Enerpac Tool Group Corp (EPAC) 2007 Q3 法說會逐字稿

Welcome to the Actuant Corporation third quarter fiscal 2007 earnings conference call. Today's speakers are Bob Arzbaecher, President and CEO, Karen Bauer, Director of Investor Relations, Andy Lampereur Executive Vice President and CFO. Here's Andy Lampereur with an update of the live meeting.

Good morning, everyone. We've been getting reports this morning that some people are having a difficult time accessing our slides that we will be going through on the presentation. People have been successful in accessing these slides going to the www.actuant.com website and then clicking on the investor relations bar and then looking for today's webcast on it. Click on that to participate. And the dial-in number for today's call on that would be the 415-537-1869, the participant code is 21301971. I will turn it back to the operator to comment on our Safe Harbor statement. Thank you.

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 Actuant's filings with the SEC. We are conducting a live meeting to coincide with the audio conference. If you'd like to view the presentation online, please refer to your meeting invitation for details. As a reminder, this conference is being recorded Tuesday, June 19, 2007. It is my pleasure to turn the conference over Mr. Arzbaecher. Please go ahead, sir.

Thank you, operator and good morning. We're pleased to have you join us today and are happy to announce our record third quarter results. Sales EBITDA and EPS were at the high end of our guidance for the quarter. This positions us well to deliver EPS at the upper end of our guidance for 2007. Andy will walk through the results for the quarter in detail, but I wanted to cover a couple of highlights. First, sales were a record $385 million, up 22% from last year, including 4% core. As expected, EBITDA margins expanded 50 basis points year-over-year and 160 basis points sequentially. EPS, excluding nonrecurring items, were $0.96 per share, a 23% increase over the prior year.

Acquisitions continue to play an important role in our performance. They represented 13% of our sales growth for the quarter and we completed the TTF acquisition during the quarter. I'll provide more color on this deal as we go forward on the call. Cash flow for the quarter was exceptionally strong due to record earnings and working capital management. Through nine months, we generated approximately 98 million of free cash flow. Finally since the end of the quarter we issued 250 million of new senior -- senior notes which Andy will cover with you sortly. Now I'll turn it over to Andy to go through the third quarter, and I'll come back to review growth initiatives. We'll wrap up today's prepared remarks with a preliminary guidance for fiscal 2008, and then open it up for your questions.

Andy? Good morning again. As Bob summarized, the third quarter came in nicely and at the high end of our guidance. The combination of 4% organic sales growth, the weaker dollar as well as acquisitions drove a 20% increase in our top line. Our profit margins also improved. We saw the margin expansion that we talked about last quarter despite unfavorable business unit and acquisitions sales mix which totaled about 40 to 50 basis points during the quarter. The combination of increased sales and margins somewhat offset by higher financing costs drove the earnings growth during the quarter. On slide five from a GAAP standpoint, you can see we delivered EPS of $0.95 per share in the quarter. This includes a $0.01 a share charge for European electrical restructuring. Last year, we reported third quarter EPS of $0.86 a share, but that included a 2.6 million or $0.08 a share tax benefit. If you back both of these out as we've done in this slide, you can see that our adjusted EPS increased 23% from $0.78 a share in fiscal 2006 to $0.96 a share this year.

Before moving on to the next slide, I wanted to provide a brief update on the European electrical restructuring efforts. To date, we recorded about half of the anticipated restructuring costs in this program. We anticipate about $10 million more in costs to be booked by the end of calendar 2007 which means our second quarter of fiscal 2008. By that time, we expect the restructuring to be completed and the savings from the activities to be coming through our results. While there are puts and takes, the overall restructuring program is moving forward on schedule and on budget.

Now back to the numbers. On slide six, you can see a year-to-date snapshot of our results, and we are on our way to another record year at Actuant. Sales are up 22%, 7% of which is core. Our diluted EPS excluding one-time items is up 18%. Similar to the third quarter, we're excluding both the European restructuring charges this year and the tax gains from last year to arrive at 18% year-over-year EPS growth as you can see on slide seven. This resulting earnings improvement reflects the two pronged growth strategy at Actuant, core growth and accretive acquisitions.

Now let's dig into this quarter's results in more detail on slide eight. On a consolidated level, we reported a 22% increase in sales for the quarter. Our core growth contributed 4% while acquisitions added 13 points and currency added another five. Core sales came in slightly better than the 3% we had anticipated going into the quarter, however, they did moderate as expected from last quarter's 7% core growth due to a lower auto and North American truck sales. As we discussed on last call, we expect this moderating trend to continue in fourth quarter. For the full year, we're still forecasting core sales growth in the 5% range.

As you will hear shortly, three of our four segments reported core sales growth, led by the industrial segment. Actuation systems segment sales declined in line with our prior guidance because of the lower auto sales relative to last year's very difficult comp in the North American truck prebuy related to the emissions cycle. Seven of our ten reportable product lines showed year-over-year third quarter core sales growth as you can see on slide nine. Not unexpectedly, our industrial segment product lines, which is Enerpac and Hydratight, both showing very strong double digit growth. We also saw nice growth from our professional electrical product line, which is our transformer business, which reported a combination of price increases and higher unit shipments aggregating better than 10% growth. RV had another strong quarter primarily benefiting from stabilizing mobile home demand as well as the market share wins we discussed over the last several quarters.

I'm going to provide a little bit more color on sales for some of the other product lines as I review each of our four segments. And this is a bit of a change from what we've done in the past. We'll comment on each segment then move on to the next one. Starting first with our industrial segment on slide ten, again, this segment consists of Enerpac and Hydratight. Any way you look at it, they had a great quarter Our total sales grew 36% and operating profit increased 55% from last year; the combination of organic growth, acquisitions and margin expansion. We also completed a tuck-in acquisition during the quarter. This pair of very strong businesses continues to perform exceptionally well. Given the segment's customer and geographic diversity, we wouldn't anticipate a big change in the sales trends in any single quarter.

Total segment sales increased 36% including a robust 15% core growth. We saw higher core sales growth in both of these product lines and both on a year-over-year basis and on a sequential basis. Similar to last quarter, the sales growth took place in all regions with Europe continuing to perform very well. Margins in this segment were up over 300 basis points both year-over-year and sequentially. The margin expansion primarily comes from higher volume across the fixed cost structure, cost reduction programs, and to a more limited extent price increases in certain markets.

The next segment I'll talk about is electrical, which is on slide 11. This consists of our North American electrical, our European electrical, professional electrical and specialty electrical product lines. The segment reported a 17% increase in sales during the quarter but a reduction in operating profit, on account of lower margins. The 17% top line growth included 3% core growth and 10% added from acquisitions. This 3% core growth was pretty much in line with our expectations and compared to 4% core growth last quarter. We saw slightly better growth in the D.I.Y. electrical businesses both in North America and in Europe during the quarter but softer sales in specialty electrical, partly reflecting year-over-year declines in OEM boat builds.

EBITDA margins in the segment declined about 140 basis points year-over-year after factoring out sales mix and acquisition mix which were both unfavorable. This primarily reflects lower margins in Europe, some product buyback costs in both Europe and North America, inefficiencies in Europe related to the restructuring and lower absorption in our more profitable units as they reduced inventory levels. The good news in margins, however, which bodes well for the future is that they did improve sequentially through the second quarter and were the highest of the year thus far. We expect to see continued improvement in future quarters.

Moving on now to slide 12, which covers our actuation systems segment. In this segment, total sales were up 2% year-over-year but reflected a 2% decline in core sales. As previously mentioned, this was not a surprise and was driven by the well publicized North American heavy duty truck prebuy as well as the tough comps from a year ago in automotive when we launched a number of new platforms. We expect both of these two headwinds to continue for the balance of the calendar year until we anniversary them. And partly offsetting the weakness in these two end markets was decent core sales growth in both truck outside of North America as well as RV. We've been surprised by the strength of the European truck market all year long which comprises about two-thirds of our overall truck exposure. We're expecting these good conditions to continue as we've been told by a number of our major European customers that they're reducing the summer shutdowns due to robust backlog.

On the RV front, we continue to enjoy the market share wins we announced late last year. We're also encouraged by reports that motor home inventory and dealer lots declined again and that the backlog at some of our OEM customers increased in the last quarter. From a profit margin perspective, we continue to see good progress in improving our margins in RV and auto businesses. Our operating efficiencies are improving and we were successful in obtaining price increases to offset material cost increases. Of particular note, our automotive performance metrics improved sequentially for the fourth consecutive quarter despite lower shipment levels this quarter. Also worth mentioning is the fact that segment margins increased sequentially despite less than optimal product and business mix.

And lastly, I wanted to cover our engineered product segment which is on slide 13. This consists of Maxima and some of our smaller business units. The total sales increase was over 100% or 119% year-over-year due primarily to the acquisition of Maxima which was acquired in December of 2006 and therefore wasn't included in last year's results. Excluding this acquisition, core sales were up 5%, pretty much in line with our expectations. While down year-over-year partly due to mix, our third quarter margins were the highest of the year for the segment. We completed the 100-day acquisition report out and integration on Maxima during the quarter and are pleased with the direction of this business. This looks to be a very good acquisition for Actuant. So, that's it for a snapshot of our third quarter performance in each of our four business segments.

I'm now going to move away from the income statement to slide 14 to talk a little bit about cash flow and debt. Needless to say, we had a huge cash flow quarter as you can see in the cash flow statement that we attached to this morning's press release. We generated a little over $90 million of free cash flow in the quarter in addition to 20 million from expanding our A.R. securitization facility to include recent acquisitions and sales growth. We used about 23 million of this cash flow in acquisitions during the quarter and the balance was used to reduce our net debt. At quarter end, our net debt to EBITDA leverage ratio was down to 2.2 times EBITDA with EBITDA being pro forma to include a full year of results for businesses acquired in the last year. On a year-to-date basis, we've generated about $98 million of free cash flow and are in great shape to meet or beat our $110 million free cash flow target for the year.

My last slide here will be slide 15. I just wanted to provide a couple of comments on our senior notes offering that we completed in the last few weeks. We used the proceeds from this $250 million offering to repay term loans under our bank credit facility. While slightly dilutive from an EPS standpoint, the primary reasons for the offing were to extend the ladder maturities of our debt, to secure a long-term piece of patient capital and to effectively increase availability for future acquisitions from our commercial banks. The chart on this page shows our debt picture as of May 31, both on an actual and on a pro forma basis, as if this notes offering had been completed on this day. As you can see, we would have had less than one times trailing EBITDA in debt owed to our primary banks. It also shows that we're in great shape from an availability standpoint to fund our future growth strategies which Bob will be talking on. With that note, I will turn it over to Bob.

Thank you, Andy. Before discussing guidance with you, I wanted to comment briefly on a couple of sales growth initiatives going on. Whenever I comment on Actuant, I increasingly refer to our business model, which is shown on slide 16. Sales growth is the starting point for our business model, both internally and through acquisitions. As Andy walked you through earlier, our core sales growth this quarter was 4%, higher than our expectation going in at the quarter. On a year-to-date basis, core sales growth is 7% with our industrial segment leading the way, with core sales of 13%. We're pleased with our internal growth initiatives, whether that's establishing a presence in emerging markets, our efforts at new product development, or simply winning additional market share from competitors.

Some recent highlights of internal growth successes that we had in this quarter include a revised and expanded oil rig frame agreement with a number of Hydratight's largest customers; a new Hydratight office in Kazakhstan to service some new customers in that oil-rich area; an expanded product offering with W.W. Grainger's catalog for Enerpac; some new retractible roof projects for Enerpac; a deeper relationship with Home Depot Supply or whatever it will be renamed -- probably within the next week -- for Gardner Bender; another convertible top win for Power-Packer -- we won the Chevy Camaro which will go into business in 2010 -- and significantly more emissions-related activity at Gits. While, not all of these will impact 2008. I think they're good examples of where our internal growth focus is starting to get traction.

The second area of growth is acquisitions. We've been very successful over the past three years at focusing on small, niche acquisitions which tie to one of our existing business units. These acquisitions are more reasonable many valuation in bigger deals and tend to have greater synergies as a percentage of the capital deployed. T.T.F., the European acquisition we closed this quarter is a great example of a smaller deal and how we try to do that. Its product is pre and post tensioning system very similar to the Precision SURE-LOCK acquisition that we did last year, and ties to Enerpac's platform. This product line is used by large construction companies that do major infrastructure projects. These are the same customers that Enerpac sells hydraulic tools to.

Lastly from a cost and asset utilization point of view, we expect our lead program is going to create excellent opportunity to lower T.T.F.'s assets that are deployed. Just as important as finding acquisitions is how to integrate them into Actuant. We built our management capabilities in acquisition integration over the last few years and are pleased with the status of our acquisition/integration model or A.I.M. process which really drives all of our efforts. As Andy stated earlier, we've deployed a little over 130 million on acquisitions and expect to meet our internal target of 150 to 200 million of acquisitions. As you'll hear later, you should expect more of the same for fiscal 2008.

This brings us to our guidance. First for 2007. We are expecting fourth quarter EPS of $0.90 to $0.95 a share, excluding Europe restructuring on sales volume of 360 to 370 million. This in in effect tightens our guidance around the full year estimate we had before around the high end of the range. Our fourth quarter for Actuant which ends in August is seasonably weaker than our third quarter given summer holidays in Europe. You see this in our sales guidance which is down modestly from the third quarter. Provided we deliver this fourth quarter guidance, our full year 2008 EPS will be in a 3.38 to 3.43 range again excluding Europe restructuring on sales volume of 1.43 to 1.44 billion. This will be sixth consecutive year of EPS growth meeting or exceeding our 15% to 20% target. I think it's also important to recognize how 2007 came together from an earnings guidance point of view. We started the year with EPS guidance of 3.15 to 3.35 a share. Through a combination of acquisitions and stronger with this from our industrial platform we've raised this guidance twice as the year went along, currently targeting 17% to 18% EPS growth.

Now let's move on to 2008. As we communicated in today's press release and as you see on slide 21, we're endorsing an initial EPS growth range that's approximately 10% to 15% above the midpoint of this year's range or translated to 3.70 to 3.90 per share. This is on a sales range of 1.53 to 1.55 billion which adjusting for completed acquisitions and currency represents core growth of around 5%. Consistent with our past practice this guidance does not include future acquisitions or the remaining European restructuring costs. Similar to 2007, we expect to deploy 150 to 200 million on acquisitions and these should be accretive to our 2008 earnings guidance. We expect operating and EBITDA margin expansion in 2008 and expect free cash flow in the $120 to $125 million range which is in excess of net income for the seventh consecutive year. That's it for our prepared remarks. Operator, I'd like to open it up for our investors' questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Wendy Caplan from Wachovia Securities. Please proceed with your question.

Thank you. Good morning.

Good morning, Wendy. How are you?

Good. We always like to start about Enerpac. Can we talk about the spectacular core growth and margin performance of the industrial segment? You did say in your prepared remarks that Enerpac and Bolting were both doing well but Enerpac is a company that we typically think of as kind of a GDP grower. Can you talk about what's driving the core growth there, please?

Sure, Wendy. You know, Enerpac has had very good growth. I think you're accurate. We typically describe Enerpac as more of a GDP grower. Where we've been successful with Enerpac is a few spots that are really heated up now. The first is that I think Enerpac really plays into the late cycle recovery area. So, when you see some of Grainger's comps, for example, I think Grainger has the same kind of capabilities in their big tool area, which is where we serve. So again late cycle recovery I think is keeping the U.S. sales certainly north of GDP levels.

Second is we've had good strength in Europe. That has been a phenomena that we're seeing across really all of the industrial businesses in Europe but particularly Enerpac doing quite well there. Emerging markets are ripe for us. We're doing more in China. I was over there a couple of weeks ago and our Enerpac business there even against the Nantong big project that we had a year ago is doing quite well.

The last piece is the bolting. Enerpac and the major reason for buying high Hydratight a couple of years back was to get a product line for our bolting that we could brand Enerpac and sell through distribution. So not really to the oil and gas or power gen markets but more of the Enerpac type persons. So somebody may be assembling a caterpillar tractor on the line would use a torque wrench to torque the bolts on a wheel. That business is up significantly. It's up almost triple from when we started before we bought Hydratight. I think it's a good indication of our plans where if you got a good tool and you brand it Enerpac and use and leverage that distribution, you can really drive incremental volume. Hitting on all of those cylinders, just coming from multiple spots and very strong.

Okay. And as a follow-up, in terms of the margin in that segment, can you comment on what X the acquisition expense what would the operating margin have been for the quarter, and given that this margin, segment margin is the best you've ever posted since you've reported these four segments in this way, can you comment on whether you think it it's sustainable here or is it expandable from this level?

Well, I'll start and maybe Andy can deal with some of the more factual answers to your question. Obviously, and we said in our prepared remarks this had a great quarter, and, you know, surprised us as to how strong it really delivered. We thought for the last couple of years that we were reaching peak margins, but what's happening is that as you get incremental sales volume coming through, you're leveraging the fixed costs. And that is going through quite well. This is not a place where we have a lot of pricing pressure or a place that we have a lot of raw material cost increases. So I think all of those are factoring in and helping the industrial margins. Andy, anything to add to that?

I would just say from a margin standpoint, Wendy, the 300 basis point improvement that I mentioned, that actually was over that, and that was factoring out the mix where there's a slight drag in the acquisition impact. So the real improvement was a little north of 400 basis points so very robust. This was both in Enerpac and the Hydratight business as well, which is also seeing very nice expansion because of new product sales, geographic expansion and synergies from tucking in the acquisitions as well.

Okay. And just one more question on your outlook for '08, and then I'll hop off and let someone else have a chance. You talked -- last quarter you said you expected the margin to expand in '07 versus 06 and in order to get one basis point in margin expansion for the full year, assuming the high end of your revenue growth, you need about a 14.5% operating margin in Q4 which would be more than 100 basis points over Q4 '06 and sequentially up about 70 basis points. Is this doable in the fourth quarter?

I'm not sure if I can keep up with all of your numbers there, Wendy, to be honest with you, but we are definitely expecting margin improvement in the fourth quarter. When I look at it, our EBITDA margins should be up about 100 basis points year-over-year. I think operating profits trail that a little bit because of more amortization. But I think the other key point with us is the improvement in the fourth quarter would be broader based whereas in this quarter, it was primarily the industrial segment that came through so this is the strength here in the fourth quarter. The improvement in the fourth quarter we think will push the full year up slightly year-over-year last year from a margins standpoint. So, we're pretty comfortable with that.

Okay. Thank you very much.

Our next question comes from the line of Amit Daryanani from RBC. Please proceed with your question .

Thanks a lot. I just want to address the margin question in the industrial segment again. Could you maybe just talk about the margin differential between the Hydratight and Enerpac businesses? I think you may have room to improve Hydratight's margins with Enerpac going forward.

Amit, as much as we'd like to answer that question, we can't provide detail as far as specific margins between some of the product lines out there. I can tell you that Enerpac margins are north of where Hydratight's are right now. But both of them improved. We're not trying to rebuff you here, but we don't want to run into issues with segment disclosures and end up with 20 segments next year as opposed to the ten we had last year. So, I can't get into a lot of detail, but we do believe there is room to grow in margins next year in both of these businesses including Hydratight.

My guess, Amit, is you're correct that Hydratight has more opportunity for growth in margins because we haven't owned it nearly as long as we've owned Enerpac. It is on the lead journey but has not been on it as long. For example, some of our Asian sourcing for Hydratight is less. I think it has got more growth. We've been leveraging our technician sales force. We have 250 people there being able to leverage that across more seasonality, adding to that being able to manage your down time for those people. These are all things that we're newer at than we are at running Enerpac. So I think you're thesis is correct even though we're not going to give you any numbers.

All right. Fair enough. Just the restructuring front, you aren't building any savings there but if I recall this right, $7 million to $8 million of savings would be expected in fiscal '08 and started in Q2 in fiscal '08 essentially?

The amount of the savings is seven to eight when is this completed on an annual basis. (inaudible) We'll be kind of hitting that completion point mid-year. You aren't going to see that full seven to eight next year. You will see some spillover nearer to '09.

It sounds like some initiatives got pushed back by a quarter or so. What drove that?

I think our position all along was we'd be wrapping this thing up by the end of calendar 2007. I think we've been pretty consistent on that the last several quarters here so--

Yes. You go back to the original guidance. We already were saying it was slopping into fiscal '08.

So, I wouldn't say it slid in the the last couple of quarters here.

Just finally looking at the FY 2008 guidance on the EPS of 3.70 to 3.90. What's that raw material had been built in there? Is that the $12 million annual number or is that a different one we're looking at?

We spent some time looking at that this quarter and quite frankly, we're having a difficult time assessing the ten to 12 million anymore. Because what's happening is you're getting price increases from customers based on what happened a year and a half ago. You're annualizing some of those. You've got some new ones going through. So from what you're passing through it's very difficult for us now to even look at knowing what that is. After saying that, it is less pressure than it was a year ago. We are through most of those price increases. I believe this is just kind of normal business. So I wouldn't even attribute your ten to 12 million or two million a quarter kind of number we were giving in the past. I would just attribute it to it's just normal operations for us. It's not something that's necessarily dragging earnings.

All right, thanks a lot.

Our next question comes from the line of Deane Dray of Goldman Sachs. Please proceed with your question.

Good morning, this is Mark Zeff calling on behalf of Deane.

Good morning, Mark.

Good morning. I wonder if you could touch on the core sales growth assumption for 2008 and what kind of moderation in industrial is baked into there and where might an upside surprise come to provide an offset to any moderating growth in industrial from the current, you know, 15% organic rate?

Okay. The way we look at that 5% for next year, I think industrial will be the strongest of this group so I think it'll be north of that 5%. I think electrical and engineered products will be roughly in line with GDP so maybe a little less than that 5% and the actuation systems will probably be a little stronger than that, so maybe right around the five. It'll be back end loaded. We're still going to be anniversarying as Andy talked about, the truck and automotive items in the early part of the year. It will have a pretty strong robust back half of the year. That's how I would guide you on your models.

Okay. Great. Thank you, and then I wondered if you could touch on the acquisition pipeline of what you're seeing in terms of pricing and which businesses and segments, you know, have the greatest opportunities and whether, you know, there are still more opportunities in Europe versus the U.S.?

Okay. There's a bunch of questions there. I'll try to accumulate them all together. The pipeline is still full. It's probably a little less full than it was a quarter ago. Last quarter, I think you remember my calls, I was pretty bullish that we were in the throes of some things that were a little more meaningful and they got away perfect us really due to valuation. We still have chunks in there that are meaningful. We still think we're going to hit the 150 to 200 million for the year, so that would, since we're at 130 to date, you should assume that you are going to see some activity in the fourth quarter. Plenty of things tying right to our base businesses. That's really where, you know, we're finding a lot of things. The smaller deals, the valuations are better, they meet our return on invested capital hurdles, and those are the ponds that we're fishing in for now.

Great. Thank you very much.

Our next question comes from the line of Scott Graham from Bear, Stearns. Please proceed with your question.

Good morning, Bob, good morning, Andy.

Good morning.

I've got a couple of questions for you. Could you talk a little about the spread right now between total company pricing and total company raw materials inflation? Are we getting closer to parity there?

Yes.

Could you quantify that? In the past you said that it was kind of running in the $3 million range? Is it now lower than that so one to two type of thing?

Yes, as I said earlier, I can't even identify if it's one to two Scott. It's probably less than that.

That's helpful.

We are at good parity. And the components of our business are different a little business to business. Industrial's a little easier to pass things along. Engineered solutions, particularly some of the OEMs are a little harder. Electrical's a mixed bag. When I put it all together, I can't attribute much drag. Your one to two may be a good estimate but it's very difficult to quantify and certainly isn't something that is impeding our ability to deliver margin improvement.

All right. Also on expenses, the corporate expense number sequentially jumped up a bit. Could you talk about that and what we should be looking for as a run rate if there is a run rate in that line?

You're talking selling and admin?

No. The corporate expense number when you sort of --

I'm sorry, I thought you said core expense. No problem. We have been, as Andy's pulling out that number, we have been increasing our capabilities at corporate. We also don't allocate things out, so when we talk corporate, all of our training, for example, ends up residing up here. A fair amount of different types of insurance reside up here. Audit fees, et cetera, stuff like that. So when you're looking at our number this is not a kind of dummy down number. It's pretty well as is where it is. I'll let Andy go through the numbers.

That being said, we did have a bit of a heavier run rate in the third quarter. There was some relocation expenses in there, some recruiting expenses in there for some positions. We feel more importantly that we had a fair amount of professional fees running through in the third quarter both on a legal standpoint, audit standpoint, Sarbanes area, to the extent we use outside resources on that, as well as some tax planning. So a little bit north of normal. I would not point you to say, hey, we're now at a $24 million run rate. You're going to see that in the fourth quarter and I expect it to come down a bit. Clearly, we are out of the -- we are clearly out of the $4 million a quarter type range that we saw last year. We're north of that five to six million zip code. That's pretty typical going forward.

Got you. Last question relates to Maxima and the M&A pipeline overall. Was Maxima the reason why the margin in Engineered went down a little this quarter? You mentioned mix, but I was curious was Maxima additive or dilutive to the margin of that business?

With Engineered products it was not a big component of it. The mix, more had to do with the mix of some of our smaller units including aerospace as an example, just margin mix but again we don't want to get into a lot of specifics, individual businesses, because I don't want 20 segments next year.

Understood.

Maxima is around the average there. It's not a crazily off business comparatively.

I think when we bought this business, we said coming in it's near our average, maybe a hair above our average EBITDA for all of Actuant.

That's fine. Well, in the past, and maybe this is kind of finishes up the question on Maxima, you've talked about, you know, wanting from an M&A standpoint to get more into harsh environment, more hydraulics and oil and gas would be nice. I'm wondering now if we add the Maxima and that platform to maybe your wish list of acquisitions that you would like to build out from?

It's a good question. I think one of the primary reasons for buying Maxima was really to get an in-house capability for process and controls. It was something that's important to some of our Engineered Solutions systems but we were relying on third party vendors for it. So in that analogy it's a little similar to that Hydratight torque wrench example I went through earlier. We really wanted to have that in-house. After having Maxima we're really recognizing there's a lot of what we call white space synergy across other businesses. You talked about harsh environment electrical. Maxima easily could provide a lot of Marine type products in terms of gauges and sensors. So that would be an area what I call white space. It wasn't why we did the deal but now that we own it, it fits that mold.

This (Warner) brand has some applicability to some of our electric business. Del City sells some of that directly. That would be another what I call white space synergy for that. I'm not sure I need a lot more controlled businesses. We could use some more capability in that area but I think these white space sales opportunities and again the Maxima competencies to be able to use across Actuant, I think that that is definitely an area that we're spending more time farming some of those synergies.

Understood. Thanks very much.

Our next question comes from the line of Curt Woodworth from J.P. Morgan. Please proceed with your question.

Yes. Hi. Good morning, guys. If you look at the electrical segment this quarter, the margins, obviously year over year you're a little weak. I'm just wondering, could you break out, you know what the impact was from the restructuring related inefficiencies in Europe and some of the buyback and reset costs?

You know, we're not going to do that for the same reason we've given on the last two segment questions. It was one of the reasons why the margins were under pressure.

Okay.

We have not gotten the efficiencies we like. As we are doing the restructuring, it's just very difficult to get the efficiencies out of the factory that you would like to get, and whenever you have impacted employees, it's just difficult to get that done.

I just wanted to expand on that a little bit maybe provide a little bit more color on that. When I put together the original estimate for restructuring here, I came up to $17 million to $20 million. Those are hard costs as in we are paying X in severance. We are shutting down a facility and we will pay X to buy out of a lease for that sort of thing. I did not build in any inefficiencies at all in the $17 million to $20 million cost. So, part of what you're seeing coming through here, and shame on me for not doing it, is you are seeing just some of the inefficiencies. I mean, we had a sick out. We continue to have some sick outs in this business because of disagreements with the work councils, as we're leading up to negotiations and whatnot. Those we think are behind us but just the absorption by shifting more stuff offshore, lower absorption coming out of some of our plants until we actually lock the doors that is flowing through our results, and that's part of what you're seeing, Curt. On top of that then, you did have some of the other items I talked about like the product buybacks. We had some reductions in force in one of the domestic businesses, as well, items like that. Those are the primary items that you saw impacting margins in addition to mix in the quarter. Our two lower margin businesses in the electrical segment grew the most. Our two highest margin businesses grew the least.

After saying that and Andy talked about it in his prepared remarks, we were off the bottom sequentially electrical got better and we would expect that trend to continue, right through 2008.

As you are restructuring, clearly, you're getting productivity loss there but you're also seeing some savings from initial head count. Do you think those are going to kind of offset this year or do you think net/net, you still will be at a productivity loss position?

I think the fact that you look at the total EBITDA and O.P. numbers for the electrical business, the answer to that is no, they're not equal. That will come in 2008.

It's just drag right now.

Okay so it's a drag now and then you get kind of the bulk of the savings next year?

Next year or the year after as we talked about.

And then you talked about the North American was getting a little bit better sequentially. Can you just comment on why that is and maybe help us frame how we should think about growth going forward given some of the residential weakness on the housing market we're seeing?

I think the key here, Curt, is that I think people are a lot more worried about resi for Actuant than they probably needed to be. We've been telling people even though product goes into resi , when you're talking Home Depot, Lowe's, Ace, TruServ, or Menards, these guys serve more of the remodeling type environment, the avid do it yourselfer. They're not particularly involved in somebody who's building out 150 condominium complex in the middle of some city. They would not be buying from Lowe's or Depot, they would be buying from Gray Bar or somebody with much more SKUs where they could really drive that.

So the electrical aisle has been better than the core, you know, same-store same numbers for both Lowe's and Depot. And it's in the low single digits decline early in the year, and it's been kind of puttering its way back. And actually it went positive this quarter. So you know, not near the degradation that I think people expected from our electrical. I think we told you that in the last slowdown of housing, we didn't feel the impact back in '00 and '01, and the same is turning in true this time. I think that issue is probably over cooked from a concern point of view from our

Last question on the industrial business. Your guidance for '08, are you assuming margin expansion for that business?

Yes.

Okay, great. Thank you guys.

Thanks.

Our next question comes from the line of Steven Fisher from UBS. Please proceed with your question.

Good morning, everybody.

Good morning, Steve.

Good morning, Steve.

Back to the industrial margins, I'm wondering on the Hydratight side if the service piece of the businesses had any meaningful margin benefit. I'm assuming that labor for oil and gas have got to be tight at this point. You could be getting pretty good pricing. Does that have any meaningful benefit to you.

To be honest with you, we don't split on a global basis. We'll see pieces of that from here to there but the reality is, it's very difficult to split apart service from rental in terms of those Hydratight assets. I can't attribute anything specifically to that we're making more in service or more in rental or more on product sales. I think you got to look at them together. So, I probably wouldn't draw that conclusion. What I would say is that we've had good utilization of our tech force; that because we're much bigger, because we've combined three and now four companies worth of technicians and we've done a lot of cross training that a guy only used to do DL Ricci, only did machining can now do a torquing and somebody with Injectaseal can now do torquing or tensioning and we're able to leverage that utilization better with that worker.. I wouldn't say the pricing issue as much as its we've got a better global infrastructure with those 250 people.

Okay. Not sure if I missed this, but can you talk a little more about some of the drivers of your professional electrical segment, you know, where the end market strength is coming from and directionally where has that growth gone? Has it accelerated recently?

Sure. I'll handle this one. The professional business that we have is low voltage transformers. If you look at where the end market's here, the majority is not going into construction or end uses. Some of the end markets that have been growing very rapidly for us have been on the OEM side where -- and where the product is going in is a lot of it is data centers as an example where back up power, cleansing of power, expansion of all of these service providers, it's a big market for us. We're seeing that. There's a heavy season for us seasonally on this thing. We also are seeing pricing coming through -- no surprise there. This is one of the -- parts of our business have been hit the hardest because it's double whammy.

It's not just copper it's electrical steel as well so we're seeing it there. Some of the other end markets is going through would include communications type equipment like Motorola as an example as a customer. Some factory automation, industrial controls. We're seeing it there, but it's much less oriented toward commercial type brand new commercial construction than you would think. I would probably say that two thirds of it's not construction oriented. So, it's a lot of interesting end markets there.

Did I hear you say you expect deceleration there next year?

Our believe with this business is that i t will just from a pricing standpoint we've got a lot of benefit from pricing the last 12 months more so than I would expect this year. We didn't have a carry over this year so that is fair. So that is fair.

I don't think we're expecting units to slow down materially.

Right.

It's more pricing. And again this is the seasonably high quarter, so you can't take it times four.

Okay. Great, thanks a lot.

The next question comes from the line of Robert McCarthy from Robert W. Baird. Please proceed.

Good morning, guys. It's actually [Chris Walter] in for Rob.

Hi Chris. How are you doing?

I'm doing well. Can you give us an update of how customer testing of new Gits products is going and whether there's been any significant design wins?

There haven't been any significant wins. There have been a number of smaller wins this quarter, particularly in Europe seems to be a little farther ahead on a couple of accounts there. The activity is very brisk. A lot of these tests. they really want to test it almost the whole quarter where you'd be on an engine or a mule test stance. So this is a longer cycle than, you know, you got it this quarter you're going to see revenue. We will probably give you an update a little later probably a quarter or two where we can probably accumulate a few things together. If any of you guys come sneaking in my office, I got a little wall Gits bar graph in my office. You can sneak and see it that way. But it really is a great opportunity for us. We've got a really believe this business goes from kind of its $40 million size now to 100 by 2010/2011 timeframe. Nothing's discouraged us, nothing has changed on that from a quarter since three months ago.

Got you. Thank you. I was just wondering how we should think about distributing the restructuring charges in the next couple quarters? Should they be about equal in both or more fourth quarter weighted?

Don't have a lot of guidance for you, Chris. A lot of it just depends on when we have vacated a building; When we have people out the door so we're not really providing guidance on that. I would expect it more back end loaded than say next quarter as an example. Beyond that I can't really help you out.

Got you. Did I understand from your comments earlier when you were talking about the acquisition pipeline that the last quarter you had talked about a new growth platform, potentially a new, larger acquisition, that's now, that opportunity has passed?

That's correct.

Okay. Last question, just what sort of tax rate are you assuming for your FY '08 guidance some.

Looking into the 31s in that zip code. Little bit higher, China tax rate is going up, mix.

Got you. Thank you.

Our next question comes from the line of Charles Brady from B.M.O. Capital Markets. Please proceed with your question.

Hi. This is actually [Kuni Hiko] sitting in for Charles. Good morning, everyone.

Good morning.

I just had a couple quick ones. First touching back on the electrical segment. The product buyback and reset cost you mentioned, were they one time in nature or do you expect them to linger a little bit?

In these businesses, there's just buybacks and resets. All the time, the downside of them is they can be lumpy through the year. You had that situation come through this quarter where it was noticeably more than what we had last year. It's possible there's going to be a little bit more coming through here in the next couple of quarters as well. But nothing huge.

The good thing about buybacks is the buybacks means you want some new business and you're buying back either your product or a competitor product. We wouldn't be doing that if we didn't think we were meeting our payback hurdles, where we are going to get that money back so while it's negative sometimes in one quarter, the reality is we more than get that money back as we deliver the real product back out.

Okay. And as far as their impact on margins, would you say they were more or less significant than the mix and the restructuring efficiencies?

Less.

Less. Perfect. And the other question I had was just on European truck sales. Can you give us an idea ast to how much they grew year-over-year or maybe at least tell us to what extent they're partially offsetting a drop in North America?

Same story as before. We really don't want to give specifics on division segments.

Understood. Okay. Finally was Maxima accretive in the third quarter?

Yes.

Okay. That's all I had. Thank you very much.

Thank you.

And our last question comes from the line of Scott Blumenthal of Emerald Advisers, please proceed with your question.

Good morning or I guess afternoon already.

We've crossed over the dateline.

You've been patient.

Thank you. I'll try and make it quick. Can you talk about the opportunities some of your recent activities in cross branding some of the Hydratight tools with Enerpac and where you feel you were in that process? Any significant, you know, results or wins?

Yes. As I talked about earlier, I think it's been kind of a triple for us from where we were to where we are now on a running rate basis in terms of torque wrench sales. A little bit of tension as we're pretty early there. A tension is a harder product to roll through that standard because technically, you have to know a little bit more about where it works. So it -- I would say we've gotten the majority of the benefit we're going to get from the Hydratight product within the Enerpac platform. Probably we haven't anniversaried that on an annual basis but we probably have on a quarterly basis. There is more opportunity going the other way which would be Enerpac providing pumps for the Hydratight platform. And different types of products --- Andy said a flange spreader, that's what opens up one of those flanges after you've taken bolts off. Standard product within Enerpac. There's more opportunity for Enerpac to sell cylinders and pumps that are doing construction. If you're already on a North Sea oil rig, you've got tons of equipment out there that might need to be moved around, lifted, positioned. Those are kind of opportunities.

We've been doing a little more in Enerpac in terms of looking at some deep commissioning projects for big rigs. Obviously, you're out there on a rig, you're going to hear about these kind of things more. I think there's more long-term things going the other way now. We always knew those were kind of the second hit, the quick hit was getting the product. This is now the second hit where you can kind of move to more of a global industrial tool business when you are talking to these customers.

Very good. And I know we're all pretty familiar with your relationship with Grainger. Can you talk about any opportunities you might have with some of the other large industrial distributors?

Well, let's start with Grainger. We were vendor of the year again for our second consecutive year. We picked a number of SKUs that we're doing both in Enerpac and in private branding items that we're doing for Granger. That account just seems great. We're helping them in China where they're trying to launch a different initiatives. We've obviously got offices there that can support local Grainger wherever they're at. We're strong with A.I.T., strong with McMaster Car. We're strong with Manhattan Supply, Oklahoma Rig. This should probably be the four or five or six people that I would put in our catalog business. There's three or four catalog firms in Europe, I am apologizing to all those names on the tip of my tongue, but we also provide some catalog business in Europe. So it's pretty much the who's who of industrial distribution.

Okay, terrific. And since you finished up with Europe, we've been talking a lot about electrical, about the restructuring in the European electrical business. That economy seems to be turning around a little bit. Can you talk about what you're seeing on the demand side?

Yes. Was kind of in my earlier remarks. We're seeing mid single digit growth rate as cross a number of the businesses in Europe. Some are higher and some are a little lower. But pretty much everybody positive. Germany seems to be one of the stronger places in Europe. We've been really impressed with that. We don't have as much business in France, so having that Germany a little stronger has been good for us. So, yes, I typically say that Europe trails the U.S. in terms of economic recovery by somewhere between 12 and 18 months. I think there's an indication that we're in process of that happening right now.

Very good. Thank you.

Thank you.

Mr. Arzbaecher,there are no further questions at this time. I would now like to turn the call back to you.

Thank you, Operator. Thank you, investors. Sorry we got a late start. We tried to get the glitch done and hopefully you've had access to the slides. If not, we can certainly get them to you any time today. As you probably know from meeting us one on one, we're immensely proud of Actuant's proud record of producing growth many sales of sales earnings and cash flow. We think the quality of our business coupled with our return on investment capital business model is an excellent way of generating above average returns for you the investor. We look forward to continuing to do that for you. We will talk -- we look forward to discussing the full year results with you in September. Andy, Karen and myself are around the majority of the week to answer any questions you might have, but enjoy the call and thank you for your participation.

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