Enerpac Tool Group Corp (EPAC) 2006 Q3 法說會逐字稿

Welcome to the Actuant Corporation Q3 Fiscal 2006 Earnings Conference Call. Today's speakers are Mr. Bob Arzbaecher, President and CEO; and Andy Lampereur, EVP 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. As a reminder, this conference is being recorded Tuesday, June 20, 2006. It is now my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Thank you, Operator, and good morning. Today we've got a lot to cover, including our third quarter results, a discussion of our Europe electrical restructuring efforts, an update on our end markets, and lastly, our guidance our guidance for the fourth quarter and for fiscal 2007.

Before turning it over to Andy, I want to say that we were pleased with out third quarter performance, meeting the top end of the guidance expectations for both sales and EPS. And that's excluding the favorable tax reserve adjustment that we'll discuss.

The highlights for the quarter include 11% internal growth, 100 basis point improvement in operating margin expansion, a 22% increase in EPS, and $48 million of free cash flow for the quarter.

Andy is going to go through and review these results in detail with you and provide you an update on the Europe Electrical restructuring. Andy?

Thanks, Bob. Good morning everyone. Things came together according to expectations for the quarter. We hit the top end of our sales and earnings guidance ranges. We completed 2 acquisitions in April that had been in progress since last fall. We were pretty happy to see continued strong demand in our industrial markets and the expected ramp up in our Convertible Top production.

Similar to last quarter, our sales increased 17% year-over-year, but we had more internal growth and less acquisition growth this time around. We were happy to see continued strong demand in our industrial markets during the quarter. Our core sales were up 11% this quarter, compared to 8% in the second quarter. Our operating profit increased 30%, as our profit margins expanded, driven by nice improvement in the July segment.

Our borrowing costs increased over last year due to borrowing for acquisitions and 200 basis points of interest rate increases over the last 12 months. EPS increased 30% to $0.86 a share for the quarter. As explained in this morning's press release, our EPS included an $0.08 a share benefit from tax reserve adjustments this year, while last year included $0.02 a share. If we exclude both of these adjustments from both years, EPS increased 22% from $0.64 to $0.78 a share, the top end of our EPS guidance for the quarter.

On a year-to-date basis, we are also tracking well ahead of last year's results - the combination of 7% year-to-date organic growth, acquisitions, and margin expansion. As you can see on this slide, our year-to-date sales are up nearly 25% from last year, while EPS is up 22%. We are in the final quarter of fiscal 2006 and expect to deliver EPS in line with our original full-year guidance.

Now, back to our third quarter. The $317 million of sales for the quarter was a record for Actuant and came in just about the high end of our $300 to $310 million of sales guidance for the quarter. But $5 million of the sales overage came from the D.L. Ricci and Precision Sure-Lock acquisitions, which we completed in April. As you can see on this chart, our 17% third quarter sales growth represented 11% internal growth and 7% from acquisitions, offset by a 2% currency headwind. For the first time in a year both our Tools & Supplies and Engineered Solutions businesses had core sales growth overall, with Tools & Supplies up 10% and Engineered Solutions up 11%.

The turnaround in Engineered Solutions is a combination of 47% core sales growth in Convertible Top from a ramp up of new platform production, as well as RV sales being down 6% this quarter, compared to 14% and 25% declines in each of the last 2 quarters. I'll be providing more color on individual markets in a few minutes, but believe that the Engineered Solutions segment will again generate the stronger core sales growth in the fourth quarter.

As you can see on this slide, our year-over-year sales on all of our primary end markets were positive in the third quarter, with the exception of Truck, which was down slightly, as well as RV. Besides the 47% growth in Automotive, consistent with the last 2 quarters, both Industrial Tools and DIY Electrical led the way in sales growth, both in excess of 10% for the quarter.

Drilling down into the RV market, it's hard to be positive about a year-over-year sales decline, but in the context of the broader motor home industry, we were pleased with the 6% year-over-year sales decline. Why? Over the same period, retail motor home sales were down between 15 and 20%. So the 6% decline is better than retail sales, which we attribute to 2 items. First, a much better balance, which we didn't have last year between production at the OEMs and retail demand. Secondly, a number of wins in terms of actuation applications for customers, including winning back some business and regaining market share that we had lost a few years ago. While we are not calling for a rebound in the motor home market, we do expect our year-over-year sales to be slightly positive in the next few quarters. RV today is about 6% of total sales for Actuant.

As has been the case all year long, our Industrial Tools businesses posted strong results for the quarter. This includes our Enerpac and Hydrotight businesses, and effective in April, the D.L. Ricci and Precision Sure-Lock units. Enerpac, again, posted strong growth in Europe and North America, although slightly lower than last quarter's record pace. Hydrotight, our joint integrity business, was up low double-digits on a core basis and should continue to do well for the foreseeable future given the strong oil and gas markets.

Our Convertible Top business was the fastest grower during the quarter, as I mentioned earlier. This is pretty much in line with our expectations going into the quarter and was a result of the continued increase in build rates on the 4 new Convertible Top cars that you see here. The retractable hard tops, being the Volvo, the Volkswagen Eos, and the Pontiac G-6, as well as the Mitsubishi Eclipse rag top. The good news is that production levels and therefore sales increased; the bad news was the havoc it caused in margins in that business.

Similar to 2004, when the business grew about 60% that year, the learning curve and inefficiencies were both high. Bob will be discussing this a little later in the call. We hope to work these issues out over the next few quarters, but this, coupled with a lower than normal RV shipment, reduced Engineered Solutions margins to lower expectations. Automotive shipments will accelerate further in the fourth quarter's production levels, move closer to normal levels by the Auto OEMs. This will continue to help drive Actuant's overall sales growth in the fourth quarter and into next year.

Shifting away now from sales to margins, our consolidated operating profit margins expanded by 100 basis points in the third quarter, benefiting from acquisition and sales mix as well as cost reductions, including low-cost country sourcing.

As you can see on this graph, all of the improvement in the quarter in margins came in our Tools & Supplies segment. Engineered Solutions margins improved sequentially by 60 basis points to 11.6% but were below the prior year levels due to the Auto startup inefficiencies and lower RV sales. We do expect them to improve sequentially into the fourth quarter, but not as much as we had previously forecasted, which impacts our fourth quarter guidance.

Another development during the quarter that impacts margins going forward is material and commodity inflation. In particular, our copper, energy, and resin costs have increased sharply. Copper, by far, was the worst and primarily impacts our Electrical businesses. In a nutshell, copper prices rose so quickly during the third quarter that we weren't able to pass it on in the form of price increases to our customers. This will actually impact the fourth quarter more than the third when we have a full quarter's worth of purchases at the inflated prices.

As a frame of reference for copper, copper increased from about $2.25 a pound at the beginning of the quarter to about $3.75 a pound before the end of the quarter, before retreating to about $3.25 today. While most customers understand the increase, some will not accept it. In these cases, we have to make the tough decision whether to walk away from the customer to absorb the cost in the hope that the copper prices retreat. Beyond copper, resins, and energy, we also definitely saw price increases in other areas of our segments. We don't think Actuant is alone in having to manage these issues. Inflation with commodities looks like it's going to be something everyone is going to have to deal with going forward.

Wrapping up our third quarter was a big positive. We were really pleased with the cash flow for the quarter. Actuant generated about $48 million of free cash flow for the quarter and paid off $52 million of borrowings during the quarter. While our actual debt levels increased during the quarter, we were pretty happy with them. The increase on accounts of the $95 million of borrowings that we used to fund this quarter's acquisitions. Despite the acquisitions, our debt leverage declined to 2.4 times trailing EBITDA, EBITDA being adjusted to include a full trailing month of earnings at the acquired businesses.

We are expecting to exceed our original $100 million free cash flow target for the fiscal year. This will leave us in a strong balance sheet position at year-end with plenty of availability for future [tuck] and acquisitions.

Before turning it over to Bob, I'm going to provide an update on our European Electrical restructuring efforts. A lot of progress has been made on restructuring, planning, and negotiations, to the point where we are comfortable in providing some more clarity on it to you. The restructuring will be multi-faceted in nature, involving the outsourcing of certain work, including injection molding and store stocking and service in Germany. We also will be shifting manual assembly of switches and other products out of high-cost countries to lower-cost regions, our own plants in Tunisia and the Czech Republic. We'll also be sourcing more product from suppliers in low-cost countries, such as China, and critically reviewing our product offering to determine which SKUs are not making the cut and eliminating them from our line. Lastly, we'll be consolidating into 2 fewer buildings in order to reduce our fixed costs.

We hope to reach agreement with the appropriate Works Councils and other third parties in the coming months that will enable us to start the restructuring in earnest. The restructuring would then take place throughout fiscal 2007 and be pretty much completed during the first quarter of 2008. Our estimated annual pretax cost savings are in the $7 to $8 million range, but most of that will not be realized until 2008.

Although we don't have a more precise estimate of the restructuring costs until final agreements are in place with the appropriate parties, we believe that the pretax costs to the restructuring will be in the range of $17 to $20 million, which includes both cash and non-cash costs for item facilities, severance, inventory write-offs, and moving costs. This is slightly more than a 2-year payback. We expect that the costs will be spread over the next 15 months, with a sizeable chunk of it coming this quarter, being the fourth quarter of fiscal '06.

The $17 to $20 million of pretax restructuring equates to $0.49 to $0.58 a share, which on a per share basis may appear high but that's because we're not allowed to book a tax benefit for the majority of it under GAAP. The restructuring actions will help put our European Electrical business in a better cost position to generate acceptable terms going forward.

Now, I will turn it over to Bob to cover end markets and guidance.

Thank you, Andy. First, I'd like to give you a little color for our end user markets, business units, and end markets. Let's start with Auto. Andy talked about the 47% core growth in Convertible Top during the quarter and we expect to see solid growth in the fourth quarter in 2007 as well. Clearly, we are positive about the Convertible Top market as a subset of worldwide automotive. We continue to see convertibles become more and more mainstream in the Auto market and expect convertibles, as a percentage of worldwide Auto, to continue to increase for the remainder of this decade.

Two good examples of this are the expansion of 2 new platforms that we are launching right now and really are hitting stride in '07. That would be the Ford Focus and the Mitsubishi Colt. The 4 you are looking at here on the screen are really the '06 launches. Both of these new cars, the Focus and the Colt, expand the Convertible Top market as a percentage of worldwide automotive.

Our Power-packer Auto business is not without its challenges, however. It is one of Actuant's lower margin businesses and current margins are severely impacted by the startup efficiencies with new models. This problem existed 2 to 3 years ago when we were launching a lot of new models, and while better, it's also an issue today.

I would like to say these inefficiencies are totally within our control, but many of them relate to rapid shifting of production schedules by our customers and, therefore, are largely out of our control. We have redoubled our efforts to improve this margin, but it's going to take a little bit of patience to get them to acceptable levels.

Moving to the Industrial businesses, as Andy discussed, both Enerpac and Hydrotight had great quarters, both showing double-digit growth year-over-year and both adding to the serve markets with acquisitions. Both D.L. Ricci and Precision Sure-Lock, the 2 acquisitions we completed this quarter, are great examples of [tuck] and acquisition strategy at Actuant.

Hydrotight and Enerpac were already in both the flange machining and the concrete tensioning markets. The bulk of the acquired companies are leaders in their submarkets and thus increase Actuant's presence and capabilities and expand our current served markets. Both acquisitions were of North American centric and allow Enerpac and Hydrotight's global capability to create incremental growth.

And finally, both Ricci and Precision will be able to leverage 2 of Actuant's key processes - our lead continuous improvement process and our low-cost country sourcing capabilities in China. At the 7 to 8 times EBITDA valuation we paid for these businesses, we think they are excellent examples of how we deploy capital and through synergies I just discussed get a premium in return to that capital deployed.

Now, let's move to our Truck business. Our global Truck business, consisting of Power-packer and Gits, account for approximately $140 million of Acutuant's sales, as you see on the screen here. On a year-to-date basis, sales in these businesses have been about flat with the prior year. We are expecting Europe to be flat to down next year, but North American business, namely Gits, to be down 30 to 40% over next year or around $20 million on account of the pre-buy of Class A trucks in North America and the end of a major EGR contract with a customer.

While both Power-packer and Gits have excellent long-term prospects in terms of growth, 2007 is going to be a tough year. What we find perverse about this is that even though we have to manage through this slowdown with Gits in 2007, Gits is actually one of the long-term beneficiaries of the tighter emissions standards. We have numerous significant opportunities across the broad spectrum of engine and turbo charger applications for 2008 and beyond. And we have very expectations in terms of growth for this business.

With that, I would like to turn to our guidance for the fourth quarter and for fiscal 2007. Before I start, let me remind you of what Andy already advised you of regarding Europe Electrical restructuring. That the charges for it would be spread over the course of the next year and that the first of these charges would be coming in the fourth quarter. Given the inherent uncertainty on timing and amount of these charges, all of these restructuring charges have been excluded from both the 2006 and 2007 guidance I'm about to give. But rest assured that we will give you full transparency of these costs as we go forward on a quarterly basis.

Starting first with the fourth quarter of 2006, past history suggests our fourth quarters are typically pretty similar with our third quarter. While this year we'll be able to pick up a little incremental revenue from the acquisition of Ricci, Precision, and BET, we typically see a seasonal slowdown in Europe sequentially during the summer vacation, due to summer vacations and shutdown.

While we had hoped that the fourth quarter would be stronger than the third in terms of margin, the commodity cost inflation has dampened our previous outlook. We are now projecting a pretty similar quarter in the fourth quarter to the third quarter, excluding the tax reserve adjustment. We are predicting sales in the range of $310 to $320 million in sales and EPS in the $0.73 to $0.78 per share. This would be up 16 to 24% over the fourth quarter of 2005. Provided we meet these expectations, this will complete our fifth consecutive year of meeting or exceeding our 15 to 20% EPS growth target.

Moving to 2007, we expect Actuant's continued growth track record to be intact, albeit at a slower pace. Essentially, the 3 items Andy and I discussed earlier. Slowing 2007 sales growth, headwinds from the Truck market, and raw material price inflation are headwinds to our earnings growth. We are projecting sales of about $1.3 billion, give or take $10 million, or around 10% up from fiscal 2006. Core growth, meaning no acquisitions or currency, we would expect our growth to be in the 4 to 5% range on an internal basis. And the carryover impact of acquisitions for next year is $35 million on the top line, considerably less than we saw in 2006.

We expect Tools & Supplies to be a little above this 4 to 5% Actuant average for core growth in 2007, with Industrial Tools continuing to lead the way and Electrical a little softer, up against some tough comparables, due to last year's product recess, both in Europe and in the U.S.

We are projecting a slowdown in growth rate for both Enerpac and Hydrotight in '07, and while we've only seen limited of this, both businesses operate with virtually no backlog. And we think it's prudent to be conservative at this point going into 2007. Our Electrical businesses will slow in 2007 also, but similarly, lower growth rates than 2006 on account of no line fills at lows and praxis, which helped this year, and an expected SKU reduction as part of our Europe restructuring, which lowers the sales there. We would expect Engineered Solutions to be a little lower than the 4 to 5% Actuant average in '07, with growth in RV and Auto being offset by declines in Trucks that I discussed above.

We look for modest margin expansion and profit of 25 to 50 basis points, up from fiscal 2006. While we did better than that this year, we are fighting the headwinds of raw material prices, particularly copper, and fighting a mix issue, as Auto growth significantly had a lower than average Actuant margin. We are targeting interest expense to be in the range of $26 to $27 million and it's assumed that we will see one more rate increase. Our effective tax rate should modestly decline from the 2006 level and should be in the neighborhood of 31 to 32% for the year.

If you run all this through your models, you will come up with an EPS range of $3.15 to $3.35 per share, up low double-digits from 2006. Again, this excludes Europe restructuring costs. While this is less EPS growth as a percentage than 2006, I'd like to remind you of the following. The shrink in the Truck business sales of around $20 million is worth $0.10 to $0.15 a share. As I discussed earlier, while 2007 will be a tough year for Truck, we will more than offset this decline in 2008 through 2010, as the Truck market gears up for the 2010 emission requirements and uses -- gets technology to help get there.

The raw material price increases, net of customer increases, have been running about $1 million a quarter for the last few years. Pricing of raw materials, particularly copper, have increased rapidly in the third quarter. And based on our current assessment, we're expecting a $2 to $3 million drag a quarter in the 2007 forecast. Again, we define this drag as net cost increases by vendors, offset by net price increases we can pass along to customers. This increase is worth about $.10 to $.12 per share for a full-year basis.

Based on these 2 items, as well as the Auto mix discussed above, we think a 25 to 50-basis point improvement in margin is a satisfactory result for 2007. We accomplished this margin improvement by offsetting these headwinds I just discussed with our lead program and our Asian sourcing capabilities.

Moving to cash flow, we're expecting cash flow for 2007 to be in the $105 to $110 million range. And this is before the Europe restructuring efforts. CapEx is projected to be $20 to $25 million, with D&A around $28 million. This free cash flow will be used to either reduce debt or fund additional acquisitions.

Before taking your questions and getting off guidance, I want to remind everyone that our 2007 guidance does not include future acquisitions. Acquisitions over the last few years have been a major contributor to our sales and earnings growth and I would expect the same in 2007. But it is not prudent to forecast these unknowns into our guidance at this point. So we'll continue our policy of announcing acquisitions and updating our guidance once the deals are closed.

That wraps up our guidance and our prepared remarks. Operator, I would like to turn it back over to you for our investor's questions.

Thank you. [OPERATOR INSTRUCTIONS.] Deane Dray, Goldman Sachs

On the guidance, you identified, and it was very helpful, and calibrated the impact on the Truck for next year as well as commodities. And you also, there were 2 other items; maybe you can help calibrate those. The first was on the acquisition contribution. If we compare last year, if I have my numbers right, it looked like you had a carryover of about $140 million from ACI and Headley and so forth. What's that number going into '07? Is it in that $30, $35 million range?

Yeah, it's probably around $35, Deane.

Okay. And then the other piece, and I'll come back to acquisitions, I just want to make sure we calibrated that, I know you don't include acquisitions in your guidance, in the fourth item, beyond the commodities, Truck and acquisitions, it was just a general sense that you'll get some of the Tools business, the Enerpac business, is likely not going to grow double-digits forever. And so could you address what kind of moderating growth you are expecting out of Enerpac next year?

Okay. Well, it's a good question and a very difficult one to answer. As I said in my prepared remarks, Enerpac is a hand-to-mouth business. It does not come with a great deal of backlog. You don't get the kind of visibility you would get in some of the OEM businesses. But after taking that into account, we saw that Enerpac and the Industrial Tool business slow slightly in the third quarter, still well into the double-digit neighborhood and probably a good barometer of what we see.

I think our view is that we've got the guidance set at about 7 to 9% of growth in terms of those businesses. There is probably 1 to 2% of price in there and the rest would be unit volume growth. So that's a significant slowing. If I'm wrong on that I'm going to be conservative. There is nothing -- there is no market share changes, there are no other issues there, I just think 15 months out of trying to deliver a forward-looking forecast, we don't particularly want to stretch any further than that. And, Deane, being a long-term guy, it was probably my same position last year with Enerpac.

What I'll clarify or just add a comment, is I don't really see it as slowing. I mean, I just want to comment on that. We're not really seeing slowing as a year-over-year. Slowing is just the growth rate is decelerating. I think moving toward a more normal steady growth environment, clearly, what we've seen in the last several quarters with Enerpac and Tools & Supplies has been strong, Industrial Tools being the double-digit growth. That is just not sustainable on a go-forward basis and we haven't built that into our forecast.

Well, I would say a 7 to 9% is still a very healthy growth for Industrial businesses.

And, again, a couple percent of that is probably price.

Okay. And then 4 to 5% is your internal growth guidance for '07.

That's correct.

And then last question is give us a sense on the acquisition pipeline in terms of how realistic do you think there will be transactions done or are you a ways away on those?

Well, we've got things that are fairly far down the, what we call, the aim process or the acquisition funnel, where you are in negotiations with other parties. So I would expect acquisitions will continue to lump in on a fairly consistent basis and I think our prior guidance of $150 to $200 million of deals, smaller deals in the $25 to $50 million range, is exactly what you should model.

And that's for '07.

No, that's in our guidance, but that's exactly what you could model.

Scott Graham, Bear Stearns

Bob, you did a great job, as usual, of the laying out of Enerpac and some of the other things that you talked about. Could you do the same type of what your thought processes behind the 4 to 5% organic growth for the other businesses as well, even if it's just for the 30,000 feet. The one thing I will add, if you don't mind is, the European DIY business with what is looking like a fairly sweeping set of changes are going to take place there, to what extent have you incorporated within your 4 to 5% organic growth that this will impact Kopp and Dresco sales?

Okay. Well, let me start with that one first. We're forecasting very low single digits for Kopp/Dresco combined. I would say probably most of that is price, due to the copper that we're attempting to pass along. So I think we forecasted that during a period of restructuring you are not going to see a lot of growth. Now, I would tell you that that is -- in the last quarter we just finished, we had pretty decent growth out of our Europe businesses and there is some element of recovery going on in Europe as we speak. So that's probably something that's a little bit of a buffer. Offsetting that, we are trying to get out some of the lower profitability SKUs.

If I walk down some of the other businesses, I think bolting is going to be in the same similar neighborhood as Enerpac in terms of growth, 5 to 7%, maybe a little higher. We're still learning that business, Scott. We're trying to be conservative. We haven't lived through a lot of cycles in that oil and gas market. So we're trying to be careful.

I think if you look at Gardner Bender, the U.S. business, mid-single digits, probably a couple percent of that is price, the rest would be growth. We do not have major market share switches with people like Home Depot or Lowes. We're just expecting somewhat of a steady as she goes period of time there.

When you look at the Specialty Electrical, it's a little higher than that, 6, 7% neighborhood. What's driving that? We've got a pretty healthy Marine market, at least in the markets that we've been serving. The B.E.P. acquisition has opened up a few global opportunities for us. We've got some cross-selling there.

Acme, I think it's going to be somewhere upper end of the corporate average. That's the Professional Electrical business. That's where we'd go.

Auto, no real difference, 15 to 20%, which is the range we've been giving you for a while. I think we're saying that that will be in the same range.

Truck, I talked about, flat in Europe and down in North America, about a $20 million decline there, 30, 35% decline.

RV, small growth, 0 to 5% zip code. We think it will be positive. There is probably some upside in that, but again I think we've lived through a very low number there. I don't want to lead a recovery when we really haven't seen the evidence of it yet.

I hope that answered all of your questions, Scott.

It does, indeed, on the sales side. If I just could ask this one other question. To the extent that you're working on margins in your businesses, which you delineate in your press release, could you give us a little bit more about what the game plan is on the European restructuring, what happens on the first 100 days, what happens in the first 6 months, and what are some of the other things you are doing in the other businesses as well?

All right. Well, I'm going to have Andy start that conversation with the Europe restructuring and then I'll come in behind and talk about some of the other business.

Scott, there's been a fair amount of work that's been going on in the background, but the key thing to getting it done is getting an agreement with the Works Council with Europe, and discussions have been going on with them essentially since late last January. So it definitely is not a case that we haven't been doing stuff. That's the key thing in it.

Other things behind the scenes that has been going on have been getting all kinds of quotes in China for outsourcing certain products that are made in the Czech Republic, as well as Germany, and totally outsourcing them, as opposed to making them in-house. We also have been working with a number of contract ejection molders over the last 3 or 4 months to get pricing on outsourcing all of our molding. So we would have no molding machines left in that business. That's pretty far along on that and that would probably be one of the earlier actions that would be taking place in this thing as far as starting, but it's going to take quite some time to transition out because Kopp has now probably 28 injection molding machines at their location and that doesn't happen over night.

There is also going to be happening, I would say near calendar year-end, shifting of manual assembly of switches and different types of products. There are going to be lower unit runners out of Germany into the Czech Republic and more so down in Tunisia, which is lower cost areas for us. So in terms of timing, a lot of these actions are going to be kicking in before the end of the calendar year, but the link here obviously is [that the Lynch] is obviously getting an agreement with the Works Council, which we think we're making good progress on.

Behind the scenes, there have also been negotiations with Star Service crews. These are the firms that will go in and put in placement orders and tidy up your set. We've had RFQs going out with a number of different firms for that in Germany, which impact something that presently is done in-house. That will be shifted in gear, pretty high gear, as well once we get an agreement with that party going forward. So a lot of work and SKU reduction as well. There are some SKUs, I can tell you right now, we plan on just getting rid of and others we're working on. So you are going to see action coming up this fall and it will generate savings by a lot of the individuals in terms of where the headcount savings really come from are coming out of the back half of next year.

Scott, as you know, Europe restructuring is fundamentally different than the U.S. I know you cover a lot of global companies. Basically, you have 2 things that happen that don't happen in the U.S. One is there is a negotiation with the Workers Council that happens -- that lays out the business case and what you're trying to do. The second is there is a notification period based on seniority. These things can last a long time. This is the stuff that basically puts you in the majority of the savings into 2008. The process is going in earnest right now in terms of that negotiation. The 2007 full year will be the notification period and things going on and there will be the downsizing happening during that period. And you'll come out of that in the fourth quarter. And then going into next year, we start seeing the benefit.

Let me move to your other half of the question though. What other restructuring or cost initiatives are you driving across the rest of Actuant? I do want to remind you, while we're waiting for getting some of those things done and while we're fighting these headwinds we talked about, Actuant has had a pretty strong track record of improving margins. You see that this year certainly. And a lot of that is driven by our lead process and we've been driving the lead process harder this year in 2006 and I expect that to continue in 2007. We did a lot of training this year. We started bringing every business unit into the lead process in the past. We had only the major units involved. So we really have done that and I expect that will accelerate and continue to work.

The second is China sourcing. Today, we've got about a 90-person organization, all Actuant employees on the ground in China. These people are sourcing about $90 million of component and raw material for us out of China. That's about 20% of our spend. It's somewhere in that zip code for the total Actuant organization. We would expect over the next 3 years you probably could double that and we are driving that process strongly. That's one of the key ingredients, obviously, to help the Kopp Europe price cost structure. It will also help automotive. We are looking at that as a fairly major effort. The Truck business, we've got some initiatives going on. So there is a lot of activity around the China sourcing to also roll it a component cost.

I hope that answered the questions you were looking for there.

Charlie Brady, DMO Capital Markets

On Enerpac, how much growth in '06 is from pricing versus just organic growth?

Probably 3 to 4% is pricing.

Okay. And then on the --

That would leave low double-digits in terms of organic.

You didn't finish your question, sorry.

So 3 to 4% pricing in '06. And even with taking the pricing out, your base growth on Enerpac is still double-digits?

Right. Moderating as we are going through the year, but yes.

And then that double-digit base growth dropped over 50% to '07 in my -- at least in your guidance. Would that be kind of what you're telling us?

That's an accurate forecast.

But you don't have any -- you haven't seen a significant slowing yet. Price slowing at Q3, but nothing that would indicate that magnitude of slowing, at least in the near term?

That's correct. You are accurately reflecting the fact that we think traditional industrial markets are going to slow in '07 and Enerpac, which has had just a great recovery since the last slowdown, the growth is going to moderate into the 5 to 6%, 7% neighborhood. That's pretty heavy. (Indiscernible).

On the [Packer] business, have you seen any similar slowdown going into the fourth quarter on bolting? Or in the third quarter, did you see any slowing of bolting?

We did not, but I will tell you that is a revenue trend that has more seasonality to it than Enerpac. And, again, we acquired some of those businesses at the beginning of the last season. So we're trying to live through our first full season of some of that. So it's a little harder to look at. I guess I would tell you a 3-month rate of change in bolting has quite a bit more volatility to it than it would under Enerpac.

Now that you've got the Ricci acquisitions and the other ones, you sort of formed it all with the Hydrotight business, and I know Ricci is not as high in oil and gas as the other. What do you think the overall blended mix tied to oil and gas markets would be? 50%?

I think that's fair.

Okay. Switching gears a little bit, on the Trucking side with Gits, and in your guidance you see it down significantly and have it at 7 on its pre-buy. Is that a shift in your thinking to what you would have thought 3, 6 months ago?

I think it is and I think if I want to put some criticism on myself for the Gits business, I think we assumed that we would pretty much offset the Gits shortfall for 2 reasons. One is that we're an obvious [GRN]. We thought the pre-buy would kind of offset the pulse buy. Number two, we have a China growth initiative going on in our total Truck business, so we thought Power-packer would be able to offset some of the Gits shortfall. Some of that is probably going to happen, but clearly -- and then the third thing, and probably the most significant, is we really thought that some of the new emission wins that we are working on and that we are in the process of getting some test stands, etc. would create a little more incremental revenue in the back half of '07. And I think what we're recognizing is the timing of those programs has a longer lead time. It doesn't -- you don't win that program and then start shipping next month. It's got a longer tail to it. Probably more like an automotive Convertible Top lead time. And because of that, the offset is not happening. And that is a change from 90 days ago.

Robert McCarthy, Robert W. Baird

Bob, following on that last question, you've been talking about a 30 to 35% decline in Truck. What are you talking about?

It's about $20 million. It's, basically, the Gits business in North America.

Yeah. So that $20 million is a 30 to 35% decline at Gits?

That is correct. Power-packer is mostly a European business. It doesn't have the same pre-buy issues. Most of our vehicle Truck business within Power-pack are in North America, due to the fact that the cap tilt market is very small here. It's mostly specialty vehicles - military, off-highway, big vehicles. And those don't have the same impact to the '07 changeover.

Okay. Compared with this $2 to $3 million per quarter headwind in raw material costs, which I gather you're just assuming is going to last all next year. Is that right?

Yes. I mean, we are not forecasting any decrease in copper, if that's what you're saying. I mean, copper is probably the big commodity that's done. Now, it's come off a little bit over the last month, but it is still significantly up. It's in the 3.25 neighborhood right now. And we're forecasting that to stay at that level through '07.

And you're anticipating taking some pricing actions?

I think we have.

It's a continuous process on pricing. So there is pricing going though the system. We have raised prices at a number of DIY accounts. But, as you can imagine, these are very difficult negotiations with a fairly brutal market in terms of getting pricing through. And we're -- I will stand by -- well, Actuant has been the hallmark actually. We've taken an aggressive role in trying to pass this along, but we are also realistic. It never seems to line up exactly with what's going on in the copper market itself.

Okay, but you would, of course, continue to make efforts, as next year unfolds, to get more pricing if costs remain at elevated levels? Wouldn't that be right?

Yes, it would.

Okay. And compared with the $2 to $3 million, that's the number you're talking about you think you will see on the fourth quarter. How big was the number in the third?

A little over $2 million.

It was running about $1 million in the earlier quarters.

And I gather from the way you were talking about the RV business, you think you could see a positive revenue comparison in the fourth quarter?

Yep. We expect that.

Okay. But then would -- you're saying you think it would -- you are not going to count on anymore than, what, lower single-digit kind of growth going forward?

2 to 5%.

5, okay. In Auto, I'm a little confused, Bob. You have startup problems associated with a lot of new business, you got huge quantities being yanked around, etc. Why would that be a persistent problem in future quarters?

Well, we're expecting margins in Auto to improve in 2008.

'07.

Sorry, 2007, my fault. We do expect margins to improve in 2007 from the 2006 level. To get there, we have a lot of work to do. You've got 2 new launches in the Mitsubishi Colt and the Ford Focus coming in. So you've got additional new inefficiencies that will come and start in the fourth quarter and run through probably the first quarter. At the same time, you start getting a better running rate on the G-6, on the Volvo, on the Volkswagen Eos. And the balance of all of that is we're saying it will be an improving margin picture.

You don't have any -- you haven't discovered any pricing problems in any of your programs, have you?

No.

Okay. And with the improvement, would you get back to -- I mean, historically, we talked about this 10% level as kind of a minimally acceptable level for that business. Do you think you can get back to that level before the year is over?

Yeah.

Okay. One more, if you will indulge me. In your outlook for -- or I'm sorry. In your summary of how third quarter sales performed in the different business units, the table with the 0 to 5, 6 to 10, over 10?

Yep.

How do I split the domestic DIY from the European? How did they perform relative -- because they are both in DIY Electrical, right?

Yes. It's, clearly, a GBS, primarily do-it-yourself electrical, about three quarters of it is. And the same thing with Kopp.

Okay, my question is I gather GB was up well over 10% and Kopp was up --

No, I think, Rob, what you're forgetting is we had the Lowes launch last year in the third and fourth quarter, which was adding a fair amount of incremental revenue. Because you basically had done the buyback and you were replenishing all of the shelves. Now, it didn't affect the margins as much because that buyback had a fairly significant cost to it. But the revenue growth for GB in the DIY slowed considerably in the third from the second because of those launches.

So you really did have a very strong comparison in the European business?

We did. We were low double-digits in Europe.

I've got it.

So it was a good period in Europe. Now, unfortunately, that doesn't help you much at the bottom line, right, because our margins in Europe are much lower than they are in North America. So that is not a mix that worked in our favor from a margin point of view.

That's understood, but if you are going to generate $7 to $8 million in cost savings, that's against a -- in Europe, isn't your sales base there something like $140 million?

Yes.

Oh, a big incremental margin. Okay, thanks guys.

Mike Hamilton, RBC Dain Rauscher

I was wondering if you could comment a little bit on the China business within the country? What you're seeing and what your feelings are on economic trends there?

Okay. We have, even though China today is a quite small piece of Actuant, it's only about a $20 million chunk of business for us, we've got fairly high aspirations to get bigger there. And a couple of areas. The $20 million we're doing today is about three quarters Enerpac and about a quarter Truck. There is really not a lot of Electrical in there. And that would be an initiative that we would like to push. There are some opportunities within Elliott, our flexible shaft business within Europe. Sorry, within China. So today, small base but growing at a fairly decent rate. We're expecting kind of core growth in the 10% in terms of market and at what new things can we add to what we're already selling there.

When you move over to the sourcing, I think I already covered that. We would like to do a lot more than the $90 million in sourcing of components that we're doing today.

If we could shift over to European Electrical. As you've been able to analyze what it's going to take to get that business to where you want, what do you see are the Actuant core competencies that you're bringing to that marketplace? So what compels you to want to stay there and go through the pain?

Well, we like the DIY market. I mean, it is a direct connect with the consumer. Consumer spending is an important ingredient to any economy. Europe is a little bit behind where the U.S. is in terms of store consolidation. So you don’t have the profitability and a praxis or a metro or a bow house or a bow mat that you would have at a Depot and a Lowes, but we think that consolidation is going to happen over the next 3 to 5 year period of time. And you'll start seeing some improvement there.

The big difference in the big core competency I think that we see is about 60% of Gardner Bender comes from an already low-cost country source product. We've been doing that for a long period of time. Giving the U.S. consumer the quality that they want but also hitting the price points in the channel. We are not nearly as far as along in Kopp. If I'd give you the same percentage, it would be 10 to 20% between the Europe Electrical business. So that is the core competency that we were going to bring to that equation and that is a significant change from where we're at today, where we are much more vertically integrated, vertical manufacturing. And that's really the crux of the Europe restructuring efforts.

And I assume you're -- I'm sorry.

I like -- let me just finish. I do like the Europe DIY market. We haven't spent a lot of time talking about it, but there is great growth going on in Poland and Czechoslovakia, some of the Eastern European things. We see where Home Depot has made a lot of innuendos that they are going to go international, probably start in China, but I think there is a fair amount of evidence that they wouldn't mind getting something in Europe. I think you're going to see globalization of that. You already have [OBE] really globally going around the world. So we're going to have to be in that business. If we're going to be in the DIY, we're going to have to be in Europe.

I assume that you also have not seen your competition make a lot of the outsourcing moves in Europe?

I think the major change that's happened in the 4 years we've owned Kopp is 4 years ago it was difficult to have a Chinese source product hanging on a wall in Germany. The consumer, the tradesmen, they really want a dramatic product. There has been a fairly major shift in that direction. And it has allowed Chinese competition to come in. It's allowed some of our German competitors to try to do exactly what we're doing. So I don't think you should come to the conclusion that other people can't do what we're doing.

Last one. As you look at your excellent job in diversifying across cycles and just in your inherent growth, how do you feel on your 15% longer-term EPS target and do you think you are going to need to do some things like share repurchase realistically to be able to stay there as you take a longer-term approach?

That is a great question. Now, let me try to dissect it. We have been saying, literally, from about 2 years after the spin-off that 15 to 20% growth is our long-term target. And we've had a good track record of hitting that over this period of time. Now, as you get bigger, Mike, you obviously understand that this gets more and more difficult. Obviously, General Electric would like to go 15 to 20% too, but when you get to a certain size, literally, it makes huge differences. And I think we're finding the fact that those numbers are harder to get to. So what I think we're starting to focus on is delivering upper quartile returns. What is upper quartile? I think it does mean 15 today. So you are seeing us be a little more cautious in terms of 15 to 20 is more upper quartile type returns.

Now, we never said we were going to do 15 to 20% returns without acquisitions. We've always thought that in our current size that you can probably get 10% of that growth from your base businesses and that your acquisitions are going to have to chip in a bigger piece than that. And, quite frankly, that's what's been happening over the last 2 years. Acquisitions have been adding easily that 5%. And what we're saying is our guidance for next year includes the one, which is the core growth and the internal growth in the acquisitions we have. It doesn't have any factor in there for the acquisition growth. So I'm still pretty positive that in the end of the day the 15% upper quartile growth for 2007, it's not an easy target but it's one that's probably in the zip code, just depending on how the acquisitions play out.

Steve Fisher, UBS

Just a couple of clarifications here. I know you said you'd see $7 to $8 million of savings starting in fiscal 2008 from the restructuring. How does that ramp up? Are you going to see anything material on the back half of fiscal 07?

You probably get $1 million in each of the third and the fourth quarters coming through, but the run rate really doesn't hit until the first quarter of '08.

Okay, great. And you may have covered this already, but how does that 25 to 50 basis points in margin improvement in '07 break out by your 2 segments?

We really didn't give that guidance, so let me try to ballpark that. Andy, chime in if I'm not accurate. I think it's going to be pretty even between the 2 segments. I think, as we talked about, I think the Electrical tends to be, given the restructuring we're doing in Europe, it's probably a little less. And Enerpac and bolting, just given its higher growth rate and the variable contribution coming through is probably a little bit more. When you move over to Engineered Solutions, Truck clearly going to be less. You're fighting off a $20 million volume decrease and there is some variable contribution that kind of comes with that. Bottle will be up, as we talked about earlier. RV will be up, provided the sales are up. That would probably be your color.

Mr. Arzbaecher, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay. Well, thank you very much for being involved in the call today again. I think Actuant continues to try to focus on its long-term shareholder value creation. This is our first guidance for 2007. I look forward to driving and making that successful and continue to add acquisitions that could add to that guidance. I look forward to taking any of your calls. I will tell you that Andy and I are traveling this afternoon, so you've got about an hour to 2 hours here to grab us if you need us. Otherwise, we'll have to catch you later in the week. Thank you very much 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 great day everybody.