Enerpac Tool Group Corp (EPAC) 2009 Q2 法說會逐字稿

Welcome to the Actuant Corporate earnings conference call. (Operator Instructions)

It is now my pleasure to turn the conference over to Karen Bauer, Actuant Investor, Director of Investor Relations. Please go ahead, Ma'am.

Good morning and welcome to Actuant second quarter fiscal 2009 earnings conference call. On the call with me today, are Bob Arzbaecher, Actuant's Chief Executive Officer, and Andy Lampereur, Chief Financial Officer. I would like to point out that our earnings release in the slide presentation, supplementing today's call are available in the Investor Section of the website, at www.actuant.com.

Before we start let me offer the following cautionary note. During the call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain, and that there are a number of factors that could cause actual results to differ materially from these statements. Those factors are outlined in our SEC filing. With that, I would like to turn the call over to Bob.

Thank you Karen, and good morning. By about any financial metric other than cash flow, our second quarter was pretty tough. Core sales were down 27%. But due to absorption and a rapidly changing delivery schedules with customers, the profit impact was much greater. Only our Energy segment grew for the quarter, which was up 5%. While the positive growth from this was welcome news, this business did moderate it's growth rate from the first quarter. Lastly, our vehicle businesses were particularly weak, with truck, auto, RV and off-highway all contributing heavily to the sales decline. As you will learn today, we have responded aggressively to the end market headwinds, we are rapidly reducing our inventory, our facility costs, head count, corporate and SA&E expenses. When you see such a dramatic topline decline, the costs never catch up with the revenue in the quarter.

But we are confident this will happen as 2009 progresses, and we will discuss the major components of this later in the call. The highlights of the quarter, as we expected was cash flow. We generated $28 million of free cash flow for the quarter, and believe we are on track for $110 million for the year, or a conversion of about 75% of net income. Both inventory and receivable reductions contributed significantly to this cash flow, and we would expect this to continue as the year progress. With that as an introduction, I'm going to turn it over to Andy to go through the details of the quarter, our cost restructuring initiatives, and then I will come back and discuss guidance and a number of other topics. Andy?

Good morning everyone. As Bob mentioned, our second quarter results reflected the poor economic conditions, as well as the cost for restructuring actions that we have taken for a better position for Actuant for the future. The decline in core sales we reported in the first quarter, accelerated in January and February. Customers in virtually every market and geography cut back on purchases to reduce their inventory, and in some cases cut plants down for several weeks and even months. This resulted in a significant reduction in production and sales for us, and an urgent need to accelerate cost reductions everywhere we could, and resulted in $3 million of restructuring charges. It also meant reductions in manufacturing output and fixed cost absorption, which meant high decremental margins. The end result is over the last 90 days, we saw big declines in sales, earnings, employment and working capital.

I will cover each of these in today's prepared remarks starting first with sales. Overall, our second quarter sales declined 25%, with a core decline of 27%, which was somewhat offset by a 6% growth from acquisitions of Cortland in September, and Superior Plant Services last spring. The stronger US dollar was also a 4% head wind to our top line. From a geographic standpoint all regions weakened from the first quarter, with Europe falling the most for us. In order to illustrate how quickly things deteriorated during the quarter, our consolidated core sales were down 19% in November and December, and then accelerated to 29% down and 30% down in January and February of respectively.

From a segment perspective, three of the four segments experienced core sales decline during the quarter. The first was the Industrial segment, this segment consists of Enerpac, Milwaukee Cylinder, Simplex, TTF and Precision SURE-LOCK . It started okay in December and then hit a wall in January, which continued into February. Industrials year-over-year core sales declined from plus 9% in the first quarter, to a 13% decline in the second quarter. Most of its product lines and all of its geographic areas reported significant declines. Next I will provide some sales color on the Energy segment. As a reminder this now includes Hydratight and Cortland . Core sales were moderated in the segment from plus 18% in the first quarter, to plus 5% in the recent quarter. We attribute most of the lower sales growth this quarter to a very strong second quarter comp a year ago when sales were up 31%. While it's not include in the core sales figure on account of being acquired this past fall, Cortland also performed well during the quarter, slightly better than Hydratight, and was within striking distance of expectations. Looking forward, we are starting to see the initial signs of slowing investments in large project work in the segment such as exploration which is going to impact Cortland first. But we remind you, that the majority of the volume is (inaudible) especially as it relates to Hydratight, where we don't anticipate any big drop in demand during the balance of the year.

Within the Electrical segment all product lines saw incremental weakness in the second quarter relative to the first. Our harsh environment Electrical product line generates from the marine channel saw the biggest sequential decline, as a result of the marine OEM demand pretty much drying up. We were down 80% year-over-year on a core basis. Finally, the Engineered Solutions segment experienced the biggest overall decline from a segment stand point year-over-year sales with terrible conditions in all vehicle markets. Sales to the auto, truck, construction, egg, RV and other vehicle markets were off substantially as OEM's purged inventories from systems and led to a 42% core sales decline in the quarter versus a year ago.

I would like to shift away from sales now and discuss margins which were also adversely impacted by the weaker than expected core sales. Including our restructuring costs in both years, our operating profit margins were down 670 basis points from 10.7% in the second quarter to approximately 4% this year, which you can see on this slide. Although I will provide color the simple explanation for the decline is that we could not reduce costs as fast as the sales declined. The slide attempts to explain the decremental margins in a little bit more detail, looking at just gross profit margins and SA&E expenses. First I will talk about margins, gross profit margins. As I mentioned earlier, we had substantial under-absorbed overhead in the quarter, on account of much lower production levels.

We did rip out a lot of manufacturing, warehouse and overhead costs, but not enough to keep up with the reduced production levels. While it may not sound that difficult to adjust production overhead to meet the reduced customer orders, just think about this example. One of our $5 million dollars a year customers notified us in an email late on a Friday afternoon, with no advance notice prior to that, that all of its plants would be closed for the next 6 weeks, starting on Monday. You just can't rip out costs quick enough to offset lower production like this without adequate warning. This example, unfortunately was just one of many during the quarter. In addition to lower customer orders, we also produced less than our sales in an attempt to reduce our own inventory. We were successful in doing this as inventory came down about $15 million, in our base business excluding currency.

But the down side of reducing inventory is lower production, which also leads to lower overhead absorption and that hits margins. Despite lower overhead costs, our net under-absorbed overhead increased by about $7 million versus a year ago. And when you consider $300 million in revenue for the quarter, this fact alone essentially accounts for the entire reduction in gross profit margin. Now a couple of comments on selling, admin and engineering expenses. The good news is that it did decline during the quarter, 10% year-over-year despite $4 million being added from last year due to business acquisitions. However, this 10% decline was not enough to offset a 25% decline in sales, resulting in SA&E as a percentage of sales, increasing 400 basis points from last year to 24.9%.

So in summary, these two items lower gross profit margins and higher SA&E as a percentage of sales, as well as year-over-year changes in the amortization and restructuring expenses account for essentially all of the 670 basis point decline in the margins this quarter and operating margins. This is not a result of not being aggressive enough in reducing cost in our business. I will provide more information on that in a few minutes. Now it's easy to focus on the negative, when it seems like everything is going wrong. But we have seen good progress on a number of fronts over the last 60 days. The first of which is working capital management. I'm very happy with the job our employees are doing managing working capital in this bad environment.

During this quarter we reduced primary working capital significantly, including our receivables, inventory and payables. Unfortunately our payables have declined the most, as we pretty much shut off all purchases in the last 60 days of the quarter, and we paid for our prior purchases as they came due. We expect to see additional progress of working capital reductions in the balance of the year, which certainly will help out free cash flow for the year. One of the many challenges in the downturn in managing customers is managing customer receivables and credit. We are definitely seen an increase in customer bankruptcies in the environment.

During the quarter alone, several good-sized customers filed for bankruptcy including Fleetwood, Monaco and Country Coach in the RV market, which are three of the top seven players in the industry. (inaudible) and Saab in automotive and another number of marine customers including Odyssey, Bentley and Boater's World. This group of customers accounted for $30 million of revenue for us last year, yet we managed down the exposure to just a $1million. This $1 million charge is also included in SA&E expenses for the quarter. In addition to the customers, we also had a few competitors seek bankruptcy protection in the last month, including one of COPS in Europe. Hopefully this will result in future market share gains.

While effectively managing down receivable and inventory is obviously critical for cash flow, so despite a weak earnings quarter on account of the economic environment, we are happy with the $28 million of free cash flow this quarter. That led to a net debt during the quarter at the end of the quarter of $658 million, or about 2.7 times EBITDA pro forma for acquisitions. From a debt amortization standpoint, our capital structure is in good shape. We got just $9 million of scheduled debt repayments over the next 18 months.

We received calls from a few investors asking about our debt covenants in light of the current economy. Our credit agreement has two primary financial covenants, maximum leverage of 3.5 times EBITDA, and minimum fixed charge of 1.75 times. We are in compliance with both measures, and with the strong cash flow forecast for the balance of the year, and a number of other levers to pull if things get tight, we feel pretty good about compliance with the covenants. Most importantly from a debt and capital standpoint, at the end of the quarter we had over $175 million of financial liquidity available for our businesses, considering existing cash on the balance sheet, as well as current revolver availability, and we're forecasting $70 million or so of free cash flow during the balance of the year.

Second good news callout I wanted to make is our progress on cost reduction efforts. There are so many detailed projects going on I'm going to cover a few of them in a summary here. During the second quarter alone, we reduced head count by almost 800 employees or 10%. On a year-over-year basis excluding acquisitions, our head count is down 17 percent. While reducing employment is not something we enjoy, next to materials it's our biggest single cost and it has to be reduced if our volumes decline. In Electrical segment alone our head count is down 30% year-over-year. Head count in some of the hardest hit businesses,such as RV and marine is down over 50% just this year-to-date, 6 months to date. We reduced employment further from the end of the second quarter, and this will continue over the balance of the fiscal year.

Now part of the head count reduction is tied to facility consolidations. We closed ten small facilities in the first half of this year, and we're working on a similar number for the balance of the calendar year. We are also utilizing rolling furloughs in some of our businesses to reduce compensation costs, this is unpaid time off to retain employees in cases where the head counts already are reduced to a mission critical level. For example a number of sites are working three or four day workweeks. We have also reduced executive salaries by 10% effective March 1st, and we implemented a 5% reduction for other highly compensated employees on the same date. These two actions will generate annual savings of $2 million. Incentive compensation expense obviously is way down as well.

We also suspended annual 401k core contribution for essentially all of our US employee a few weeks ago, an action that will save us $4 million a year. In addition, discretionary spending in all areas has been slashed. Just as a quick example, travel and entertainment was down a third from a year ago. But we have a ways to go on our cost down efforts, and there is more corming. I'm expecting additional $12 million to $14 million of restructuring charges during the balance of this fiscal year, and then an additional $5 million or so hitting in the first half of next year. Pay backs on these projects vary project by project, but on average are a probably a 12 month pay back. These restructuring costs and the benefits from them are incorporated in to the guidance we provided in this morning's press release. That's it for my prepared remarks this morning. I will turn it back over

Thank you, Andy. While you might question my positive attitude today, I think Actuant is operating in a high efficiency in an absolutely horrible economic environment. While we can't change our served end markets in the short term, we can manage items that are under our control. And that's what Actuant is doing. As Andy just reviewed with you, we reduced head count compensation, facilities and working capital on a year-to-date basis, and are working on many more projects for a second half. This work is never fun, but it is what Actuant does well, and it does it quickly, thanks to our variable cost business model and our talented management team, which has a bias for action.

My goal as the leader of Actuant, is to balance these aggressive cost down actions with growth initiatives that will position us to be stronger when the economy recovers. I want to cover a few of those with you today. Continue to expand Energy our platform is a key initiative of the Company, this now includes Cortland and Hydratight. Despite the weaknesses we seen in other markets this year, we opened a new office for Hydratight in Mexico and in Angola, and have committed capital expenditures for umbilical and cable armoring capability for Cortland and invested in new rental equipment for Hydratight in many emerging markets. During the quarter, we invested $3 million to buy a small Hydratight distributor, an acquisition that will provide us greater access to the European and middle eastern markets.

Within the Industrial segment, we've continued to focus on expanding our Enerpac integrated solutions business. For those of you new to Actuant, this is the product line that focuses almost exclusively on large infrastructure programs on a global basis. We won a contract for our European wind farm in the second quarter, and are excited about a number of large initiatives that will get awarded as the year progresses. We believe that some of the US and China stimulus packages will impact integrated solutions business in a favorable way. We just completed a review of our human capital, or HCAP for Actuant . This our second year in this process, in which we specifically focus on our top talent, there development and succession plans, and how we raise the bar on our organizational competencies. We are quite pleased with the results from this. And lastly, we continue to invest in opportunities for our engine emissions business, the [GITS] business.

We would -- while some of engine manufactures have moved to SCR systems to meet the 2010 requirements, it doesn't mean that [GITS] won't have a meaningful role to play, either in the engine, or in different valve solutions, whether thats on the turbo charger working in tandem with EGR or SCR engines, or on engine itself. We've won three programs to date with this product line including two in Europe, and we remain very excited about the prospects of this business. So in summary our 27% core decline for the quarter masked some excellent opportunities for long-term growth. There has been very little market share loss other than the fiscal 2008 Lowes business, which we've discussed with you previously, and is about to anniversary in May. My expectation is that continuing to fund our growth initiatives coupled with cost reduction efforts that Andy discussed, is going to make Actuant even stronger in the future. With some of the facility consolidation and relocations, my belief is our cost structure will become more variable and our cash flow generating ability will even get stronger.

As you might expect in this turbulent economy acquisition activity has diminished considerably. First, because it moved to a buyers market and not much for sale. Second and more important, it's difficult to diligence to future earnings in cash flow of any potential acquisition in this unsettled economy. And lastly, liquidity is king right now. But that doesn't mean we that we are not going to do opportunistic things. I just discussed the acquisition the small Hydratight acquisition that we completed during the quarter. We also added a small product line in another business during the quarter, the result of a bankruptcy of a competitor. So while there are a few small things we will work on, I think it will be quiet on the acquisition front for next six months, as our preferences is to use our cash flow to reduce debt, and wait for the earnings and cash flow pictures to become predictable on acquisitions.

Now moving to our earnings guidance. Given the dynamic nature of the global economy right now, it's difficult to provide any earnings guidance with a great deal of confidence. The full year guidance range we endorsed in today's press release, EPS of $0.85 to $1.00 on sales of $1.3 billion, this excludes the RV asset impairment charge in the first quarter, this is wider than would be normal, with only two quarters to go in the fiscal year. Given the dynamic nature of many of our end markets and short nature of order to sales cycle. we think this is appropriate. For the third quarter, we are endorsing revenue guidance of $300 million to $320 million, and EPS of $0.12 to $0.20 cents a share.

Let me quickly review some of the key assumptions that go with this guidance. We expect a similar quarter in terms of a 25% to 30% core sales decline in the third quarter, with this improving to around a 20% decline in the fourth quarter, as we anniversary the start of the decline of the marine and RV markets a year ago, and the Lowes loss in Electrical. The big variable here is our sales forecast is where the customers in the end markets are in terms of the inventory levels. Andy talked about this earlier, and this is pronounced than our truck, auto, RV and marine business, but does impact the some of the other ones also. Our guidance assumes the recession continues until fiscal 2010, and that the inventory correction lasts to the end of the fiscal year in most of our served markets. We are expecting restructuring costs to accelerate in the next two quarters, to around $6 million to $8 million, in each of the next two quarters. This included in our guidance range for EPS.

We would expect EBITDA margins to improve sequentially over the next two quarters to low double digits, as our cost reduction efforts begin to take hold, and the absorption issues begin to moderate. Interest expense we think will be a little over $9 million in the next two quarters, with an effective tax rate of 25% for the balance of the year. We are expecting full year cash flow of about a $110 million, meaning that we are expecting $35 million to $40 million per quarter in each of the next two quarters. We'll likely use this cash flow to reduce our outstanding debt. Before opening the line up for your questions I want to summarize a couple of other thoughts for you. As one of Actuant 's largest shareholder, I'm as unhappy as anyone with the rapid decline in sales and earnings and resulting affect on stock price. But I remind myself, we are not alone here, and that there will be plenty of Industrial peers along side of us, as the March quarter unfolds for calendar year companies. Actuant's goal is to execute on what it can, cash flow, cost, capital deployment, and internal growth initiatives.

I believe that our future is quite bright and that we're navigating the current economic headwinds with speed, agility and an eye towards making Actuant stronger for the eventual economic recovery. We have also had a cash flow and (inaudible) focus, and that business model is on display in 2009. Cash flow of $110 million equates to 175% conversion of net income, and represents a cash flow yield of about 20% based on today's stock price. We obviously need to deliver this forecast, navigate whatever turns in the road the economy throws at us, and if we do this, we are confident that you a shareholders will be rewarded in the long-term for staying invested with us. Operator I would like to now open up the call up for the question and answer

Thank you.

(Operator Instructions)

The first question is from James Lucas with Janney Montgomery Scott LLC . Please

Alright thanks, good morning folks.

Jim.

A couple questions here. Housekeeping first one, in your cash flow what are your CapEx assumptions for the full year?

Jim, we are looking at about $30 million for the year. It will be a little bit higher than the $5 million we had this quarter, for each of the next two quarters.

What is that maintenance versus growth?

Probably two-thirds maintenance? I'd say maybe half of that, yes, $15 million to $20 million is maintenance.

Depends where you put computer systems, there is a pretty good chunk in the number is computer upgrades, whether thats maintenance or growth is a little bit debatable.

Okay. Fair enough. And -- when speaking of the Energy segment, now that you are breaking that out, in your prepared remarks you referred to majority of Energy, the volume of Energy is maintenance related, what by majority, what is that on a percentage wise? Two-thirds? Three quarters? Trying to just understand, now that you are breaking that out separate, of what is specifically maintenance related.

Yes, I think for the Hydratight business, it's 75%, 80% is maintenance, and for Cortland about a third of the size of Hydratight, probably half of it is maintenance. So it's about two-thirds in total.

Okay.

And some of that Cortland, that's not maintenance, is in the non ENergy field. We do some stuff for defense and some other holes there.

Okay. And specifically with the margin, and the Energy segment could you speak to the mix issue, of just trying to understand the margin profile of how much Cortland is below Hydratight and what the opportunities are there.

If you look at what Hydratight did last year, Jim, from margin standpoint. Cortland probably running 500 basis points with behind that in a normal environment. But it's very difficult to look at the second quarter as normal, because it is definitely the low point for Hydratight. Seasonally there is very low rentals going on in the second quarter. And we tend to have somewhat of the fixed costs of the service techs out, that we have to hold on to them for the entire year, a certain base later of them hold on to them for the base year, so our margins tend get beat up in the second quarter relative to other quarters. So we had those dynamics going on this quarter.

Okay. Finally, I mean, I think you guys did a good job of laying out the profile of what we are hearing from everybody, in terms of you getting to be lucky of having a February quarter, and spilling the bad news first. Can you talk about, I know we only had a couple of weeks of March here, but are you seeing any sort of stabilization? Or can you talk about the overall environment which you seen early in March?

I think it's along the guidance we gave, which is a similar month we saw in February. That the key ingredient as I said in my prepared remarks, is when do you get through the vehicle inventory. When does Volvo and Scania and some of the big guys that we sell to a lot of the European guys, when does this volume turn on. I mean it's normal for those guys to have a weaker second quarter, because the December is in there and January, but it has lasted longer and it --- accelerated. I can't tell you that I have seen anything in March, that it has ended.

Okay. Fair enough.

If I want to put more optimistic hat on, this is the spot where you get a little more spring construction season, and we have a lot of businesses, whether its Enerpac, whether its trucks, or RV's marine, a lot of this stuff is purchased in the kind of the spring season. So if you look back historically, this has been the area where you would start seeing that improvement. And we are probably a little early for it. But April, May time frame, that's where we usually start seeing a little bit of a pick up there.

Positive from that standpoint as well, is those type are our higher margin businesses, so there is more favorability from a margin standpoint in the back half of the year as well.

Let me hit one last comment and I will let you follow. My last comment on that, is obviously our guidance is somewhat of a mirror image of the third quarter to the second quarter. So we are not forecasting this thing, we're optimistic as we just discussed, but it is not what the guidance is comprised of.

And specifically to Enerpac given a fair amount of that goes through distribution, do you have a feel for what the channel inventory looks like, trying to understand has the channel brought down inventory too far?

You know Enerpac channel inventory is probably the hardest number in all of Actuant to try to quantify. You are talking about 1200 independent distributors, all of which have their own appetite, their own capital structure, and their own strategies on inventory, it's very global. So it is not something I can give you comfort where we are at in the cycle. They do not stock a ton of inventory. They stock a couple of months of turn normally. We have no idea where they are at on the cycle. But this is not a business like trucks or RV or auto that you have a big couple of layers of inventory between the manufacturer and the end user.

Okay. Great, thank you very much.

Thank you. Following question comes from Jeff Hammond Capital Markets, please proceed.

Good morning, guys.

Hey, Jeff.

Hey just wanted to the -- Andy, you laid out the debt covenants -- the debt covenants well. Can you just on those debt covenants tell us where you stand today, maybe at least on a more restrictive one, and just maybe as you look on the full year where you see EBITDA troughing out, where you would fall within -- within those covenants. And also, can you just explain any kind of how the calculation on debt to EBITDA is calculated, what is included and excluded?

The bank covenant, the two of them again, is the two of them are fixed charge coverage, and the leverage -- maximum leverage -- out of the two, the fixed charge coverage is -- has got plenty of room I'm not concerned about that one at all. I mean its just so far over. The leverage one is pretty much in line with what I had mentioned earlier. 2, 7, 2, 8 somewhere in that kind of range. I'm on it right now. The actual calculation, there is a lot of puts and takes in this thing. What I recommend you do is go out and take a look at the document, it's out in our filings and stuff, there are add backs in there for acquisitions and FAS 123R and stuff like that, so it's more detailed than I want to get in to in this call. But clearly the drivers of it, is debt and EBITDA, and every restructuring action that we do, works against us on this stuff, so we want to make sure we have quick pay backs on these projects. And it's important we generate cash flow for the yea, and that we rip costs out and we feel comfortable that you should be fine with the forecast we laid out, and some other levers that we can pull as I mentioned on the call.

And the 27, 28, is that on the last 12 months?

Yes. It's a trailing --

So its -- Back in the envelope, what would it look like based on your fiscal new fiscal '09 guidance?

Why don't you follow up offline with that. I don't have the numbers in front of me. We are somewhere in the 27, 28 range on it right now Jeff, so just give me a buzz.

Okay. We can follow up on that. Then just in terms of -- I just want to understand how the cost savings flow through. I mean how much cost savings are you really getting in the second half of the year from the head count reductions, restructuring, what would be the annualized savings in to fiscal '10.

It's really difficult to put a number on this, because part of the headcount that is coming out is direct labor, and by definition it comes out directly with the sales number, on this thing. In that the timing as well, as when you pull the trigger relative to when the savings comes through. It's on average, we're saving, we have a 12 month pay back on the restructuring charges we are taking. So if we are going to have $15 million to $20 million come through this fiscal year -- $15 million to $20 million savings -- coming through from those restructuring items as well. But again, it's predicated on where your volume is, your production volume and those sorts of things. So it's difficult to pinpoint it. We are definitely seeing savings coming through. I saw it come through the the back half of January and February, in particular on the SA&E lines. We just announced a number of new projects in the last two weeks as far as cost reduction activities and restructurings and that sort of thing. I'm confident we will see the savings going forward.

Add more color. I think Andy said this in his prepared remarks, its somewhere around a year, I think the smaller pay backs are in six months, there are some like comp reductions that are immediate with no one time costs, but the majority of them six months would become fast, and two years would be slow, and you get in to some of the European workers counsel issues its takes longer. If its north of two years, candidly Actuant doesn't -- we really need we kind of challenge the businesses that over two years, it's not worth doing. Now obviously it is at a 20% ROIC hurdle we throw on the businesses, but in this time we are challenging businesses, it's got to be under two, so it's balanced. Those the other thing I would mention is we can move fast on this. This is Actuant, it's not a place with a lot of legacy costs, we have some unions in a couple of smaller businesses, but by in large it's employment without contracts, so we can flex this and have flexed this pretty fast, I think in comparison to most Industrial companies.

Okay. Perfect, thanks, guys.

Thank you. The following question comes from the line of Wendy Caplan, Wachovia. Please proceed.

Thank you. Good morning. Bob, does this environment push you to think about your portfolio businesses in terms of in a strategic sense? That is as you kind of scope across the businesses, you get to the point where you are thinking that some of the these, we should exit some businesses? Or conversely some that you wish were bigger in this environment?

I think an economy now obviously tests your whole diversified profile thesis and portfolio management. We go through that with the board annually, we actually went through that in December with them, right in the middle of the storm. So it certainly does get attention probably with a little finer lens in this kind of environment than others. But the reality is now is not the time to worry about portfolio management. Now is the time to take the costs you can do, and take on the things that you can really affect and drive there. I was looking at some slides recently, what we done in portfolio management towards the oil and gas space, towards more Industrial tools, towards some of the electronic things with Maxima, I'm sure glad I'm running the portfolio I am today, rather than the portfolio we inherited at the spinoff back in 2000. I think our mix is steadier, more global, and it fits more of a growth profile than it did back there.

Fair, thank you. As you look at the cost reduction efforts, can you speak to the geographically whether you are getting traction in Europe, given some of the social cost issues? And some of the issues we had with the cost business for example, can you speak to that versus how successful you have been in the US?

I think the answer is, I think we got a early head start on the European thing with COP. I mean that was really more of a '06 announcement, '07, '08 implementation of the COP restructuring. I'm sure glad that's out of the way and those savings have been coming in as we expected during this year. So not by any forecasting this decline, but doing what we do, that we got a head start on. I think the other items in Europe we have been working on, we have been working on a number of the vehicle markets, trying to move more of the assembly and the manufacturing to low cost countries. We moved a number of things to Turkey where we have a facility. We moved a number of things to China in to the new Taicang facility. So those processes keep going. Every time you announce one of those, you go through it with your workers counsel and get approvals, so some of that has been done, some of it has not. So we continue to accelerate those kinds of things. The other place where Europe where we are pretty strong is in the oil and gas and Enerpac. Obviously those businesses are more sturdy. We did continue to have growth in Hydratight. So it has been less of an issue.

Okay, thanks. Regarding your outlook for the year in terms of earnings, I'm a little confused, this $0.85 to $1.00 range, excludes or includes the $0.12 to $0.15 cents in that I'm guessing, would be restructuring for the balance of the year.

It includes that and it includes the savings from that in the stuff that we already done already. So clearly predicting improved margins in the back half of the year. Because of those savings, as well as just the normal seasonality and mix of our business.

The only thing it does not exclude is the asset impairment charge in the first quarter, Wendy.

Right.

Does not include that.

Okay. And the biggest -- are there any other big chunks in that $6 million to $8 million in each of the next two quarters, in terms of restructuring, is there anything that you haven't tackled yet, or is it just taking pieces out across the board.

Most of them vast majority of them have been announced. I would say the probably looking at something like $8 million in the third quarter maybe $6 million in the fourth quarter. So out of the two, probably the third quarter is a little bit bigger as far as the hits.

Okay. Thank you very much.

Thanks Wendy.

Thank you. The following question comes from the line of Charlie Brady, BMO Capital Markets. Please proceed.

Good morning Andy, good morning, Bob. Hey with respect to your comments about bankruptcy as customers, can you just comment on what steps you do to manage that process, bad debt expense reserves, and just the whole monitoring process so you don't get caught with someone who is not going to pay you.

Yes. It's essentially monitoring receivables on a daily basis and putting customers on credit hold if they are falling behind on payments. We have very little tolerance right now for that. So I mean we have several big customers that we put on credit hold that did not go bankrupt during the quarter, just trying to be sure they understood we are not going to be stretched out on receivables. So in the case of some of the customers that went bankrupt during the quarter, especially in the RV space, gosh, some of them we didn't ship them anything for 60 days, even if they would have been open the entire time, they were on credit hold the entire time, because of payment concerns and stuff like that. I think we have done a good job of monitoring and cranking them down and keeping them tight. You just have to do it in this environment. When I look over all at our aging -- our aging from a whats current today versus current a year ago, what percentages, we are at the same percent than a year ago, so the overall quality of receivables is strong, you have to have increased diligence on it right now. It takes a little bit of courage to put a customer that's ten times your size on credit hold. But we done that with some of these OEM's it's somewhat of a simple discussion, harder to implement, but the discussion is, "Hey, we agreed to contractual terms, whether 30 or 45 or 60 days, if you are a day late, we are implementing credit procedures". The other thing Charlie, that I think outside of receivables that we do well and is part of our lead process is the one piece flow. We don't carry a ton of investment in inventory or tooling or other things for these customers. When you have a lot of OEM customers the receivable risk is one thing, but you run a pretty substantial inventory risk if you are not if you're trying to supply OEM customers, and that's the area I think our lead process would minimize the impact of a bankruptcy.

Thanks. Can you give a sense of where you're running on a capacity utilization base across the firm? Maybe even by segment?

I can't give you that Charlie. I would say it's a combination of declining revenue and declining capacity. And I don't have a -- we don't keep a score card of that. It's not a metric that we track, clearly anything vehicle oriented is much lower than anything else. We are running under 50% on all vehicles now. If your question, I don't know where your question driven on. The businesses that have growth potential like Enerpac gets some of the big growth initiatives, we have not cut capacity where we are going to have to add it back within the next couple of years, we would add people back, but wouldn't add brick and mortar back. You see anything that says if the volume went back to where it was $1.7 billion, $1.8 billion, on a annual basis, that we would have a lot of brick and mortar or any brick and mortar to add back. So I don't know if that is where your question was going or, with our variable cost model, that is not a big issue for us.

Alright. That's helpful. Final question, back in the queue, when you get the those on the Friday saying don't ship on Monday, and you're talking with your customers, are you getting a sense that in the future, there is a way of minimize the shortness of lead time on those calls as you talk with your customers? Do you have a better sense, are they giving you some indication we may be calling you back again in four weeks from now? Or is it completely dependent on kind of where we are in four weeks.

Charlie, this is a whole new world concept for us, I don't know how else to describe it. We have typical lead times of 30 to 60 days, 90 days with a lot of the OEM accounts. And those bets are just off, they've been off since September and October. And they are just -- I mean you can bitch, you can yell, you can put them on hold, you can do a lot of things but that isn't going to change the reality. They have just shut off orders, they are doing it on their own terms, as are we with some of our vendors. And it's a new world order where you are going to run in to that, and I don't see a solution. If it continued to happen time and time again, I think you look at the customer and think about trying to exit the relationship, but I don't think you do that in a six month period of time, as quick as this has all happened.

Thanks a lot.

Following question comes from the line of Scott Graham, Ladenburg. Please proceed with your question.

Good morning.

Hey, Scott.

Wanted to ask, you guys are really putting the knife to your cost structure here. I'm just wondering, I know how quickly you guys can do this, you're proficient, thats been proven over time. How do you balance that with recovering?

Well, I tried to cover that in my remarks. I think we I are trying to do a skilled surgeon's removal of cost without impacting the rest of the patient. It -- and I think we are ready to come back when it comes back. I think we are still investing in the pockets of growth that we see out in front of us. And we are doing a good job of balancing some of those growth initiatives.

I would say it's we are being more cautious in markets that aren't down 70%, 80%. When you see something discretionary spend, like RV and marine, we are erring on the side of ripping out cost there, and not -- not betting on the recovery. Much different situation in our more established, I should say much more stable businesses, so we are erring on the side of conservatism on the more stable businesses.

Scott, you have been around me long enough to know that I had concerns about the North American consumer for while. And Andy is absolutely spot on. I think these big discretionary items. Our view is this is going to come back slower than other businesses, and I think we take more of a let's take the cost out now, and because we might be here for a while in some of those businesses. That would be auto, RV, marine, would be the big three I would put in that camp.

So you would be willing essentially to potentially seed some margin share here in a up cycle? Because -- at the end of the day, some of the businesses when they pop, they can really pop.

I don't know if its seed market share, I think in RV, two of the top three customers we have, Monaco and Fleetwood, filed for Chapter 11 during the quarter, within a week of each other. At the same time that was happening, we are in dialogue with Winnebago about additional business. I don't look at it as we are seeding anything. Andy went through the bankruptcy in Europe, one of our largest competitors, a company called [Duvay] in Germany, just closed down, And we had immediate discussions with customers. If anything I think the strong survive, and we probably view that more as a positive, not a seed market share.

So you are thinking that business ultimately could end up going to the customers that you're maybe better aligned with?

I think that on the OEM side, obviously the key is to bet with the the right customers. Right? But that's not always an easy bet to figure out. That is what you got to do.

Let me ask you another strategic question. A lot of what you do manufacturing wise is assembly. And that has always worked for you. In this situation, it's kind of working against you, because you can't dial the production down as quickly as you would like. Are you thinking differently on vertical integration versus assembly today?

No. I'm thrilled with we don't own machine shops. We would be writing off fixed assets because we weren't utilizing, we would be mothballing stuff. I mean for those 10 facilities that Andy referred to that were closing, our closure cost tends to be the lease payment, not a bunch of other asset writeoffs. So doesn't -- I think actually the more variable model will be more successful at converting cash flow than the nonvertical model. Sorry, the nonvertical model that we have lack of fixed assets will be a better model.

That's fine. Last question is regarding cash flow. This is a time that you guys typically shine on the cash flow side. And I don't think there are any worries with me, or perhaps even on this call. The question is, is this a situation now where you pay down the debt that you can, and then you build some cash on the balance sheet for when things are a little bit -- when are skies are little bit brighter and what have you, and you kind of kick back in to acquisitions in calendar 2010, or whats the thinking on the use of cash from here? Other than debt.

If we are generating this $100 million of cash flow, we got a couple years of cash flow we can pay down senior debt. There is no prepayment penalties, there is no issue. I don't think this is a build cash, it's just prepaid senior. That's what our game plan is. In fact, the most recent facility in September, was skewed towards a revolver because we thought we would be using the cash flow to pay down the revolver. So it's skewed in that direction.

Okay. Thanks lot.

Thank you. The following question comes from the line of [Mat McConnell], Robert Baird and Company. Please proceed.

Good morning. Been a lot of talk about the financial health of your customers, but how about your suppliers have you run in to problems there, and do you have alternatives in those situations?

Yes. We do. Just because a lot of our -- over the last three, four years we moved a fair amount to China. We have a lot of dual sourcing that goes on, so I think we are comfortable where we are at there. It is not without its challenges, I think we have a monthly call with the China sourcing team. And they are kind of knock on wood holding it all together. But you do some of the reports that you read in the paper, about people just shutting down their sourcing operations over there, and you can't find them, is actually a true statement. You got to work through those kinds of things. We have not literally that's not a top ten issue that myself or the executive counsel worries about.

Thank you.

The following question comes from the line of Jamie Sullivan. RBC Capital Markets. Please proceed. .

Good morning everyone.

Good morning.

I wanted to -- most of my questions have been answered. I thought I would ask about what you are seeing in the quoting activity and order patterns and the E&P side of the business. Energy.

Well again, we don't it's a very small piece of the Energy segment, the exploration and production. So ours is more of the maintenance side. And those orders come monthly, as we said the growth is moderated but we continue to be expect that the maintenance focus area of our business will survive pretty well.

Its about $20 million of our revenue Jamie. Just In terms of last year. It's not a big number. It's will almost all vested in Portland. They are reporting some of their exploration on the seismic side, some customers are funneling, back and they have other customers, we don't see softness at all, we are still growing, there is mix signals there, but we are expecting a weaker back half of the year.

Candidly, its probably more of a 2010 thing we will pay attention to. There is a little bit of backlog on the E&P stuff. As you're building those FPSOs and things like that. Not a big issue right now.

Right. Okay. Just curious at what point portfolio management would be more appropriate, or more of a focus, would it be more when valuation seemed to stabilize on some of the properties. Just your thoughts there.

Like I say, it's a continuous process here where we present that, have good discussions with the board. I would tell you already Jamie, if there was a market that I department like a year ago, we would have gotten out of it. So I -- that's a discussion that happens on a continuous basis. Yes, it would be better to sell high, not sell low. So it would be better to do this in higher markets. In retrospect you look at the vehicle stuff and say boy, maybe we should have monetized it. But -- it's kind of armchair quarterback. I don't know how else to describe it. We do have a few small things that we look at from time to time. You guys have been aware of that. So we have a few small businesses. I think the right buyer came along for some of that, we would probably be more motivated now than we were a year ago on some of that. But it's pretty small potatoes in terms of the total portfolio.

Okay. Just one last clarification. Andy, what did you say for the tax rate we should use going forward?

It's going to be in the neighborhood of 25%, little bit lower than what we said in the past.

Thank you.

Thank you. We have no more questions at this time. I would now turn the call back to you.

Well, thank you for your patience and your interest in Actuant in this difficult time. We really do appreciate your interest. If you have follow up questions, Andy, myself and Karen are available the rest of the day. If you are interested in trying to get a face to face, talk to Karen Bauer. She can see if there are slots available. Otherwise, thanks for your patience and have a great day. We are doing some Investor Relations activity. We are going to be in Denver late this week, and on the east coast, and in some of the Midwest locations.

Thank you ladies and gentlemen. That does conclude our call for today. We thank for your participation, and ask that you please disconnect your lines.