Enerpac Tool Group Corp (EPAC) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the Actuant Corporation first-quarter fiscal 2008 earnings conference call. Today's speakers are Bob Arzbaecher, President and Chief Executive Officer, and Andy Lampereur, Executive Vice President and Chief Financial Officer.

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. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded on Wednesday, December 19, 2007. It is my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Thank you, operator, and good morning, everyone. As you have hopefully read in today's first-quarter earnings announcement, we are off to a fast start for fiscal 2008. A combination of factors allowed us to beat our sales and earnings guidance for the first quarter and to raise our guidance for the full year.

First, we have 3% core growth, stronger than the 1% for the quarter we were expecting. Next, we had very good margin conversion with EBITDA margins up, 130 basis points excluding our European Electrical restructuring. Importantly all four business segments contributed to this margin increase. And finally, we benefited from strong currency translation created by the weakening US dollar. While we view this largely as a translational benefit, our strong presence outside of the US, which comprises about half of Actuant's total sales, bodes well for the months and quarters ahead. All of these factors led to record first-quarter sales and earnings with EPS up 27%, excluding the European Electrical restructuring.

Andy will go through the numbers in detail with you, and then I will come back to discuss our guidance and a few other topics with you. Andy?

Thanks, Bob. I will be covering our consolidated results first this morning, and then we will provide some comments on the performance of each of our four segments. My first slide is a simple comparison of our first-quarter results between this year and last year.

As a reminder, it reflects the first quarter's 2-for-1 stock split. Overall the comparison of results looks great -- 21% topline growth to $415 million; 32% EBITDA growth to $68 million; and 27% EPS growth to $0.52 a share. All of these are records. The $0.52 a share of EPS for the first quarter excludes the European Electrical restructuring cost. We booked a $5.5 million or $0.09 a share charge for costs this quarter.

Including this restructuring provision, our first-quarter EPS was about $0.43 a share. During the first quarter, we reached worker's council agreements on reducing headcount by another 20 people in Germany. We exited certain product lines, as well as determined assembly building. We anticipate booking the final European Electrical restructuring provision in our second quarter which will wrap up this project.

Now I will provide a little bit of color on our record first-quarter results. Our first-quarter sales growth was 21%, consisting of 3% core growth, 5% from the impact of currency rate changes and 13% from acquisitions. Sequentially our core sales growth slowed as we had expected from 6% last quarter to 3% this quarter. However, as Bob mentioned, we had forecasted about only 1% core sales growth during the quarter, which we viewed going into the quarter as our lowest growth quarter of the year due to tough comps in both North American truck and our automotive convertible top business.

The beats to our internal forecast came from our Industrial segment and stronger than anticipated truck sales outside of the US. We saw strong core sales growth both in the Industrial and Engineered Products segments, which each recorded double-digit increases on a segment basis. Meanwhile, total Actuation Systems segment sales were in line with our expectations in low single digits, and Electrical segment core sales growth of minus 3% was weaker than we had forecasted.

Now if we drill down one more layer into product lines sales, you can see that we enjoyed double-digit growth in both of our Industrial segment product lines -- high force hydraulics, which is Enerpac, and joint integrity which is Hydratight. We also enjoyed this overall Engineered Products segment double-digit core sales growth in the Engineered Products segment as well.

The weaker than anticipated sales in the Electrical segment primarily came from the European Electrical and Professional Electrical product lines which were down in the mid to upper single digit range. I will provide a little bit more color on each of these as I walk through our segment results in a minute.

Margins on a consolidated basis overall were very good, and we were pleased with the margin expansion. As you can see on this slide, all four segments had year-over-year EBITDA margin increases. Overall acquisitions were a drag margins as they had lower margins than our base businesses in the quarter.

However, this was offset by other factors including operational improvements, the impact of higher volumes, pricing in some of our markets and decent cost control. While we were pleased with the 130 basis point first-quarter margin expansion, we don't expect this level of year-over-year expansion for the balance of the year.

Now I will review performance by segment. First, with our Industrial segment, results were very strong and above our expectations. Overall core sales growth was 11% compared to 12% last quarter. Enerpac product lines sales were up 11% on a core basis compared to 9% in the fourth quarter, so we actually had sequential core growth, which we had not anticipated. Our Hydratight core sales growth was also very strong at 11%.

Now one item we wanted to call out for you with the Industrial segment is the fact that we moved our Milwaukee Cylinder business from the Engineered Products segment to the Industrial segment at the beginning of the current fiscal year due to an organizational realignment, and we have adjusted all prior years' segment numbers to reflect this change.

Returning now to margins for this segment, they continued to be strong despite unfavorable acquisition mix, including the impact of TK Simplex during the quarter. Looking forward, we expect continued solid results from this segment for the year, but believe Enerpac's core growth will moderate as the year progresses.

Turning now to our Electrical segment, the topline was a little lighter as I mentioned than we had anticipated, primarily due to year-over-year declines in both European Electrical and Professional Electrical product lines. In the case of European Electrical, our DIY customers reported weaker sales in fall which impacted our sales to them.

Meanwhile the weakness in the Professional Electrical product line primarily reflected inventory adjustments at a few of our larger OEMs. Sales in the other two product lines within Electrical being North American Electrical and Specialty Electrical, both grew on a core basis in the low single digit range, which was in line with our expectations.

While total segment sales for the first quarter or core sales were down 3%, we expect this to improve for the balance of the year to low single digits.

On the profit margin front, our Electrical margins were in line with the forecast, and we continue to expect full-year expansion driven by both cost reductions and the benefit of European Electrical restructuring.

Turning now to Actuation Systems, the first-quarter core sales we had anticipated that our first-quarter core sales would not be positive due to the tough comps we had a year ago with the automotive launches in the North American truck prebuy. But we were surprised in that overall core sales came in in positive territory, albeit at 1%. This is primarily driven by strong truck demand outside of North America.

As expected, our RV growth did moderate in the quarter to 4% growth as we started to anniversary some of last year's market share gains.

Looking forward, we expect core sales growth in this segment to continue to be in the low single digit range for the balance of the year.

From a margin standpoint, we were quite pleased with the margins in Actuation Systems and saw nice improvement in several of our businesses. This was a combination of price increases, manufacturing efficiencies and other cost reductions. We expect continued year-over-year margin expansion within the Actuation Systems for the balance of the year.

Now wrapping up our segment discussions with our Engineered Products segment, we are also pleased with the results there. Our core sales growth was better than we had expected at 19%. But we do not think this is a pace that is sustainable for the year. This figure does exclude the results of Maxima, which we acquired in December of last year, and that is also our segment's largest business.

Looking forward, we expect the full segment including Maxima, the sales moving forward excluding currency to be up in the high single digit range.

On the margin standpoint, while on the surface margins looked like they were down at the operating profit level, that was primarily acquisition mix related and reflected the amortization expense associated with the Maxima acquisition. If we exclude acquisitions, our operating profit margins were up year-over-year with solid improvement in most of our units.

Before turning it back to Bob, I wanted to provide just a couple of comments on our cash flow and our debt picture. Our quarter-end net debt was $505 million, which is about $30 million more than what we entered the quarter with, reflecting the $47 million we spent on the TK Simplex acquisition. We typically use a fair amount of cash flow in working capital in the first quarter due to seasonality, and this one was no exception.

Overall I was pleased with the cash flow for the quarter in that we generated $25 million of free cash flow, which enabled us to maintain our debt to EBITDA leverage at about two times. Equally as important, we have our entire $250 million bank revolver available for acquisitions and other growth initiatives for the balance of the year.

With that, I will turn it back to Bob.

Thanks, Andy. To augment Andy's comments, I also wanted to provide a few updates on each of our operating segments before discussing guidance.

Starting with Industrial, we're really off to a great start in the Industrial segment for fiscal 2008 with strong future prospects as well.

A good example that happened this quarter -- Hydratight landed its first multiyear frame agreement in the Gulf of Mexico. A frame agreement is essentially a blanket maintenance contract to work on the integrity of joints for the customers' installed assets. We have numerous frame agreements in Europe and hope this is the first of many in North America as we put more focus on our service revenue in this region.

Moving to the Electrical segment, we're seeing a number of changes from some of our North American home center customers as they go through their normal product line reviews. We won some new business, and we lost some business as part of these reviews. While not getting into specifics due to customer and competitive reasons, we are going to be seeing an increase in our Gardner Bender sales with Home Depot and a decrease in our business with Lowe's with the net effect being a modest revenue loss. While these changes are not material to Actuant, we're providing them to you for transparency. These changes have been included in our guidance that I will discuss shortly.

Moving now to Actuation Systems segment, I wanted to emphasize the progress that we have made on improving margins and then the strength of the truck business outside of North America. As Andy mentioned, we are experiencing very strong sales growth in both Europe and China for our cab-tilt product line, and this has been increased in our forecast for the rest of the year.

On the margin front, we have seen steady improvement in both the auto and RV margins over the last several quarters. We still have aways to go here, but we're making good progress, and you are seeing that through our segment results.

Finally, let me comment on Engineered Products. The sales and earnings growth of this segment have primarily come from last year's Maxima acquisition, although the base units that also reside in this segment have been doing pretty well also.

We're getting more and more excited about the growth prospects of Maxima the longer we own it. Culturally it has been a great fit, and the Maxima employees have embraced and added to our lead programs and our continuous improvement approach. So stay tuned for this one.

Next I would like to provide you some -- an update of our acquisitions. We completed one transaction during the quarter, that being TK Simplex. This transaction was completed in September and is well on its way through its 90-day integration process. Early results look good from a sales and cost energy point of view in this acquisition.

Given that the credit markets have tightened considerably for private equity investors during the last three months, we would have expected valuation expectations of sellers to moderate. This really has not happened in our opinion. But against this backdrop, our return on invested capital valuation philosophy has not changed. While this leaves us on the sidelines on some deals, there is still plenty of else to work on, and we feel pretty comfortable with our target of 150 to $200 million of tuck-in acquisitions for the fiscal year with TK Simplex already completed totaling $47 million. We have a fairly full funnel of activity that we are working on, and this activity is very broad-based with tuck-in possibilities in all four business segments.

Lastly, I would like to update you on our new China facility. As you see pictured here, we have broken ground on our new Actuant campus in [Tongcheng], China and expect this facility to open in August of 2008. Tongcheng is Northwest of Shanghai and outside the Shanghai province. This facility will accomplish a number of key things for Actuant.

First, it will centralize our China manufacturing strategy, which has been increasing at a rapid rate. This manufacturing will augment our sourcing operations which buy components and completed products from third parties. Tongcheng will provide a campus environment for Actuant businesses to operate in. While we have existing facilities in and around the Shanghai area, none of them were large enough to support the expected growth from China. By creating this campus, our goal is to leverage the backoffice functions of IT, finance, engineering, customer service, warehousing; all of these kind of functions across Actuant for all the businesses doing business in China.

Now moving to guidance. As you saw in today's press release, we're raising our fiscal 2008 guidance. The primary reasons for the upward revision are the strong first-quarter performance, the weaker US dollar and changes in end market demand for businesses with some units stronger than previously forecasted and some weaker. The new guidance is for sales of $1.625 billion to $1.66 billion and EPS of $1.95 to $2.05 per share. This guidance excludes the remaining European Electrical restructuring charges as well as future acquisitions. It represents a 13 to 18% EPS growth for fiscal 2008, and if the midpoint or better is achieved, continues a string of seven consecutive years of EPS growth at or above our long-term rate of 15 to 20% annually.

Lastly, we're projecting fiscal 2008 free cash flow in the area of 130 to $140 million, which also continues a string of at least 100% conversion of net income.

For the second quarter specifically, which is seasonally our lightest, we are forecasting sales of 385 to $395 million and a corresponding EPS of $0.39 to $0.42 per share. This guidance also excludes the European Electrical restructuring. Versus last year's second quarter, this is EPS growth of 11 to 20%.

That completes my prepared remarks. Operator, I would like to turn it over to you for instructions for the question and answer session.

(OPERATOR INSTRUCTIONS). Deane Dray, Goldman Sachs.

This is Mark Zepf calling on behalf of Deane.

We are pleased to have you, Mark, too.

A quick question on Electrical, I guess first on top line and then on margins. Looking for the negative 3% core sales to improve sequentially through the year, what are the key drivers there? Is it just the inventory drawdown of professional going away, or is there something at the margin that we should be looking for on the DIY side?

No, I think it is just what you stated. It is the professional -- a number of customers drove that decline that Andy referred to in the first quarter. We have ordering patterns and orders and expect that to turn around as we get into the second quarter.

I think our feeling on the retail side of the business is pretty similar to where it was in the first quarter. I think everybody always worried about resi being a big factor. It just has not shown up in our ordering patterns, and I think I have talked to you at length about that, how it is really more remodeling related than it is new resi construction. So expecting really driven just by those OEM accounts.

Okay. And have you seen, on the DIY side, have you seen any of your customers draw down inventories there either?

No, nothing that appears to be a trend or any kind of movement there.

Okay, great. And then Andy, on the margin side in Electrical, comparisons got better even as the core was a bit weaker. Are we reaching an inflection point where further along in the restructuring the inefficiencies are not as much of a headwind, or what is -- if you were to rank order the drivers on the margin improvement there, what were the most significant?

You know, I think we do expect our margins to improve as we sequentially move out. I do warn you, however, the second quarter can be pretty lumpy because it is a low-volume period overall within our businesses. But we do believe we will come off the bottom.

Wendy Caplan, Wachovia Securities.

A couple of things. Is there some way for you to quantify -- have you quantified the impact of acquisitions? You mentioned in several cases that acquisitions penalized results in the quarter. Do we have an EPS or EBITDA number for that?

My comments about acquisitions hurting were more within some of the individual businesses from a margin standpoint, from a mix standpoint, and overall the acquisitions -- the five acquisitions we did last year and the one we did this year collectively added -- they were accretive to earnings overall. But we do not provide that on a quarterly basis in terms of the exact number. But they definitely were accretive.

No, I was not referring to the accretion. I was referring -- they would have if margin -- if we had not included the margin or if we include the margin was impacted in a negative way by ex-percent or -- is there a --?

Yes, I think the margin -- I'm not sure I'm understanding your question. If you can try -- just try and rephrase it one more time.

If we had not had the penalty from the acquisitions in the sense of not the accretion but the charges related to the acquisitions, the initial charges, what would the margin have been? Is there a way of quantifying that?

Are you referring to -- sorry, I'm not sure if you're referring to the initial -- when you say the initial charges, are you talking like the one-time (multiple speakers) amortization of inventory, that sort of thing?

Right.

Overall for all the acquisitions that piece of it was about $0.5 million drag overall. But that piece of it was not a significant one-time item (multiple speakers) in the quarter.

Thanks, Andy. That was what I was referring to. (multiple speakers) Historically you have spoken a lot, recently you have kind of talked with us about some acceleration in terms of efforts in seeking a larger acquisition that could -- I think you have talked about it, referring to it as adding another leg to the school. When you talked about acquisitions for '08, you mentioned tuck-ins. Can you talk about whether this your strategy to seek out larger acquisitions is intact? Are some of those in the acquisition backlog? What should we be thinking about that?

Okay. It is a great question, and I think we absolutely at our investor meeting in New York talked about new platforms. But let me put this in context. When we communicated that to you, we said and the likelihood is that sometime over the next three years we would add a new platform to the four platform segments that we have today. And we have just begun, when I'm saying begun in the last 90 to 120 days have begun to have some platform meetings. We have people internally who are working on that with Ted Wozniak, myself, Andy all at the top of that group. We also have been using some outside resources meeting with investment bankers and hearing what they think about new platforms.

My goal is to try to have that list of ideas for platforms narrowed down to five by December of '08. That is when we do a strategic plan with the board, and that is when I plan to do it. So this is not something that you should expect seeing something happen immediately.

Now there are always assets for sale. There was a recent asset this quarter in safety that moved to another party. I'm not saying we will not do one before the December period. I'm saying we're going through a very deliberate process to identify and find those new platforms that we think have above-average growth and try to get those done by December.

So, in our funnel, there are some of those idea, nothing that applies to the 150 to $200 million of tuck-in that we talked about that would be outside of that, and nothing to my point that is imminent at all.

I think the other point I would just add to that, consistent with what we said in the past, at least 80% of our M&A efforts are focused on tuck-ins. So that part of it really -- (multiple speakers)

Thank you and one last question. Your European Electrical business you've stated before and you stated again today that you expect the charges to be completed by second quarter of this year. Can you comment on the profitability in European Electrical at this point and what you expect for that in '08?

You know, we are not going to get into specific sub-business segment things. That is just -- we have been consistent on that. I think our original targets for this restructuring in the 7 to $8 million zip code are still intact. You will not get the full benefit of that in '08 because we're doing it halfway through the year. But those kind of targets are still intact. So that is probably about all the guidance I'm going to give you.

Curt Woodworth, JPMorgan.

Can you guys talk about any differences in growth rates you're seeing globally for the Enerpac business right now?

Well, as we have been pretty consistent in telling you really for the last six quarters that the growth rate is moderating in North America, and it is somewhere in the middle of the single digit area for this area. Europe, much stronger than that, still in a double digit zip code. Asia even stronger than that depending when you look at it. Some of our Asian sales are a little lumpy because we do a little more of these bigger infrastructure projects. But that would be the context.

Now against the backdrop of what we were forecasting, that is a little bit ahead as Andy talked about. Industrial was a little stronger than we expected for the quarter.

And are you seeing any implications in terms of more the project business for Enerpac from the tighter credit conditions that we are seeing?

No, most of those projects are funded by governments, federal or state governments. They really do not get influenced in a short term period of time by that credit market. So I have not seen any issues there at all.

Great. In terms of the joint integrity business, you have seen you know pretty significant increases in MRO and upgraded spending on oil and gas. What is the outlook there? What are customers saying about incremental growth going forward, and what is really going to drive that?

Well, what you are describing, MRO in an oil and gas powered gen environment is precisely our business. We do do new installation, but the lion's share of our Hydratight business is driven by the MRO nature of existing assets that are installed. Obviously with oil in the 80's and '90s, most of our customers are really running at capacity, trying to improve capacity using a lot of new technologies to get every last minute, last gallon of oil out of existing facilities. A lot of new technology going into that. And all of that is helping the MRO nature of our business. Higher pressures impact that. Deeper drilling helps our business. So really it is just a very favorable environment for the MRO nature of our business.

Okay. And in terms of incremental growth, is it pretty much the song remains the same. It is just going to be continued incremental spending there to maintain capacity?

Yes. I mean I think when we look at the growth of industrial, we believe going forward that the oil and gas will be a little stronger than the industrial tool side of that. And it is just what you described. It is the MRO nature of it.

In fact, we are in an area right now in the winter where you really cannot do a lot of maintenance and repair in the North Sea. It is just too dangerous to be trying to do stuff on a rig or a platform. So this is actually a little of our slower season from a seasonal point of view.

Okay. And what are your expectations for the RV market this year?

Well, we have got a good data point at the national RV show in Louisville the first week in December. You know, it is a tough market for RVs. We play in the motorhome side versus the travel trailer side. A number of accounts talked about that orders were down at the show. A few said they were up. We see a lot of activity where people are extending their Christmas production shutdowns a little bit longer. This is not a big season for RVs right now anyway. You will really get the real litmus test as you get into the spring season.

You boil all that together, we were pleased with our first quarter. When I talked about adjusting forecast going forward, this is one that is probably a little on the minus side. I'm being very conservative there, and we will just have to see.

Again, it's -- and I want to remind people, it seems like I have to do this often. You know, RV is 5% of our total business. It used to be much bigger than that, but now it is not that meaningful in terms of overall actual performance.

Scott Graham, Bear Stearns.

Several questions related to the top line. What happened in European DIY this quarter?

What we -- it hit pretty hard because we had the change. We were up about I think 4% or 5% in the fourth quarter, and then all of a sudden we were down in the 7 to 8% range this quarter. We were down essentially in all of the customers. We went digging in and looking in. Their volume through their stores came off quite a bit. Their reorders to us came off. So it kind of surprised us how strong the fourth quarter was and how quickly it turned. It is one we're watching pretty closely as we go forward. And for the full year, we assumed this thing was going to be flat out there. So we're pretty confident that we will not see the same thing repeat for four quarters here. But it was a little bit of a surprise as we mentioned.

Now two things to comment on that, Scott, do not be surprised if you do see some negatives. I think we're trying to balance this here, but we are getting rid of SKUs, unprofitable SKUs. The first way you try to improve an unprofitable SKU is to go get a price increase. And if it is due to copper or freight or any of the costs that we have, we are fairly aggressive at doing that.

The second way in Kopp, we are willing to walk away from unprofitable SKUs. We think that is the right thing to do, and there is a major piece of work getting done as we speak on that. I do not think that was the major influence of the reduction Andy talked about, but it probably had some effect, and it probably will going forward. But again, the European Electrical, losing sales there and our current profitability level before the restructuring is completed is not a bad thing.

Understood. Alternatively, US DIY, even though the growth there was only modest, it looks like you have been kind of outperforming that market for awhile, even if it is just modest outperformance. Some of your newer products with some traction, what would you say that is attributable to?

Well, I would put a couple of things on there. The first would be to say that if you look at the same-store sales comps for Lowe's and Depot as a proxy, these guys are down in the 5% to 10% zip code.

The Electrical aisle is not as bad as the full store. The reason for that is the white goods, the lumber much bigger ticket items tend to drive those same-store sales. The Electrical aisle tends to be an area that performs better than that because it is more of a recurring revenue, if you will. You know people need to replace a lightswitch or something along those lines. So I start with the fact that the Electrical aisle is not down as much as the same-store.

And then our performance within that aisle has been favorable. This quarter we launched a major cable tie, a piece of business with Home Depot, and we are probably a third of the way through that launch. And that certainly helped our revenue with Depot.

Lowe's was reasonably flat. Not a huge amount of change year-over-year. So again, some of those wins and losses I referred to in my comments started from a positive point of view this quarter with Depot.

Okay. Sort of a question on the two businesses that are sort of more program-oriented, obviously convertibles and the US truck business. I know that both of those businesses you guys have been looking at trying to win some new platforms and have, in fact, won some and what have you. And most of that I suspect is sort of 2009 oriented.

Did we see maybe the bottom of the truck business this quarter, or will it be next quarter? Kind of the same question for the convertibles business in terms of bottoming.

Well, I think the truck we probably have one more quarter, Scott, just because of the prebuy that happened in December. It will obviously depend on how strong January and February come along. But I would say we are treading along the bottom maybe one more month worse.

From the auto side, I think you're getting into a period now where it really is year-over-year volumes that drive the unit volumes of existing platforms that drive our sales volume more than new platforms. We do have a couple of pretty significant ones coming late in 2008, early 2009, that would be a couple of BMW products, a little bit more of the liftgate actuation that we do. So we do have a back-end loaded thing.

I think when you're looking at the more current quarters that we are in, it is going to be dictated by how well the cars are selling.

Right. Could those businesses, though, be double-digit growers in 2009?

Yes, I think (multiple speakers). I think the truck has probably got a better chance of doing it than auto, but I would say both have that potential.

I would not say for the full year in auto. But you are going to have some quarters when we are ramping up some things.

Chris Weltzer, Robert W. Baird.

Most of my questions have been answered. In the press release, you talked about higher intangible amortization affecting industry margins. Is that solely acquisition-related, or is that something -- is there something else going on there?

Solely acquisition.

Solely acquisition? Okay. And then on the new frame contract in the Gulf for Hydratight, is that a new business win for you, or is that just converting an existing customer to a new contract type?

A little of both.

A little of both?

A little of both.

Yes, it was a customer we had a lot of frame agreements with in Europe, and we have assets here in the Gulf and we won it here.

And the (multiple speakers). Go ahead.

What I wanted to do is maybe just spend a second and talk about how frame agreements work. But basically what a lot of asset owners are trying to do is just outsource the joint integrity away. You guys keep track of the joints. Wherever our assets are, we want you to try to service them. Keep track of them. Do it safely. Adhere to our safety requirements. Do all the training you need.

And there's a lot of service providers that work on an oil rig or an oil platform, and what some of these customers are trying to do is, hey, we want to have more of a consistent safety approach where a single provider is responsible for the assets.

So it is almost an outsourced maintenance, if you will, would be probably the way to describe it. And it has been going on in the Gulf -- for us in the North Sea for a long time. People like Statoil and others. This is the first one here in the US. We do plan to market this as a trend and try to convince other asset owners that this is a good way to outsource a major concern you might have about joint integrity.

Okay. And if I'm understanding correctly, you're saying that you picked up some revenue because you're doing some other things that maybe you were not doing before. But is it also the sort of agreement positive for margin mix as well?

It is not as much a margin issue as it is -- it allows us to start planning. I guess it affects margins where you start having the service crews. You have a more reliable predictable stream knowing what you have to do because you're responsible for a bigger group of assets. It allows you to time out that work a little bit better and have a look more visibility, kind of like a backlog-driven business, if you will. And so it probably helps the efficiency of our service groups.

No, that is very helpful.

Scott Blumenthal, Emerald Advisers.

I'm going to try and fill in some of the white space from some of the previous questions. But can you talk about kind of the evolution of product in the auto business?

For example, I know that a large portion of the minivans that are being sold nowadays have gate actuators and sliding door actuators. You know just the evolution and characterize how that is either going -- how that is going to kind of help you both here in North America and in your European business?

Sure. I mean if you look at the evolution of convertible tops, the whole world was basically either manual or electric actuation in the 80's and early '90s. By about mid-90s ourselves and [Hoebert], I'm not sure exactly who came up with the first hydraulic system, but we started moving into hydraulics from electric actuation. And what hydraulics did is they really did a better job of keeping the roof consistently going up and down from side to side, not having jammed, not having electric motors that get a little out of sync. And the market very aggressively went to hydraulics.

We went from there to the retractable hardtop roofs, which needed more hydraulic cylinders, a more complete sophisticated system where you had to sense where various parts of the roof are, and we started to get into latching. So latching was an extension of that product line, and we bought a business called CPS and started getting into latching as part of the system.

What has happened more recently now is people are looking at hydraulics to do the liftgate. And again, electric actuation dominates that market today. Most of the minivans and SUVs that you have liftgate actuation are doing that in an electric fashion.

Two problems with that, though, and the first is the same as convertibles. The weight of these roofs is a big issue.

The second is a unique technology we have brought in that helps the [anti-pitch] point. If the liftgate is sensing that there's something in the way, we reverse the motor and the fluid and like a garage door reverse the thing.

In electric actuation that is more problematic to deal with. They deal with it with sensors along the strips, and sensors in cold weather freeze up, and you never know that until somebody's hand is in the way.

So this is kind of a unique technology. It probably is not going to be accepted by every customer. I think it will take awhile for that to happen. But a number of high-end safety conscious people are going this way. Volvo, for example, has gone this way. A number of things going on with Daimler Chrysler in this way. So that is the evolution that you're describing.

We have not done any sliding doors yet. Not a lot of weight to a door sliding. I do not know if that technology would move that way.

The liftgates though when you look forward, (inaudible) talked about earlier the question on our growth in automotive. Some of the growth that we expect to see later this year into the next couple of years definitely is increases in these liftgate actuation, and a lot of it is beyond the vans. There is also some of it is cars and some of it is SUV type vehicles.

And obviously a big convertible top model is 50,000 units. You start getting into liftgate, you're talking about much, much higher volumes. And then clearly is something that will drive -- a few programs can drive quite higher incremental growth than a convertible.

It would appear to me that that is becoming more and more standard in many vehicles, so that could be an opportunity here over the next years.

I think it is very similar to convertibles where convertibles started as a smaller subset of the market. And people want convenience vehicle. People do not want to touch things that are dirty if you're in a Northern climate where snow and stuff and you have bags of groceries. You're looking for easy in, easy out access, and that is playing right into this thing.

And sticking with the auto theme or I guess the truck theme, can you talk about how some of your truck customers are trying to get ahead of the next -- I guess 2010 we are going to have a new emission standard truck engine?

A lot of what we have been working on within our Gits business for last year and certainly this year is focused on the development of those new platforms. We have picked up a couple of small wins that we have not really publicly announced. They are not big ones yet, but some of the larger opportunities we are working on we hope to talk more about in the next year or so.

But that clearly is part of the growth opportunity that we have been talking about with our Gits business, which even though we are in a trailing 12 month period here where our sales are down 30% from a year ago, this is a business we're saying we are going to see doubling going from $40 million or so up to $100 million by 2010, 2011 for the very same thing.

So we are working with a number of customers, potential customers, both here and in Europe on that, and we remain very bullish on that market and of our prospects as well.

[Tom Wakeman], BMO Capital Markets.

Most of my questions have been answered, but I do have a few more things for you. First of all, good quarter. Just wanted to ask if you would break down the core sales growth in the Industrial segment into Enerpac and then Hydratight?

Yes, it was about 11% core in each of the -- it was even between the two segments. 11 (multiple speakers) or between the two product lines in the segment, yes.

Okay. And then also I was just curious about this quarter's sales for the Gardner Bender at the big box retailers. You talk about the outlook going forward, but can you just comment on how they were historically here this quarter?

That would be within our North American Electrical business that we said was up 3% or 4% this quarter, so that essentially is Gardner Bender.

Okay.

No surprise at all. It was a fairly quiet quarter from a big box point of view.

Okay. That is definitely good news. And then as far as the Actuation Systems segment goes, how much was the Gits business down in this quarter, and how does that compare to your expectations for the quarter?

It was in line with our expectations that I just mentioned on the prior question. We have been down 30 to 35% for the last year or so since the -- the last rolling three or four quarters. I know it was pretty much in line with that. I would say it was in line with our expectations.

But again, the reason for that big decline, or a big chunk of that reason for the decline, was the prebuy last year. You know, they had to change out those engines by December. So our first quarter and our second quarter will feel the worst of that comparison.

Okay. Also, I have additional questions. I will just get back in queue for that, though.

Steven Fisher, UBS.

It sounds like Hydratight has got to have one of the best outlooks in your portfolio. Do you think there's still M&A opportunities for you in that business?

Yes. The answer to both questions is yes. The outlook is quite strong for the reasons we have talked about already.

From an M&A point of view, we also have, of the funnel of activity I talked about, I would say probably Hydratight has the most opportunities in the total funnel. That does not mean things are going to close next quarter, but there's just a lot of ideas there.

Part of that is the guy who is in charge of that segment. Brian Kobylinski used to be our M&A leader. So he is very equipped at working on the internal grassroots efforts of trying to find acquisitions that tuck-in there. But there's a lot to do there, and it is just how broad you want to define joint integrity.

It is really two different prongs. One is just building up geographically what our opportunities are or where building out our platform, our capabilities. And secondly, what other type of services or products can we add to right alongside of our current product offering.

I mean there's just a lot of areas we have not touched. As Andy said, geographically we've got more of an internal growth going on in China, but there are other parts of the world we would probably do acquisitions to get our growth.

Nuclear is an area we are very excited about. There is more we could do there. We got a taste of that with the D.L. Ricci acquisition who does quite a bit of machining in there. That is exciting. Deep sea, subsea, offshore, lots of different technologies going in the business you saw last year where we had Injectaseal and Morgrip, which is one that came with Hydratight both focused on things that emergency repairs and lots to do in emergency areas.

Building out the service crews is an area where you can buy some companies that focus on that service. We have done that with a couple of acquisitions, and that is a fast way to get -- you just then have a heavy dose of training and boom, you can start selling additional services. So there is tons to work on in that segment. Obviously the markets are pretty robust right now.

Would you say that is high on your priority list relative to other areas of M&A?

We love all our areas, but probably Industrial would be the one we love the most.

Got it. And then just to clarify on the Professional Electrical, have you already started to see the reversal of some of those OEM ordering patterns, or would you expect that to improve later in the quarter? I know we are still early here.

That is probably too granular of a question for us to answer.

Okay. Do you think you could get back to the strong double-digit growth that you had in Professional Electrical over the last few quarters?

We're not anticipating that for the year. Part of that growth as we mentioned last year was pricing, and I think we have anniversaried -- (multiple speakers). We have anniversaried that, and part of that transformer business does get resi in some form or fashion. We have -- that growth rate will not be double-digits. It will be single-digit growth going forward.

At this time, Mr. Arzbaecher, I will turn the presentation back to you once again for your concluding remarks. Thank you, sir.

Great. Well, thank you, operator, and thank all you participants for observing our call today. We are obviously excited about our first quarter and the prospects for a record 2008.

Andy, Karen and myself are here for the balance of the week to answer any follow-up questions you have. If we do not talk to you, please have a safe and happy holiday season. We look forward to the continued prosperity in 2008 for our investors. Thank you and good bye.

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a great day and a wonderful holiday.