Enerpac Tool Group Corp (EPAC) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation second quarter fiscal 2008 earnings conference call. Today's speakers are Bob Arzbaecher, President and CEO, and Andy Lampereur, Executive Vice President and CFO. As a reminder, this call contains forward-looking statements that are subject to the Safe Harbor language in Actuant's press release today, and in Actuant's filings with the SEC.

We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, March 19th, 2008.

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

Thank you, operator, and good morning. Actuant is halfway through our fiscal 2008, and we are pretty pleased with how things are going. Our operating results have been at the high end of our guidance for both quarters this year. In large part I think this is due to our focus and execution of our business model which you see here on this slide. Our business model starts with core growth which was up 4% for the quarter, and 4% for the six months.

As Andy will walk through, we are pleased with this core sales growth, given the moderating North American economy. As many of you know, we have about half of our sales outside of North America, and sales growth out there internationally has been holding up better. To this core sales growth we add acquisitions, so far this year we have completed two transactions, TK Simplex and Superior Plant Services. Acquisitions through six months have added about 10% to our consolidated sales growth. You then take these combined growths, and we'll work on our continuous improvement program through our LEAD process. LEAD stands for Lean Enterprise Across Disciplines. To goal of our LEAD program is to improve growth, profitability, and working capital.

Through six months, compared to last year, we have improved our EBITDA margins by 100 basis points, and improved our year-over-year primary working capital by 140 basis points. All of this leads to increased free cash flow. Through six months we have generated $56 million of free cash flow. This is up substantially from the first half of last year, and again, represents better than 100% conversion of net income.

We used this cash flow to pay down debt, or to fund future acquisitions. The bottom line is that our EPS is up 25% to $0.95 a share through six months, compared to $0.76 a share a year ago. Both of these exclude the European Electrical restructuring. I think the first six months of 2008 is a great example of our business model at work.

With that I will turn it over to Andy to talk about the second quarter.

Good morning, everyone. We are happy with the second quarter. It came together at the high end of our internal expectations. 17% top line growth, and excluding the European Electrical restructuring cost, 22% EBITDA growth and 23% earnings per share growth. The increased earnings reflects the combination of sales growth and margin expansion, with contributions from both our base businesses, as well as acquisitions.

On a GAAP basis, we reported second quarter diluted earnings per share of $0.35 a share. This includes a little over $0.07 a share impact from the European Electrical restructuring provision we booked this quarter, of about $5 million. Excluding this item, we earned $0.43 a share.

As covered in this morning's press release, we have now completed the restructuring program that was launched two years ago in Europe. It included the reduction of about 150 employees, facility and closures, outsourcing, the relocation of production to lower cost regions, and the elimination of low or no margin SKUs from our product offerings. The restructuring was completed within the original estimates and timelines, and will generate the anticipated cost savings.

Now let's get back to our second quarter, and dive deeper into sales. This chart shows the buildup of our 17% year-over-year growth. Core sales growth was 4%, as Bob mentioned, and acquisitions added 8% year-over-year. The weaker dollar also contributed 5% to the top line. The core and acquisition growth components were both in-line with our expectations, while currency provided a little bit more tailwind, than we had anticipated in our original 385 to $395 million guidance tore the quarter.

All four of our business segments reported top line growth, with three of the four also benefiting from acquisitions as you can see on this slide. In total, acquisitions added about $27 million in revenue to our results in the second quarter. We also had three of our four segments generate core sales growth, with the Industrial segment leading the way. Industrial's 16% core sales growth was the strongest we have seen from it in the last two years. This is our most geographically diverse segment, with over half the revenues coming from outside of North America. It is also our most profitable which benefited earnings.

Now in contrast to the Industrial segment, which came in stronger than forecast, the Electrical segment had a more challenging quarter. With two-thirds of it's sales in North America, this segment felt softness in each of its four product lines, and reported a 6% decline in core sales in the quarter. On a combined basis, our two OEM segments, Actuation Systems and Engineered Products, had second quarter core growth in-line with our expectations. Actuation Systems came in slightly better than the forecast, with 5% core growth, while Engineered Products came in a tad light of our expectations.

I am now going to drill down one more layer, and provide a little bit of color by each of our reportable product lines. Starting first with our Industrial segment, which is our high force hydraulics, or Enerpac, it had high-single digit core growth, a slight moderation from last quarter as we had forecasted, but this was still at the high end of our expectation for the year.

Hydratight was the clear star of the quarter with strong double-digit core growth. No matter which geographic region or product line within Joint Integrity, it was rock solid and is benefiting from robust maintenance demand and the success of its geographic and product expansion strategy.

We expect robust growth to continue in this product line for the foreseeable future. As mentioned earlier, all four of our Electrical segment product lines encountered sluggish demand during the quarter. North American Electrical, European, Professional, and Specialty. In addition to weak demand from the DIY channel, both builders and resi construction, we saw some softening of demand recently from other markets, including commercial construction and OEMs. Given these sales trends, we have adjusted our fiscal '08 core growth expectations for this Electrical segment to negative mid-single digits.

Truck sales continued to be very robust and ahead of expectations, including improvement in North America this quarter. We expect solid core truck sales growth for the balance of the year, above our prior expectations. Core sales growth in the other product lines were generally in-line with our forecast, including RV, which declined in the mid-teens during the second quarter.

RV, the decline was also in-line with the recent declines in the wholesale motorhome production within the industry. This was not a surprise, and was factored into both our second quarter and full year guidance from last quarter. Well, that is it for my prepared comments on sales.

I would like to talk a little bit now about our profit margins. We did generate 60 basis points of EBITDA margin expansion in the quarter, with higher margins in two of our four segments. As you can see on this slide, both the Industrial and industrial segments generated solid EBITDA margin expansion relative to last year, each of them up 120 basis points. In the case of Industrial, its increased volumes and pricing more than offset the unfavorable sales and acquisition mix. For Electrical, the cost savings more than offset unfavorable sales mix.

On the surface it appears that margins were down in both the Actuation Systems and Engineered Products segments, but after factoring out some special charges our margins were up, and I was pretty happy with the progress we saw in these two segments. During the quarter we incurred costs to consolidate two RV plants into one location, and if those are excluded from actual results, our EBITDA margins for this segment, Actuation Systems, were up slightly year-over-year.

Similarly, within Engineered Products, we started up a new facility, closed two others, wrote down another one, and recorded severance elsewhere to reduce [outcomes]. Excluding the costs of these profit improvement actions, our second quarter margins in this segment also increased modestly year-over-year.

Now before moving off of margins, I wanted to provide color on the increase in our corporate expenses year-over-year. This increase is comprised of a number of items, including incentive comp accruals, employee training programs, tax consulting fees, prestartup costs for our new China plant which opens in the fourth quarter, and higher staffing levels at the corporate office, support the various growth and continuous improvement initiatives we have got going.

We are confident we will continue to see returns on these types of investments. So taking all of this into account, the margin picture continues to be a positive one at Actuant. Excluding the European Electrical restructuring costs, we have expanded our margins in each of the last four quarters, including 100 basis points in the first half of this year. We expect continued expansion in the balance of the year, but at somewhat lower levels, given tougher comps in the back half from a year ago.

Before turning it back to Bob, I wanted to provide just a few more comments at this time on cash flow and debt. We again had a very good quarter with about $31 million of free cash flow. Our net debt was reduced to $487 million at quarter end. Which is about 1.9 times pro forma trailing EBITDA. Bob is going to provide additional comments on our capital structure later on the call so I will stop here. After confirming that we still are on track for 135 to $140 million of free cash flow for fiscal '08.

Bob?

Thank you, Andy. As you can probably tell from Andy's remarks we are pretty pleased with our second quarter results. If you ask why Actuant is doing well right now, the answer I would give would be one word, diversity. First by our markets, then geography, and then customer.

It's one of the core attributes of Actuant, and has been a major driver in our consistent earnings and cash flow performance, and growth over the last seven years. Diversity doesn't mean every market is behaving well. We always have an end market or two, that are having some type of downdraft. Today that includes Gardner Bender, whose sales at the large home centers is off due to reduced consumer spending, and residential housing slowdowns. It also includes Acme, our Professional Electrical business, which serves both residential and commercial markets, as well as RV and Marine where erosion in consumer confidence has affected spending.

But diversity also has winners, markets that are doing quite well. As Andy mentioned, Hydratight grew exceptionally well in the second quarter, and the strength of MRO activity in the Oil and Gas, and Power generation markets. The growth in this business more than offset the combined declines of North American Electrical, Specialty Electrical, Professional Electrical, and the RV product lines, and that ignores other strong markets, like Enerpac, European Truck, China, and Agriculture, all of which did well.

The reason I emphasize this diversity now, is given the uncertainty surrounding economic conditions worldwide, Actuant's diversity should be a huge comfort for investors. Investors should also find comfort in how we are managing our cost structure at Actuant. We are managing costs very differently, depending on which end market dynamics, based on end market dynamics and growth prospects. If you are looking at Europe Electrical, RV, Professional Electrical, we are proactively working to lower our cost structure, and better position these businesses for the future.

As Andy discussed, the European Electrical restructuring is complete. We had downsizings in RV, as well as others, and these are good examples of us reducing our cost structure. But if you look at the other side of the coin, we are investing in Hydratight, China, Gits, you see a very different picture. We are adding resources and spending capital.

We see solid growth of Actuant overall, and are taking opportunities to reduce costs in some markets, and those reductions fund growth and expansion in others. One of the best opportunities for our growth is the Gits diesel engine emissions business. Gits designs, develops, and manufactures Actuation Systems that are used to precisely control the air flow of diesel engines, either in the turbocharger, or the engine itself.

By precisely controlling this air stream, you can improve three things. Horsepower, fuel efficiency, or reducing the emissions. Engine emissions tends to be getting most of the attention with our customers now, given the new North American emission standards going into effect in 2010.

In the first half of 2008, Gits worked on over 20 new engine applications. Either on a Tier 1 basis with the engine OEMs, or a Tier 2 basis with the turbocharger OEMs. These projects are all active sales opportunities at some level. They are either in engineering discussions, prototype design phase, engine test phase, or successful completion of all of these.

We have been awarded two programs to date, totaling about $10 million of incremental volume, starting in late fiscal 2009, or early fiscal 2010. One of these programs is exclusively in Europe. The other has both European and North American volumes. We continue to be extremely excited about the growth of Gits, and think we are close to some more wins, and also see this business doubling over the next three to four years.

The next business I would like to highlight is Hydratight. Hydratight is a global leader in Joint Integrity solutions, including sales, service, rental, and technical expertise in solving customer issues, in the field of mechanical jointing and coupling. This business predominantly focuses its attention on the oil & gas, and power generation markets. As we have mentioned earlier on this call, this business is on fire for us right now.

We have huge growth in demand of our products and services. As customers increasingly look to safely outsource their Joint Integrity needs. Our customers include asset owners and their service providers. We have increased Hydratight's capabilities with the Superior Plant Services acquisition, which was completed just after the end of the second quarter.

This acquisition added significant breadth to our Gulf of Mexico service capabilities, both in terms of technicians, customer relationships, and technical know-how. For example, Superior has added heat-treating and metal disintegration technology, that can be added to Hydratight's Joint Integrity product offering.

This acquisition comes with 125 field service technicians, and moves our global Hydratight technicians to over 600. It is pretty amazing if you step back and review what we have accomplished with our Joint Integrity platform since our first acquisition in 2005. In 2004, we started looking for a torque wrench that we could brand Enerpac.

As we looked at the market we realized that a torque wrench was only a piece of the opportunity, and that by focusing on Joint Integrity, we could expand the served market considerably. The Joint Integrity strategy has led to five acquisitions, which now comprise Hydratight. Sales have grown from practically zero to 225 million, with the inclusion of Superior Services, and this represents now our second largest product line within Actuant, and this has been accomplished in just three years. It is a great example of how asset deployment through acquisition works for Actuant.

I would like to talk about our capital structure which is an area we have also made some great improvements on over the last five years. At the end of February, our total enterprise value was about $2.2 billion, with net debt being $487 million, or 1.9 times our debt to EBITDA leverage level. Factoring in the Superior acquisition which closed in early March, we are still operating at the lower end of our target levels of 2 to 3 times debt to EBITDA. Beyond operating at the lower end of this desired range, there are a couple of other things to consider.

First, our debt includes 150 million of 2% convertible bonds, with a conversion price of around $20 a share, and they are deeply in the money. Many investors view this more as equity than debt. The second is we have some patient capital. We completed a bond offering last summer, before the credit markets ran into trouble. These bonds are 10-year bonds and are attractively priced at 6.875.

And finally at the end of the quarter, we had our entire $250 million revolver untapped, and almost $100 million of cash on our balance sheet. The reason I wanted to highlight these items, is at a time where the credit markets are in turmoil, Actuant has great flexibility and availability, in terms of our existing capital structure, to pursue our internal and external growth strategies.

Now let's move to acquisitions. Our outlook in the current M&A market hasn't changed much in the last quarter. We still have a healthy funnel of activity we are working on, and believe some of these will come to fruition before year end. We have deployed a little over $100 million on acquisitions this year, and feel pretty good about our 150 to $200 million target we set for the full year.

This leads me to our final topic, earnings guidance. I think the numbers in the press release this morning are pretty self-explanatory. We are raising our lower end of our guidance by $0.05, and the top end of our guidance by $0.02. This takes into account second quarter activity, the weaker dollar, a lower second half effective tax rate, and the Superior Services acquisition. Finally, our third quarter guidance is for EPS of $0.53 to $0.57 on sales of $435 to $445 million.

That is it for today's prepared remarks. Operator, I would like to turn it back over to the investors' questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Deane Dray from Goldman Sachs. Please go ahead.

Thank you. Good morning, Bob and Andy.

Good morning, Deane.

For the core revenue growth, which really came in above expectations, and it is hard to kind of reconcile the fact that you are seeing negative industrial production numbers in the U.S., and that goes back to your diversity benefit. How does that core number split between North America and International for the quarter?

Well, I will let Andy think about how to answer the second part, Deane. We really don't give a lot of segment data below the total data we gave. When I look at North America, while I think you are correct, you are starting to see a slowdown, I think when you look at numbers like Grainger's numbers, which is a distributor of ours, and a pretty good proxy, you see moderating growth but you still see growth, and that is what we have seen within the Enerpac platform. It is moderating but it is not, we don't see a recession on the horizon for that business.

In terms of the split, just geographically, Deane, I mean, when you look at our different product lines, our Electrical segment product lines are, with the exception of European Electrical, it is all North American, and that clearly was our weakest segment overall, in terms of growth. And RV was down about 15% for the quarter as well. So because of those factors, I mean, during the quarter we essentially were flat in core growth in North America. Looking at Enerpac in the U.S., Hydratight, clearly we were up in those markets, but the Electrical markets overall, pulled us to kind of a flat range year-over-year.

That is exactly what I was looking for. And then what about the impact of pricing today, and what is the outlook for the balance of the year? So if you look at 4% for revenue growth, was there a price component that contributed?

I think there was. I would say it was primarily in the Industrial segment. We've anniversaried most of our increases in Electrical. I think you will see some price increases coming in in the back half of the year, especially in Electrical.

With copper.

Yes, with copper increases coming through, and some of what we are starting to see with steel as well. But I think it is a pretty small number. I mean, within the Industrial segment, out of the core growth there, the core growth we had there, I would say maybe 2% of that was price. If you look across the other three segments, it was not much. I didn't think it was a percent.

It might even be a little less. The answer is, Deane, we really with our financial system here, and all of the diversity, we don't have a way of tracking unit volumes to really hone in exactly what price is. I think Andy's number is probably a pretty good estimate, and it would be more leaning toward the Enerpac side. I think the Hydratight side, given we sell a lot of services, is kind of a different beast.

Was that enough to offset the raw material costs in steel and copper?

It was.

Yes.

Good. In terms of the businesses, Hydratight, was there any seasonal impact this quarter? I know we talked about weather can be a factor, either positive or negatively in the quarter. Was there any effect there?

None that I think I would point out. And while that was a more seasonal business, when we acquired just Hydratight and Hedley, with the D.L. Ricci acquisition with the Injectaseal, and now with the more recent Superior, I think we are going to see more moderation of that cyclicality, because we are more of a global business, than just a North Sea dominated business.

Great. And then last question, and Bob I absolutely remember the comment you made about potentially adding a torque wrench to the portfolio, and then yes, we did see this all develop into the whole Joint Integrity business. Within it today, what is the mix between equipment and service, and is there a service model that could be developed further?

Well, the mix is probably about a third product, a third rental, and a third service. I am looking at Andy.

Yes, within Joint Integrity, yes.

I think was your question was just Joint Integrity.

Yes.

And that hasn't changed a great deal. It might skew a little more toward service when you add the Superior in on a running rate, because it is almost 100% service and rental. It does that and that model has worked well. I think I said in my prepared remarks, I mean, there is a major trend towards safely outsourcing Joint Integrity. The OEMs recognize that Joint is a critical element to leaks and other things that happen in a refinery, on a pipeline, in subsea, and they are increasingly looking to outsource that to the technical service providers who can do that work. That has worked really well for us.

Is there an expansion of service into Enerpac, for example, or Electrical? Not that obvious to us, that that would be a big strategy to do. Obviously, our distributor network in Enerpac provides a lot of that service. I think you would be treading a little bit on your customer's turf. I don't see a monster amount of that within our current platforms.

Great. Thank you.

Our next question comes from the line of Amit Daryanani from RBC Capital Markets.

Thanks. Good morning, guys.

Hey, Amit, how are you?

Good. Just had a quick question on the Q3 guidance, looking at 14% or so of revenue growth at the midpoint, roughly. By my math, about 8% is acquisitions. The remainder is 6%. Could you help me understand how much of that is organic versus FX?

We are looking at organic growth for the year still in the --

About even.

Still in the 4% zip code. So I am not sure where the 8% from acquisitions that you came up with is coming in. I would have to go back in. Our assumption is roughly 4% core growth for each of the next two quarters.

All right. And then just in terms of restructuring, you did a minor tweaking in the Actuation segment on the Engineering side. Do you expect any further restructuring besides consolidation going forward, given the micro environment?

Yes, there are different things that we are looking at in the third quarter. We are moving one of our operations out on the East Coast into a new site, and we are going to essentially co-habitate two of our businesses together.

So there are a number of actions like that that we are looking at, whether it is sharing sales offices between Enerpac and Hydratight, or trying to consolidate our footprint a little bit, we will continue to try to do that, take the opportunity to do that. But with what the guidance we've laid out there, those kind of actions are included already in the guidance.

Said another way, we are always doing that kind of stuff, Amit, and my view is the next two quarters, three quarters, the level of activity is going to be pretty similar to what has been in the past. So I don't see any margin improvement or degradation associated with those efforts. The only reason we called out the Europe restructuring is that was a much bigger magnitude, working with workers councils and things. The payback on that one is a longer, it was more substantive, and it was a longer payback.

We are talking about these small ones. Many of those are between one and two years, some are even less than a year. We do those all day long, with our return on invested capital philosophy. And we will continue to do those as Andy said.

I would just add another comment. That isn't those type of things I talked about are not items you should add back, saying it was one-time in nature. To Bob's point, we will continue to do them going forward. The reason I called them out was just to explain why the margins year-over-year in those specific quarters saw a blip, but those kind of actions are absolutely included in our guidance. The second quarter and we are contemplating more as we move forward.

And as I said in my prepared remarks, the term we use around here is, we feed the eagles a little bit. The businesses that are doing well, we are trying to pour more resources in. Hydratight with technicians, and we are adding to the rental asset fleet, and in Gits we have got just a ton of engineering activity going on, and we are trying to pay for that with reductions elsewhere.

And squeeze down businesses, be very proactive and try to get out in front of the cost structure to reduce those, whether you are closing plants, whether you are getting aggressive about going to China for sourcing, whether you are working on an attempt to fix the relationship that we do with employees, all of these kind of things are really trying to improve the efficiency of those businesses, and then use that money to recirculate it into the growth businesses.

That was extremely helpful. Just finally --

Did it really make you choke that much? It was such a good strategy that you are choking on it. (laughter)

Exactly. Moving on to the raw material side of things, I think five, six quarters ago, when copper was especially escalating, I think you were talking about a $3 million headwind from commodity, at least for the last 45 days, the two months at least, copper has gone from the low $3 to almost $4. Do you expect a similar kind of headwind to come up if copper stays at these elevated levels?

I think the difference, when we talked about 3 to $4 million headwind I think that was actually two years ago. The big change is I think we have got procedures in place and wording built into contracts, for an understanding with customers that if increases come through, we are not eating them.

We are not going to be stuck in the middle and we definitely have passed on copper price increases since then. We have talked about doing it again in each of our Electrical businesses here for the back half of the year, so I think we are much better in reacting to that, and getting ahead of it as opposed to being six months in arrears like we were in the past.

Sounds like you may have better escalation clauses built in, so you can negotiate them.

The other piece is we started hedging a little bit from a copper standpoint over the last 18 months. We probably have 10 to 20% of our spend hedged at any point in time on that, so that helps a little bit as well.

Got it. And then just finally, I am going to hop off after this one, the Superior acquisition you did, in terms of a margin perspective is that comparable to your industrial business, or how does it compare versus that side?

Really don't want to comment specifically on margins in businesses like that, but I can say the acquisition of that thing was at an enterprise value to EBITDA multiple similar to other deals we have done. You can probably back into it from that standpoint.

It is pretty hard to buy acquisitions at our industrial EBITDA levels. It is more in-line with our total corporate EBITDA level, is the way I would answer it.

Got it. Thanks a lot, and congratulations on a good quarter.

Our next question comes from the line of Scott Graham from Bear Stearns. Please go ahead.

Good morning, Bob and Andy.

Good morning, Scott.

Hey, just wanted to ask you about a little bit more about Hydratight, and a little bit more about Electrical. Are you guys starting to benefit from the pull-through of the products in the 1/3 product piece, are you starting to benefit from some of the acquisitions you have made, as far as being able to pull-through some of those products, Enerpac and otherwise through Hydratight?

Yes. Let me think through the pull-throughs, and Mark, and Andy chime in if I have missed any. The first big pull-through that went from Enerpac to Hydratight, was to get a pump platform that we could use and leverage within the Joint Integrity business. We have done that pretty well.

On the other side, now, this would be coming from Hydratight to Enerpac, both tensioners and torque wrenches are in various levels of ability to bring that. We have had a torque wrench product for a couple of years. We are introducing a new tensioner for Enerpac, which is really made for the Enerpac more maintenance and repair market than the oil & gas, but it was a product that we really leveraged a lot of the know-how from Hydratight to do.

In addition to those, I think we have done an excellent job of leveraging D.L. Ricci on a machining capability. That is more of a service than a product sale. But we have done an excellent job there. Injectaseal is a recent one that we added, and again, Superior has got some things in heat-treating and metal disintegration capabilities, that we will be able to use in those.

Okay. It does look like it is starting to benefit the organic in that business, is that needle moving enough, what you just talked about, to impact the organic?

Yes, I would say the bigger thing to move the organic than that is the global footprint, and the increased ability to do one stop shop for a big asset owner. That is what they want. When they send you into a field in Kazakhstan, they want you to be able to do as much as you can, and not have 16 different vendors, all of which they are on their safety records and they have to worry about training, and all of that kind of stuff. So that has really been the theme that I think has grown the core growth.

Okay. That is helpful. The other side of the equation here of course is the Electrical, which I was wondering if you could characterize for us, I mean, obviously in had the last six months this market has gotten a lot weaker. I assume both U.S. and Europe. And I was wondering if could you kind of characterize U.S. versus Europe sales?

I think if you remember last year, Scott, with European Electrical, we expected it to be kind of flat to down during the year, and we were surprised in that it was up about 3%. In the first quarter of this year it turned to negative territory. We were down about 7%, 7 to 8%. It was still in that same kind of zip code this quarter, so we have seen year-over-year pretty good sized swing, but there hasn't been I would say a change in Europe between the first quarter and the second, in terms of the trend. It is pretty similar.

When you go to the DIY market here in the U.S., and I think we talked about it on the last call, there has been some increases at the Home Depot and some decreases at Lowe's. A lot of those increases happened in the first half of the year. And the decreases will happen in the back half, and we did get a little start on that with Lowe's affecting the second quarter.

So that trend probably continues, which is why in Andy's comments he talked about the negative comps in the back half of the year in the DIY market. When you move out of that, we have certainly seen weakening at Acme, which we talked about in our prepared remarks. That is affecting commercial transformers, and some outdoor lighting, and both of those products have both resi and commercial applicability.

The Marine market which is kind of a combination of both DIY through people like West Marine, and also boat builders, I think we have seen a slowing in the boat builders side of that business. Consumer confidence, very similar trends that we see in RV, and I think the long-term trends for the same reasons we like RV, are also in existence for Marine. But with consumer confidence weak, you are feeling the effect of that.

Understood. Actually, there was one more question, if I may.

Go ahead.

The auto piece, U.S. and Europe, what is the outlook for the platforms coming online, and what are you thinking in that business?

Go ahead, Andy.

This year we talked about a pretty flattish year in terms of revenue. We definitely had some, and have some new platforms, new work that is coming on. There is a BMW that has come on. There is some lift gate actuation. We had one in the beginning of the year, we have got another one coming on at the end of the year. This year is kind of flattish.

I think the more interesting news is looking out. We have a pretty healthy I should say backlog, which is billed scheduled for next year, in terms of new platforms coming on. I expect this to be a double-digit grower next year, in terms of core sales growth in Automotive. With a number of new platforms hitting and some replacements as well, where you just get more of a kick when you launch a revamped platform, relative to a more tired platform.

I think Andy is being a little modest this year. We are having a pretty good year in Auto. It is a little ahead of where we would have expected it to be at this point. We are powering through, which is obvious that there is a consumer confidence weakness, but convertibles as a subset of Auto, and we have talked to you guys a lot about that, continues to do pretty well. Mostly out of the U.S. to be candid with you, not as much in the U.S. programs, but that is where most of our business is is in Europe. So Auto has been doing okay.

That is great. Thanks a lot.

Our next question is from the line of Charlie Brady from BMO, please go ahead, sir.

Thank you. That was BMO Capital Markets. Hey, Bob and Andy.

Is this a commercial or what, Charlie? Go ahead.

Just wanted to make sure he got it right. The cost savings on the Electrical restructuring, given that now we are done with that, and the market is also kind of softened at the same time. Any change to expectations on what you expect to pull out of that restructuring?

I think that the restructuring, in terms of what we expected to get out of it, I think going in we expect to get that coming out of it. We talked in past quarters about some of the inefficiencies that have happened during the restructuring, such as underabsorption, some of these plants as we are bringing them down. Inefficiencies, walk-outs, labor slowdowns, those kind of things have impacted our efficiencies, have impacted service levels to some extent as well. So that has kind of muted I think some of the improvements coming out here. But in terms of the overall savings from this plan, I think we feel pretty comfortable about that.

That being said, it doesn't help right now that the demand over in Europe is weaker. I mean, clearly I mentioned earlier that we are down about 7 or 8% year-over-year, and this is a seasonal business. Back half is considerably weaker, in terms of revenue than the first half. So I guess I would advise you guys not to build up some sudden big ramp in margins in this business in the back half of the year relative to the first because of that. Those would be our comments.

Just to add to Andy's, I think the actual benefit from the restructuring, most of that was people-related, and is just math. We took out the right people. Their salaries are gone, or the right amount of people and their salaries are gone, so that is just math. As Andy said, now is our chance to really start getting in and do the LEAD stuff. I know you guys have listened to enough companies talk about Europe restructuring, it is very difficult to run your plants when you have got people that are on notification that they are leaving the organization.

It is just very difficult to go for continuous improvement. That is now behind us. That started in mid-February and we are aggressive, I was in a meeting with Mark and the leadership of this business less than a week ago, talking about some of the good things that are starting to go with the LEAD programs. So Andy is correct, the profitability of the business declined while we were doing this restructuring.

Now we are getting it back, and we are driving that piece of it back. So feel good about the fact that it is behind us. As Andy's comments said, it is on-track and the costs were on-track, and the benefits are on-track, and now we have got to get the business cranking at a higher level of profitability.

Are you comfortable with the product mix and the SKUs that you are selling out of comp, or is there more sort of re-evaluation of that?

There is more to do, but we have done the heavy lifting. Now that doesn't come overnight. When you are talking about thousands of SKUs that you get rid of, you have to adjust the customers' buying behavior over time. That is not a light switch-type issue.

But yes, we are comfortable with the heavy lifting we have done, and I am sure as we run through that first iteration, you will do just a regular Pareto 80/20 rule, and you will say, let's take another bite of that, and work on the lower profit ones. And so that process won't end any time soon.

Just on your core sales growth assumption for fiscal '08, you have taken down Electrical, but the overall was the same. Is it fair to assume that the Industrial side, particularly Hydratight, is kind of making up for that takedown in Electrical, or is it coming you out of --?

That and Truck.

Going into the year, if you look back in your notes, we had forecasted somewhere in the 7 to 9% core growth for Industrial. I think what we are looking at now would be low teens, I mean, we are looking at 11, 12, 13% growth in that segment.

One more, I will get back in queue. Any update or change I guess in the China facility? How is that coming along?

It is in great shape. It is scheduled for a Grand Opening on August 6th or 8th, something like that, and we have some pictures in our lobby that are updated every day, and we are onto the second floor of the actual construction there. Expect the building itself to be done in the April/May timeframe, and then starting to move in product and people behind that.

Thanks a lot.

Our next question comes from the line of Chris Weltzer from Robert W. Baird, please go ahead.

We talked about raw materials a little bit already but I know you don't buy much raw steel, but do you see component suppliers starting to come back to you on price yet?

Yes, Chris, there are clearly rumblings out there. Some of those suppliers are coming in and saying hey we have got increases there. Obviously we are trying to push it back, trying in some cases trying to bundle more volume to offset it, those sorts of things. I would not say it is at a fever pitch right now. It is not across the board but clearly we are hearing some.

I wouldn't say it is any different over the last several quarters, than what we are hearing today.

Okay. That is helpful. And the Engineered Products segment, the restructuring activities you did, could you just sort of give us a rough cost, or rough impact from those? Go ahead.

My comment, I guess I don't want to lay out a specific number here, but my comment on it, if you just look at what our margins are there and how small that segment is in terms of overall, just throw $0.5 million or $1 million of EBITDA on top of that, and see how far the EBITDA margins swing. It is in that kind of zip code.

Then the restructuring activities, you were talking about a move of an East Coast plant, et cetera. Are those going to be concentrated in one segment or another next quarter?

I would just say it is not necessarily just next quarter. There are things that will be hitting for the next three or four quarters.

The one we announced is Engineered Products.

The one that I said next quarter in particular. I think they are actually moving some of the stuff this week on it up at Nielsen Sessions. So that is in Engineered Products, but there will be other actions in some of the other segments as well. It is not exclusively that one.

Okay. And then can you help us differentiate the North American versus International growth rates in truck right now? I thought I maybe heard you say that North American growth was positive this quarter?

Yes, we turned positive for the first time in be about five, four quarters. We definitely saw a change from the first quarter to the second quarter on that. I think it is tough to get a gauge as to what the real run rate is in North America, but it was a mid-single digits-type grower. Europe has continued to book along in the teens.

And China is doing great.

And China is doing even better than that.

You mentioned a lower second half tax rate. Could you enlighten us as to what you are expecting there, and whether it continues in fiscal '09, or is it just a one-time sort of benefit?

Yes, we've been spending, part of the reason our corporate expenses have gone up is we have been more aggressive in looking at our tax structure overall, with all the acquisitions that we have added over the last several years, so we have got a couple of different programs we are working on. The back half of the year I think you will see a rate that will in that period, probably 30% or so. Most of that is sustainable going forward for the year. I think we will be somewhere in the 30.5 rate this year.

Next year, that kind of zip code, 30 to 30.5. So it isn't just a one shot. There is some of it that is a little bit. But you get an idea, 30 to 35 is probably what we are looking at for next year.

30 to 30.5.

Yes, I am sorry. 30 to 30.5. That is a pretty broad range otherwise, yes.

Just going back to Hydratight, a really huge pickup in organic growth. Did you pick up another customer, or how do you explain the quarter-to-quarter difference in growth rates?

Well, it was forecasted. So this was not a surprise to us. It was a little stronger than we expected. But it wasn't a surprise to us.

It was a combination of some very large one-time sub-sea programs, and some of those connectors can sell for $0.5 million to $1 million. You start putting three or four of them down for a specific customer, it can really be a lumpy type sale. It is not the core of the business. The core of the business tends to be similar to Enerpac. It has got a core thing, and then you have these lumpier infrastructure-type items. Those hit this quarter. I think also there was an absence of them last year in the comparable quarter.

First quarter was weak this year as well. It was our lowest core growth quarter at about 11% since we have owned the business.

But this is a business that the market it has grown in the mid-teens. I mean, it is very difficult to tie down but it is growing in the mid-teens, and a lot of people, I know a lot of investors have talked about gee, we are seeing some signs that new exploration is maybe moderating. This business is really more about installed base.

It is really more about refineries and pipelines and fields and platforms that are already in place, pumping oil, it is about more pressure, getting the last bit out, needing the infrastructure to be taken care of so that can happen. I have talked at length in the past about how in the '80s and '90s when oil wasn't selling that well, and was sub-$20, that things weren't getting down. Now you have got lots of maintenance and repair getting done, to keep that infrastructure alive.

Very helpful. Thank you, guys.

Our last question is from the line of Jeff Hammond from KeyBanc. Please go ahead.

Hi, good morning, guys. Can you hear me?

Yes. Good morning.

I guess just in terms of the guidance, I mean, it seems like you raised at the midpoint by the amount of the beat, versus the midpoint this quarter. It just seems like given the momentum in the Industrial business, that maybe you can let out a little more, in terms of the second half. It sounds like you are getting the lower tax rate. I mean, is there anything moving the other way on a go-forward basis, that gives you a little more caution? It just seems like the back half is a little bit conservative, given the momentum in Industrial?

Well, I appreciate the fact that you would like me to go up more while the whole world is going the other way, but --

(laughter)

But maybe Scott Graham at Bear, oh, never mind I won't go there. All kidding aside, you are accurate but we are a very short cycle business, and I think we talked about some of the Electrical amounts that got weaker this quarter, and we are not ignoring that fact.

Both Hydratight and Enerpac have short cycle businesses, and I think we are looking at a year that if we hit the high end of our guidance we are up 20%, and I think if we are going to do better than that, it is going to be in actual results, not us trying to predict that great curve at the front end. And it is typical behavior. I have had this pushback before, so I am not picking on you.

But I think we are paid to set, manage, and deliver the results that we give you, and that is what we plan to do, and I just don't feel in this uncertain worldwide economy, where things can come at you in hurry, that letting out a little more, to use your term, is the right answer.

Okay.

Couple of other comments on that. If you think back to last year, Jeff, we had year-over-year margin erosion in the first half of the year, and we had year-over-year margin expansion in the back half of the year. So I would characterize our comps this year as easier in the first half, and more difficult in the second half. So I mean, that is part of it.

The second piece is the mix, as Bob mentioned. We do see Enerpac moderating over time, and that is a high margin business. So I think that comes into play in this thing as well, and just where we're trending on other stuff, looking at the commodities going forward, where corporate expenses are, that sort of thing, we just think it is prudent to be conservative right now with the uncertainty in the economy, with some of this other stuff going on, certainly not that we lack confidence in the forecast, although we never even raised guidance in the first place. We just want to be, we think it makes sense to be cautious right now.

Okay.

Not get too far ahead of it.

And then on the industrial margins, certainly at very good levels. But just given a lot of the moving pieces with acquisitions, amortization, I know you don't give detail on incremental margins, but how would you characterize incremental margins at Enerpac, Joint Integrity, versus the normal incrementals you see?

I would use the term breathtaking, but that doesn't help you necessarily try to quantify.

They are substantially larger in the Industrial business than, say, in the Electrical.

But in the reported quarter that was the case in the reported quarter, that they were at normal incremental levels, so that the flat margins is really just a function of the mix, and this one-time step-up?

The way I would answer --

I guess maybe I misunderstood your question. Why don't you come at us one more time on that question?

Just in the reported quarter, given the margins being flat, but given how the incrementals are pretty good in these businesses, I just want to understand if the incremental margins in this quarter are what you would consider as normal?

I would definitely characterize them as normal. I am just hesitating a little bit when you are saying the margins were flat. The margins were up year-over-year in the second quarter in Industrial.

Right.

EBITDA margins, if what you are getting at is the operating profit margin, that is clearly the amortization expense coming through. It is that. The second piece is mix between Enerpac and Hydratight, Enerpac has higher margins. So you had a little bit of mix working through as well.

We try to challenge the business on margins, and what a high class problem to have, to have a business with upper 20s, low 30s type EBITDA margins. What I try to drive the organization for is how do we keep, how do we reinvest some of that money, and keep the growth going, and get the growth growing faster, and maintain that margin. Now the business, the reality is, their continuous improvement mentality, continues to drive improvement.

But the goal is not to take that margin up 200 basis points over the next three years. It is to keep that sales growth in the double digits. It was a terrific top line. We are reinvesting in both Enerpac and Hydratight, and that is the thing that really creates shareholder value. It is not squeezing the last ounce out of that very successful business on the margins.

That is good color. Thanks.

There are no further questions. Please continue.

Well, thank you, operator. And thank you investors, we appreciate your participation in the call today. If you have any follow-up questions for myself, for Karen, for Andy, we are around the balance of the week. Thank you and good bye.

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.