Enerpac Tool Group Corp (EPAC) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation second-quarter fiscal 2007 earnings conference call. Today's speakers are Bob Arzbaecher, President and CEO, and Andy Lampereur, Executive Vice President and CFO.

As a reminder, this call contains forward-looking statements that are subject to the Safe Harbor language in Actuant's press release issued today and in Actuant's filings with the SEC. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details.

As a reminder, this conference is being recorded Thursday, March 22, 2007.

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

Thank you and good morning. There were a little bit of technical details with the online presentation. If you're having trouble with the login, you can go to the Actuant website, Actuant.com, go under the Investor Relations tab, and there should be a pop-up for a webcast that you can plug right into there. You will have to move the screen yourself, but I think you can follow along on the slides.

With that, thank you, operator, and good morning. We are pleased to announce our record second-quarter results with you today. Sales, EBITDA and earnings per share were at the high end of our guidance for the quarter. Specifically, sales were a record $341 million, up 24% from last year. Looking at core sales growth, excluding the effect of currency and acquisitions, we were up 7% for the quarter.

Earnings per share, excluding the Europe electrical restructuring, was $0.71 a share, a 13% improvement from the prior year. We went into the year knowing the second quarter would be our most challenging from an earnings growth point of view, and 13% results as a low point for the year is still pretty good and was at the high end of our and our analysts' expectations.

Acquisitions continued to play an important role in our performance. We had three new acquisitions completed this quarter in which we deployed about $110 million in capital. Andy will discuss these with you later in the call.

We also made good progress on the efforts to restructure our Europe electrical operations and believe this is continuing to be on track to be completed by the end of the calendar 2007.

The combination of all these drove strong quarterly sales and earnings and resulted in us raising the guidance for the year. I will let Andy cover the second-quarter results and acquisitions, and then I will come back later and provide some color on a few businesses and guidance for the balance of the year.

But before I turn it over to Andy, I thought I would comment on Enerpac's most recent project, lifting the retractable roof in Miller Park's stadium, baseball stadium, pictured here. This project entailed replacing the bogies that were used to move the roof, and we had to lift that to replace the bogies. Despite cold weather, spring and baseball must be right around the corner. Andy?

Good morning, everyone. As Bob indicated, our second quarter came together well and in line with our expectations. The combination of 7% organic sales growth, a weaker dollar and acquisitions drove the 24% increase in sales. Our profit margins were also in line with our expectations.

While we saw a year-over-year decline, much of that was due to acquisitions and sales mix. We saw real margin expansion in two of our four segments and improving trends in both auto and RV. These factors, somewhat offset by higher financing costs, drove the earnings growth for the quarter.

From a GAAP standpoint, we reported second-quarter diluted EPS of $0.62 a share. This includes a $0.09 a share impact of the $3.8 million restructuring charge that we booked during the quarter. As you can see in this reconciliation, excluding this charge, our EPS for the quarter was $0.71 or a 13% improvement from a year ago.

I'm going to take just a minute now to provide a brief update on the European electrical restructuring efforts. The charge that we booked in the quarter represents the cost to exit a facility and to idle it, as well as the early retirement costs in Germany. Today, we booked about $9 million or half of the estimated $17 to $20 million in restructuring costs and we are on schedule for completion of the project around the end of calendar 2007.

Overall, from our perspective, costs and the resultant savings are tracking according to our plans. Now back to our second-quarter results.

On a year-to-date basis, sales were up 22% and diluted EPS, excluding the restructuring, is up 14%. Year-to-date operating profit margin is down 70 basis points from last year due to acquisition and sales mix, as well as lower margins in both the electrical and actuation systems segments. As you will hear shortly, we're expecting year-over-year margin expansion sequentially for each of the next two quarters.

Now let's go back to the second quarter and dive deeper into sales. This chart shows the buildup of our 24% top-line advance. Core sales were 7% of this, acquisitions added 12%, and the weaker dollar contributed 5% to the top line.

All four of Actuant's segments had core sales growth in the quarter, with the industrial segment leading the way at 12%. Its core sales growth in the quarter was a sequential improvement from last quarter's 11% core growth from industrial and is noteworthy, given that the second quarter of last year was a difficult comp, given a large Australian torque wrench shipment and the completion of the Nantong, China, stadium project a year ago.

Core sales grew 4% year over year in the electrical segment compared to 3% growth in the first quarter. The first-half core growth of between 3% and 4% is right in line with our 3% to 5% full-year core sales growth expectations for the electrical segment.

Turning now to actuation systems segment, second-quarter core sales growth was 7%, which was down sequentially, as expected, from last quarter's 16% year-over-year growth. We saw slightly better than expected sales performance in both truck and RV markets. Our automotive growth was strong at 17%, but noticeably slower than the first quarter's 45% on account of anniversarying two of last year's -- actually, three of last year's new platform launches.

Lastly, year-over-year core sales growth in our fourth segment, engineered products, also was up sequentially, from 4% last quarter to 9% this quarter.

Now back up at the consolidated Actuant level, our 7% second-quarter sales growth -- core sales growth was a moderation from the 9% that we saw in quarter one and the 13% core growth that we saw in the fourth quarter. This was expected and is consistent with our guidance.

It reflected moderating industrial growth in North America and challenging conditions in certain end markets like resi construction and North American heavy-duty truck. This trend of moderation will continue into the third and fourth quarter, partly driven by year-over-year reductions in automotive shipments and North American truck sales. For the full year, we are projecting consolidated core sales growth of 5%.

Now I'm going to cover product line sales. Eight of our 10 reportable product lines showed year-over-year second-quarter core sales growth, and five of the eight showed double-digit core sales growth. Enerpac and Hydratight, being high-force hydraulics and joint integrity, both had a great quarter, propelling the industrial segment to its 12% core sales growth.

Europe was especially strong this quarter, and Hydratight saw better than expected service demand in the North Sea in what is normally seasonally a weak quarter. We expect both of these reportable product lines to generate 8% to 10% core sales growth for the balance of the year.

In the electrical business, our North American electrical core sales declined 2% year over year and was pretty much in line with the same-store sales change reported by GB's large DIY customers. Across the pond in Europe, the DIY electrical business there showed moderate growth, which was also in line with our expectations.

We again had strong sales growth in the professional electrical product line during the quarter. This represents the combined Actown and Acme transformer businesses. This growth is a combination of strong OEM demand as well as price increases, reflecting higher copper and electrical steel input costs.

Rounding out electrical segment with our specialty electrical product line, its sales improved from a year-over-year sales decline in the first quarter to reasonable growth in the second quarter, buoyed by growth in both industrial and marine markets. We expect core sales growth of about 5% in the specialty electrical segment for the balance of the year.

Turning to the actuation systems segment, RV product line sales were a definite positive, showing 15% year-over-year core sales growth, pretty much all of it market share driven. We expect high-single-digit core growth in RV for the balance of the year, driven by the market share gains we've talked about, as well as new products.

I am going to skip both engineered products and auto since I already covered both of them, and finish off by talking about truck.

As expected, our truck product line sales declined in the quarter year over year, due primarily to what I would call the North American heavy-duty pre-buy hangover. After the new emissions regulations went into effect on January 1, we saw volume fall off significantly in North American truck. The impact of this, along with the conclusion of the Detroit diesel EGR valve contract, will continue for the balance of the fiscal year, but will be offset to a limited degree by strength that we are seeing in truck in Europe.

Now that is it for sales. I'm going to turn to margins. Our expectation going into the fiscal year was that the first half of the year would be down from a margin standpoint year over year due to unfavorable mix and lower margins in the actuation systems and electrical segments. Actual results have matched our expectations.

Our second-quarter operating profit margins declined 70 basis points year over year compared to an 80 basis point decline in the first quarter. As a reminder, due to seasonality, the second-quarter margins in Actuant are always the lowest of the year.

On the surface, it appears that only one of our four segments showed year-over-year improvement. However, if you pull out the unfavorable acquisition and sales mix, we see robust operating profit margin expansion in both the industrial and the engineered products segments, which is a repeat of the first quarter.

The industrial margins were up 250 basis points, and engineered products were up 160 basis points. The electrical segment margins declined on a real basis during the quarter and were a little below our expectations. The primary drivers here were higher than anticipated rebates and discounts with the DIY units, production inefficiencies in Europe caused by the facility consolidation with all the restructuring going on there, as well as domestically higher medical insurance costs. We expect a rebound in margins and electrical in the third and the fourth quarter.

We saw decent improvement in a few places in the actuation systems segment, notably in auto and RV, but that improvement was masked by the impact of the North American truck sales decline I just reviewed, as well as heavy prototype development expense activity within the Gits business. Bob will provide a few more comments on that later in the call.

We anticipate noticeable sequential improvement in margins in the actuation systems segment over the next two quarters based on the progress that was made in auto and RV during the second quarter.

So that is a snapshot in terms of margins by segment. We've consistently said that we expected lower margins in the first half and higher margins or year-over-year expansion in the back half. From our current vantage point, we continue to believe that will happen.

Moving away from the income statement now, a few comments on cash flow and debt. Our net debt increased during the quarter by about $115 million on account of $110 million of borrowings to finance this quarter's three acquisitions, as well as a working capital build due to base business growth and a $9 million reduction in our AR securitization. We expect solid free cash flow during the balance of the year and continue to believe we will see $110 million of free cash flow generated this fiscal year.

At quarter end, we had over $200 million of availability under our recently amended senior credit agreement, which provides us ample capacity to fund future core growth and acquisitions.

While we are on the topic of acquisitions, I'm going to provide a brief overview of each of the three acquisitions we completed in the second quarter. The first of these is Maxima, which we acquired in December. Maxima is an electronic controls company with about $65 million in annual revenue.

From its operations in Spain, Pennsylvania and Juarez, Mexico, Maxima supplies its customers in a variety of end markets, with vehicle instrumentations such as speedometers, tachometers, hour meters, fuel gauges and the like. But the magic at Maxima is marrying all of these gauges together with sensors into a bundled system for its customers.

We had strategically targeted electronic controls companies for some time, and we like Maxima because of its diverse end markets and its blue-chip customer base. As you can see on this slide, its sweet spot is low- to medium-volume vehicle applications for instruments such as agriculture, construction equipment, motorcycles, forklifts, marine and military.

In addition to its highly engineered OEM customer base, about a third of its sales are standard gauges for the aftermarket, such as the [Cima] channel that are sold under the Datcon and Stewart Warner brand names.

Lastly, while actually reported in our engineered products segment, Maxima's in-house electronic controls expertise will provide value to other Actuant product lines, including RV, auto and specialty electrical.

The next acquisition is also the smallest, that being Veha. We paid about $5 million for this Dutch business, which has been a long-time supplier of high-tonnage cylinder components for our Enerpac business. Over 50% of Veha's $5 million of annual sales are made to Enerpac, so this deal solidifies our supply base of these critical products for our European Enerpac customers.

The third acquisition was Injectaseal, which is a good fit for the Hydratight joint integrity platform. Injectaseal provides in-situ machining similar to what D.L. Ricci does in the States, with leak sealing to Western European power gen customers. This tuck-in acquisition provides Hydratight not only with a product line extension, but also with service teams in mainland Europe for the power gen market.

Annual sales for this business are on the range of $10 million. Both Injectaseal and Veha are included in our industrial segment. We are very excited about each of these three acquisitions and are confident they will provide a good return and strengthen our existing businesses.

Currently, we are pretty busy working on a number of other M&A ideas right now, including small tuck-ins, as well as a few larger opportunities. How successful we will be in completing any of these remains to be seen, but there certainly is no shortage of interesting opportunities today.

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

Thank you, Andy. As you can tell from our prepared remarks, we are pretty happy with how the year is progressing. I will cover guidance shortly, but first wanted to highlight a couple of the businesses that we are especially excited about.

The first is our Hydratight business, which is included in our industrial segment. It has been about two years since the acquisition of Hedley Purvis, which we then followed the Hedley acquisition with Hydratight Sweeney, D.L. Ricci, and most recently, Injectaseal. This joint integrity platform now represents about 11% of our sales and had about 10% core growth year to date.

Most of you know, though, our focus on return on invested capital. In total, we have invested approximately $190 million to build out this Hydratight joint integrity platform over the last two years. Through a combination of internal profit from sales growth, synergies, and our lead process, profits in this business have grown substantially.

By the end of the fiscal year, we expect the pretax EBITA ROIC, which is what we use for our bonus measure, our CMM, will surpass our 20% hurdle rate. And this ignores $7 to $10 million of incremental torque wrench sales that have been made possible by these acquisitions that come through Enerpac. And the exciting part of this is there is more growth coming.

So what is driving Hydratight's strong sales growth, core sales goal? First, the demand for oil and gas in power generation markets. The oil and gas market accounts for about 70% of Hydratight's sales, with power generation adding another 20%. Offshore platforms, subsea applications, pipelines, refineries, power plants, are all excellent growth markets for Hydratight right now.

In the oil and gas market, improved technologies have really extended the useful life of rigs, oilfields and similar installations from about 20 years to now 40 years or more. We are the beneficiary of this expansion and aging of these assets, as there is more maintenance and repair to extend these useful lives, and these rigs and related downstream installations need a lot of maintenance.

We believe our focus on joint integrity is driving market share gains. Customers are increasingly interested in our global service capability. This includes both tensioning and torquing solutions, experienced technicians who can work on a joint-related issue, rental of tools, machining of joints, remote subsea installations, emergency rupture solutions, just to name a few.

We believe we have the broadest coverage in the industry, operating out of 24 facilities in 14 countries, with over 250 field service technicians. The picture you see here is our new facility in Houston, double the size of our former home due to our rapid growth.

Two other positive developments that are increasing focus and attention in this is safety and reduced asset downtime. Both of these have significant impact to our customers' cost of ownership, and they're doing everything they can to address these issues. Improved joint integrity is one way to reduce downtime and improve safety.

As happy as we are with our early success in this platform, we're only two years into it. We believe we have many years of robust growth ahead of us, driven by worldwide demand for energy and fuel and additional tuck-in acquisitions to this very fragmented market we serve.

Now let's turn our attention to another business, our Gits engine emissions business. Gits was part of the KCI acquisition in December 2004. While we liked Gits a lot during our due diligence of KCI, we did not fully appreciate its technology and the potential this business had in terms of solving customer issues related to more restrictive emissions regulations.

To put this in layman's terms, Gits provides precision actuation to control the airflow in the extreme temperature and vibration environment of a diesel engine. These valves are precision controlled to effectively regulate airflow throughout the engine and can be actuated hydraulically, pneumatically, electrically or some combination of all three of these. Gits engineers work closely with designers of turbochargers and diesel engine manufacturers, and our valves have to keep very tight tolerances to ensure low leakage rates.

Based on our assessment of the competition and working with applications for customers, we believe we are the leaders in this technology. Our strategy is to continue to provide our customers unique technologically advanced products that helped them address the three challenges associated with diesel engines -- horsepower, fuel efficiency and emissions.

We are excited about this business because it's technology-driven internal growth. We believe that through a combination of existing and new customers we can double Gits' revenue to approximately $100 million by 2010 or 2011. This growth comes from a diverse base of customers and applications.

We are working with numerous new and existing engine and turbocharger OEMs on applications in Class A trucks, off-highway equipment, agriculture equipment, light-duty diesel trucks and even some niche applications in diesel passenger cars. Our new technology applications are presently being tested by OEMs in North America, Europe and Asia.

What's perverse about discussing these Gits growth opportunities with you today is that the revenues at Gits are declining about 30% this year to around $35 million in revenue. This is a combination of the pre-buy activity due to the 2007 emission changes and the completion of a Detroit diesel EGR program which was replaced by a Daimler world engine out of Europe. But stay tuned as we get closer to the next emissions regulation in 2010, as this is definitely a growth market for Actuant.

Now I'd like to move off the businesses and move back to our outlook for the balance of the year. As we stated in this morning's earnings announcement, we are raising our full-year guidance for the second time this year for both sales and EPS. Our new guidance is $1.39 to $1.4 billion in sales, with corresponding EPS guidance of $3.30 to $3.45.

The increases are attributable to the fact that we've hit the top end of our guidance in each of the first two quarters and that we have completed three tuck-in acquisitions that were not previously in our guidance.

We are projecting full-year core sales growth of 5%. For the first half of 2007, our core sales growth was 8%, but given the slowdown in North American truck that Andy talked about earlier, and our tough second-half comparables in auto, which we also had a lot of growth last year, we expect core growth to moderate to the low to mid-single digits over the next six months.

We are also expecting margin expansion for the year and in each of the next two quarters and for the full year, resulting in an EBITA range of $217 to $222 million. Our financing costs for the full year should be in the $32 to $33 million range, and our tax rate somewhere around 31%.

If you narrow this guidance down to just the third quarter, we're forecasting sales of $360 to $370 million and EPS of $0.89 to $0.96 a share. Finally, none of this guidance includes Europe electrical restructuring charges or additional acquisitions.

I think it is important to reflect here on the last nine months. For our long-term shareholders, I am sure you remember what happened when we announced our initial 2007 guidance last June. Investor reaction was decidedly negative.

We believe a significant piece of this was due to the fact that we were ahead of other industrials in providing 2007 guidance, given our August fiscal year end. Stepping back and looking at it today, I want you to focus on a few things.

First, we have a track record of doing what we say, and this is measured in years, not quarters. Second, 2007 is coming together at the high end of our original guidance, adjusted upward for acquisitions. This has resulted in sales growth of 16% to 18%; EPS growth of 14% to 19%, excluding restructuring; and free cash flow in excess of net income. And third, on top of this, this is five consecutive years of creating greater than 15% annual EPS growth.

Provided we keep delivering these strong fundamentals in the future, we are confident you will reward us with a higher stock valuation than today.

That is it for our prepared remarks. Operator, I would like to turn it back over to you for our investors' questions.

(OPERATOR INSTRUCTIONS). Deane Dray, Goldman Sachs.

If we could just -- first question, on the increase in guidance, and Bob, you gave a couple very important points, and especially in perspective of when you gave the initial '07 guidance, that was the first time any of the industrial companies were talking about '07 and the moderating growth.

And if we talk about the first-half core revenue growth at 8%, if you believe you're going to be at 5% for the year, that would imply something like 2%. And that seems like a fairly rapid drop-off. If we go across your end markets, didn't seem like there was that much of a drop. So if you could address that first in terms of core growth expectations.

Sure, Deane. I will try to cover that, and Andy, chip in behind me. I think the two pieces, Deane, that drive that growth -- the first is that the Gits business this quarter did not see a full quarter of the decline from the prebuy, because December was actually a pretty strong month. So that we will feel the full force of in the third quarter and that is a piece.

The second is we were up something like 70% last year in automotive in the back half of the year. And that was based on the launch of the G6, the Volkswagen Eos, the Mitsubishi Eclipse, and one other program. And we do not see us being able to get positive in those comparables year over year. And you still had pretty good growth, as Andy talked about, during this quarter.

So those two pieces are the primary drivers. We are expecting moderating growth in industrial, high single digits, as Andy talked about. So that is a little more moderating. You can make your own economic assumption whether you believe that will happen.

If you look at it from a segment standpoint, Deane, really the industrial business, we talked about 9%, 10% growth for the balance of the year. The electrical business, I talked about 3% to 5% growth. And in engineered products, which is smaller, is going to be kind of where it has been at, in mid- to high single digits.

The change here is -- not even change, but the first half to second half, the swing that is really driving this is what Bob said -- it is auto and it is truck. And we will be negative in the third quarter and fourth quarter in the actuation systems segment on the core sales growth. The rest of the businesses are hanging in there. We do expect it to moderate a hair because of the economy, but it is primarily driven by those two markets.

That is very clear. And the only thing I would suggest is when you talk about the core revenue growth, that you would also say what the impact of auto, because from our perspective, those are more program related as opposed to underlying demand. So that is fine. We will just stay tuned for that.

And the second question is RV. And this is a pleasant surprise to hear you talk about market share gains and core revenue growth of 15%. Could you give us an update? I want to say it is around 6% of the Company today. What is going on? Is this a big sea change in the RV outlook?

I'll handle that, Deane. Before I do, the last comment I had on the revenue that we talked about before -- one of the reasons the margins improved in the second half is that mix will get decidedly better in the second half. Actuation systems is one of our lower-margin businesses. So when you are talking about declines that are happening there, from a margin, when you look at it from a margin point of view, clearly you would rather have the growth in industrial, which is where we are saying it is going.

To answer your RV question, the reality is we won a lot of new business over the last year and a half. The full-wall slide-out is a good example that we introduced at Fleetwood last year. What happened was, even though we had won the platform and we were on it, they weren't selling any of their vehicles. They were liquidating inventory of other things.

So this win and these market wins that we have been talking about have really happened over a longer period of time. But because of the nature of depleting the inventory that was already built, we weren't seeing a lot of that volume go through production. We definitely saw that change this quarter, had a very good quarter in RV. The market itself for motor homes did not grow anywhere near 15%, which is what our business grew. And that really was market share driven.

So we expect it to have a healthy next couple of quarters. And I think we, again, it is a smaller piece of Actuant, but I think it will be a nice piece for growth.

Is that RV shipment for the industry still expected to be down a couple percent for '07?

Yes, from a motorhome standpoint, Deane, we're looking at probably mid-single-digit decline, travel trailers, which is a small part of our business, probably double digits.

And then last question and I will give up the floor here, Andy, I think you said there were a couple deals in the pipeline that could be larger. Could you quantify that? And what sort of type of expectations would you like to set here?

I think in terms of the deals I'm referring to, bigger deal -- some of those deals would have revenues of a couple hundred million dollars. That is not the majority of the deals we're looking at, obviously. It is probably a fifth of the type of deals that there are, some that are a little bit bigger than the $30 to $50 million tuck-ins that you have seen over the last year and a half or so.

We have one deal, Deane, in the funnel now that is a new platform. And we have talked about new platforms on this call and with you guys individually -- don't know if it is going to happen. It is in industrial products. I think you would expect us to stay in that kind of an industry. I don't want to give you any more color other than it has a lot of the similar characteristics to Actuant. It's got very high return on invested capital. It is not vertically integrated, spins out a lot of cash flow, global business, that kind of stuff.

So that is what we're looking for when we start talking new platforms. Again, not signaling one is going to happen, just saying that we continue to spend a little time of our acquisitions looking at some of these new platforms.

Wendy Caplan, Wachovia Securities.

Good morning.

Happy birthday, a couple days late.

Thank you. It is always a good birthday when Actuant reports. Your margin in industrial -- since we don't have a lot of historical data because of your resegmenting the business, can you tell us whether that is the best it has ever done, and whether that margin should increase, given the fact that -- of the seasonality of Hydratight?

The answer, without being specific -- if you pro formaed in Hydratight over time and looked at industrial margins, it would be at an all-time high. So the mix between both Enerpac and Hydratight would be close to their peaks.

I think it is very sustainable. I actually think we will improve it a little. I never say never that we won't -- so some of the lead processes and things we do. I think the piece that will affect industrial margins going forward is really going to be acquisitions. The likelihood that you are going to find acquisitions with this kind of operating margins is probably not that likely.

But again, if you come back to what Actuant looks at, we look at return on invested capital. We are going to be looking to try to get to that 20% CMM hurdle quickly with our acquisitions. So I think they will have -- the acquisitions will have good return on invested capital, but what they probably won't have is operating margins to the extent of this business.

And when you talk about those acquisitions, I know you do focus on ROIC, but if we were to look at the margin, should we think about if you were to announce, for example, an acquisition that had an, I don't know, high-teen to low 20 EBITDA margin, kind of speculatively, could we assume or would you be looking at that acquisition in terms of the potential for that -- the leverage in that business -- the potential for margin expansion?

Yes, I think when you look at where 80% of our acquisition activity happens, it is in industrial products, electrical and actuation systems. We are always -- that is where most of our activity is happening. When we have talked at length about our acquisition strategy for Enerpac, we want to leverage that global brand name, leverage that distribution.

Obviously, we believe whatever we put in there, like a Precision SURE-LOCK, like a Veha, that we are going to be able to leverage that and get -- and that leverage dictates into margin expansion. There's no question about that.

When you move to Hydratight, again, we are a $150 million platform there, we think a little over $1 billion served market. To the extent we do acquisitions in that space, we expect we will be able to leverage that globally through that Hydratight technical workforce. Again, I think you'll see leverage.

Go to electrical -- again, we're looking for more of a professional brand name. That continues to be a strategy. We like to hit people like Graybar and people like that. There would be synergies with our agent sourcing and some of the other stuff we do in electrical.

So I think to answer your question, yes, return on invested capital focus, but if there weren't synergies, we probably would not be probing it that hard.

Amit Daryanani, RBC Capital Markets.

Just a question on these three acquisitions that you guys have announced in the last quarter. I think they contributed about $40 million in revenues. I'm just trying to get a sense on how much of the $0.07 to $0.08 EPS that you've raised, how much of that is driven from those three acquisitions at this point?

Amit, during the quarter, actually, the contribution of the acquisitions for the quarter were about $12 or $13 million. They weren't 40 -- that $40 million number would have been the year-over-year impact from last year's acquisitions as well, so just to clarify that.

With regard to what the businesses did during the quarter, we don't get into explaining that in detail. I can tell you that really had no impact on the quarter because of purchase accounting charges coming through. So it was really EPS neutral during the quarter. Going forward, they will clearly be accretive.

Andy, I guess the question was really for the back half of 2007, for the next two quarters, the acquisitions should add about $40 million in revenues to the next two quarters. I was trying to get a sense of how much of the $0.07 to $0.08 EPS that you have raised for the full year is driven by those acquisitions.

Certainly part of it, not all of it -- maybe half.

Fair enough. And then could you just maybe remind us on the raw material headwind that you saw this quarter -- I think last time we spoke about a $3 million headwind quarterly. Is that sort of the run rate it has been tracking at?

Yes, it is continuing to track about that $3 million. And then we have been offsetting that with our lead activities. So we haven't seen any major change. Copper came down a little. Aluminum went up a little. Electrified steel went up a little. So on blend, I think we're still running at about that $1 million a month or $3 million a quarter.

And then just looking at the inventory, it was up about 8% sequentially, which I think drove the cash flow fairly down as well. How much of that 8% rise was due to the Maxima acquisition versus just core organic inventory rise?

The biggest part of it was because of the acquisitions. I think excluding those acquisitions, I believe our inventory was up by a couple million dollars -- give me a second here.

While Andy is doing that, pulling out the number, one of the things that is driving our cash flow is a working capital build. We typically have a working capital build in the first half of the year, and it comes out in the second half of the year.

What has made that a little headier than normal is our efforts to move more product to Asia and our Europe electrical restructuring efforts. Both of those, we built a little of safety stock until you get those supply chains bedded down. That will definitely happen by year end. I think you heard us confirm our $110 million of guidance for the year-end cash flow.

The piece of the inventory build that was not acquisition related was $2 million. So it was not big. It was primarily what Bob just commented on, a little bit more safety stock as we are transitioning, more stuff [like LCC].

And just kind of looking at -- my next issue is -- sort of you addressed it anyway, but if the organic growth drops off in the back half of the year and the buffering of inventory kind of get burned off, you should be able to generate a lot more cash in the back half, right, as you liquidate your working capital for the most part?

Yes, again, that $110 million of cash flow for the year, the majority, the lion's share of that is coming in the back half of the year. So yes, it's going to be a couple of robust cash flow quarters.

Scott Graham, Bear, Stearns.

Very nice quarter, you guys. I wanted to ask you about organic growth sales mix and one of your acquisitions. So bear with me. The organic growth in the second half of the year -- I see your guidance for the second half in the electrical business, yet I am also curious about these negative year-over-year same-store comps domestically that you guys looked like you've got some heavy lifting still in front of you on the European restructuring. And that could be sales disruptive.

Let's say that I am right on those and to whatever degree we will argue about later -- pro electrical -- that is a business that certainly the last four quarters has been a really good grower for you. Is that where you are looking to sort of be a big offset for the other two businesses' sales? Or do you expect really no disruption in European sales for DIY?

You have given me a bunch of things to comment on there, Scott. First, let's go to the professional electrical. A big chunk of that professional electrical, as Andy comment on, is price increases associated with copper and electrified steel. When you peel that out, you are not talking about a growth rate that is double digits; it is kind of a high single digit. It is actually kind of hard to compute because we don't look at unit sales in that business as very diverse.

But that will be a pretty steady grower just due to the price increases. And obviously, it comes through the margins in the same way, because you've got an increase in costs.

The OEM part there is really where we're seeing the growth. It is not in the construction market. It is OEM oriented. It is pretty solid growth.

And Andy, just to get to the 5%, you've got the North American headwind, and I'm just wondering what your thinking is within each of the businesses within electrical to get to 5%.

Well, clearly the professional channel runs a little short of $100 million in total and will be a good contributor. When you look at our DIY business in North America, you're getting in the $150 million neighborhood -- very diverse across a lot of different end users there.

You know, I think we do think the same-store sales are going to continue to be a little negative when you [read the] Home Depot and the Lowe's. I will tell you, that doesn't always transcend into the electrical aisle. A lot of their comparables is a decline in the cost of lumber, which is a big chunk for them, and also a decline in light goods. Neither of those have any impact on the electrical aisle. Most recent Lowe's announcement was actually pretty growth-y in terms of where they thought the back half of '07 went. So I guess I think that will be negative, but I don't think it is a big doomsday negative same-store.

When I look at the back half of the year, Scott, I think the piece that you are looking for is why are we going to go -- are we assuming DIY will improve? Yes. From what we saw in North America in the first half, yes.

Why is that? That is because there are a number of new products coming on board. And you look at the comps from last year, we were up against probably some headier comps the year ago -- the first quarter of last year because of the [laws] launch and stuff like that. We have new products coming through in both Gardner Bender and in the European electrical businesses in the second half.

The second piece of that is we virtually had no promos coming through in the first half of this year. There were some that were supposed to happen in February, and they got pushed out a little bit as well. So those, we have better visibility as far as when those are hitting as well. So it gives us comfort that we're going to see a little bit of improvement in those DIY businesses in the balance of the year. So that is a big piece of it.

The business we also haven't talked about here is specialty electrical. This business will grow mid-single digits. It did better than that in the quarter that we just -- I shouldn't say better -- it was a high mid-single digits in the quarter we just completed.

So you add it all up and it holds together. I am not that concerned about that space as far as us having a lot of risk with the sales number we are putting out there.

Let me give one less piece of color and then we will take your next question, Scott, and that is the Europe electrical. It has grown, even though we are restructuring the business. We are eliminating some SKUs. So we are deliberately walking away from some business. But it has grown nonetheless. And the Europe economy is doing okay. We saw that in Enerpac and in bolting and a number of other businesses. And Europe electrical has been in the same area.

I do think you might see that moderate because we are going to get out of some SKUs. But again, it is the lower profitability that will not move the needle on the bottom line.

Going back to an earlier question, you indicated that you were kind of looking at 3% to 5% organic growth for the year. And truthfully, sort of this low- to mid-single-digit growth in the second half of the year implies, frankly, something more than 3% to 5% for the year. So --

Scott, we did not say 3% to 5% -- we said 5%. We said 5%. We started the year with 4% to 5%, and now we're consolidating around 5%. So 5% is coming down from 8%, and 8% core through two quarters. And what we are saying is we are going to be in the 2% to 3%, maybe 4% -- depending on these next two quarters, we're going to be in that ZIP code.

I missed that. Sorry. Okay, that math works.

Talking about your second-quarter operating margin reconciliation, you have sales mix going negative in your three largest segments. And with electrical, because of Gardner Bender being such a high-margin business for you and those sales declining, possibly, even if they are flat in the second half of the year -- hopefully they will be -- that is a negative mix pressure, as is the weakness in the truck business, which I think is a fairly high-margin business for you as well.

Notwithstanding the fact that I know you guys are doing things in RV and in auto to improve those margins, can you get to, in your sort of internal thinking, that sales mix actually goes positive in the second half? And maybe you can tell me why that would be.

In margin mix?

Yes. In sales mix, components of margins in electrical and actuation.

The sales mix in electrical will probably continue to still be negative because we are seeing the highest growth in electrical right now in the professional electrical business. Those margins are lower than, say, the Gardner Bender business, as an example.

So I am not necessarily expecting the sales mix in electrical to turn, where suddenly we have a positive. I think in actuation systems, you are going to see quite a bit different situation. We were down 90 basis points from a mix standpoint in the quarter because of sales, because of the mix, within actuation systems. That number will be much less and not a hair positive.

So that is the one that is going to change quite a bit, because you've got automotive, which grew 15% in this quarter and grew 45% in the first quarter. We all know that has been the margin -- one of the laggers here in the first half of the year. That is going to go, from a revenue standpoint, that is going to go negative in the back half of the year -- the revenue growth will.

The margins clearly improved in the second quarter in both RV and auto. We obviously would not put the numbers out here if we weren't comfortable that there's real improvement in here. It is not dependent on sales mix, the margin improvement. That will help, but that is not the driver.

It is more the switching the all other to something flat or better, yes?

Absolutely.

Could you then talk about Maxima a little bit more? Now, this is a very interesting acquisition -- a little bit off of the reservation, but seemingly, from a product line standpoint, but seemingly very synergistic with several of the businesses which you have mentioned. What are the plans for Maxima, and could that be a new platform for you guys that you might need to break out of the -- I think it is in engineered, right?

Yes, it is in engineered products.

I am wondering if that is something that maybe is essentially a new platform for you under which you might acquire underneath.

It might be, Scott. But let me put it in context of why we looked at it and where it came from. We have told you guys for a long time that our engineered solutions business was mirroring electronics and sensors with mechanical and hydraulic actuators to create a closed-loop system. That is what a convertible does, that's what an RV does, that's what our truck-tilting system does. And in a little bit, that is what gets it, as I talked about in my prepared remarks.

Maxima is basically the control element of that. In the past, Actuant has always bought that from third-party vendors. And we will continue to do that. But primarily, we now have the capability of bringing some of that electronics and sensors into our existing served market. And on top of that, Maxima is serving a lot of actuation markets that we weren't prior in. Farm equipment is a great example. Off-highway trucks is a great example. Military is a pretty good example.

So there is a lot of leverage points here. But the primary purpose was to secure in-house that ability to marry the electronics with the actuators. And that is where we looked at.

We have actually -- we had canvassed this market. We had probably looked at 15 or 20 different types of electronic control acquisitions and businesses that we had targeted and had looked at. Some of those are still on our radar screen, but Maxima cleaned up a lot of our needs there. And I'm not sure it is going to branch out into its own segment. I think it stays with that highly engineered position motion control capability we are looking for.

Scott Macke, Robert W. Baird.

First, wanted to talk about auto. And I believe you gave this number to us, but just in terms of expectations for the back half of the year, I believe you said down year over year in the back half. Was curious in terms of order of magnitude what you saw.

We're expecting auto to be down in the range of the back half of the year probably 10% -- probably a little bit more than that in the fourth quarter, could be 10% to 15% in the fourth quarter.

Again, with the lower profit in this business, it tends not to have a lot of effect, and with some of the improvements we're doing, kind of digging out from last year, that has got very little bottom-line impact.

The reduction here, just to reiterate, I have in front of me a schedule, all of our automotive platforms and what the year-over-year sales -- this is clearly being driven by the four big platforms we launched last year. It is the G6, it is the Eos, the Volvo C70, retractable hardtop, and the Mitsubishis Eclipse. That is where 95% of the year-over-year reduction is coming from. So it is not an issue of our underlying business conditions being weaker. It is just the impact of the pipeline fill or the lot fill last year.

So just kind of extending from there, then, how should we think about '08 in that business in terms of organic growth expectations and maybe the progression that we are apt to see in that business?

Well, I think we will dodge the '08 question and give you that next quarter when we give our '08 guidance. What I will tell you, and Bill Blackmore just returned from the Geneva Auto Show -- the concept cars, the numbers of convertibles, the number of other possible actuation like liftgates and SUV gates, trunk actuation -- the opportunities that we have to work on continue to dictate to us that this is a two to three times GDP grower in this market.

It continues to be dominated by ourselves and [Hoibeger], the two players in this industry. And I am still very optimistic that this is a growth platform. We do have to moderate what happens with automotive in total. And as we have gotten bigger, I think we see that convertibles start following some of the other trends. But the number of cars that they're still trying to design into convertible models, things like the Volvo C70, brand-new platform for Volvo -- we see a lot of those type opportunities.

And we have in our backlog three or four models that are not in the running rate today that are still not a launched program. They will come in either '08 or '09.

We definitely are expecting growth next year. A couple of those platforms that come on come on late in '08. And it shouldn't be a surprise if we're going to be negative in the first -- in the back half of this year, that the first half of next year could be light with those bodies coming out. But there will clearly be growth in this business the next few years; that is the expectation.

And then just in terms of understanding the flow, I guess, of these four new platform, that they contributed so much growth in the first half of the year and the second half of last year, and now are contributing to the declines, as we get into year three of those platforms, is there a re-acceleration in growth in just those platforms? Or how does year three typically look for these platforms?

No, at that point, it is a regular car. Is the car selling well? Do people like the car? The way we have always described it is the first year, you usually get kind of a 2X normal volume because you're filling the lots and you're selling cars. Then it moderates and you might even go less than 1X in year two as they figure out what the right levels of balance are and then you balance -- and then third year is how is the car doing?

So we have cars that are doing great and we have other cars that get canceled or pushed out or customer's not happy with how it is going. So the nice thing for us is we are on 15 or 20 programs. You've got a lot of diversity in terms of your weddedness to any specific model that you have to ride the coattails of.

And then just wanted to ask one more, if I may, and just kind of stepping away from the forecast for the back half of the year, but just -- with two specific end markets, just wanted to asked about overall activity levels that you are seeing in terms of orders, in terms of quoting and bidding, the first being the Hydratight business and what is going on in oil and gas -- if you are actually seeing increased activity year over year in that business, and then secondly, just in your nonresidential construction businesses, particularly the Enerpac and what I would assume would be the professional electrical as well.

Well, I'm going to try to stay at the segment level, which is what we're supposed to do. When you look at the industrial tools, I think Andy laid it out. It has been moderating growth. I think when you look at oil and gas specifically, it had a very good quarter, given it had a couple of things that were big one-time orders last year. Hydratight had an order with a company called Coates out of Australia that was a big chunk that we had to jump over. So that -- sorry, that was in Enerpac, but it was a bolting product.

So I think the demand trends are what I talked about in my prepared remarks. We see a lot of demand for oil and gas and power gen. That represents 90% of the market we serve, and it is doing well.

You go into resi -- we think we've got somewhere around $100 million of total exposure in residential. That is the PSL business, the concrete tensioning business we bought a year ago. And the rest would be some piece of the electrical business. We don't think that that is that major. I think people figure that Lowe's and Depot is a lot of resi, and I don't know if it has really shown that in terms of the trends, at least in the electrical aisle.

Curt Woodworth, JPMorgan.

It is actually Alex Johnson on for Curt. Just wondering, given that you were willing to quantify the revenue growth trends in auto in the back half of the year, can you talk specifically about margin trends, what you would expect sequentially or year over year?

I would love to, but we can't, given our segment reporting and the issues we ran into last year. We can't get down to segment-level margins. We can talk about product line sales, which is what auto is, but we can't talk about margins. There, clearly, the expectation clearly is the margins will improve year over year. We saw progress made here in the second quarter in this business, and we expect additional improvement as the year rolls out.

I think what we can tell you is at the 217 to 222 EBITDA, you go back through the math, you're going to be 30 to 70 basis points or something like that in each of the next two quarters. How that falls out, I don't know. It will be somewhere in that range. And that is overall.

I think we have given you pretty much guidance on the four major segments. Industrial, doing real well -- it is probably not going to do a lot better, although it is continuing to improve and it continues to beat our expectations.

Electrical, we think we're going to see improvement. We're going to start getting some of the benefit certainly in the fourth quarter, we think, of some of the restructuring we're doing in Europe, not as much as the rebates and some of the things that have hurt us in the first half that Andy talked about.

Move to actuation systems -- we think we will see improvement. But you have got the kind of auto/RV doing better and you've got the Gits prebuy and a business that we are investing a lot in doing worse. It's just not going to be able to absorb the kind of volume decline we talked about earlier.

Last business is engineered products. It had a decent quarter, as Andy showed you on the thing when you peel out the mix -- probably continues that trend.

Bring it all back to the total, we are going to have margin expansion this year in the kind of same neighborhood we have endorsed for awhile -- 25 to 50 basis points. Second half is obviously where all of that is happening.

Thank you. There are no further questions at this time. I will now turn the call back to Mr. Arzbasecher. Please continue with your presentation.

Thank you. I really don't have anything more to talk about. We appreciate your involvement in the call and hopefully you are as excited about Actuant as we are. Andy and I are here today and tomorrow for any follow-up questions you might have. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.