Enerpac Tool Group Corp (EPAC) 2008 Q4 法說會逐字稿

Welcome to the Actuant Corporation's fourth-quarter of 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 issued today and in Actuant's filings with the SEC. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details.

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, October 1, 2008. It is now my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Good morning from Milwaukee. Given the current economic environment in a number of our end markets we were pleased with our financial results for the fourth quarter. Our EPS at $0.54 on a diluted basis was at the higher end of our endorsed range of $0.51 to $0.55 per share. Andy's going to go through the quarter in detail, so I'll shift to full-year results.

Fiscal 2008 was a year that we set many new records at Actuant. Sales were a record $1.66 billion, up 14% over 2007. Operating margins were 20 basis points higher to 13.3 and EBITDA margins were up 70 basis points to 16.2. Free cash flow was $151 million and our free cash flow as a percentage of net income was 116%. We deployed $110 million in acquisitions during the year and announced and closed the Cortland acquisition of $230 million in September. EPS, excluding restructuring items, was $2.05, an 18% improvement over the comparable figure last year.

Now I'm going to turn the call over to Andy to go through the financials and I will come back and talk about my perspectives of our full year in '09 -- or sorry, in '08, the Cortland acquisition and our guidance for fiscal '09. Andy?

Thanks, Bob. Good morning, everyone. My first slide is a comparison of our fourth-quarter sales and profits between this year and last. We generated $405 million of sales this year which was 4% higher than the prior year. As I'll explain in a few minutes, the growth was driven by acquisitions, foreign currency rate changes as our core sales declined 4% during the quarter.

EBITDA increased about $5 million to $70 million or 17.2% of sales. This represented 60 basis points of year-over-year margin expansion in the fourth quarter which was our sixth consecutive quarter of expansion. The continued improvement reflects favorable mix, price increases and cost reductions.

Last year we reported $0.50 a share of fourth-quarter earnings per share, but that included a tax gain and some European Electrical restructuring costs. If we exclude both of these items the comparable EPS from a year ago was $0.49. So excluding these one-time items last year EPS increased 10% year-over-year to $0.54 a share.

The fourth quarter put a pretty good wrap on a very good year. As you can see on this slide, we had sales and EPS growth, as well as EBITDA margin expansion, throughout all four quarters of fiscal 2008. The sales and the EPS growth rate in the back half of the year was lower than in the first half on account of the timing of acquisitions and a weaker economic environment.

In the fourth quarter in particular we saw our consumer facing markets such as marine, RV, electrical and automotive become much more challenging. Conversely we saw continued strength from our Industrial and Engineered Products segments which both reported strong core sales growth.

In total for fiscal '08 it was another record year; sales increased 14% for the full year to $1.66 billion, EBITDA margins expanded 70 basis points to 16.2%, and diluted earnings per-share was up 18% to $2.05 for the full year excluding European Electrical restructuring and tax gains. This was our second consecutive year -- seventh consecutive year of double-digit sales and EPS growth reflecting strong diversification and the effective execution of the Actuant business model.

We combined 1% core growth with incremental sales from acquisitions over the last two years to generate 14% topline growth. We added year-over-year margin expansion to the topline growth to increase EBITDA to $270 million for the fiscal year, also a record. The higher sales and margins drove record EPS of $2.05 for the year -- this compares favorably to our original 2008 guidance of $1.85 to $1.95 a share which is our guidance that we provided back in June of 2007.

Now I'm going to start peeling the onion a little bit to provide a little bit more color on our fourth-quarter income statement starting first with the topline. This first slide shows a quarterly sales growth by component, breaking out the impact from foreign currency rate changes, from acquisitions and from core growth.

In the fourth quarter we generated 4% total sales growth consisting of 5% from currency and 3% from acquisitions which combined was partially offset by the 4% core sales decline. Besides core growth overall sales growth was impacted by lower benefit from acquisitions with just 3% year-over-year contribution in the fourth quarter relative to higher numbers earlier in the year.

The next slide provides another cut at sales. Here we're looking at just core growth in each of the four business segments. What you can see is that we had robust growth in both our Industrial and Engineered Products segments. Industrial core sales were up 14% year-over-year, consistent with what we saw in the third quarter. Both Enerpac and Hydratight continued to each generate double-digit core growth in the quarter. Engineered product segment generated 9% core growth in the quarter versus the prior year, a sequential improvement from the 6% growth we saw last quarter.

Our electrical segment had a rough quarter with headwinds on a number of fronts. First, DIY retailers such as Home Depot and Lowe's in the United States, as well as their counterparts in Europe, reported negative same-store sales in the minus 5% to minus 10% range. Secondly, SKU reduction in Europe impacted sales by about $5 million in the quarter, and this includes the productline divestiture we discussed on last quarter's call.

We also saw lower sales in the US as a result of the loss of some shelf space at Lowe's that we discussed a few quarters ago. Compounding this, our electrical sales into the marine market were off sharply as boat builds dropped by approximately 30% year-over-year in the quarter. So in total, electrical was down 19% on a core basis with SKU reduction accounting for about 3% of this, DIY same-store sales declines about 6%, marine market softness about 5%, market share shifts of about 3% and everything else aggregating about 2%.

Moving on now to our final segment, Actuation Systems. During the quarter we had an 11% year-over-year core sales decline with the very weak RV motorhome market significantly impacting core sales. During the quarter our RV sales were down 50% which was in line with industrywide motorhome builds during the quarter. If we would pull out the RV from the segment sales for the quarter, core sales for the balance of this segment were up slightly during the quarter.

Turning away from sales to profit margins, we generated 60 basis points of EBITDA margin expansion during the quarter reflecting the favorable impact of mix and base margin expansion in both our industrial and Actuation Systems segments. As you can see on this slide, our industrial segment EBITDA margins improved 140 basis points year-over-year in the fourth quarter with increases in both Hydratight and Enerpac. These are our best growing businesses as well as our most profitable and, due to mix, they drive overall Actuant margins higher.

Electrical segment EBITDA margins declined to 5.4% from slightly over 10% last year. The 19% core sales decline I just discussed as well as unfavorable productline mix within the segment, lower production levels to eat into and reduce inventory levels, and other downsizing costs we incurred in the quarter negatively impacted margins. On a positive note, we continue to see margin expansion in the European Electrical business reflecting the forecasted restructuring benefits we've discussed in past quarters.

Actuation Systems' segment EBITDA margins increased 10 basis points year-over-year to 12.1% despite the falloff in RV volume. This meant we saw margin expansion in most of the other product lines in this segment.

And finally our fourth segment, Engineered Products EBITDA, within there margins declined 10 basis points to 19.2% primarily attributable to a facility closure provision. If we pull this out, margins were up year-over-year by 50 basis points.

So in summary from a margin standpoint, we had margin expansion in three of our four segments if we exclude the facility closure provision in the Engineered Products segment. The one segment with margin erosion, the Electrical segment, was impacted significantly by lower production levels unfavorable mix and the downsizing cost.

Now I'm going to shift away from the P&L and provide a few comments on cash flow. We ended the year strongly with $46 million of fourth-quarter free cash flow; that was a good finish to a record free cash flow year at Actuant. The $151 million of fiscal '08 cash flow was quite an accomplishment given the high level of capital expenditures we had during the year, our highest ever at $45 million. This included about $11 million toward the new Taicang, China plant and several million dollars on four new ERP installations during the year.

Our free cash flow conversion to net income, which is an important metric for Actuant, was 116% in 2008. This extended our strength of years of free cash flow conversion in excess of net income to eight consecutive years and speaks loudly to the efficiency of the Actuant business model.

We ended the year with about $452 million in net debt which is about $20 million less than we had at the beginning of the fiscal year. Our 2008 free cash flow more than funded the $110 million of capital we deployed in acquisitions during the year.

Our year-end net debt to EBITDA leverage was about 1.7 times trailing EBITDA. This did not reflect the Cortland acquisition which was completed in September. We funded the Cortland deal with a combination of cash and revolver borrowings which increased our leverage on a pro forma basis to 2.3 times trailing EBITDA. With that I will turn it over to Bob.

Thank you, Andy. As we've already gone through with you, 2008 was a year of record financial results for Actuant, a result of our focus and execution of our business model shown here. Core growth of 1% coupled with acquisitions and favorable currency resulted in 14% sales growth. As Andy reviewed, EBITDA margins expanded 70 basis points to 16.2 for the year. Positive cash flow conversion of net income lead to $151 million of free cash flow; EPS growth of 18% excluding one-time items. Simply stated, we believe our business model is working.

(technical difficulty) 2008 was an easy year, but it wasn't. Our consumer facing businesses, namely RV, marine, auto and most of the electrical segment, saw the markets deteriorate significantly as the year progressed. We tried to stay ahead of this decline, closing facilities and downsizing our cost structure, but it was tough to catch up with this rapidly deteriorating situation.

Despite this weakness our industrial segment had a huge year and with core growth and margin expansion. Industrial is our largest segment and, given its high profitability, dwarfed the weaknesses we had elsewhere. Our Engineered Products segment also had a good year with core growth of 10% and high teens EBITDA margins. Maxima, the largest asset within the Engineered Products segment, is turning out to be an excellent contributor to Actuant's overall results.

Probably more satisfying to me as CEO is this chart showing the consistent growth that Actuant has achieved over the last five years. This performance did not come by accident, it came with a lot of hard work by all of the Actuant employees. We've always done a good job of cutting costs and turning profits into cash flow. But our success over this seven-year period has been to add growth to this cost mentality.

Actuant has spent considerable effort in internal growth initiatives within our operating businesses. Enerpac and Power-Packer are great examples of this; both businesses have grown considerably. So has our commitment to growing in emerging markets. Our China business revenues have grown sevenfold from $5 million at the spin-off to $35 million today.

We've supplemented that core growth with acquisitions. Since the start of 2005 and including Cortland we've deployed $1.1 billion capital on terms of acquisitions. We've created a system to integrate acquisitions called our AIM process allowing us to integrate and leverage acquisitions into the Actuant culture.

What people have been focused on is how much this acquisition capital was deployed towards growth here and diverse end markets. This pie chart that you see now shows how we've changed our overall sales mix towards markets that have higher growth. Consider the fact that we barely participated in the oil and gas market in 2000, but through a combination of five acquisitions we ended the year with a $250 million running rate business that we now call Joint Integrity; it represents 15% of Actuant and is growing in double digits on a core basis, and that doesn't include Cortland which I'll cover shortly.

But sales are only part of the story. Consistent margin expansion has been a core attribute of Actuant, as this chart depicts. As Andy mentioned earlier, we've had eight years of free cash flow conversion in excess of net income. You don't accomplish these kinds of financial results without excellent employee engagement and a world-class management team. Actuant has invested heavily in both creating a learning organization that continually raises the bar in managing the growth I just discussed.

One of the things that gives me real satisfaction is the management teams of acquired businesses and how they integrate into the senior team of Actuant. Of our current senior leadership team running actual business units, about a quarter of them have come to Actuant through the acquisitions. With the completion of the Cortland acquisition John Stidd becomes the most recent LT member to join this group.

So you put it all together -- growth, excellent employee engagement, continuous (technical difficulty) driving higher margins and cash flow, and you have the Actuant performance -- nearly tripling the EPS from $0.70 a share five years ago to $2.05 in 2008.

Now let's shift gears and talk about our most recent acquisition, Cortland, which we announced and closed in September. Cortland is a diverse business within its own right with approximately half its sales in offshore oil and gas markets and the balance in transportation, medical, security and other industrial markets. Cortland is headquartered in upper state New York but has facilities in Washington, Indiana, the UK and China.

The largest market for Cortland is umbilicals which are highly engineered products. Umbilicals are the connection of the surface to the ocean floor and can include electrical, hydraulic, air, water, communication -- just about any type of application you're thinking about hooking up. Applications for umbilicals include commercial diving and diving bells, rovers and also providing power connections for pumping operations. Umbilicals are the typical Actuant niche market -- not a lot of competition and they connect very expensive mission critical applications together.

The second product line has to do with oil exploration. Cortland provides tow cables used by seismic equipment on ships to explore the ocean's floor for oil deposits. Cortland's productline here offers a competitive advantage in terms of size, strength and weight and these advantages have resulted in significant growth over the last few years. We believe this productline has a bright future and given our -- especially given the focus around the globe on oil offshore exploration.

Cortland also makes a high-performance rope, which you see here, for towing and lifting in the marine environment including offshore oil and gas. We're talking about rope that can reach 22 inches in circumference, 25,000 feet in length and over 250 tons of lifting capacity. This has been a strong market as synthetic rope has increasingly replaced metal cables and chains for deep water lifting and towing applications due to weight savings. We expect the beneficial trend here to continue as deepwater oil and gas increases.

The last productline is the Sanlo business. Sanlo manufactures cable assemblies for a diverse group of industrial companies ranging from aerospace, medical, recreation and security. Due to Sanlo's similarity with Elliott we are going to include Sanlo within our Actuation Systems segment and manage it within our Elliott business.

We believe Cortland adds a lot to the Actuant portfolio. It increases our presence in offshore oil and gas. Not only is this a fast growth market, but Cortland moves us into the exploration and development portions of this market whereas Hydratight mostly plays in the production and MRO part of the market. If you exclude Sanlo, which again is going to Actuation Systems, Cortland is going to report as a separate business unit directly to Brian Kobylinski, our industrial segment leader.

We believe there are a number of synergies within Actuant that we'll be able to see from a sales point of view. First, Cortland will be able to leverage our global footprint to Actuant, particularly the Houston, Brazil and Asia Pacific locations. Further, we believe the synthetic rope business offers a number of synergies with Enerpac's already strong position in lifting and infrastructure opportunities. And last, given a healthy EBITDA margin and high-growth profile of Cortland, we believe it's going to be a strong return business for Actuant.

Now let me move to guidance and talk a little bit about our 2009 guidance. As you recollect from our third-quarter conference call, we provided 2009 EPS guidance of $2.25 to $2.35 a share on sales volume of approximately $1.75 billion. We are reconfirming this EPS guidance and tightening the sales range to $1.725 billion to $1.75 billion.

I wish I could tell you I was more confident about this range than I was 90 days ago, but the uncertainties around the economy, the credit market and exchange rates prevent this. While the Cortland acquisition is modestly accretive, it simply doesn't move the needle in a meaningful way in terms of EPS accretion for its first year, meaning fiscal '09.

Clearly some things have gotten tougher in the last 30 to 90 days. First, electrical, RV, marine and auto were all worse than we expected in the fourth quarter and, while we're taking aggressive actions to reduce cost, it's hard to offset the topline impact of these four markets.

Second, the strengthening dollar has created additional headwind. The dollar has strengthened from EUR1.55 to EUR1.44 since June. The British Pound has also moved in the same direction. A 1 point strengthening of each of these impacts our sales by $4.5 million. So an 11 point move moves these by about $50 million in sales, $8 million in EBITDA and $0.08 EPS.

Interest rates have also gone up. While 70% of our debt is at fixed rates, we do see a 125 basis point jump in LIBOR over the last two weeks alone and this increases our borrowing costs on floating debt. It creates another $2 million or $0.02 a share headwind.

While we're not reducing or EPS guidance we want you do recognize the headwinds have increased. Currency and interest rates that I just mentioned represent $0.10 a share alone. The reason we're reviewing all this with you in detail is Actuant has had a long track record of meeting or exceeding the top end of our guidance and the fact that raising guidance as the year progresses has been our norm.

My current view is 2009 is going to be a tougher year for that. And being anywhere within our guidance range, including the bottom, is going to be a strong showing. With that as a backdrop here's some additional detail to help you with your modeling.

The sales range we're endorsing -- $1.725 billion to $1.75 billion based on today's exchange rates. We expect low to flat single-digit -- sorry flat to low single digit decline in core sales with backend loaded being stronger than the first half due to RV, marine and electrical headwinds.

Here are our thoughts on core sales by each segment -- Industrial we expect to have most of our core growth somewhere in the 10% range; Electrical be negative by about 10%; Actuation Systems will decline, be negative mid-single digits; and finally, Engineered Products should generate low single-digit core growth. In addition to all of these core growths we're expecting to have $125 million of acquisition carryover benefit on the topline and that does include the Cortland acquisition.

Due to favorable mix and cost reductions we expect operating and EBITDA margin expansion of about 150 basis points, pretty significant, and it reflects our favorable mix and cost reductions. Our interest (technical difficulty) will grow to $47 million to $48 million reflecting current market rates in the Cortland acquisition financing. Our rate should be around 29% for the year with some quarterly fluctuations around that number. And finally, we're forecasting capital expenditures in the neighborhood of $45 million and free cash flow in the range of $160 million.

If you move forward to just looking at the first-quarter guidance, we're looking for a sales range of $405 million to $415 million and an EPS range of $0.48 to $0.52 a share. Both our first-quarter and full-year guidance does not include future acquisitions, except Cortland, that's already in. Even though Cortland was a sizable acquisition we still believe we'll be able to complete a number of tuck-in acquisitions during 2009.

Based on our track record and our variable cost business model we feel good about Actuant's ability to grow earnings and cash flow in what is becoming an increasingly negative external environment. Our balance sheet is solid, and our management team is focused and our diversification helps us in this downturn. Operator, that concludes my prepared remarks. I'd like to turn it back to our investors for their questions.

(Operator Instructions). Deane Dray, Goldman Sachs.

Good morning. This is Mark Zepf calling on behalf of Deane. A quick question on the spending you're seeing out of the consumer, obviously weak, but I was wondering how that compares in the US versus Europe. Both are likely weak, but any nuances there in terms of the rate of change or anything specific that you're seeing differently in Europe versus the US on the consumer side?

Well, it's a difficult question to answer just because of the diverse markets that we play in. For example, there's no RV market in Europe and there is here in the US. I would say in general -- I'd say the US is twice as bad as Europe when it comes to the rate of decline, that would be my best answer to you on that question.

Okay. And is that your estimate that the US is just further along in a similar pattern perhaps, or are you seeing just different cycles altogether or is it too uncertain to tell at this point?

I think my own thesis, and everybody has their own, but my own thesis is that the US consumer has been outspending his means for a while and the housing crash slowed that down. So I don't think Europe saw the same kind of situation, so I don't think it's as dramatic of a decline because they never really levered up as much as a US consumer would.

Great. And then just a quick follow-up. Andy, could you bridge the year-over-year margins in Electrical between the impact of the lower production mix, any raw material or pricing headwinds you saw there as well?

I don't have it right at my fingertips. I would say that raw materials was not a significant factor in the fourth quarter. We did have certainly some increases along the way, but we passed along price increases and comp early on in the quarter.

Mix definitely worked against us where some of our higher-margin businesses such as marine and our North American electrical business, which tend to be a little bit higher margin, businesses were down. But I don't have a specific bridge to say this much point relates to this. Inventory reductions also played a part of that, but mix and absorption probably be biggest piece of it.

The piece I would add to that is, the two businesses that on the topline were the weakest were the DIY electrical and the marine. And these are two businesses that have higher profit than the Kopp type business. So there was absolutely a mix issue between that sales decline.

A little bit better color on this thing here, I do have something now. Acquisitions also worked against us by about 50 basis points or so, mix was probably a 1.5 impact, audit and the balance just being I'd say volume within the businesses coming through.

Great. And you're getting the full run rate of the benefit of the Europe restructuring?

Yes, profits were up year-over-year in that business. Absolutely.

Even with the sales.

Yes.

Great. Thank you very much.

Jeff Hammond, KeyBanc Capital Markets.

Just in terms of -- I mean it sounds like you guys are certainly reacting the best you can to some further weakening. And I was just wondering if you can quantify any kind of restructuring cost you would have absorbed in the quarter, and I think you mentioned some downsizing and headcount reduction? Then in the forward guidance if there's anything else you're contemplating or that's underway, maybe quantify that and then maybe speak qualitatively what actions you might be taking along those lines?

Sure, I'll grab the first part of that which is commenting on what we saw in the quarter, fourth-quarter in particular in terms of downsizing or restructuring. We had I'd say somewhere between $1.2 million -- probably $1.5 million or so float through during the quarter, a good chunk of that was in the electrical segment, we had a little bit in Engineered Products, as I mentioned, with a facility closure provision.

It's similar amounts I would say to what we had earlier in the year. We have been reducing costs throughout the year and I think we've done a good job of balancing growth. What I mean -- cost reductions. What I mean by that is our headcount within electrical year-over-year is down 20% on a year-over-year 10% decline in core sales growth. Conversely we are feeding our growing businesses like industrial or Enerpac where our headcount is up 10% on a 12% core growth.

So there's restructuring that's ongoing in these things and probably $1.5 million or so, as I mentioned, in the fourth quarter. A little bit higher than what we had anticipated in our guidance for the year. I think Bob will provide some comments on next year.

I think it will be more of the same next year. We are always doing restructuring, some of that comes right out of our lead process where you see inefficiencies and you pick up things. $2 million, $3 million a quarter is pretty usual for us to be bouncing around with what I would call one time. We don't necessarily call those out to you every time -- we'll talk about them off-line or, if you ask, detail. But it's not like the Kopp restructuring where there's a one-time charge and then you basket against that one-time charge.

So we're always going to be doing some of those and the slowdown we're seeing now leads you to drive more aggressively at a number of warehouse consolidations where we're not getting the efficiency, plant utilization we look at across businesses and leads to some movement of things around. We built the new Taicang office -- (multiple speakers).

It sounds like someone else's line is open.

Yes, we'll get that taken care of, Jeff. So we will be doing some of that -- types of stuff as we go through the year. I don't think this is going to be a year where you're going to hear us talk about a restructuring charge or anything like that. I think we've already got a pretty lean business model and we're going to be driving these kinds of smaller global restructuring programs on a continuous basis. With Electrical and Actuation Systems being the places that probably have the most likely impact.

Okay. And then just as a follow up, just a few questions on Cortland. One, can you break out what percentage of the sales will be going into industrial versus actuation? How the margins might be impacted in the overall segment just on a comparison basis? And then just any nuances -- I think you said nominally accretive -- any kind of nuances within the first-quarter inventory step up of any quantity, etc.?

Sure, I can handle those, Jeff. Revenue split, roughly $75 million is going to be going into the industrial segment, roughly $25 million going into actuation products representing the Sanlo business. From a margin standpoint, given where our industrial margins are, the portion that's going into industrial will actually be a net drag or unfavorable, they'll be lower than the industrial margins whereas they'll be above the margins in the Actuation Systems segment.

With respect to your final question on some kind of color or review on what kind of impact this business will have on the first quarter in terms of EPS, that sort of thing, we are just working through the valuations on this thing right now to understand exactly -- nail down the amortization that's a big part of the equation in this acquisition since there's a fair amount of intangibles on it.

There will be -- there's no question, there will be a hit, up front purchase accounting hit related to valuation of inventory and having that inventory turn in the first quarter. So Cortland definitely does not help us in the first quarter from an EPS standpoint. It will probably be slightly negative from an EPS standpoint.

Okay, great. Thanks, guys.

For the full year they'll recover that, but the first quarter it will be down.

Amit Daryanani, RBC Capital Markets.

Good morning, guys. I just had a quick clarification to start off with. I think last quarter we were expecting the actuation business to be up mid single-digit in fiscal '09; right now it's supposed to be down mid single-digit. The delta there, is that essentially RV, or are you seeing sort of a more broad based slow down in that segment?

It's clearly RV which, as Andy talked about earlier, was down almost 50% in the quarter. We didn't see it that bad and so that's a chunk of it. The other places -- we have seen some push out in automotive. This is not market share related, this is not anything to do with market conditions, it just has to do with auto builds. It's a combination of both Europe and US so it's not one or the other. And then the last place is we have started to see a little bit in the cab-tilt product line, a little bit of slowing -- that's not the major piece but it is a smaller piece.

Got it. And then I guess when I look at your EPS guidance, I'm still looking at 10% to 15% EPS growth next year despite the fact sales will be flat to down a little on an organic basis. Could you just talk about what's sort of driving that EPS growth? Where are you getting that margin expansion from?

I'll start, Andy, and you can come in behind me. One of the large pieces of it is just the mix -- as we said, 10% growth in industrial and close to a 30% EBITDA and it ends up dwarfing some negatives that happened on the core on the other side. Obviously you guys can model that, I don't need to go much further on that. But that is probably the largest chunk.

The next piece would be the Europe electrical restructuring. If you recollect, that was a $7 million or so restructuring initiative that would be a benefit. We have some of that in 2008; we'll get the rest of it in 2009, so that's going through. We closed our Cottage Grove, Oregon facility about three quarters of the way through the year, that's a piece. Our lead processes are a piece. The Taicang location, we had some start-up costs last year, those don't repeat, we're already up and running there. So I would put those as my top things. Andy, anything you want to add to that?

I would agree with that. I think just a couple of other tidbits or sound bites on this thing. Within electrical we clearly have been pulling a lot of cost out. We talked about that earlier, my reference to a 20% headcount reduction in a 10% down year. So we have been combining plants within the marine segment in particular, we've been putting -- even though we're looking at a slowdown we have been putting ERP systems into help from a rationalization standpoint trying to leverage some of the back office functions, that sort of thing.

So the BH business as an example is now on the same system as Marinco, we have all three of our transformer businesses will now be on the same -- so it's those types of items. But clearly the biggest one by far is the fact that you have the flagship segment being industrial growing on a 10% plus range with margins that are on a 30% range. That is the big piece that's driving the ship here -- as well as the interest expense reduction from cash flow.

That was extremely helpful. Just a quick follow-up, a quick question, it's the last one for me. When you look at -- you guys talked about the credit markets starting to tighten up a little bit. Given that sort of backdrop, could just you talk about how does the acquisition pipeline look and do we sit in the scenario where [EBITDA] valuations come down our ability to potentially do sizable deals will shrink because of the credit markets?

I think the answer to your question is it is so dynamic right now that if I give you an answer today it will change tomorrow. Andy was in here this morning telling me that LIBOR in the last 24 hours has moved on a significant basis; that currency in the last 24 hours has moved 4 basis points from the euro to dollar.

So it is an incredibly dynamic market. What that's led to is some auctions that are really getting strained right now. And candidly, Cortland was an auction and we saw a little of that, and that happened before some of the things we are talking about happening.

So my belief is there is going to be good opportunities for acquisitions over the next year, that it is going to be much more of a buyers' market than a sellers' market. I wouldn't say we have seen it yet, but I would tell you that some of the things in the funnel are more reasonably priced, and it is a little more of a buyers' market.

Now on top of all of that, you have to have the credit profile to deal with it, and we are in great shape there. We lowered -- as you guys know, our fairway was two to three times debt to EBITDA. And prior to the Cortland deal, we dropped down to about 1.7. Cortland moves us back up to 2.3, but with $160 million of free cash flow on an annual basis, it rapidly goes back down there.

So we have a lot of horsepower there, and I believe it is going to be a good time to be an acquirer because I just think you have a fundamental shift to a buyers' market from a sellers' market.

Fair enough. Thanks a lot, guys.

Scott Graham, Ladenburg Thalmann.

Good morning. Is there anything that you guys -- you did a great job in summing up some of the drivers for the operating margin in 2008. Is there anything that you are contemplating, let's say, over and above what you were a month or two months ago that is either at the ready or maybe even further than that to drive the margin?

And what is going to be obviously a little bit of a pocket year in between some of your weaker end markets and then maybe the truck business picking up at Gits and one or two other areas possibly picking up. But in these next couple of quarters, has the market environment really had you kind of go back into the room and maybe come up with even more potential opportunities and strategies to cut costs?

Clearly, the kind of slowdown we saw in electrical at 19% core is going to get you to focus on if that is a sustainable loss. Some of that, again, Andy went through was one-time in nature; sold off that business line in Kopp, had some SKU reductions. But if you get through that and you come to the conclusion that the end markets are going to stay that substantially negative, you have to look at cost opportunities.

And our senior team does that pretty seamlessly. All of the guys are -- the segment leaders all reside here in Milwaukee. We meet with business leaders four or five times a year in a big group session, and we go through this. And I think we as an organization don't play a lot of politics in trying to get to the right answer on that. We justly lay it out and go through that.

But again, you have to focus on the diversified business model of Actuant. It was only three years ago that everybody loved our DIY business. The consumer was spending, everybody liked it. Now, if you are going to make the conclusion that the consumer is going to be out of play for the next three years, we would take different actions. I don't think we are there.

I think we believe that a lot of this stuff will shake its way through. So combination of looking for opportunities, the diverse business model, it is easy to focus on these consumer things and lose track of the fact that industrial is up in double digits with a 30% EBITDA.

So I think we are playing this out just the way Actuant always does. The market, things that are happening now, are not significantly changing our behavior.

Okay. Two other questions for you, both acquisition-oriented. The Cortland acquisition looks like it has got synergies across a couple of business units, let alone geographies. And I am wondering is this a business where we could see fairly quickly in 2009 some sales synergies from running some of those products through some other distribution?

I guess maybe to put a final point on it, would you expect the $100 million in sales of Cortland to be up year-over-year in '09?

The way I would answer the question is a couple-fold. One is I do think there will be some synergies with base businesses, but none of that is baked in the guidance we gave you. Cortland will grow in 2009 on its own. It is a strong growth business. It grows similar if not faster than Hydratight kind of zip code. And it's playing in those same markets. So we will get growth out of the Cortland asset in 2009.

I think what is interesting about Cortland is it feels to me like a similar platform that Hydratight did a few years back. We started Hydratight as a bolting product line and morphed into a joint integrity. Cortland is starting as an umbilical cable business, and I just feel like there is going to be opportunities to take that into broader areas; whether that is connections at the other end of these cables, whether it is taking the performance rope business into some markets that are non oil and gas related.

I just feel like there is things that are going to happen as part of that kind of mini diversified conglomerate of Cortland that are going to be opportunities for us, and our goal is to go sniff those out as fast as we can.

Understood. Now, the pipeline you guys have been talking about how fat and how healthy things are, how many things you are looking at without necessarily quantifying for some time. Cortland is obviously a big win for you guys in terms of getting it done. I am wondering kind of what is next? You have obviously made your calendar year 2008, however you want to measure that timewise -- acquisition, capital deployment number.

But I am wondering now with the markets where they are with becoming a little bit more of a buyers' market as you have alluded to, combined with the comments that you have made previously that the pipeline was pretty fat, I suspect -- I thought that that meant that there was more than Cortland in it.

Where do you see acquisition shaking out maybe in the next six months, Bob?

Great question, Scott. I mean the reality is -- and Cortland is in a microcosm way of just recognizing that you give any guidance on acquisitions, you're going to be wrong. They just come out lumpy. We were getting a little bit beat up on the last quarterly call that geez, you guys only did $110 million during the fiscal year. You were talking $150 million to $200 million and you bumped it. How did you get there?

Now we're sitting here with the big Cortland right out of the box at $230 million. So when I context it all, Scott, I still would like to do three to four more tuck-ins, $20 million to $50 million in size. Where at? Industrial, Enerpac, Cortland, Electrical. We are looking at all of these kind of places for continued bolt-in, and the funnel has a pretty good activity in all of those areas.

In addition to that, there still are some platforms in the funnel. Cortland was the one we were referring to saying that we thought we would get it done, and we did get it done. So Cortland was one of them, but there are some other ones in there. You have to index that with what is going on in the credit markets, what we can afford. Want to stay in the two to three times fairway, all of the other things that come into play. But there are Cortlandesque type thing still in the funnel that are bigger.

So I wouldn't say we have modeled those -- clearly none of that is in the guidance for the rest of the year, but I think you will still see acquisition activity both large and small. And the large ones are more lumpier, and I don't know if it's the next 12 months that that happens or further out.

Very good. Thank you.

Curt Woodworth, Actuant (sic).

We may be talking later; so far so good I guess. Anyway, good morning. So I have a couple questions. It seems like the guidance for next year is highly dependent on continued success in the industrial segment. And with the ISM out this morning -- or this morning for September at 43.5, which is the lowest level since '01. I know one month doesn't necessarily make a trend, but have you seen any changes in buying patterns for Enerpac? And specifically can you comment on any activity level changes you're seeing in the US or Europe? It definitely feels like Europe is weakening relatively quickly. I'd be interested to know what your thoughts are on that.

Well, it's a great question. I start with the fact that Enerpac is incredibly diverse -- geography, product lines, etc. So you've got to take that into account -- 40% in the US, 40% in Europe, 20% in Asia. Hydratight, even smaller in the US, larger outside of the US. So you've got very diverse businesses here that make that up. You are not going to have a change that happens in a month or a quarter like you can in RV or auto or electrical. So that gives me a lot of comfort in terms of giving you the prediction for the year.

Now we have seen and have told you guys that we've had moderating growth in North America and this quarter it moderated again for Enerpac. I'm not going to give you the specific numbers, but still positive, still doing well, but it's moderating. And I think the ISM number you're talking about probably is online with that.

Your Europe question that it's slowing rapidly, most of our slowing rapidly happened due not do the industrial business but more to the consumer facing businesses -- the auto that we talked about and the Europe electrical we talked about earlier. I am not a believer that Europe is in a rapid decline type situation and we haven't seen that within the industrial assets.

Again, you've got to recognize, a lot of our industrial assets in Europe are in the North Sea where they are pumping every barrel that you can humanly man. A lot of Enerpac's growth is on infrastructure and things that get funded well in advance of anything that would correlate to ISM. So that would be how I'd answer the question. I don't think Europe -- I don't think we're expecting or seeing any kind of huge change in Europe. And with the diversity of this industrial platform I get a lot of comfort that this isn't going to surprise me quickly.

Just a couple other comments add on to that. When you look at '09 I think something that should give you comfort is when you look at that guidance for that segment of roughly 10% topline, Enerpac growth is quite a bit less than Hydratight's expected growth for next year and that does reflect more what you (inaudible) as far as directionally. What is happening? Enerpac will continue to moderate, there's no question in our view on that. Hydratight, we are not seeing any signs of moderation at all. So again, the growth there is coming from the Enerpac side.

And again, Curt, we're showing 30% moderation in the growth rate. We're at 14 today and we're endorsing 10 for next year. So you've already got some of that factored into the guidance.

Okay. And I know you guys announced pretty substantial price hikes in Enerpac mid this year. How much of the growth next year would be just carryover or incremental price increases?

We don't track that number. Do you want to give him a guess, Andy?

Probably 3%, 4% maybe (multiple speakers).

And on the European truck market, it seems like that's been one of the better performing businesses certainly for you this year. And there were some announcements out yesterday that both Volvo and Scania were cutting production and I think those are two of your largest customers in Europe. Is that factored into your guidance and do you have a view on how the truck business will perform for you this year?

Kind of what I referred to when somebody asked what were the pieces. We have seen a little bit of diminishment in the truck, we're in the kind of 0% to 5% decline zip code for next year. And I think that's in line with the most current data that we're getting as a supplier to Volvo and Scania, Vaco -- all the gang.

That would be the whole powerpack of global truck business, so you're getting a little bit of benefit of China growth offsetting that. But we are expecting for the full year Europe to be down.

Okay. And just the last final question. Bob, your comment that you said getting to the bottom of the guidance range would still be a solid or strong result -- what are kind of the key moving pieces there? Is it really mainly that electrical continues to go down or the fact that some of these tuck-in acquisitions perhaps don't happen early enough to move the needle which historically that's kind of been one of the enablers of your earnings growth throughout the year?

Is your question what's the delta between the high and the low end of the range, what would be the things that move us to one or the other?

It seemed like your comment that even getting to the low end would still be a pretty good result. So I'm wondering, it seems like the bias would maybe be towards the low end. Those are my words, obviously not yours. But I'm curious, what is your view that would maybe change that sentiment going throughout the year? Do you need more acquisitions or is it hope for stabilization in electrical?

Let me try to talk it through. The major reason for putting the comment in the prepared remarks is the analysts who cover Actuant historically all camp at the top end of the guidance range. And we've always given it at a range -- and I've had a couple of you guys laugh about it and say it might sound like a range but it's never a range, you're at the top or you're a few pennies above the top -- and all I'm telling you is '09, it is a range, okay? I think there's an equal probability at the top and the bottom and that's our current outlook.

So that was what I was trying to convey where I said the bottom side is a satisfactory outcome. Now, let's face reality. The bottom side of that range is 10% EPS growth. It's $160 million of free cash flow, 7%-8% up from the prior year. These are still damn good performance given what's going on in some of these ends markets and that's where our head is. So that's kind of my color on the comments.

When you ask what's going to affect the top and the bottom, I think FX is probably the thing that I have no control over. It's translational; we manufacture in the various goods we're in. But it does affect it and if you just go with what the euro has done in the last -- since we gave that original guidance, we've got a $0.06, $0.08, $0.10 headwind right out of the box. That's the difference between the top end of my range and the bottom. So a great example of that.

The other one that will drive it is the mix. If Hydratight and Enerpac can do a little better that will drive powerful mix in terms of the total. That would probably be the ones that I focus on. Obviously the consumer, we're not expecting Europe -- electrical to be down 19%, it's going to start a little slower. I don't think this recovery is going to come right away, but I would expect the back half of our year in electrical is going to feel a lot better than it does at this exact point in time. So that would be the color I'd give around that.

That's very helpful. Thanks a lot, guys.

Robert McCarthy, Robert W. Baird & Co.

Good morning, gentlemen. I've still got a couple questions, believe it or not. On Cortland, two small incremental questions. I'm hearing I think that you think organic growth in that business could be in the same kind of range that you're talking about for the industrial segment, in other words around 10%.

Correct.

And in terms of the impact on your first-quarter guidance from purchase accounting affects, the inventory write up, can you give us an idea of what kind of number that might be, Andy? I was speculating as much as $0.03 or $0.04?

No, it wouldn't be that much, Rob. I think -- try talking a penny or two -- the net result from that acquisition in the quarter.

Okay. And then obviously it gets accretive in the back half of the year and we're thinking a penny for the year, something like that zip code.

All right. Hearing your comments, Bob, about some push outs in automotive, are you still looking for that -- you've been talking about that business being up double-digits in '09, are you still looking for it to be up in '09?

Flat to down a little bit.

Flat to down a little bit, so a fairly significant change. And the SKU cuts in Europe, when do we anniversary that?

In the second quarter.

So we'll have two more quarters of --

The end of the second (multiple speakers).

-- sort of comparable year-over-year effects?

Yes.

Yes.

But recognize that doesn't come with much profit attached to it.

I do, believe me. And so absent that affect what are you thinking about in terms of organic growth in the European Electrical business this coming year? Are you also figuring you're down besides that or, no, you'd be up if not for that?

We'd be flat to maybe down a few percent.

Okay. All right, just a little color. Thank you, guys.

Michael Watchorn, PIMCO.

Good morning, gentlemen. How do you, how would you compare the sales declines you're experiencing in the domestic DIY channel versus the traffic patterns you're seeing for those retailers?

The sales declines we're seeing I think are higher than the traffic going through there because of the items that I talked about as far as a loss to some Lowe's volume earlier on in the year, we're seeing that. If we would look at Lowe's and Home Depot, excluding that I think we're pretty much tracking what they're seeing as far as the electrical aisle and that sort of thing to their overall same-store growth or same-store sales decline. But our revenues declined more than theirs because of that market share shift.

Do you know what that decline would have been in round numbers had the Lowe's business have been in there?

Yes, probably 6 to 7 down.

All right, thank you.

Dana Walker, Kalmar Investments.

By your comments you seem to be making a case that Enerpac is a far better positioned business as we enter this economic grinder compared to the last time we faced big-time headwinds. Is that a fair statement?

Yes, I think that's accurate. I think, Dana, maybe me and you are the only two on the call who actually lived through the '90/'91 kind of time and then I guess it happened a little more in 2000/2001. It is in better shape and a number of reasons for that. Number one, I think we're much more organized on an infrastructure type of view than we were back then where it was more of a product line. We have actual businesses within the Enerpac model that focus only on the large global infrastructure projects. So that's been powerful.

I think we've got very good focus on some of the commodity oriented businesses -- oil and gas; mining; some alternate energy, and wind has been a great business for us; bridge building; bridge launching -- these have been just terrific so that was true. In the last two things -- we had nothing in China. We had a distributor in China; we now have our own sales force. It's doing -- it's gone from maybe 4 million through distribution to 20 million with our own group and the same distributors.

Then the last thing I would tell you is more of a cost issue, but we've really done a good job of globalizing the purchasing organization of Enerpac. If you went to Taicang, our new facility today, Enerpac -- a lot of the cylinders and pumps, some of the lower sophisticated items are there. And those are the ones that in a downturn we had trouble holding onto and I think we're in a much better position to really hang on to that. So I think your position and your thesis is accurate.

Would it be a proper follow on then to pose whether you believe that Enerpac can stay in a tough environment closer to flat in that we're in a big-time deceleration as we play here today and even if Enerpac lags, I would think by the back half of '09 moving into '10 things would begin to catch up with most companies that are addressing these markets.

I think flat would be probably maybe a touch too optimistic, but in the last cycle Enerpac was down kind of 20, it got to a maximum of maybe 20 -- I'm talking to '90/'91. Andy is shaking his head, he was thinking about 2000. It was down maybe 20. And what I'm guessing would be I think you could be 5'ish at the trough just due to the global nature of it.

Now our goal would be to fill that 5 in with tuck-in acquisitions. There are a fair amount of things in our funnel. I think the TK, I think the Precision SURE-LOCK, TTF, Veha -- these were all good examples where those small tuck-ins can offset some core decline within Enerpac. And with the global nature of that distribution you get synergies from the sales point of view pretty quickly.

That's helpful. Andy, on Cortland, is there a fair amount of transitory amortization that touches along with the inventory step up, that touches '09 so that the penny of amortization -- or the penny of accretion that you're describing is not a real view of what the near term effect is of that acquisition?

Yes, I think really what you're alluding to is cash EPS. We're estimating that it's going to be somewhere between $6 million and $7 million of amortization on this deal that's non-cash. So that from a cash EPS standpoint would get us up into $0.05 or $0.06 of cash EPS for the year.

When we gave you the penny accretion, that was a GAAP number.

Does that $0.06 to $0.07 though go away in some finite time frame?

No, it'll be with us for several years. There's nothing real short-term I think to your point transitory. No, it's going to be there five to 10 years.

Is the reason why you have that because there's more of a customer list orientation to this business than many intangible approaches?

Yes, there's not a lot of value in non-competes in this one which tend to be short-term oriented, it is more customer lists and know-how, that sort of thing.

Trademarks, that kind of stuff.

Final question is this, related to Cortland -- how would you describe their market share in their given markets and do you believe you have room to grow in those markets whether it's organic and/or through further business development?

We absolutely have room to grow a lot of the market share data that we were given by the Cortland team focused on the North Sea because that's really where a lot of their offshore stuff is, they don't have much of a presence in the Gulf. But even with that being the case, they're number one in diving and diving -- commercial diving umbilicals. That's a great market. They're number one in the seismic product. As I talked about in my earlier remarks, they've done a number of technology things to that that take weight out of that and actually weight is a big issue if you're towing these things behind. It's 8% or 9% fuel savings by having it be more efficient.

So they have really, with that new technology, have really started dominating the seismic market. There's a lot of focus on what's called dynamic umbilicals versus static umbilicals. A static could be something that just sits on the ocean floor and brings in a windmill that might be offshore or something. Cortland is focused on the dynamic side, so it's a niche within the umbilical market and that's been -- they're the dominant player in the dynamic side of that market. Hopefully that answered as much as I can for you.

It sure did. Thank you for your time.

Mr. Arzbaecher, there are no further questions at this time. If you like, I could turn the call over to you so you can continue with your presentation or closing remarks, sir.

Before signing off today I'd like to remind you that tomorrow is Actuant's annual investors day in New York City. It's at the New York Hilton in midtown. We'll be reviewing the 2008 accomplishments in a little more detail. It will give you a chance to poke at the business executive council members who really drive these segments. It runs from 10 to 2 New York time tomorrow. So if you're already coming we'll look for you there. If you'd like to come just show up, we'll get you situated at the time. Thank you very much and good evening.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you would please disconnect your lines. Have a good afternoon, everyone.