis point improvement in EBITDA margin.

Low-cost country would also have contributed to that as well.

Then, just a question on the comment that there had been a transaction you contemplated that would have taken you outside of the core businesses. To the extent that you can, just sort of what's the thought process -- what's the -- what might have been any sort of the leverage points or synergies within the core businesses today with this contemplated new platform?

Well, the market we were looking at was related to kind of safety -- industrial safety products. So, it was not -- it was a business that fit kind of helmets and glasses and -- the safety market is a fairly big market, so there's a lot of little niches in it. The synergies we liked about it is a lot of that product gets sold to existing channels, both the retail channel and the professional kind of Grainger-type channel. We like the nichey nature of it, a lot of little places where you were competing against large competitors. This particular asset had a similar style to Actuant in that it wasn't very vertically integrated; it had very strong incremental cash flow-type margins. So, we continue to try to steer away from capital-intensive businesses. We thought we had some leverage points with this one; it was predominantly North American centric. With our international operations, we thought there were some opportunities.

But, in the end of the day, we were not successful due to valuation. Without boring you with details, you are seeing very high prices paid in a lot of different markets and a lot of different acquisitions. I think we continue to stand at the plate and not swing at some of these pitches that at least in our view is going to have a hard time having a return on invested capital theme to it. So, ultimately, price was the big driver that drove us away.

That was great color. With regard to the potential of the positioning of that products, we would've considered that to be a pretty attractive space, especially how fragmented and the ability to leverage your channels. So, those look like exciting opportunities and we will stay tuned.

Yes, again, I don't want to shock people that we're spending a lot of time there. It's not where we're spending most of our time. Our time is spent in these core markets of industrial tools, electrical tools, and actuation. But, we do look at some of these other markets. I think over time, we're going to have to expand our served marketplace. You know, this was one that kind of shared some of the customers, so I think took some of the risk out of the acquisition.

Wendy Caplan, Wachovia Securities.

It's actually Julie LaPunzina for Wendy. Can you give us a little more color on demand in different geographic regions?

Sure. For us, it was actually pretty level between those core growth across the regions. We had good results out of the industrial tools in Europe. We had good results out of industrial tools in Asia, that large order that Andy talked about was out of that territory. Obviously, Nantong, the big roof system is out of that territory. And we had it in the US. Probably the places that was a little weaker was -- geographically, truck in the US was a little weaker. And Europe electrical while it was positive, it was pretty weak.

Also, you might have mentioned this, but I know you were looking for above-average growth from the resets at Lowe's in the quarter. Did that happen? Did you see that?

We did. Now, the comparable year last year was affected by a couple of things. First, Lowe's was making a major move to reduce their own inventory in terms of what they had in their distribution centers. We started shipping a lot more to indirect directly to stores rather than to distribution centers. The second thing was as we had already won the relaunch of Lowe's and they were deliberately trying to bring the inventory down getting ready for that relaunch. So, a combination of those two factors was a very easy comparable in Lowe's. That won't exist in the third and fourth quarter.

Charlie Brady, Harris Nesbitt.

Can you just talk a little bit more on truck. I know you just mentioned it was a little weaker in the US. I'm just kind of wondering sort of what you know, given the (indiscernible) European business, what's going on there. Is the weakness in US truck -- is there anything going on with Gits that's important for us to know? And then, can you talk about trucks in China, that opportunity?

Quite a bit there to talk about. So let me try to get them all. If I miss any, come back at me. Starting with setting the expectation, while it was weaker, it was expected to be weaker. I think we told you guys on the prior call that Gits had some incremental orders in prior years related to us solving a technology issue that didn't work in the marketplace with a specific customer and that was the lion's share of the softness that I talked about. It was totally expected by us as we went through the year and I think you probably remember those calls. Gits is continuing to percolate along on a lot of new opportunities for expansion both in the turbocharger side of the market but also on the engine actuation. Just to refresh people, Gits makes some actuators that live in the hostile part of a diesel engine -- very high temperatures and very -- a lot of vibration. We have been successful at getting ourselves specked in on some design programs. We are on engine tests around the world, both Europe and US. We are excited about those opportunities, but they are opportunities of '07, '08, '09 timeframes. So they are not something that's going to have an immediate gratification in terms of the earnings flow.

The comment I would say just in total on this is for the balance of the year, I mean we were down modestly in the second quarter here. We were up a couple points last quarter. I mean our forecast is to be hanging right around that hoop plus or minus a couple of points for the full year. So, we're not expecting a significant change. The Gits situation has pretty much anniversaried itself, and the results won't be quite as weak as what they were this past quarter.

Moving to China -- as I said, I was over in China a couple of weeks ago. We've got a number of truck initiatives going with FAW and CNHTC are two of the bigger truck companies going there. We had double-digit growth in terms of that marketplace in the second quarter. We had even stronger growth in the first quarter. We continue to believe that that's kind of a 10 to $20 million opportunity for us with reasonable market share. We've been working those initiatives pretty well. So, China truck is in launch mode for us. It's not a material amount of sales, but it has been a growing market for us.

Thanks and just on the automotive business, your forecast for the second half of the year particularly Q3 if I looked at that chart you guys have versus the chart you guys show I guess in your fourth quarter, the third quarter obviously is a pretty big ramp-up versus your previous -- is that just because of the results that we saw in Q1 and Q2 in terms of some of that -- your expectations kind of slid more to that? Or is there any (multiple speakers)?

I don't think that that range has really changed that much from the prior slide. It might have been fine-tuned a little. It really is due to the fact that you've got a full quarter of the -- of that launch and you are up against easier comparables in the prior year.

Both of the -- when you look at the four models that have launched so far, they are still in launch mode. They are not at normal production levels -- any of the four yet. They are still working their way up. So, the fourth quarter will probably see more of the normal run rate for these four and the third quarter will be getting there. So, that's why you see a little bit more growth in the fourth quarter. Plus, you're up against a pretty easy comp from a year ago in the fourth quarter.

As these things have ramped up, generally you run into some sort of hiccups and time to go back. Any surprises in these ramp-ups, or has it been sort of a normal ramp-up for you guys?

No. It is always difficult as you state in ramp-up mode. We have had efficiency issues across this. We've had some tooling issues and a few supplier issues associated with programs. All of that was within our guidance, our expectations. We planned and I think told you guys going into the year that automotive itself -- the margins we had indexed down conservatively because we thought there would be some efficiency issues, nothing outside of the realm of normal behavior for us and certainly nothing to the magnitude of some of the problems we had in 2004 when we were launching a lot of models.

Just one more question, I'll get back in queue. Just on the foreign exchange, did I hear you correctly? In your third-quarter guidance, you are just assuming kind of a same sort of impact that you experienced in Q2?

Yes, it's probably about a 10, $11 million drag year over year, yes.

Same kind of 5% drag.

Scott Graham, Bear Stearns.

Two questions for you. Could you give us an idea of where you guys are on the KCI and Hydratight and Hedley integrations? I know, Andy, your comment of the accretion on KCI being essentially lapping going forward. But nevertheless, I know how you guys are on the cost side. Where are we in -- what stage are we in each of these businesses cost opportunity realization if you will?

Okay. I mean, KCI in our belief is a complete acquisition. Whatever KCI we're doing in terms of integration, it feels just like any other Actuant business unit at this point. So, they are involved in our lead events. They are -- there's really no what I would call integration efforts still going on in KCI. Clearly, there's things like penetrating the Europe engine market with Gits product and penetrating Europe with Elliott that are longer-term plays. But again, I view that as kind of normal business for Actuant. We have those same type things. They are integrated with our low-cost country sourcing operations; that has already happened. We saw good benefit of that. It's not on a full 12-month rolling basis but nevertheless saw a pretty good activity that quarter.

Moving over to Hydratight and Hedley, I would say these are in the eighth inning of a 9 inning game in terms of the integration. We are under a single brand name. We are under a single facility in Houston. We've consolidated into the single facility in Aberdeen. We've moved the Hevilifts product line to Enerpac. We've launched the product for Enerpac that's being sold under the Enerpac brand name. So, I would say we are in the later innings of that integration. That is a longer play. I mean we believe that that's $1 billion market we're playing in, and there's lots more to do in terms of aggressively -- we are already the leader, a little over 100 million in sales. What can we do to continue to drive our initiatives there? You know, even though it's in the later innings of the integration, there's a lot of additional opportunities including acquisitions in that area.

I think in the bolting, where a lot of the cost stuff has taken hold, even though we haven't seen a full 12 month's cycle on it, I think what we're getting excited about is similar to what we saw this quarter, just some leveraging opportunities on the top line across customers, across products. Rolling those out into the market, there's still some room to go there.

I think one way of commenting on this and I know you have traveled with me to know that I say that the gating factor on acquisitions is management and my team's ability to integrate these deals. When I say we are in the later innings, what I'm saying is we have people that are now ready to support additional acquisitions. And that wasn't the case 12 months ago. I think after KCI and Hydratight, we were in a position where we knew we were going to focus on getting those integrated. That is now behind us, and we're looking at the next wave of potential ideas. The only one that is in true integration right now would be BEP.

You are a mind reader, Bob. Because that was my second question about -- we've been kind of quiet on the acquisition side a little bit. I know pricing has been an issue, but I also know that management resources have been an issue and I know you like to do them right. Is there anything that tells you between now and the end of let's say this calendar year that you can't hit your acquisition target?

No. No. I would say that we -- I think this kind of concept of $100 million -- 100 to 150 million a deal or the side deals in the 20 to $50 million range, I would say that I feel quite comfortable with that. It never seems to hit exactly one a quarter or anything like that. But, I'm fairly comfortable that we are on that track record -- track rate. Even with pricing going up, I think we are in that neighborhood. There's just enough things in the funnel that give me confidence.

(Operator Instructions). Curt Woodworth, JP Morgan.

Bob and Andy, can you talk a little bit more about the European restructuring that you're going to start in the fourth quarter? You know, how sizable is this going to be? What is going to be the impact on those businesses? Ultimately, what type of cost savings do you expect to obtain from this?

That's precisely the guidance I can't give you. The reason for that and I think people who have been through these Europe restructurings will appreciate is, there's a fairly major negotiation that happens with workers councils. In Germany, it's nothing like what happens in the US. We are knee deep into that process. There are meetings that are happening kind of on a weekly basis. There are timetables you are on. If you don't get the settlements within certain dates, you go to arbitration. It's a very formalized, legalized process, and I'm not going to try to predict the outcomes of that. Obviously, we have a range that we are willing to accept and other ranges we're not. But, I'm not going to try to predict that at this point. It's just there are too many dynamic factors.

What I will tell you is we're focused on trying to get to more of the Gardner Bender model in terms of our acquisitions. If you just look at a couple of metrics, today, GB has about you know 50 to 60% of the products coming from low-cost country sourcing. Kopp and Dresco are nowhere near that level, and that's part of the philosophy we want to get to -- have a more variable cost structure. So when you have very large seasonal swings, which you do have in the Europe DIY, you are not heating that fixed cost in the down periods. That's what has led to a lot of the substandard margins.

That's helpful. Andy, you had a comment in the prepared remarks, looking for 50 to 100 basis points of margin improvement. I think quarter on quarter the next two quarters, I just want to make sure I have that right. Also, if you could provide a little bit more clarity on where is the margin improvement going to come from? Is it mostly on the auto side, or do you see more margin gains on the industrial tool side as well?

Sure. Last year's operating profit margin third quarter was about 12.5. In the fourth quarter, it was about 13. I think we are expecting over the next 6 months that the improvement over those two quarters to be somewhere in that kind of range. Where is it coming from? It's the full-year impact of some of the sourcing activities that we talked about. It is the lack of a buyback in DIY. If you remember, last year, we had two of them. We had Lowe's going on and we had a big one in Europe with [Practice Plumbing]. That would be driving it on that side.

A continued mix benefit here, clearly some of our more profitable businesses like electrical and industrial are doing well right now that will help the mix. On the engineered solutions side, I think it's also low-cost country. It's going to be volume as automotive comes up. It's going to be the efficiencies in automotive as the learning curves and the change orders from the customer stop. We expect the RV volumes year over year to -- or the comps to get a little bit better. So, that's where I see it coming out of.

Just one final question on the acquisitions. If you expect to hit this target of 100, 150 million in 4 to 5 deals, you have 5 months left in the year. So, I assume that a lot of things are in the hopper are pretty well along then. Can you just give me a sense for what are the markets you're looking at? Is it more on the bolting side still or maybe back to some of the actuation markets?

It's all of the above. We have acquisitions targeted at bolting, at industrial, at electrical and at actuation. It's all of the above. It's not limited to any particular geography. I would say China is not part of it; there's not a very active M&A environment over there. We don't have a lot of effort going. But, other than Asia, I would tell you it's pretty robust looking in visibility for us in both Europe and North America.

The other item I would clarify there -- I think when Bob made his comment about acquisitions and thinking we could hit 100 million or so, he's talking about the calendar year as opposed to fiscal year. I think you made the mention of the next 4 or 5 months here, so --

I guess I would answer that a little different then. As I said, it's a little lumpy. Last year, we did 450 million of deals. So, this year, we expect to do 100, 150. I think I described in my prepared remarks that a couple of those deals got delayed for things that were out of our control. I think I am probably guilty of being too enthusiastic of exactly when these happen and acquisitions just don't work that way. I think you just got to prepare yourself for lumpiness. There will be quarters where nothing happened. There will be other quarters where you say, wow that -- on that running rate, you're going to do $1 billion of deals. It's going to be that kind of lumpy.

Scott Macke, Robert W. Baird.

I just wanted to take a step back just in terms of China sourcing and wanted to get I guess a better understanding for how much product overall Actuant is sourcing out of China maybe in terms of dollars or in terms of percentage of cost of sales and how rapidly or how significantly that opportunity can grow from here.

Andy, if I chime in behind you. But we are on a running rate right now of about $90 million for the year. That is supporting all the Actuant business units. Some are a little further more advanced, like Gardner Bender than others but somewhere around 90 million. We think that's about 20% of our component purchased material posted in that zip code. One of the things that we talked about when I was over there a week ago is in addition to component purchases, we're also looking at doing some more assembly operation there. We're doing that today with truck and with some Enerpac product and with some Gardner Bender product. We'd like to bring a few more businesses online there. So, that might be more of an Actuant-dedicated facility that accomplishes some of that. So, fairly broad initiatives going on in terms of that. We are really keeping our efforts focused just on China. We're not looking at India and everything else. We're trying to marshal our resources into a specific China strategy.

Then in terms of -- you talked about what -- bringing some assembly over there. Is this something where between assembly and sourcing, it's 90 million today and we could double that in 3 years or 5 years or what sort of trajectory seems reasonable?

My guess is you could double it in a 3 to 5-year period. Now, I expect some of that doubling will happen because we did acquisitions. What we find is acquisitions are further behind in Asian sourcing than our base businesses. So, we bring that competency and quite frankly that accretion right to the acquisition. You know, I do think this is a business that could double and maybe even go bigger than that. It's going to get paced by acquisition integration. We have about -- one last comment, Andy. We have about 90 Actuant employees that do sourcing on the ground in the Shanghai area; some are out at satellite geographic locations. But, we have a 90 person organization. They are all Actuant employees. It's not third-party reps or anything like that. The initiative is fairly robust and it's fairly new. We really only put that organization together in the last 24 months.

The other comment I was going to add just from a sizing standpoint -- the acquisitions clearly come into play here. But over the last 18 to 24 months, we pretty much doubled our volume over there and then part of that has come from the acquisition. So, it's dependent on that whether we could double it again.

Then, just a final follow-up to that. With the business that you sourced over there to date, what sort of cost savings have you experienced or have you realized with that business?

It's hard for me to quantify at the Actuant level because it varies fairly wildly. You have some businesses that are -- to use an analogy -- are picking fruit very low on the tree and other businesses that have been doing sourcing over there for a long time that are higher up in the tree. You know, the range varies from 15% to 40% in terms of saving. Our earlier comments that we have a $2 million drag in a quarter that we're obviously overcoming or we wouldn't have the margin expansion that you're seeing, obviously we're getting savings. I don't want to try to quantify it in terms by total Actuant or by business.

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

All right, terrific. Thank you for participating in our earnings call. We hope you are excited about our financial results. I think it's a combination of accelerating core sales growth, significant EBITDA margin expansion and strong EPS growth. Andy and I are available all day today and tomorrow to answer any of your follow-up questions. 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.