Enerpac Tool Group Corp (EPAC) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation first quarter fiscal 2007 earnings conference call. Today's speakers are Mr. 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 safe harbor language in Actuant's press release issued today and 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 Wednesday, December 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 are pleased to announce record first quarter results which were at the high end of our quarterly earnings guidance. Some highlights include 21% sales growth. If you exclude currency and acquisitions, our core sales growth grew 9% with all four of our revised business segments participating. EBITDA grew 16% to an all-time high of $51 million. At 15%, this represented a margin decline from the prior year, and Andy will discuss the details of this with you momentarily. And lastly, our EPS was $0.81 per share, up 16% from last year's first quarter and at the high end of our $0.78 to $0.81 guidance for the quarter.

This was a quarter where we met the high end of our expectations even though a number of our business units didn't perform that great, and we'll discuss this with you as we go through the call.

Now I am going to turn it over to Andy for -- to go through the quarterly details, and I will come back and update you on our guidance for the rest of the year. Andy?

Thanks, Bob. Good morning, everyone. We started off fiscal 2007 obviously on the right foot with solid sales and EPS growth. As you can see on this slide, the EPS growth is a result of a combination of top line growth, lower operating profit margins, and higher interest expense. In total, the results were in line with our guidance and expectations but we had some puts and takes across our diversified portfolio that I will address shortly.

One change that should have been apparent from reviewing our press release and the accompanying schedule this morning was a change to our segment reporting. This results from some internal changes in how we view and organize the business units within our portfolio and was influenced by the SEC's review of our fiscal 2005 10-K. As part of its normal cycle, the SEC reviewed our 10-K and raised about 10 issues related to reporting, all of which were quickly addressed with the exception of one comment on segment reporting. It is fair to say that compliance with the underlying segment accounting rule, which is FAS 131, is difficult for most organizations and it is even more difficult for multi-industry companies like Actuant that have a lot of diversity by design in business units and a lot of end markets.

While we believe we were in compliance with FAS 131, the SEC review, coupled with our own internal review, established that we were not in compliance. The issue related to internal report distribution to Bob, who is our Chief Operating Decision Maker which is a term used in FAS 131, and he had previously had access to financial information at the business unit level which the SEC says is not a good thing. With the help of our auditors and advisors, we critically reviewed our internal management reporting and report distribution in the first quarter and fixed the issues to comply with our new four-segment reporting approach. We believe that this expanded four-segment reporting alignment provides investors with more transparency and is consistent with the way we internally look at the portfolio.

As you can see on this slide, the change we made from a year ago is really pretty straightforward. We simply split the former Tools and Supplies and Engineered Solutions segments into -- each of them into two new segments. Mark Goldstein and Bill Blackmore continue to oversee the same operations that they previously had but now you have more detail.

Our overall focus in Tools and Supplies has always been on branded tools and supplies going through various channels, be it industrial distribution, fluid power distributors, the DIY stores, electrical wholesalers or specialty distributors and in channels like marine. With the new segments, we've effectively split Tools and Supplies in two to separately highlight the electrical and the industrial operations. As you can see here, the Industrial segment now consists of Enerpac and the acquisitions that we've added to it over time including Hydratight and Precision Sure-Lock as well as tuck-in acquisitions to Hydratight itself including D.L. Ricci as an example.

The new Electrical segment consists of all of our electrical business. This includes GB Electrical, European Electrical consisting of Kopp and Dresco, Professional Electrical which includes Acme and Actown,and Specialty Electrical which consists of a variety of brands including [Marenco] and Anchor, BEP and others.

Turning to our Engineered Solutions group, our primary focus has always been on position in motion control or actuation. Over the last ten years, including a few before the spin-off, we picked up some other highly engineered businesses that weren't necessarily position or motion control oriented but were good OEM-type businesses. With our new segment reporting, we have split the old Engineered Solutions segment along two lines, the Actuation Systems businesses and the other Engineered Products businesses. As you can see on this slide, the Actuation Systems segment now includes Automotive, both of our truck units, RV and Elliott. Meanwhile, the Engineered Solutions product or Engineered Products segment consists of our non-actuation OEM businesses, Milwaukee Cylinder, Turner, Nielsen-Sessions and Acme Aerospace.

As I mentioned earlier, we have restated in this morning's press release our 2006 quarterly sales splits, EBITDA splits, and operating profit by segment to conform to the reporting that we have this quarter. We hope you find the new reporting helpful in better understanding Actuant.

Now let's dig into first quarter results starting first with the sales line. This first chart shows the build-up to our 21% year-over-year first quarter sales growth. The biggest piece of this was core sales growth at 9% overall. Acquisitions year-over-year added 8% growth and currency rate changes because of the weaker U.S. dollar impacted sales by a favorable 4% impact.

As mentioned earlier, all four of our segments generated core sales growth. The first of these, Industrial segment's core growth remained robust during the quarter due to the continued strength in our oil and gas end markets as well as power generation and solid industrial MRO demand with the Enerpac. The 11% core growth in the quarter for this segment was sequentially lower than the fourth quarter but in line with our expectations of moderating growth.

Turning now to our Electrical segment, the core sales here also moderated from last quarter, most notably in North America's residential construction market and the marine market. While core sales growth was down sequentially, we remain comfortable with our 3% to 5% full year core sales guidance for the Electrical segment.

Actuation Systems segment core sales growth was 16% which is the highest of the four segments and clearly benefited from the continued year-over-year growth in automotive but as well as growth in the other major end markets being RV and truck. Not surprisingly, our automotive sales were up significantly, 45% on the strength of new convertible top platforms. Truck sales were also very strong, slightly above our expectations which is driven by the pre-buy demand in North America leading up to the January 1st new diesel emissions standards that come out. As Bob will comment later on, we expect Actuation Systems segment core sales to decline sequentially from the first quarter to the second driven by auto and truck.

Stepping back now to the consolidated level, sequentially our 9% core sales growth was a modest moderation from the fourth quarter. This was expected and was consistent with our guidance. It reflected the moderating industrial growth in North America and a tougher construction market. We expect to see this continue as the fiscal year progresses. We still expect about 5% core growth for the year but the back end of the year will exhibit lower core growth than the first half. This, coupled with the truck pre-buy and headwind in the form of anniversarying our convertible top automotive platform launches, will result in second half core sales growth in the low to mid-single digit range.

Now one last thing on sales before I move off it, I wanted to quickly cover product line sales. As I mentioned earlier, and you can follow along with me on this slide, both our Hydratight and Enerpac businesses performed very well in the quarter with core growth in the 10% zip code. Our North American electrical definitely felt the impact of residential construction slowdown as well as inventory reduction efforts from some DIY accounts and was down 1% or 2% year-over-year in the quarter. This was not a big surprise versus our expectations.

Meanwhile, European Electrical volume was pretty much in line with expectations, maybe at modestly favorable as was Specialty Electrical which felt the impact of the expected reduced OEM build schedules. Meanwhile, sales growth from the Professional Electrical product line, consisting of Acme Transformer and Actown, was above our expectations and benefited from sizable price increases to customers to cover up the substantial increases that we've seen in the business over the last year. We also saw very nice OEM demand during the quarter.

Our RV sales were up a couple of points for the quarter which was in line with what we had expected. This primarily reflects the market share gains we have discussed over the last couple of quarters against a back drop of the 10% decline in motor home industry production levels.

Now I am going to skip truck and auto since we've already commented on those and move onto the last product line which is Engineered Products. This performed pretty much as expected, a little less growth in prior quarters on account of a moderating North American economy.

Well, that's it for my comments on sales. I am now going to talk about margins. Our expectation for the first quarter was that margins would come down about 50 basis points year-over-year on account of sales mix and lower profitability in Actuation Systems segment and some downsizing costs in GB. As you can see on this slide, the operating profit margins did declined roughly 80 basis points with two of our four segments reporting erosion and the other two reporting solid margin expansion. Now rather than keep the margin discussion at the consolidated level, I am going to walk through -- walk you through them on a segment level because I think you will better understand the moving parts that way.

Now, this is a new chart that we prepared to explain the margin picture. There is a lot of numbers on here but let me just walk through it. What we're doing is bridging margins from the first quarter of last year to the first quarter of this year, specifically taking into account sales mix changes, acquisitions, downsizing costs, and all other which essentially is a base improvement or changes in margin. For example, starting off with our Industrial segment, margins last year were about 26.6%. They increased 180 basis points year-over-year to 28.4%. Of that improvement, 30 basis points came from favorable acquisition mix, but the bigger part, 150 basis points, was just improvement in the base business.

Our Electrical margins declined from about roughly 200 basis points from 9.7% last year, but the majority of that was driven by mix, acquisitions, and downsizing costs. Margins in the base Electrical segment were down about 40 basis points year-over-year which historically has not been an unusual quarterly swing. As described in this morning's press release, we incurred about $1 million of downsizing costs which we had planned for in the Gardner Bender business in the first quarter, and that was to cover the cost of closing a distribution center as well as an Asian sourcing office and a sales office during the quarter. All of this was separate and unrelated to the European Electrical restructuring which cost roughly $100,000 during the quarter. So when you step back and look at Electrical segments, while on the surface it looks more onerous than it is, 200 basis point reduction total, most of that is easily explainable and does not signal a negative trend in this segment.

Turning to our Actuation System segment margin, we were down about 300 basis points year-over-year, and that's the combination of unfavorable sales mix in year-over-year based business erosion. This is essentially the same things we talked about the last two quarters. We made progress in some areas such as in auto which showed nice, which showed year-over-year improvement, but we regressed in others. Some of that was due to material cost increases such as aluminum this quarter, heavy overtime and expediting in our North American truck business because of the push to get engines out before the end of the calendar year, and warranty in other businesses. This segment is getting a lot of attention from management, and we expect improvement later in the year.

In our final segment, Engineered Products, you can see nice margin expansion in this business, up about 120 basis points within the base business reflecting higher low cost country component sourcing and other efficiency improvements. So that's the summary of margin movements by segment.

In total, we expected lower margins year-over-year in the quarter. Obviously, we would have liked to have shown expansion, but we had a lot of moving parts with mix, acquisitions and inefficiencies. The current sales mix and challenges are not going to drastically change in the second quarter, and a headwind in terms of sharply lower truck sales in North America and a tougher margin comp in auto next year will result in a modest decline in year-over-year margins in the second quarter. We do believe our margins will expand for the full fiscal year with our growth forecasted to take place in our third and fourth quarters.

Now I am going to move away from the income statement and now a couple of comments on cash flow and debt. Our debt for the quarter was basically unchanged on account of a seasonal working capital build in the business and the timing of certain other cash payments such as dividends and insurance premiums, payroll, 2006 incentive compensation payments to our employees. The working capital build was a little bit more pronounced this quarter than in prior first quarters on account of the build in the North American truck business tied in with this pre-buy demand that I talked about as well as the sharp increase in automotive sales growth. We also built a little bit of inventory in our European Electrical business tied in with restructuring.

In terms of other debt and cash flow metrics from a leverage standpoint, we remain pretty consistent at 2.3 times debt to trailing EBITDA including a full-year impact of acquisitions. On a borrowing availability standpoint, similar picture to last quarter, roughly $170 million of availability under our revolver. When you consider this with our free cash flow forecast for 2007 of about $110 million, we feel our liquidity picture is good and will support our growth for 2007.

The final thing I am going to cover before turning it back to Bob is a quick update on European Electrical restructuring. Even though we only had $100,000 of related restructuring costs in the quarter, we are on track with this project. To date, we've eliminated about 35 of the 200 positions that were contemplated in the restructuring. We've also shifted some of our supply chain to China and other low-cost country areas and will do more of that in the upcoming quarters. In the second quarter we will be exiting one of the two buildings that will be closed in the restructuring and will have shifted much of the manual assembly out of the higher cost areas such as Holland and Germany to lower cost regions such as Czechia. To date, we recorded about $5 million of the $17 to $20 million of estimated costs for the project and we expect the remaining $12 to $15 million will be booked by the end of the calendar 2007 including a reasonable provision in the second quarter. More importantly, we remain comfortable with a timeline as well as our original cost savings estimate of $7 to $8 million on a pre-tax basis upon completion of the project.

With that, I will turn it back to Bob.

Thank you, Andy. Before discussing our guidance for the second quarter and 2007 in total, let me talk about our current acquisition funnel of activity. While no transactions were completed during the first quarter, we have a number of transactions that are very close to the finish line, and we expect these to have an impact to our 2007 financial results. We've see an acceleration in our acquisition activity. Some of this is based on a robust M&A market, and some of this is based on our own internal efforts to put more M&A emphasis and resources into our business segments to identify tuck-in acquisitions. We made a concerted effort to start this about six to nine months ago, and we're now seeing the early results of this activity.

Our current funnel of acquisition opportunities correlates with our existing businesses. Many of the targets either expand geography, expand technology or products or expand our ability to serve existing customers. Given the breadth of the markets Actuant's serve, we think there is plenty of acquisition opportunities in the foreseeable future. We continue to target businesses in the $25 to $50 million range, although a few items in our acquisition funnel are above that range and a few are below that range. We believe that smaller deals, sub-$100 million deals, are generally less pricey and meet our return on invested capital criteria.

In summary, don't let the lack of first quarter acquisitions concern you. We think we are still on track for total acquisition activity in fiscal 2007 to be in the neighborhood of $150 to $200 million of purchase price comprised of multiple deals and touching most of the business segments.

Now let's turn to guidance. For the full year, we are reaffirming our previous guidance of $1.325 to $1.345 billion in sales and EPS guidance of $3.20 to $3.40 per share along with free cash flow of $110 million. This represents EPS growth of 10% to 17% over the $2.90 amount in 2006, excluding one-time items.

Our guidance for the second quarter is for sales of $320 million to $325 million and EPS of $0.67 to $0.71 per share. We're expecting core sales growth in the second quarter of 5% to 6%. This is lower than the first quarter due to the headwind in truck affecting our Actuation Systems segment. As Andy discussed earlier, we've seen pretty good demand in North American truck over the last few quarters as fleets have accelerated truck purchases during Jan -- prior to the January 1st, 2007 cutover. We are expecting a 40% to 45% decline in North American Class A trucks starting in the second quarter and lasting into the third quarter. This has been consistent with our previous guidance. This would result in about a $5 to $6 million decline alone in the second quarter for Actuant and will result in pressure on margins.

Automotive sales growth will be strong in the second quarter in the range of about 10% but that's well off the 45% that we just talked about for the first quarter on account of the anniversarying of last year's launches.

And lastly, as is true with most industrials, we are seeing continuing moderation in core growth in North America. If you take all of this together, we're expecting moderating core sales growth in the range of 5% to 6% for the quarter and we are staying with our 4% to 5% core growth for the full year consistent with our previous full year guidance.

From an earnings standpoint, the second quarter has consistently been Actuant's weakest quarter, as you can see on this graph. With our August year end, December, January and February all fall into our second quarter, meaning fewer business days due to holidays, and a short month in February. Also, winter months generally mean lower sales in construction and electrical tools and convertibles and in RVs.

Finally, our production levels and lower absorption levels are the lowest of the year given how they shut down at many of our customers. With all of this data considered, we're endorsing EPS guidance of $0.67 to $0.71 in the second quarter. While this guidance results in the lowest year-over-year quarterly guidance for the year, I want to make it clear we are very comfortable with our full year guidance of $3.20 to $3.40 per share.

As a final reminder, neither our second quarter guidance or our full year guidance includes any future acquisitions or the charges for the remainder of the previously announced Europe Electrical restructuring that Andy went through.

That's it for today's prepared remarks. Operator, I will turn it over for our investors' questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Deane Dray from Goldman Sachs. Please proceed with your question.

Thank you. Good morning, Bob and Andy.

Good morning, Deane.

First question just to try to get a handle on what the underlying demand is. I know you're reporting 9% core revenue growth, and part of that is, as you made very clear, is the automotive and truck pieces of that with the new programs and the pre-buy. If we were to strip that out, is it fair to say that underlying demand is in that 6% range which would be very healthy and it's also very consistent with what we're seeing elsewhere across industrials?

I am going to have Andy do the calculation for you quickly, but I think we came up a little north of 6%, Deane.

Good. That was -- we were kind of doing the rough numbers, and that's still very healthy, but is it right to look at some of the auto programs coming on as not necessarily indicative of underlying demand but it's aversive to comps, is that correct?

Yes, plus you have the issue of when you launch a new program, you're filling dealer lots in addition to actually selling cars. So you get a kind of a doubling effect, and clearly the 45% growth that we talked about for the quarter, a lot of that was driven on last year's models which are -- we're in the middle of filling those dealer lots.

Good. And then I don't know if I want to interrupt Andy doing his calculations, but what was the raw material cost headwind in the quarter and what are you expecting that to be for the balance of the year?

It's consistent with what we've kind of what we expected going into the quarter, kind of $3 million or so number. We're expecting pretty consistent number at this point for the balance of the year. Some different items, we're seeing copper up a little bit more, excuse me, aluminum up a little bit more recently, copper has not been popping the last 90 days, but I think in total we're still looking at roughly $3 million a quarter.

And let me define that 3D. That 3 is a price increase net of what you're getting from customers. And as you well know, the timing never seems to work at the front end, but we are starting to get the benefit now of price increases that went in that was really related to last year's price increases, so you get a little bit of margin improvement from that.

What's the net price increase you're baking in for '07?

It is net -- it is $3 million a quarter or $12 million for the year.

And embedded in that, what is that on average price increase you're getting from customers? Is it a couple percentage points, a 0.5%?

It is a little less than a couple. It is 1 to 1.5.

It really varies by business, Deane. We have some that might be a 10%, some that are up a couple points.

But in total, I think 1 to 1.5 is the area we're going.

Very helpful, and then in your baked into your guidance, what are you assuming on the residential/consumer type of exposure? What's baked into your estimate?

Well, let me try to define that. Our consumer -- sorry, our resi construction exposure we think is about $100 million which is a global number, so I would say 60% to 70% of that is North American based with the residual being in Europe. Our assumptions is that it's going to continue to moderate, and I think we saw that in the first quarter where you saw in Andy's sales chart where GB was in the 0 to negative 5% neighborhood. One thing that is a little unusual on our sales is a lot of our results go into the big boxes, and our belief is a lot of that is remodeling related, and when you see a slowdown in new housing, a lot of times the remodeling goes the other way. We certainly saw that in the '90, '91 slowdown in resi which was the last meaningful one that we think we can even attribute to, and we'll see how this goes this time around. We certainly haven't seen any draconian fall-offs in the DIY sales in the electrical aisle. We've been better than what you're reading in the comps of some of the big customers.

And that has more of a renovation flavor to it?

Correct.

That's been our experience that the renovation type market is a little more resilient and at least it's a dampening effect of what upswings you might see in new housing.

Some would argue it is even offsetting. If you're not moving to a new house, you're convincing yourself to redo the kitchen or a bathroom.

Good and last question, this is more of a housekeeping question, but I can't resist the zinger, but in your second quarter guidance, are you going to be providing what the expectations are for the number of segments we might be seeing?

I think we're staying with four, Deane.

Okay, four sounds like a good number to us. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Amit Daryanani from RBC Capital Markets. Please proceed with your question.

Good morning, guys.

Good morning, Amit.

Maybe start off on the new segment that you guys have broken out. I'm just wondering, was there a meaningful audit cost that was associated this quarter given all the SEC discussion that actually led to this whole realignment, and if you could just quantify that number?

There probably was, but we haven't quantified it. I mean it's not meaningful in terms of size of actions.

Meaningful internally because we pinch pennys, but so it's probably about $100,000.

All right. And then just looking at the Actuation segment, trying to understand the margin flow-through in the back half of the year, when we get to the back half of fiscal '07 we should see softness in truck and is convertibles, so would we see margins in that segment trending up in the back half of the year or how should we think about margins in actuation segment.

Well, in a perverse way, you're right. If auto, which is the one of the lower margins within that Actuation Systems, declines, you actually get margin mix, just like Andy's schedule showed, going the other way. So I think that's accurate. I think what we're focused on, Amit, is really getting the margins up in those two businesses, RV and auto, and a number of initiatives going on, too long to talk about on this call, are being focused on by Bill Blackmore and the auto team, and remain pretty comfortable that you are going to see those Actuation System margins grow in the back half of this year.

All right, and maybe if you could get a little clarity on the remainder of the restructuring charges. I think it was about $7 to $10 million left. Where do we expect to see them or will they be more evenly distributed through the rest of fiscal '07 and then I guess the flip side is when do we expect to start seeing the $7 to $8 million of cost savings from there as well?

I will handle that, Amit. We've got about $12 to $15 million of pretax charges that have yet to be recognized. We're expecting those to be pretty much wrapped up by the end of calendar '07, so it would slip into first quarter, possibly even the second quarter of 2008. The majority of those would be by the end of the first quarter. In terms of the actual flow of those, how they come out, it is difficult at this time to say exactly when it is because it is predicated on an agreement with the second phase of the Works Council, as an example. I can't take a charge until we get that taken care of. A piece of it is also tied into exiting this one building that I talked about in the second quarter. I definitely expect that to happen. So I think when you look at, just to give you a little bit of guidance, probably looking at something in the $4 to $6 million range coming at us in the second quarter, and a lighter amount in the third and maybe a little bit more in the fourth and the first, dollars again coming to at that point in time. In terms of timing of the savings on this thing, the savings, I would say what we've got factored in here is not significant. A significant part of that $7 to $8 million is not hitting this fiscal year. We will get a little bit of it the tail end of the third and fourth quarter, but more of it will be, the full run rate will be coming through in, I would say by the second quarter of next year. And that's tied in with getting the employees -- getting the rest of the employees up. That's the biggest savings.

I agree with everything Andy says. I think this -- we are going to see a touch in the fourth quarter, but it is really an '08 activity. But we don't see it slipping to the right of '08. We think we're going to see the majority of that 7 to 8 in fiscal '08.

Just a clarification. Andy, the plant, the building you said you're going to shut down, that's a site in Holland, right?

The first one, yes, would be a facility in Holland.

Perfect. Thanks a lot, guys.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Curt Woodworth from JP Morgan. Please proceed with your question.

Hi. Good morning.

Good morning, Curt.

Bob, if you look at the EBIT performance of the Company this quarter, all the improvement was really driven by the Industrial segment, and my question is if you expect, two questions. Number one, on the moderation and the growth curve there, where are you seeing that in terms of, I know it is pretty global business, especially Enerpac, and number two, do you think that you can continue to expand margins from the 28.4% level even in an environment where growth is slowing just because the operating leverage in those businesses is, I would assume, is pretty high?

Okay. Let me take a couple of points at that question. The first is we did grow, Curt, the Engineered Products segment. It is a small piece. So I'm not going to quibble with you. It didn't have as much meaningful impact but we did grow two of the four segments as we stated. The Industrial business is clicking on all cylinders right now. We have a very robust oil and gas business. We have a very robust industrial tool business. It is moderating in the U.S., but we are starting to see some growth in Europe, and as you know, these are both very global businesses. In fact, for total Industrial, less than half of it is in North America due to the North Sea exposure we have in the oil and gas part of the business. I believe they will continue to grow. I think we are still comfortable with kind of the 8% to 10% -- 7% and 9% growth that we've talked about in the past for the Industrial segment for the year. I think we will continue to be aggressive with our low cost country sourcing initiatives. We've got some new products within Enerpac that we're quite excited about, so I feel pretty good about the growth probabilities there, and obviously when you're at these high EBITDA ratios, you don't have a great deal of margin expansion still out there, but we have some.

I would also kind of view the other segments as kind of half empty/half full. I think we've been chugging along at the top end of our earnings guidance. Electrical, for example, as Andy walked through, actually had a decent quarter. We had a number of downsizing activities totaling about $1 million. You guys actually should be thrilled about because it is a cost reduction effort. That's how it came up, through our lead events, decided we didn't need a Reno warehouse any more, moved that into a different location. There is dollar savings associated with it. We're not going to call that out in restructuring every quarter. We're doing those all the time. I guess I don't have a view that I only have one engine I am going to ride. I am assuming Electrical and Actuation Systems are going to power along. They didn't do that great this quarter, but I think over the year, you're going to see better results out of that.

Okay. And last question on the Actuation Systems business, what were the peak margins there given the restatements of that segment that you look at and what do you view as a more normalized margin for that segment assuming more normal growth rates across those three businesses, the main businesses?

Well, I think it is in the low to mid-teens zip code as a blended rate would be a peak. Now, the peak has been a couple of years away. We had RV -- we've had two years of consecutive 20% down in RV. We talked to you guys at length about the automotive launches that have been going through 2006 and 2007, so there is a lot of runway in front of us there.

Great. Thank you very much.

Thanks, Curt.

Thank you. Our next question comes from the line of Robert McCarthy from Robert W. Baird. Please proceed with your question.

Good morning, guys.

Good morning, Robert.

Any chance we can get you to segment your European Electrical business by country?

(laughter).

Sorry. I just had to follow Deane on that.

I should really punch the phone right now.

Tell you what, I will come up and see you after the beginning of the year, and you can punch me. Your unchanged outlook for the balance of the year does not include any contribution from these acquisitions that you have almost at the finish line, right?

That is correct.

Is it too delicate to ask you to talk at all about the one that we're aware of because of the HR, HSR expiration on Maxima?

Yes, we have no comment on that transaction.

Okay. I haven't heard you all talk about marine much. There has been a significant amount of pressure on the recreational boating industry in terms of boat sales and demand. What are you all seeing in that end of the business?

Well, as our sales growth charts showed, it had a modest decline for the quarter. Most of that was North American related associated with OEM boat build. The other part of that business is we do a fair amount in the aftermarket. People like West Marine and Boat America and Boat U.S., and those parts of the business jump around depending what kind of specials and promos they're running at any specific point in time. Saw reasonable volume from that side of the business. The BEP acquisition performed pretty well for the quarter. They've got a nice growth program going in North America that is doing quite well, so feel pretty good about it. I think big boats follow kind of RVs. There is a lot of consumer confidence issues associated with boats, but they also follow the same demographics for baby boomers, our big purchasers, so there is a lot of similarities in the OEM side there.

Yes. And lastly, on the Gits business, naturally I think people very interested to learn about progress on potential new projects, new contract wins there, new program wins. Is that something that you're going to -- are you thinking in terms of updating us as that occurs? Should we be asking you about it every quarter whether you've won anything?

Yes, I guess I don't want to -- I am not going to get into customer specific wins and losses like we did in auto a few years back. That actually, from a competitive and a customer point of view, is just not what they want, and I think we're going to voice with the customer on that. What I will tell you is the concept of doubling this business from $50 million to $100 million is certainly, in our opinion, on track, if not ahead of that, given the need for some of the emissions technology and valving technology that Gits has. I think before we're through another quarter or two, Rob, we will be talking about in total we've won blank number of contracts totaling blank amount of business, and we'll give you some outlook of when that starts. It is the same perverse situation we had that we talked about last quarter. This is a business that's going to shrink to $35 million before it grows to that $100 from $50.

Yes, right. I think that would be quite welcome, Bob. So we'll look forward to that. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is from the line of Mr. Steven Fisher from UBS. Please proceed with your question.

Good morning. Most of my questions were covered, but just one quick one, I'm not sure if I missed this. That Gardner Bender distribution center, was that -- where was that and was that part of a longer-term plan or was that motivated by weak housing?

No. The plant was in Reno, Nevada, and it really was driven quite frankly by lead activity where we had value stream mapped the distribution of some of the electrical products and came to the conclusion that the value added to that plant, that distribution point in terms of being able to deliver right to stores quickly, can be handled in other ways through the midwest, and accordingly closed that plant.

And does that -- is that expected to generate any material savings or is it just more marginal?

It is pretty marginal. I mean, it wasn't a huge amount of that $1 million, and -- but it had a reasonable payback, kind of a one to two-year payback. That's really what we look at with some of these internal improvements.

Okay. Thank you.

Thank you. Our next question come from the line of Duncan Thomas from Bear Stearns. Please proceed with your question.

Good morning, guys. Actually all of our questions were answered. Thanks.

Thanks, Duncan. Operator, we'll take the next question.

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

Thank you. Morning.

Good morning, Wendy.

When you look at the new segments here, I know one of the things we've talked about is sort of the filling in the management levels below Mark and Bill and now we have a little more visibility relative to all these businesses. Are there -- are we going to be hearing about new management, new management folks coming in to run these businesses, run pieces of these businesses? How is it going to look going forward in your opinion, Bob?

Well, it is a great question, Wendy. I would not tie these new segment reporting to some change in our philosophy of how we run businesses. It was driven by SEC. It wasn't driven by fundamentally how we run businesses. I continue to look at Actuant and try to run it a little bit like ITW. We have very diverse businesses that service individual markets, and we want decision making as close to those customers as possible, so I still think you're going to have a leadership team like we have today of something like 20 people of which 15 are running specific P&L centers ranging from $30 million to $150 or $200 million. I think as we continue to grow, it will make sense to combine some of those, leverage engineering, leverage different things, but don't look at the segment stuff as any indication of how we're going to do that. It really is going to be a decision driven by Mark and Bill on how they want to run those two segments. I think obviously as you continue to grow, we are going to be looking for people who can step up and run bigger chunks and the concept of additional group guys showing up that run multiple businesses is certainly a, probably a probability that that will happen.

Okay. That makes sense. Your assumption of 10% to 17% growth for, in EPS for '07, could you talk about what are the top three or four items that would take you to what end of that range versus the other, as specifically as you can?

Well, I think obviously as you see in our footnote, any slowdown outside of what we've already guided you to in Industrial would have a meaningful impact to a negative or a positive, so I would say that that, by and large, is your largest single item to pay attention to. Now as much as I think some of the investors and analysts were upset with our original guidance for the year, we are tracking dead nuts-on on that stuff from where we started the year, and I think -- I am expecting we'll continue to do that.

The second place that I think would put us meaningful in there is M&A. As I talked earlier, we do think we're on track to the $150 to $200 million of transactions. We do have some things close to the finish line, and these are going to provide some kind of effect, and they will move the range up. I don't think they have any downside opportunity because they're not included in that guidance, but I do think they will impact that range up.

The last thing I would say and it's something we touched on on this call is just the execution of the improvements in Actuation Systems and in the Europe restructuring efforts. Mark and Bill are intently focused on that as are their teams below them and very comfortable with the tracks we're on there, but obviously we need improvement in those two areas in the back half of the year.

Okay. That's fair. I guess so the way we've always viewed the Company, as goes Enerpac, so goes Actuant. We just have to change the name to Industrial which includes the bolting, the most important piece.

Yes and I think that's fair, Wendy. The only thing I would say is I am pretty proud of the fact that we, the bolting is 60% of the size of Enerpac or 70% of the size of Enerpac. It is a meaningful -- that is a meaning diversification away from the industrial tools when you start to talk about the oil and gas and power generation markets.

Good point. Thanks very much.

Thank you. Our next question comes from the line of Dana Walker from Kalmar Investments. Please proceed with your questions.

Good morning, fellows.

Good morning, Dana.

Could you talk about why you believe margins would be up in the back half of the year? I can follow the industrial logic, but maybe you would fill in the blanks.

Well, if you look at us historically, that has been the case. We basically see an uptick just due to leverage of the cost structure as you get into the spring season. You start selling a lot more of our products, construction, electrical, RVs, autos, all have a seasonality that ends up helping the third and fourth quarter vis-a-vis the second and first. So that would be number one.

Number two, we continue to have traction in our low cost country sourcing initiatives. We continue to have, as I talked earlier, traction in terms of the restructuring of some of the Europe Electrical where we'll start seeing some benefit for. We'll start expecting to see improvement in both RV and auto margins, so a combination of all that is what leads us to the margins for the second half.

What time frame would you begin to see more or more palpable evidence that the convertible top margins were developing in the way that you would like?

Optimistically I would say you would see palpable evidence in the second quarter. Pessimistically, it would be the third quarter.

Very well. Final question, you've described how your acquisition sweet spot remains in this $25 to $50 million revenue range. Actuant though has better than doubled in size. Some people, and there may not be any sense to this statement, but some people believe that smaller things are more difficult to deal with as time goes on given that they have less influence and they don't necessarily have the management systems. Why do you not feel that way and why would you continue to buy in the range that you're focused on other than just valuation?

I think I probably will feel that way, Dana, in three to five years when I am $2 or $3 billion in size, but today, $50, $25 to $50 million deals still move the needle. I think I still follow more of the ITW model, and I like my nichey businesses, and I want to add on to them. I am not looking, at least today, to change the portfolio, to MetTech or other space that are popular. I think we are good at what we do in the markets we serve, and we think there is a lot of runway within that. So I like our approach where we start with, let's just use an example like Enerpac, where we were looking for a torque wrench, and we end up with a joint integrity business. We doubled the serve market just by looking at that and having that kind of a natural expansion of the serve market. That's, I think, what you're going to continue to see us do. That doesn't mean when you're $2 or $3 billion that you're not going to have to eat bigger pieces to create meaningful growth, and at that time, we'll have more capabilities to do that, but again I would -- if you wanted to kind of put us into a bucket, it would be more of the ITW, stick with your niches, expand your niches, look for adjacent fairways, but don't go too far wider than that. And we're going to stick to that.

Thank you. Keep up the good work.

Thank you.

Thank you. That was our final question. There are no further questions at this time.

Well, thank you, investors and thank you, operator. In summary, we're off to a good start for 2007. It is in line with our expectations of continuing growth but at a moderating pace. We appreciate your participation on the call and your interest in Actuant. Should you have any follow-up question to today's call, Andy and I will be around for the balance of the week. Thank you and have a wonderful holiday.