Enerpac Tool Group Corp (EPAC) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation first quarter fiscal 2009 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 filing 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 the listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference call is being recorded Thursday, December 18, 2008.

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

Thank you, operator and good morning. Sorry for the little bit of a delay there. That was our telecommunications provider, not ourselves. It has been eight years since the creation of Actuant from the spin off of Applied Power in 2000. This is one of the first earnings call where regrettably I can't report increasing sales in earnings per share. But the many markets that we serve are in severe contraction mode and that contraction accelerated as the quarter went along. Given our diversity we can usually off set weakness in a few markets. In the current economic environment, however, we are seeing customer slow downs in almost all of our end markets and in all of the geographies we serve. Andy will go through the financial results and guidance with you in detail and I will come back and cover a number of other topics affecting Actuant. Andy.

Good morning everyone. Our first quarter results included a $0.26 to share asset impairment charge, which I will cover in a minute, while last years results included a $0.09 to share Europe Electrical restructuring charge. As a result, EPS for both years for the first quarter contain Special Items. If we remove these for comparability purposes our EPS for fiscal '09 first quarter was $0.45 a share or 13% lower than last year's comparable $0.52 a share EPS. Now the details of the impairment charge, we wrote off approximately $26 million of long lived assets from the RV business as a result of the sustained shrinking of the RV Motor Home market as well as its weak outlook. Motor Home industry shipments have declined dramatically over the last three years and expected to continue in 2009. Declining consumer confidence, the credit crunch and the spade of recent dealer supplier as well as OEM bankruptcies in the industry have led us to reaccess our carrying value of this business. This led to the 26.6 million non-cash asset impairment charge we booked in the quarter. Against this charge we recorded a non-cash income tax benefit based on a 38% blended state and domestic tax rate. This tax benefit led to a strange looking overall 11% effective tax rate for Actuant. If we exclude the impairment charge it would have been 29%, which is pretty much in line with our forecast.

Now I'l move on to cover our actual operating results, which you see on this slide. This compares our first quarter results to this year to the last excluding the special items I just covered. First quarter sales declined 8% year-over year and I will provide more color on that shortly. EBITDA declined 5% on account of the lower sales volume, but at a lower rate than sale because of the 70 basis point EBITDA margin expansion to 17% during the quarter. As you will hear shortly, our EBITDA margins declined in each of the four segments but increased on a consolidated basis due to lower corporate expenses as well as favorable mix between our segments. This mix resulted from the core growth in the high margins in the industrial segment. Meanwhile the decline in corporate expenses primarily resulted from lower incentive compensation expense this year as well as a host of other spending cuts. On the bottom line, our adjusted EPS declined 13% from $0.52 to $0.45, resulting from the combination of today's weak economic conditions, currency translation resulting from the strong US dollar as well as high interest expense.

Let me provide a little bit more color on our results versus our original guidance for the quarter. Currency was a big factor in both the sales and earnings line. Our guidance from October was based on a Euro being worth $1.44 US and the UK pound being worth $1.85. The actual average rate for the quarter for the Euro was $1.35 and for the pound it was $1.68. This strengthening created a $17 million sales and $0.03 to share EPS headwind. During the quarter, we refinanced our bank credit facility and unwound our interest rate swap agreement, which resulted in the $0.02 share of additional financing cost. If we exclude both the financing cost as well as the currency increment here our adjusted EPS guidance would have been $0.43 to $0.47 a share. That means that the $0.45 a share, first quarter EPS that we reported was in the midpoint of the range.

The remaining sales and earnings shortfall to the top end of the guidance range was caused by significant weakening in several end markets beginning in October and accelerating in November. The hardest hit relative to our October 1 guidance were the Marine, truck, auto and vehicle oriented markets. To illustrate the speed of the deceleration in these markets, we saw our core sales in the European truck market change from positive 5% core in September to minus 7% in October and then to minus 33% in November. Similarly our core growth at Maxima went from positive 10% core growth in the fourth quarter to minus 16% in the first quarter, again, reflecting the vehicle market changes. As a result of these rapid changes we quickly went into cost down mode and Bob will provide some color on that later in the call.

Now, I will shift away from comparing results to guidance and provide more color on sales during the quarter. On a consolidated basis first-quarter sales declined 8% year-over-year consisting of 11% core decline and 3% currency headwind which were partially off set by a 6% benefit from acquisitions. Sequentially, this 11% core decline compares to a year-over-year decline of 4% in the fourth quarter. So where did it take place? Quick answer is almost everywhere. This slide illustrates that core sales declined in 8 of our 10 reported product lines year-over-year. The only two product lines that did not go down year-over-year were in our industrial segment being Enerpac and Hydratight. The biggest year-over-year core sale changes compared to those in the fourth quarters so the sequential, the biggest changes there, were in Specialty Electrical driven by Marine, which was down 37% year-over-year. Global truck driven by the fall off in Europe I just described, was down by 7% year-over-year. Auto down 34% year-over-year caused by a sharp decline in global auto sales and finally in Engineered Products down 9% driven primarily by the Maxima business, which I just went through.

So the key take a ways are that the economic weakness is widespread across a lot of industrial markets and geographic regions and secondly that accelerated as the quarter progressed. However, the news was not all bad as our industrial segment had another very good quarter. It generated core growth of 12% compared to 14% in the fourth quarter. As expected we saw some moderation including Enerpac, which moderated to 9% in the first quarter. It weakened late in the quarter in Europe as well as in the US but the US was off set by some price increases. Hydratight also did well in core growth, with 18% core benefiting from continued growth in maintenance work. We didn't see a meaningful impact from lower oil prices during the quarter but we do expect some modest impact in the third and fourth quarters of this year.

Our segment margins declined year-over-year by 200 basis points to 25.3%, largely on account of unfavorable sales mix between Hydratight and Enerpac, as well as the impact of the Cortland acquisition, which came in at a lower margin. Moving on now to our electrical segment, it is minus 22% core growth or core sales decline in the quarter was slightly worse than both what we had expected and the 19% from last quarter. The most notable change in demand in electrical was the Specialty Electrical product line due to a substantially weaker Marine market with industry power boat sales in the US down 40% year-over-year. Our operating margins here were poor at 3.7%, which was caused by the impact of lower sales volumes on fixed overheads, on favorable sales mix away from our higher margin businesses within the segments, as well as some downsize in costs. While it is very frustrating to report these kinds of results for the segment, we do believe we are doing the right things to attack cost. Beyond the previously announced impact of SKU reductions in Europe and the loss of some Home Depot business-- -- Lowe's business, I',m sorry, a year ago, we believe the top line issue is market driven rather than an indicator of share loss.

In fact, we actually picked up some business in market share at Home Depot during the quarter. Bill Axline and his business leaders continue to be agressive in taking cost out of the segment with year-over-year head count down 28% as compared to the 22% year-over-yeat core sales decline. Costs are definitely being attacked. All three of our major product lines in the Actuation Systems segment were impacted by the deceleration I discussed earlier in the vehicle markets leading to a 24% core sales decline in this segment. Not surprisingly are margins were impacted by the volume declines. Unfortunately the quarter ended weaker than it started and we think the second quarter will be especially challenging given the extended plant shutdowns at many customers until mid January in order to rebalance their inventory. Yesterday's announcement by Chrysler was one of many customers that will be doing this. We know we are not alone in feeling this pain and we are doing everything we can to reduce costs in the short-term until a more consistent order pattern is re-established.

Lastly, turning to our fourth and final segment Engineered Products, it also felt a slow down in OEM production of off highway vehicles, notably in the Maxima business. Segment's core sales declined 9% year-over-year. The larger decline at Maxima was somewhat muted by better performance at some of the smaller business in this segment. EBITDA margins in this segment declined 250 basis points again on account of lower volume and some downsize in costs.

So that's it for my prepared comments on earnings and I will move over to cash flow and capitalization. Our first quarter is traditionally the seasonally weakest quarter of the year for us in terms of free cash flow on account of bonus payments, seasonal working capital builds and our dividend. This year was no exception as we generated about $11 million of free cash flow in the quarter. Our net debt for the quarter increased about $218 million, now standing at $670 million with the increase attributable to the $230 million Cortland deal.

The highlight of the quarter from a capitalization perspective clearly, was amending and extending our bank credit agreement, which we completed in early November right smack in the teeth of the credit crisis. Our prior bank credit facility included a $250 million revolver that had been set to expire in February of 2009, which therefore was the impetus for refinancing. We expanded this $405 million facility to $515 million including increasing the revolver capacity from 250 to $450 million. We also extended the maturity of the agreement by three years and it now matures in November of 2011. With this new bank credit facility in place our capital structure is in good shape. This slide summarizes the principal re-payments for all of our debt. Over the next two years our required debt payments are only about $10 million in aggregate. Plus we are expecting strong cash flow during the balance of this year, which will create more room. For all of fiscal '09, were estimating free cash in 140 to $150 million range. So while business conditions are not ideal, we are in great shape today with 240 million of liquidity and little in terms of near-term principal re-payments and clearly have the capital to weather this economic downturn.

In our preannouncement press release last week we updated our fiscal 2009 full year guidance. That included revenue guidance in the 1.5 to $1.55 billion range and corresponding EPS in the $1.60 to $1.80 to share range. This guidance excluded the first quarter asset impairment charge and represented a 7 to 10% top line sales decline from a year ago as well as a 12 to 22% EPS decline. As I warned earlier, we are expecting a rough second quarter as a result of rapidly decelerating demand in most markets and the impact of extended shutdowns at many OEMs. Unfortunately given the fact that our second quarter is seasonally our weakest sales and earnings quarter even in normal times, this softness will also mean we expect larger decremental margin impacts from this lower sales volume. We our also expecting our downsize in costs to step up in the second quarter bidding a little bit more headwind. When we take all of these factors into account we are projecting a core sales decline in the second quarter in the 14 to 18% decline range. We anticipate second quarter revenue to be 335 to $355 million driving EPS guidance of $0.20 to $0.28 a share of EPS.

Looking at both our full year guidance last week and our second quarter guidance has been a challenge given the speed of customer demand changes and more recently the sudden weakening of the US dollar again. Our visibility today is the poorest I have seen since my tenure here at Actuant as CFO. While it would be easier to suspend guidance as others have done, that hasn't been our approach. We would like to tell what we know and what our assumptions are and we will leave it up to you to judge if they are reasonable or not.

The first assumption I will review is currency. Our guidance for the full year assumes the Euro at $1.25 to $1.30 and the pound at 1.50 to 1.55. With the weakened dollar in the last week there may be a little upside in our guidance if the dollar doesn't makeup this decline. From a core growth standpoint, you can see on this slide both our original guidance assumptions for the full year as well as our updated guidance assumptions. I will provide a little color for each of the segments. Starting first with industrial we lowered our core growth assumptions to a positive 4 to 8% for the fiscal year to reflect the economic slow down. While we haven't seen this kind of softening globally in either Hydratight or Enerpac yet, we expect it will moderate more than our previous estimates. We expect segment core growth will slow up from about 12% in the first quarter to roughly 6% in the second and then moderate to mid to low single-digits in the back half of the year.

Within Electrical we are projecting core growth to be down 15 to 20%, based on weaker consumer confidence in spending in retail and Marine as well as the impact of the credit crunch in other markets including commercial construction activities. We expect core sales in Electrical to slip a bit sequentially in the second quarter. We expect the back half still to be negative but less so, once we have anniversaried last years lows loss, the European SKU reduction, and the start of the Marine market decline last year. The biggest change from a segment standpoint in our core growth outlook took place in Actuation Systems for the reasons I previously covered. We are now projecting core sales to be down 20 to 24% for the full year and in the second quarter to be down 30 to 35%. Lastly, Engineered Product segment core sales will be down minus 10% for the full year, also bottoming out in the second quarter given the vehicle shutdowns and be auto little bit less negative there after.

A few other concluding assumptions on our guidance for you to consider. Corporate expenses will be 5 to $5.5 million a quarter for each of the next three quarters. We expect to reduce our effective tax rate each quarter toward a target of 27.5% for the year excluding the asset impairment charge. Lastly our guidance today assumes no future acquisitions. That's my in depth review of the assumptions and our guidance.

I will turn it over to Bob for his comments on the guidance as well as covering a few other topics.

Thank you, Andy. Today I want to spend a little time explaining why we believe Actuant is a good stock for you to own in this recessionary environment. The first reason is the diversity of our end market. As this slide shows we have tremendous diversity of customers, geography and end markets. At a time where everyone has concerns about customer and supplier viability, Actuant's diversity is a huge plus. Consider our top ten customers only represent 18% of sales and our largest customer is less than 3%.

The next attribute is cash flow. There are many reasons why Actuant produces superior cash flow. Each of these contributes to our eight year track record of cash flow and access of earnings, but I wanted to highlight a few here. The first is our DPATS model, DPATS stands for, Design, Procure, Assemble, Test and Service and is how the majority of our businesses are configured. The big component missing here is manufacture or vertical integration. By relying on our supply base to do this for us we have less fixed cost absorption in terms of machinery, people, and buildings than most industrial companies.

Another advantage of the DPATS model is our limited CapEx requirements, less machining means less equipment, buildings and real estate. In addition, we tend to lease versus own most of our major facilities so we don't have cash tied up in our fixed assets.

Lastly, but, certainly not least, is our focus on ROIC, simply stated all major business and economic decisions at Actuant are driven by what it means to a return on invested capital calculation; having this mind set is especially important today. In fact, if there is a single message we want to leave you with today, it is that Actuant is focused on delivering the 140 to $150 million of free cash flow that Andy discussed earlier. It is over $2.15 to $2.30 a share. It is a free cash flow conversion of about 130% of net income and it would result in a free cash flow yield based on our current stock price of 13 to 14%. In times of economic uncertainty, it is good to rally leadership around a common goal and for Actuant that is delivering the 2009 free cash flow guidance.

In addition to diversity and free cash flow, another reason to own Actuant in a recession is our leadership positions in the markets we serve. Our experience and history of owning these businesses over the last few business cycles indicates they get stronger when the going gets tough. Enerpac, for example, gained the market share in the 2000 to 2001 recession, as customers gravitated toward the leading brand and established distribution that's the Hallmark of Enerpac. We belive our current profile of business will exit this economic downturn with stronger market positions than it entered. Actuant has strategically overtime invested in a flexible work force driven by our global diverse business profile. We have minimal legacy costs, limited define benefit pension plans, and limited unionized workers. We utilize temporary workers at many locations allowing us to flex our operations up or down as demand rises or falls. Our ability to down size in the current economic environment has been swift and substantial. Over the past quarter we have down sized approximately 500 people or 7% of our work force excluding acquisitions. Over the past 12 months it is a 9% reduction. As we communicated earlier we have a 10 to $15 million downsizing cost for the full year. So it is logical for you to assume further 2009 head count reductions.

In addition to the head count reductions, what is interesting about the chart in front of you is how we have been adding resources to our growth opportunities, particularly in industrial and in China while we are cutting back elsewhere. Now let me elaborate on the cost reductions that we are working on and to align our costs in line with forecasted revenue. We are projecting 10 to $15 million downsizing costs for the full year guidance, including general reductions in force, production shift to low cost regions and additional facility consolidations. Most of these actions are in segments other than industrial. So far this year we have moved a product line from North Carolina to Mexico. We are consolidating Sanlo's China in Taicang, we are shifting another domestic product line to China and we are consolidating back office support functions across multiple businesses. There are additional actions both approved and under review and we will communicate these as they are implemented.

I also want to cover some growth initiatives. There are two major growth initiatives I would like to call out today. The first is in our industrial segment where we have new product launches in Enerpac and we have geographic expansion opportunities going on at Hydratight; namely new facilities in Norway, Brazil and Angola. The second major growth area is to call out is China, where our new facility in Taicang is supporting both internal supply chain growth for ATU Business Units and also sales initiatives for the China market. We are expanding our third-party sales efforts in China beyond our existing Enerpac, Hydratight, Power-Pack or Gits Units and it now includes Maxima, Elliott and Sanlo. During the quarter both Maxima and Elliott started production lines at Taicang to support sales initiatives within China. The third area of growth I want to highlight is acquisition growth. While most of our larger M&A opportunities are on ice do to the given credit crisis and sellers not willing to divest at fire sale prices, we continue to pursue a number of small tuck-in transactions that fit our core businesses. Given our success of internally generating acquisition ideas, we remain convinced that we will find a few more deals this year to add to the Cortland acquisition we completed in September.

Just to give you a quick update on Cortland. We have owned this business since the end of September and are well into our 90-day integration process. While we have seen some slowing sales at Sanlo the larger cable, umbilical and rope businesses within the industrial segment continue to show solid growth. While we have gone through a lot of significant amount of detail with you today in order to provide you transparency. Before opening it up to your questions, I wanted to summarize a few thoughts. Clearly the global economy has thrown everyone a huge curve ball and it is difficult to predict where it will all end. At Actuant, we have positioned the business to take on whatever challenges the economy brings us, we have leading markets positions, a talented motivated management team and a flexible business model that allows us to react quickly. We can and will manage our cost structure to meet the demands the market gives us. We have strong liquidity today that Andy went through to drive our Internal and external growth initiatives and we are focused on delivering the superior cash flow even in this difficult market. Operator, I would now like to open it up to the phone lines for the question and answer session.

(Operator Instructions). Our first question comes from the line of Steven Fisher from UBS.

Good morning. Just a few clarifications. Andy, did you say that your corporate expense is going to be about 5 to $5.5 million per quarter for the rest of the year?

That's correct, yes.

That would be a ramp back up. What would be driving that? It sounds like you took some permanent costs out.

The first quarter included lower bonus expense year-over-year. We are expecting that to continue for the year. The second item in there is our long-term incentive plan, the [LTIP] plan that we have out there. We had to essentially write down the value of that -- write down the reserve that we had accrued of that to date and that was a one time credit that came through in the first quarter. That will not repeat. That's the primary driver if you look forward.

The LTIP plan, that's the plan that has compensation if the stock gets to $50 a share. There is a mark to market or fair value that goes on in that calculation which caused that.

Great. Did I hear you say that you had some pricing benefit in industrial?

Domestically, definitely, yes.

Have you seen that holding as kind of the business has decelerated throughout the quarter?

Yes, we have. It is primarily in North America. The biggest portion was in North America. We put in a price increase in June/July. We have put another one in at November. We are definitely realizing benefit from it. It has stuck.

Just to confirm that you are not currently taking any restructuring action in the industrial segment?

I wouldn't say that. There are a a number of opportunities within industrial as we have bought things to consolidate facilities of the for example, in the Houston area with the SPS acquisition we have picked up a few facilities and we are consolidating around that. The same in Europe but a few small locations. Our comment though is that as that business has been growing, we have been deploying capital towards that growth at the expense of other places. In general, that's the statement. There are some cost down actions going on within industrial .

Lastly, acquisition, are you seeing multiples come down enough to off set your higher borrowing costs?

Yes, the answer is yes, we are. The fact that an owner of a business 90-days ago thought an 8 to 10 multiple was a reasonable valuation for his business and he is having to wake up to the reality that that is a difficult set of economics 90 days later. It is not like we have got a ton of things that are right at the finish line ready to sprint out at old valuations based on our new borrowing costs. The two work in tandem.

The other comment I will make to put it in perspective today, our increase to borrowing costs are on a 3 to 4% basis all in. Obviously, they are quite a bit lower than what you would think.

Okay. Great. Thanks a lot.

Thanks, Steve.

Our next question comes from the line of Wendy Caplan with Wachovia.

Good morning. I guess not surprisingly industrial remained a star, but, surprisingly, it was up 12% core. Given your expectations of slowing related to the OEM business versus maintenance and your comments that you think you can maintain a mid single-digit core growth level or range in -- for the balance of the year and the lack of visibility, is that -- how confident are you in that and you did mention you are taking some costs out selectively. How bad at this point if you think about your worse case scenario, how bad can that be, that segment?

It's a good question, Wendy. I have more confidence in Enerpac than I do in Hydratight because we haven't owned that through a whole down cycle. I don't know how that asset will do straight through a cycle. I think a couple things that we feel very strong on. Number one, when Enerpac slows and we saw slowing, we have seen moderation for a couple years now, but it comes from so many distribution points that it doesn't sneak up on you like we saw in vehicles, where Andy said you can go from minus 7 to minus 33 in a month. You just don't see that from the global 1200 distributors that support that and all the markets that those guys are supporting. One thing that gets me confident on Enerpac is that multiple visibility from spots. Yes, we will have weakness in certain markets but across the whole platform, I don't believe it will sneak up on us in any way. Even though we brought down-- we brought our guidance to try to take that into account.

When you move to Hydratight, I think we had a lot of shareholders concerned over the last six months about oil going from over a $100 to $40, this is going to be a diaster at the for Hydra tight. I don't think they appreciate how much of a maintenance and repair business this is and how much, if you are going to produce anything, you need that. Clearly, some of the front end, deep water, exploration, Cortland type things we will feel some of that. I think that's factored into our guidance. So much of Hydratight is power generation facility. We are still running all the power plants in the US. They will still need that maintenance. Again, I'm less confident because I haven't owned it the full cycle but I have confidence that our guidance has taken that into account in a moderating way.

I guess, Bob, to get to the bottom line here in terms of your outlook for the balance of ' 09, have you -- do you feel confident that you have scrubbed the numbers to a degree that unless we see another 35% decline in vehicle sales or some other event like that, that your numbers are appropriately conservative?

We believe that, Wendy. You have been covering us a long time and I believe Andy's comments said it. We are giving you guys the facts that we have. We are not forecasting the business any different than we ever have. We get -- every quarter, we get a bottoms up roll up from all the business segments. We have monthly meetings with all the businesses and segment leaders. The process that followed that allowed us to deliver prior to this quarter 24-straight quarters of meeting or beating guidance, the same process is in place. It is just incredibly dynamic. I'm comfortable there is nothing different based on the information we know. Andy is absolutely right. It is a crazy time to try to predict the future but based on what we know, we haven't changed our methodology. It should be the same conservative Actuant forecasting philosophy that has been successful in the past.

Thanks very much.

Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Good morning. Maybe just to flush out the industrial, your 4 to 8 growth. How should we think about that Hydratight versus Enerpac?

The majority of the growth is Hydratight. On our Enerpac assumption and maybe we should have commented on this earlier. Our Enerpac assumption is flat to down in the back half of the year.

Is that --

That would drive -- that would mean that Hydratight is growing at a decent rate in the back half of the year, not as strong as the 18% we just disclosed for the first quarter.

Is that flat to down? You mentioned slowing in Enerpac late in the quarter. Is that the trend you are seeing now or is it still a little healthier than that?

The most recent data we have is November, again the weakness we saw in November was primarily Europe. I wouldn't say there was a noticeable change within Enerpac for the quarter, again, the 12% we reported overall for the industrial segment was dead on the internal forecast--

Enerpac (inaudible) forecast in the first quarter. It is internal forecast. We are creating some cushion or hedge against their forecast going forward, which brings that flat number that Andy talked about.

Great. Can you give us a better sense of this 10 to $15 million restructuring? How does that flush out by quarter? Does that kind of exasperate the down side in the second quarter or does that flush out during the year?

It is definitely not a big bath. The way you can book restructuring reserves in the old days. That will be coming in over the balance of the year. I would say it will be more in the third and fourth quarter than you will see in the second. There will be some in the second. The more facility oriented projects will be back half of the year and that's where the bigger dollars are.

Great. Finally, Bob, you mentioned the Hydratight business and maintenance aspect and you touched on Cortland. Just as you get to know Cortland a little bit better and as we have seen the big drop off in oil and gas prices, what is your sense of the cyclicality of that business around these dramatic moves in this pricing environment?

Cortland has a pretty diverse profile in its own right. It is more diverse than Hydratight. It does some more in-type stuff for ships that is not energy related. It does stuff for the Space Shuttle and goofy applications that are outside of oil and gas. It also has more front end exploration. Some of the tow cables, what is called a skinny tow cable used for seismic, those are exploration related and we are paying attention to those from a slow down point of view. The rest of Cortland you have a fairly good replacement revenue stream that comes from replacing an umbilical that got damaged or needs to get changed as a rig moves. It will probably be a little more volatile than Hydratight but I don't think materially so. As Andy and we talked about in our prepared comments, it met its expectations for the two and a half months we have owned it.

One anecdote, they have not seen a fall off yet in the exploration, the E&P side of the business with the skinny tow cables and the seismic side of it we definitely expect it to happen in the balance of the year but there are still new businesses coming through, still quoting that is going on in that area. It is not shut down the way some of the articles you are reading in the Wall Street Journal.

I think just to summarize the industrial comment, it affects both Enerpac and Hydratight. The businesses in the first quarter did not see the slow down. We did not see any change in ordering patterns. They hit their forecast as Andy said. We are deliberately at the corporate level, hedging that back saying it has to moderate. We think there is a level of conservatism in there already. It is not like this is a (inaudible) pattern it is already below this and we have a stretch to get to. We are trying to be conservative about the future and these businesses saying even though we haven't seen it, it is probably going to happen. I think it is important that people understand that is the dynamic of the forecasting that happened.

Cortland, can you remind me how much is replacement in nature?

I don't even have that number, probably 15 to 20.

There is a replacement cycle on a lot of other stuff. It is probably a three-year cycle. Half of it is oil and gas --

Why don't we try to do homework and come back to you on that.

Thanks, guys.

Our next question comes from Scott Graham from Landenburg.

Thanks for being so straight forward with things, things are what they are, right. The questions I had were first, on the restructuring, the 10 to 15 million, would you be able to tell us what number was in the just -- in the first quarter results and maybe what you are assuming for second quarter? Is that something we can ask you.

First quarter was a 1 million or 2, second quarter will probably be in the 2 to 3 million range. The back half will step up from there.

On your assumption for Enerpac flat to down in the second half of the year, is that US and European general industry driven or is there something else that you are seeing there, above and beyond what I think we all know is slower infrastructure spending. Is it something more specific to you?

No, really. Again, we have not seen this thing slow down. With the slow down in all --

We have seen it slow down. We have not seen it slow down outside of our forecast.

It moderated quarter to quarter, that's correct. We have not seen a triggering event within Enerpac itself that suddenly sales are coming down quickly. We are anticipating because of the rapid slow down and other end markets out there, it is bound to impact Enerpac. That's why we have put out what we believe to be conservative guidance, flat-ish within the middle of our range.

Right, to the extent that your guidance -- your budgets, which end market or you are just taking a best guess across end markets would be the contributing end market or end markets to the potential of a down second half in Enerpac?

It would be the industrial production type sales that go through Enerpac. I think Grainger, you know is a $6 million customer within Enerpac. You can read Grainger's announcements. They are talking about slowing activity in the MRO-type of environment. That would be a chunk of it, Scott. Clearly, shift building is a chunk where Enerpac does a lot of work. There have been a lot of delays and deferrals there so that would pick up. As Andy talked Europe, distribution seems slower, a little more dramatic. That would be a chunk. It would be all of that kind of stuff.

My last question relates to some of the liquidity, I thought it was interesting that you put that as one of your main bullet points as far as accomplishments this quarter. I guess my question is can you explain a little bit more what you mean by this accordion feature? If you got $240 million right now of cash available to invest in say acquisitions off of your new facility, how does this accordion feature work exactly?

It is an ability to expand the size of the facility without having to go out and formerly amend the facility and pay additional fees to do it. Now, you have to you have to go out and find the new credit to tack on existing participants and the bank would have to increase their commitment to the facility or go out and find some other banks that would add to it. That's essentially what an accordion is. It is not sitting on the shelf ready to go committed. You can move a lot faster and cheaper than not having it.

I'll put it in this lingo, Scott, You can't force the bank to drawdown on that money. It is accelerated because it is under the same credit terms as others. There is no paperwork or lawyers or anything that has to be done to go get the piece of paper. When we did the most recent credit facility, one of the things you try to do is leave some borrowing capacity within the existing banks to try to have that availability in the accordion feature. We had three lead banks on this deal and we believe there is additional accordion capability within those three. You try to get it over subscribed where you have capacity, people wanted more of the paper than they got so now they are willing to look at the accordion. The only time you would use it would be a big acquisition. As Andy went through the cash flow, with 140 to 150 plus the 200 we have today, the only time we would be tapping that accordion would be on a bigger deal.

Understood. The 3.5 Max leverage, that would of course be annualized EBITDA plus the acquisition, is there a period of time you are essentially allowed to be at 4? What is the accordion feature in that, 3.5 as well?

The acquisition holiday is a new feature. Essentially, it allows you -- if you were to do a larger transaction -- there is nothing we are planning on doing right now -- if you would do a larger deal, the banks would allow you to go above three and a half times leverage, I believe, to a maximum of four times for two quarters. That's all it is. You have additional details on that, we can take it off line.

Thanks.

Our next question comes from the line of Chris Deyoung from Schroeder.

To piggybacks on the leverage question, the bank agreement requires leverage to be at-- or not above 3.5 times ; is that correct?

Yes, maximum leverage covanance 3.5, yes.

With the potential for it to go up for two quarters under certain circumstances with an acquisition. As you think about doing additional acquisitions, you mentioned that you would look opportunistically for additional tuck-ins, how sensitive are you to your double B credit rating? Does longer-term opportunity and equity value take first place with that double B -- with your potentially letting it slip to single B?

You have hit a sore point and we continue to get credit given to us by banks at much better rates than double B would lend so you are getting into a very sensitive area for me, which is the rating agencies don't get it right. The answer to your question though is the acquisitions we are talking about with the 140 million of free cash flow, our leverage is dropping from 2.4 back down to 2 or below just throughout the year. Nothing we are doing would change the leverage profile of the Company above what we are doing unless we really did something big. If we did something big, we have been fairly consistent. We want to stay in the two to three times fairway, don't want to go outside of that. Nothing has changed our profile. If anything, I think our credit crisis has kept me at the lower end of the two to three times at EBITDA versus the higher end. I don't see anything there that would put the double B at risk.

We definitely don't anticipate doing anything that would move us down.

Thanks.

Our next question comes from the line of Chris Weltzer from Robert W. Baird.

Good morning. We have seen copper prices drop significantly. I assume you have to give some price back on the DIY Electrical area, can you talk about what sort of headwind you are looking at from price there?

We have given up price to our customers that are buying copper. I would say most of it is not DIY in the US, a little more in Europe. Copper is more in our Marine space as well as our transformer. The magnitude of what we are talking -- I believe we are buying in the neighborhood of 500,000 pounds of copper a month. We are probably talking 12 million a year, 8 to $10 million from where we were two years ago. I'm sorry -- where we were two quarters ago to where we were at right now is that kind of change--

Pretty immaterial.

In the scheme of things -- a lot of that has been passed through. We have automatic price escalators and de-escalators built into our larger supply and customer contracts.

It is the same way on the way down as it is on the way up, Chris. We were aggressive in passing it through on the way up and we will be as aggressive as we can making sure that if we are giving it away on the way down, we are getting it from the vendor on the other side. We are moving our point of pressure from the customer to the vendor. We are the guy in the middle and our goal is to keep the stuff balanced.

Understood. You must get some sort of sell through numbers for your DIY Electrical business. Can you give us a sense of how much of the weak demand might be inventory de-stocking versus actual under lying demand?

Most of our DIY is delivered to the store, not to central warehouses and is sitting on the pegs. You do not have major inventory in the system within the Electrical DIY markets. I would say what you are seeing in terms of our orders is what is passing through, what the store and the aisle will see. There is some anecdotal evidence that our product is doing better than some of the other electrical products in the aisle, it's anecdotal would be the best--

The sell through and POS is down high single-digits on that stuff. The one caveat I will say is we are expecting based on what we have been told here the second quarter both Home Depot and Lowes are cutting back to bring down inventory for year end and that goes into our guidance for the second quarter. I would say to date here, we haven't seen any kind of real difference and what we are seeing through is a sell through relative to what you have been reading at Home Depot and Lowes.

Thank you.

If you are a big power tool, if you are more of an aisle type product, these are much more high profile issues for you than something that tends to be a consumable-type product like a cable tie. I put you at alert on that.

We haven't talked about GITS for a while and I know the look for overall heavy duty truck market has gotten worse. Can you give us your progress with new business winds and winning new applications?

If you follow the GITS business, you understand it is emission law related. We don't see any change in our government changing its emissions policy with that 2010 changes standard. I would argue with the change at administration that there is almost no chance you will see any change in the emissions standards that are coming in 2010. Regardless of what is getting sold in 2008 and 2009, these guys have to meet the standard in 2010. That bodies well for the GITS business. If we had something to announce this quarter we would of, but there is no change in our optimism and the backlog of projects we are working on, the amount of engine testing and mule vehicle testing that is going on, we continue to be excited about that opportunity.

Thank you, guys.

Our next question comes from the line of Phyllis [Kamera] from Pax World Funds. Please proceed.

Thanks so much. I just was curious, you said you were a little surprised at how the energy sector continued to be good during the quarter. Did that -- do you think that had anything to do -- I know a lot of what you do is maintenance and repair -- how much of that had to do with the hurricanes probably during the -- possible during the summer in the gulf and maybe if you saw a drop off in that too much so far in this quarter?

The business unit didn't identify any of it to be hurricane related. If anything, we had a little bit of a slow down in the summer and maybe a project or two we will get down in the summer will get done now. Not a material enough thing that anybody brought to our attention.

Our volume in the gulf is on a relative basis, it is smaller. Our sweet spot is up in the North Sea and the real deep water type applications.

Oh, okay. Great. And then can you talk about the margin differentials between the Cortland business and the other industrial business. Is it 5%, 10%?

From a -- we disclose this in -- when we announced that deal -- from an EBITDA standpoint it is probably 700 basis points differential between the base industrial where Cortland is on that in the first quarter. Wet -- purchase accounting is really what I'm talking about. It is going through in the first quarter that widen it out a little bit. It is meaningful.

I'm sure now is not the time you will be able to do anything about that, were you able to possible see how you can make changes and increase that going forward for the year or do you think it will stay at that differential?

At no time right in the middle of the 90 day integration process that includes a heavy dose of what we call lean lead enterprise across discipline and we believe Cortland's margins have a decent amount of growth probably better than the other two that are in that segment because they have been part of the family longer and the low hanging fruit has been picked. I think margins will go up there. You have to recognize when we pay on a multiple of EBITDA. It is not like you paid for something that had the same -- you will not find acquisitions that have the kind of EBITDA that Enerpac and Hydratight has. We were thrilled with Cortland's profitability going in and we think we have great opportunity to do it up.

Our next question comes from the line of Jimmy Kim from RBC Capital Markets .

Following up on the Cortland question earlier, how is that business weather the current downturn versus the rest of the-- your industrial segment, are sales up year-over-year, down year-over-year or flat?

There are two different pieces of Cortland. There was the Sanlo business, the more of the energy related umbilical and cable and tow rope business, which was primarily serving oil & gas. That part of the business was doing very well. Its growth was certainly not that far different than what we saw in the rest of the industrial business on a year-over-year basis. The Sanlo business is more industrial feeling, it is hitting a lot of end markets outside of oil & gas. We did see moderation there where it had in the prior couple of quarters. As expected.

So came in below the 12% organic for the overall industrial segment?

No, again --

It's not in that --

The Sanlo business is not in the industrial segment. The piece that is in the industrial segment which is about 70 or 80% of Cortland grew fine. It was up double-digits. The Sanlo piece is in the Actuation Systems segment. It was a piece that moderated.

I don't want there to be any confusion. It met its forecast. It did what we expected it to do and it was double-digit growth, although that is not in our calculation because we have'nt owned it a year. It doesn't enter the core calculation for a while. It you pro forma for a period that we didn't own it, it was in the double-digits. Very similar to our other energy and industrial assets.

Got it. Thank you.

Our next question comes from the line of Charles Brady from BMO Capital Markets.

Good morning or afternoon. As you look to the Enerpac, the distributor base out there, do you have a sense within the inventory levels within that distribution base?

Charlie, we don't have visibility on a real time basis. Our typical distributor out there might do $0.5 million in sales a year and they might carry $30,000 of back inventory or maybe a little bit more. They are not stocking most of what they sell. It is -- they are ordering it and it comes through that way. We don't have real good visibility. We don't sense there is big change. We had a distributor meeting in the last couple months. We are not seeing feedback from them any kind of material change from them.

What are your thoughts as far as repurchasing shares as opposed to acquisitions?

It has never been something we have really considered, seriously. Certainly at the price today it looks interesting but our focus is just conserving the cash, looking for better growth opportunities, whether they are organic or tuck ins, that is kind of our strategy going forward.

Last one, in your core sales growth, just so I'm clear on that, the core sales obviously would not include Cortland. That would be part of acquisition growth, correct?

That's correct.

Thanks.

Mr. Arzbaecher, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, operator. There is no presentation but I do have a couple of closing remarks. To summarize we are navigating some tough economic environment right now. As Andy went through our debt and liquidity cash flow are strong more than ample to pursue the growth opportunities we are doing with little redemptions over the next couple years. We are aggressively pursuing cost reductions every where and we are focused on the 140 to $150 million of free cash flow for 2009. With also a focus on trying to continue to grow for the long-term. The investing in our initiatives that make Actuant stronger. I think I talked about GITS, on this call is a great example. Hydratight, Enerpac, China, all great examples of how we are also investing for the future. Thank you for your continued interest in Actuant. Please, have a happy and safe Holiday Season and we will talk to you again in March. 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 line.