Enerpac Tool Group Corp (EPAC) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation third-quarter fiscal 2009 earnings conference call.

We are conducting a live meeting in (inaudible) with an audio conference. If you would like to review the presentation online, please refer to the meeting invitation for the details.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, June 17, 2009.

I would like now to turn the conference over to Karen Bauer, Actuant's Director of Investor Relations.

Good morning and welcome to Actuant's third-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 and the slide presentation supplementing today's call are available on the Investor section of our Web site.

Before we start, let me offer the following cautionary note. During this 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. These factors are outlined in our SEC filings.

With that, I'd like to turn the call over to Bob.

Thank you, Karen. It's been just 90 days since our last quarterly update, but a lot has happened at Actuant to update you on. Some of what you will hear about today came from last week's announcement, and some comes from this morning's press release.

In summary, we had some very satisfying accomplishments. We saw sequential stabilization in some of the end markets, but demand overall is still weak and pretty challenging to overcome.

So what went well in the quarter? Well, a number of things. We saw sequential EBITDA margin expansion of 370 basis points from the second quarter, reflecting our cost reduction programs. Andy will cover this in detail.

We had huge cash flow of $65 million. This was the big highlight for the quarter. It puts us on track for cash flow of about $125 million for the year and almost $2 a share, substantially above the 100% profit conversion level.

We successfully amended our senior credit agreement. This was accomplished in 21 days with a unanimous 100% vote from our 14 banks. Again, Andy will give you some details on this.

Finally, we had excellent execution on a large number of our restructuring project. I am immensely proud of the job Actuant employees are doing, considering the myriad of issues that they are dealing with day in and day out -- weak end markets, customer bankruptcies, reducing working capital, consolidation of facilities, and accomplishing all of this with fewer employees. They are doing an outstanding job for you, the shareholders.

In summary, we are focused on the things we can control. We executed quite well against the backdrop of a very negative and uncertain economic environment.

With that, I'll turn it over to Andy to go through the financials, and I'll come back and give some color on a number of the business initiatives and guidance for the fourth quarter. Andy?

Good morning, everyone. With the restructuring and impairment charges this quarter, our income statement takes some explanation. So I'm going to jump right in and walk you through it.

As reported in last week's press release, we booked a $32 million non-cash impairment charge in our harsh environment electrical business during the quarter to reduce the carrying value of our OEM marine businesses. As you can imagine, with low customer confidence and credit being weak, demand for pleasure boats has pretty much dried up. Our core revenue to boat builders was down 85% over the past quarter, and we don't expect to rebound soon, which impacts the carrying value of this business.

We also announced that we pulled forward some restructuring actions into the third quarter, which resulted in higher restructuring charges than what we had guided in our last earnings call. In total, we had $12 million of third-quarter restructuring costs versus the $6 million to $8 million range that we had included in our third-quarter guidance. This was one of the main reasons for missing our third-quarter earnings guidance. I will provide more color on restructuring activities later on in the call.

So for the third quarter, including the restructuring and impairment charges I just talked about, we reported the loss of $0.31 a share on sales of $290 million. If we exclude the $0.12 restructuring charge and the $0.39 a share impairment charge in the quarter, our adjusted third-quarter EPS was $0.20 a share. This compares to $0.56 a share last year after backing out a $0.04 tax gain we had last year. Our original EPS guidance for the third quarter was $0.12 to $0.20 a share, which included $0.06 to $0.08 a share of restructuring costs. If we exclude the restructuring charges from the guidance, the resulting guidance would have been $0.19 to $0.27 a share. So the prestructuring and pre-impairment EPS figure of $0.20 a share we reported was at the lower end of the comparable $0.19 to $0.27 guidance, reflecting weaker than anticipated sales. Our actual third-quarter sales were $290 million or about $20 million below the midpoint of our original sales guidance.

I'll shift now to a discussion on sales to provide more color on what we saw during the quarter. Our consolidated sales declined 35% in the quarter from the prior year. Foreign currency rate changes were a 4% headwind while acquisitions provided a 2% benefit. This resulted in a core sales decline of 33% in the quarter. Sequentially, this was weaker than the 27% core decline from last quarter, but the second quarter included December, which did reflect the full brunt of the economic slowdown that we experienced in January and February.

During the third quarter, we did see slower demand in our Industrial segment. We also saw slightly weaker core sales in the other three segments relative to the second quarter in total, but nothing meaningful compared to the rate of change for the months of January and February.

I will provide more sales and market guidance by segment in a few minutes, but I wanted to first review margins and restructuring costs at the consolidated level.

Our operating profit and EBITDA margins were also impacted by the impairment and restructuring charges, which makes comparability to historical results difficult. Attached to today's press release are two supplemental schedules that present quarterly results, both with and without restructuring and impairment charges. I pulled the consolidated EBITDA margins, excluding these charges, from the schedules and have presented them here on this bar graph to show the trend over the last six quarters.

Our fiscal '09 third-quarter consolidated EBITDA margin, excluding impairment and restructuring, was 13.1% compared to 16.4% a year ago and 9.4% in the second quarter. Margins were down year-over-year on account of the 35% reduction in sales, as well as even lower production levels in order to drive down inventory, which helped cash flow considerably during the quarter but hurt margins due to under-absorbed overhead.

The real story with margins, however, is the fact that sequentially EBITDA margins increased 370 basis points from 9.4% in the second quarter to 13.1% in the third. Again, these numbers are excluding restructuring and impairment charges.

While we normally see margin expansion sequentially from the second to third quarters, the increase this year of 370 basis points was much higher than last year's 150 basis point improvement. Additionally, all four of our segments had sequential margin improvement. We believe this reflects the significant cost reductions that have been achieved in the last 90 days.

One last thing to think about with margins at Actuant -- the margin reductions have been primarily the result of lower sales volume and the resulting higher SAE expense as a percentage of sales. When you look at gross profit margins for the third quarter versus the prior year, you see very little erosion.

Despite a 35% decline in sales, our consolidated gross profit margin declined just 140 basis points from 34.6% to 33.2%. This is attributable to the assembly and asset nature -- asset-like nature of Actuant, as well as the sizable cost reductions we have achieved year-over-year.

Some of these cost reductions come from belt-tightening such as reduced travel and discretionary spending. Some are also from lower compensation expense, including suspension of our 401(k) core contribution, incentive compensation, layoffs, furloughs, and salary reductions.

Finally, we are seeing benefits from the restructuring actions we discussed last quarter and we have been busy executing on this quarter. Bob will provide a lot of specific detail on these later in the call, so I will just move on and talk big picture.

During last quarter's call, we reviewed our restructuring actions as well as the related costs and benefits. Most of the higher-than-forecasted restructuring costs in the third quarter represented a pull-forward from the fourth quarter.

The total restructuring projects we are now driving equate to about $30 million in cost; this is up from $25 million on our last call. This $30 million has an average of a one-year payback. About $20 million of these costs will fall into this fiscal year with a balance in the first half of fiscal 2010. As you can see on this schedule, with the lower SAE cost run rate, we are already realizing some of the savings, but more will be forthcoming in future months.

Now, let's discuss results by segment for the quarter, starting first with the Energy Segment. As expected, within Energy, we reported mid-single-digit growth in the quarter, a moderation from last quarter as project and seismic exploration work slowed.

Our base maintenance business saw pretty good demand during the quarter. We are optimistic about the potential positive impact of higher oil prices on demand down the road, but it's still too early to see it in the order rates. For now, we are forecasting modest growth in the fourth quarter.

Our Energy margins were down year-over-year due to acquisition mix. If we pull out the Cortland acquisitions, margins were up in the quarter year-over-year. Sequentially, our margins rebounded sharply from the seasonally weak second quarter, reflecting higher volumes, better mix and cost reductions.

Turning now to the Industrial segment, demand there was weaker in the quarter than what we saw in the January/February time frame and below our forecast. The weakness was pretty much across the globe and across most product lines with the exception of bolting and integrated solutions. Despite the sales decline, we are very pleased with the speed and the depth of cost reductions being driven by the Industrial team.

We also saw substantial reductions in working capital, including inventory during the quarter. Our profit margins took a hit as a result of the lower sales and production, but at 25% operating profit margins, these are still very impressive. The sales declines we're seeing today are unlike anything we have seen in the past with Enerpac with core sales declining from the plus 10% range in the first quarter to minus 34% in the third quarter. However, we are confident that we are not losing share and that, with Enerpac brand name, its lean cost structure and global footprint, when the orders come, the incremental profits will be impressive. We have not seen any meaningful demand yet from stimulus dollars, but we are also optimistic that things will be more encouraging in the next quarter or two.

Within the Electrical segment, we believe sales rate of change has stabilized and could improve in upcoming quarters. Core sales have been in the same minus 30% to 35% zone since January, and we are anniversarying the start of the decline in a few markets, including the Marine aftermarket and the North American DIY market.

Electrical's product margins -- profit margins have been severely impacted by low sales, and again, even lower production levels. We are seeing the benefits of the cost reduction activities take hold, including a 180 basis point sequential improvement in operating profit margins from last quarter, even despite lower sales volume. As additional restructuring actions are completed over the next six months, margins in this segment will improve further.

Our fourth and final segment is Engineered Solutions, which has had a tough year due to its vehicle end markets, including auto, truck, ag, RV, construction equipment and off-Highway. Similar to the Electrical segment, we think the core sales rate of change has stabilized in this segment in the minus 40% range, where it's been since January.

Based on feedback from large customers, there is substantial inventory destocking going on yet today in the end markets, which is exacerbating the reductions we are seeing in OEM order rates. This of course has had a detrimental impact on our margins. However, again we are pleased to see a sequential operating profit margin expansion in this segment, 480 basis points up from the second quarter on relatively flat volumes. We are also encouraged by the cost reductions that Bill Blackmore and his team have driven in the last six months, as well as some of the business wins that they have generated as well.

Shifting now away from the income statement, Bob highlighted that the big news or the big highlight of the quarter was our cash flow. We generated over $65 million of free cash flow, which was used to reduce our debt.

Our third-quarter cash flow included about $37 million of reduction in primary working capital, including $27 million coming from inventory. To put this in perspective, the $65 million free cash flow in the quarter is $1 a share in cash flow in one quarter. Through the first nine months of fiscal 2009, Actuant has generated a little over $100 million of free cash flow, and has reduced net debt to $594 million.

Last week, we announced that we had amended our credit agreement in order to provide us more cushion on the two financial maintenance covenants. While we don't have -- while we didn't have to do the amendment now, as a covenant violation was not imminent in the third quarter, we decided to remove the uncertainty by just amending the facility to provide more cushion. In addition to loosening the covenants, we confirmed the ability to add back impairment and restructuring charges to EBITDA when calculating leverage and interest coverage ratios.

The other notable change was accelerating some of the amortization of the term loan to $10 million a quarter. As you can see in this updated schedule, our repayments, required repayments on all debt are still pretty modest compared to our annual cash flow.

After announcing the bank amendment last week, we received a number of calls from investors inquiring where exactly we stood on covenant levels relative to the minimum and maximum limits. I prepared this chart to answer that question for you.

Our actual debt leverage at the end of May, per the covenant definitions, was just under 3 times compared to a 4.0 limit, and that limit widens to 4.5 over the next two quarters. You can see that we have in nice cushion on the minimum fixed charge coverage ratio as well.

If you have any questions on the amendment or the calculations, take a look at the 8-K we filed last week, which actually includes the amendment document. We feel that the additional room provided by the amendment, as well as Actuant's strong cash flow and our cost reduction forecast, any concerns of stock price overhang due to bank covenants should be relieved.

That's it for my prepared remarks this morning. I will turn it back to Bob.

Thank you, Andy.

As Andy just reviewed, we saw some stabilization in our core sales rate of change in a few segments, but further declines in others. One of my areas of healthy paranoia at Actuant is, when I see sales declines, it's a question of whether it is market share loss. I've spent a fair amount of time reviewing this with our business leaders, and we have come to the conclusion that it is not pricing-related and it is not market-share changes. It's simply economic contraction. I am confident we are not alone. Most if not all industrial companies are feeling the same global recession we are. They just get another month before they have to report their results.

Our focus over the last six months has been to cut costs and better align them with the end market demand. From that vantage point, we have made significant progress this quarter. Let me highlight a few of the major restructuring projects that are underway that are listed on this slide.

The first is in our North American Electrical segment. In North America, we are fundamentally changing from three separate business units to a single unit with three product lines. The manufacturing, distribution and administrative cost savings from this consolidation are significant, and they will improve the margins in this segment in 2010.

It's about making the business simpler with a lower-cost business model. Key elements of this change are a streamlined distribution system, an integrated global manufacturing and sourcing organization, and a single administrative overhead structure. This segment has gone from about 2800 employees at the peak in mid 2008 and by December of 2009, it will be about 1600 employees or a reduction of more than 40%.

Next in restructuring is our vehicle systems product line within Engineered Solutions segment. As Andy discussed earlier, the truck, RV and auto markets are some of the hardest-hit markets in the industrial landscape. We have restructuring programs that are consolidating some of the administrative functions of these products -- product lines, and we are moving manufacturing and assembly from high-cost countries like the Netherlands and the US to lower-cost countries like Mexico and China. Similar to the Electrical segment, we are centralizing manufacturing and SAE functions where we can, and this will lead to margin expansion when volume rebounds.

Lastly, in the Industrial and Energy segments, we are aggressively consolidating a number of our smaller assembly facilities -- many of these came with acquisitions -- into our larger, more established facilities. For example, we have combined Cortland's North Sea and Gulf of Mexico sites with those of Hydratight, much larger facilities to leverage those facility costs.

In summary, excellent traction on our restructuring projects. This is evidenced by the gross margin discussion Andy already had and the lower SAE costs.

I mentioned, in my opening remarks, that I thought our sales decline was market contraction versus market share driven. During a time of significant contraction, we do have some exciting new pieces of business that I want to discuss with you.

The first is in automotive. While the overall vehicle systems product line was down over 30% for the quarter, we had growth in some of the key new automotive programs, including a BMW 1 series convertible, and the new Infiniti G-37 convertible. Additionally, we began shipping some new liftgate actuation models this year to Mercedes and Volvo.

Next, moving on, it would be into Enerpac and our Industrial segment. Last quarter, we discussed some of the sales opportunities and wind infrastructure, and this accelerated this quarter. We had a nice win on an offshore wind farm in Europe. We continue to believe that Enerpac is uniquely qualified to support this market with the products ranging from torque, tensioning, leveling and lifting. As you see from this photo, building offshore wind farms is a huge infrastructure project.

Moving to Electrical, we were awarded a new product category with Granger. It's ACME's low-voltage transformers. This product launch begins with Granger online in their web store over the next 90 days and will be expanded more significantly to the 2010 Granger print catalog in January. When fully up and running by calendar year 2010, we believe this is a $5 million annual block of business.

Lastly, good news out of our Energy segment, particularly outside of North America. Our geographic expansion of Hydratight is paying off, and we are seeing solid growth in emerging markets, where we continue to pick up market share and support some of the global customers, areas like as Kazakhstan, China and Brazil, to mention. We also renewed an important multi-year frame agreement in the North Sea with a customer during the quarter.

Now, let's move to guidance. We are not forecasting an economic recovery in the fourth quarter and expect it to be pretty much in line with the third quarter. Other than restructuring charges, which Andy has already covered, there will be about $5 million in the fourth quarter, quite a bit lower than the $12 million that we had in the third quarter. As we discussed in our press release this morning, we are endorsing a sales range of $275 million to $295 million, and EPS in the range of $0.12 to $.20 cents per share.

Sequentially, sales falling in the fourth quarter is normally lighter than our third quarter due to European summer shutdowns, and we expect this year to have a larger slowdown from our European OEM customers. We expect a slightly higher tax rate, a slightly higher interest rate due to the bank amendment -- as the major ingredients of our guidance. Lastly, we would expect fourth-quarter cash flow a little over $20 million, resulting in a full-year cash flow of $125 million per share.

That's it for my prepared remarks. Operator, I'd like to turn it over to the phone lines for the question-and-answer session.

(Operator Instructions). Jamie Sullivan, RBC Capital Markets.

Good morning everyone. I was wondering if you could talk a little bit more about the Industrial segment, maybe some of the geographic trends that you saw there in Europe, North America and any destocking that you are seeing, and if that's been completed.

As you know, Enerpac and (inaudible) represents most of the Industrial segment. It is a very global business. We saw slowdowns in all of the geographies around the world with Europe leading the pack, US a little bit behind that, and then China and Asia behind that.

Inventory destocking, a very difficult number for us to see -- get a handle on just because of the diverse nature of the 1200 distributors. There had to be some destocking in there, Jamie. We just have no way to quantify it.

Sure, okay. Then I was just curious on the $125 million in free cash flow this year, a strong number obviously. How much of that is from inventory reduction?

We'll get it for you in a second here.

In the quarter, as I mentioned, we had a reduction of about $27 million in inventory. Through the nine months this year, we have taken down inventory by about $37 million. I would expect the fourth-quarter reduction to be somewhere in the $5 million to $10 million range, so for the full year, $42 million to $47 million or so.

You know, the interesting thing on that is, with our lead business system and business process, our goal is to try to limit that as the economy recovers. Clearly, some of that you will have just in inventory, and you have to stock. But our goal is really to use our lead process to make some of that velocity of inventory turns permanent.

Right, okay, great. Then just lastly, on the pricing environment, are you seeing any trends there one way or the other?

You know, it has not been a big issue. I would say it's not a top ten issue. We have a few pockets where pricing is always aggressive in some of the OEM businesses and some of the DIY businesses. But I would look at this current recession we are in and tell you that pricing is not a big worry listing for us.

Great, thanks a lot.

Jeff Hammond, KeyBanc Capital Markets.

Good morning guys. I just with the -- before you decided to amend the credit facility, you were talking about a number of different things to get more comfortable with those covenants. Are you still considering, whether it be asset sales, sale-leasebacks, bringing down book cash, to kind of give you more room or even any kind of capital raise -- or are we kind of set from here, given where we think the level of business is, and then it's kind of just in the debt pay down mode?

I think there's clearly some opportunities to execute on some of the ideas that we had before, bring down the book cash. You saw it come down a little this quarter; I think you will see it come down a little bit next quarter. Certainly, sale-leasebacks are something we're working on; it's difficult to close them quickly. So yes, we haven't like stopped. I mean, there are more things we're going to pull the trigger on just to maximize cash flow, if you will, going forward.

In terms of just capital structure, are you pretty comfortable at this point with the current capital structure?

To be candid, I'm just happy to -- after the last month here, I'm just happy to have this amendment done and haven't look out that far going forward as far as where we are. The good news is it certainly looks like all of the markets are open, whether it's high-yield bond or the bank loan, or even equity from that standpoint. So certainly, if we decide to look at stuff, the markets are open, but there's nothing in progress.

Good. Just -- you talked about belt-tightening and taking out salary and incentive comp, kind of some of the more temporary items. Is there a way to quantify what your temporary cost savings are? Is there more activity that -- or are you kind of getting the full cost savings from those temporary costs at this point?

When we talk about the restructuring, there's probably about $30 million of cost savings coming from that. On top of that and to your point here, there clearly are additional cost dollars that are going on. On the way of bonus and 401(k) and other stuff like that, there's probably $25 million or so. But that stuff is going to come back over time, so we don't necessarily put it into -- put it out there as sort of some people aren't incrementalizing that as we go forward. But there's a pretty sizable number there, just on the compensation side, and other discretionary spending.

But you don't get that back until the earnings come back, so it ends up being a percentage of the improvement rather than anything that you can incrementalize.

The final question -- you talk about the expectation of European -- I guess some are shutdowns, but it seems like Europe has, in general, already drawn back production meaningfully. So I'm just wondering if you're hearing from your key customers, if they are talking about another step-down in these curtailments or production cutbacks into the summer normal shutdown.

I think, when you look at the big truck customers, when you -- a lot of these guys are public; they make public announcements on how they look at the year. It doesn't -- it's just math associated with looking at it and knowing that they are going to shut down. They normally do a couple of weeks. It's going to be at least that this time.

I would say the same is true in the automotive tier two space that we play in with some of the convertible top guys. Those are the new markets that I think I am referring to when I say the European OEMs.

Thanks a lot.

Allison Poliniak, Wachovia.

Good morning Allison. Welcome aboard.

Thank you. I guess going back to Enerpac, you saw a pretty drastic decline on the revenue side the past few months, but it does sound like there could be some encouraging projects out there near-term. Is this one of the businesses where we could start seeing at least a stabilization in the decline, or has your visibility even gotten better there?

Our visibility has definitely not gotten any better. As you guys well know, Enerpac goes through 1200 independent distributors. They send an order in on Monday and it is shipping by Wednesday. That's just the nature of this beast. There is some inventory that's held by the distributors, but it's not that meaningful of a number.

So this is a business that is very hard to get much visibility to. As Andy said, it's somewhat uncharted waters for us. We've been around this asset for 20 years, and we have never seen the kind of global reductions that we have seen where you go from 10% positive to over 30% negative.

That being said, I don't think there's any market share issues going on. The stimulus packages are focused on things that should add value. I am particularly excited about the China stimulus package, which seems to be more bridges and railroads and things that really are mainstream Enerpac infrastructure-type products.

We talked about the windfarm. I think wind is an excellent area for us. The more we get into that, the more we realize we have a complete suite of products for that industry. We have technicians in Hydratight, so we can do it in both Hydratight and in Enerpac, try to serve that market, so excited about those type of things.

Is it going to show up in the fourth quarter? Our guidance is to be pretty conservative, that this is going to last another quarter. Could it be better than that? Yes it could. I don't know if I would endorse you to model it. I guess I am more optimistic when I look more six months out than three months out, just because I just don't see, when I look at other industrials, like the Grangers and the Applied Industrials, I just don't see the kind of declines that we are seeing. So I tend to believe that the market will bounce back off its bottom.

Great, thank you.

Charlie Brady, BMO Capital Markets.

Good morning Bob and Andy. With respect to the margin differential in Energy, you commented about acquisition mix. Can you give some more granularity there as to I guess the Hydratight business relative to the Cortland business? How much degradation are you getting on Cortland? Are there restructuring efforts being focused more on that part of the business, or is there anything actually going on in Hydratight as well?

I'll handle that. If you look at last year from an EBITDA margin standpoint, our Energy segment didn't include Cortland. Last year, it was about 28% EBITDA margins, so they were pretty heady at that time.

Cortland came in in the low 20s. There's a pretty meaningful difference between margins in Cortland and the rest of Energy. So that's what we were referring to by that comment. If you would've pulled out Cortland, margins would have been up in the quarter relative to last year within Energy.

It would've been about the 28% is what you're saying?

The 28% is a full-year number. It would've been above the 27% we had in the third quarter of last year.

In answer to your question, we are not doing any material restructuring in the Cortland asset. In fact, I would say it's probably, out of all the businesses, it's been more on target to our expectations during this fiscal year.

Where we are getting benefit and I think will continue to see is using the LEAD process. Cortland really didn't have any business improvement process per se like our LEAD program. We've been able to introduce them to that, to a number of major LEAD events, get LEAD facilitator training going at some of these locations. We've seen some pretty good results there.

Again, there's lots of examples of where that has happened. It's happened up in Washington with Puget Sound rope business.

We were looking to build a separate facility in Houston through a bunch of LEAD events and using our Hydratight asset. We are going to avoid that piece of capital that we had planned on at the time of the acquisition. So a lot of good things coming out of LEAD events. Whether it ever gets to Hydratight margins, I tend not to look at it that way. I look at each business on its own. How can it get better than itself? Continuous improvement, year-over-year business-by-business. In that regard, I am very happy with the progress at Cortland.

It sounds like the Hydratight business then continues to show further improvement prior to where it was a year ago then.

Yes. I think, when we bought Hydratight, your guys' question was man, it is dragging down Enerpac's EBITDA margins. Yes it was. But it also has moved up 400 or 500 basis points on its own. So that's this theory I am saying, where all of these businesses are well north of our cost of capital. The goal is to really move the margins up business by business. Not everything is going to be at the Enerpac level. I would love to see that happen, but that's probably not an obtainable goal.

Switching gears on the automotive side, with respect to what's going on with Karmann, any material impact on your auto business there?

As people know, Karmann went through the equivalent of a bankruptcy in Europe. It's a restructuring reorganization. It is a customer that services most of the major OEMs globally. We have been working both with Karmann and with some of those OEMs to keep product flowing through that. And so some of these new models that I talked about are Karmann programs, getting launched even though they are in this reorganization that they are going through, so no major issues there in terms of us affecting our day-to-day shipments to those OEMs.

Okay. One more, I'll hop back in the queue. With respect to the restructuring that's going to happen in the first half of 2010, is it evenly spread across the first couple of quarters, or is it more weighted into one versus the other?

It's pretty even, pretty even.

Great, thanks.

Scott Graham, Ladenburg.

Good morning, Bob, Andy and Karen. I wanted to ask you, Bob, maybe a 30,000-foot question about a couple of your markets.

In the last three quarters, you have taken a couple of impairment charges, and we have obviously seen the reasons why with the negative volumes. RV, the auto market, the marine markets are heading into 2009, or about 20% of your sales. I'm wondering, Bob, if these are markets where maybe there has now been some permanent damage afflicted to some of the OEMs in these areas. I'm just hoping maybe you can share with us some of the feedback from the customers in these areas in terms of where they are thinking the bottom is, how each of these markets look a year from today, because there is still obviously a lot of pain going on in these markets right now. I am just wondering what that means for you, and I guess the best way to determine that is to hear what the customers are saying about these markets.

A great question, Scott. Let me index you. Our sales into those three markets are more like 10% to 12%, not 20%. Now, I think at the piece that you have in there is some of the DIY marine business, and some of the things that Marinco, the SEG business, does for industrial things, things like coal or generators. So it's a very different market. Let me just index you that I think you are referring to the 10% to 12% of the total, which is OEM, RV, marine, and auto. Am I in the zip code of (multiple speakers)?

I was referring to 2008, but if you are even modifying that comment relative to 2008, that's fine.

2008, you're probably right. I guess I am just bringing -- Karen is shaking her said, saying "You're still too high." But let's assume it's the 10% to 12% that I'm talking about, because I'm giving you more current topical numbers. The answer is it's been one hell of a body blow. I had two of the three RV customers go bankrupt in the first six months of this year. I had two of the three convertible top stack makers go bankrupt. I've had three or four bankruptcies in the OEM marine type market. So these are businesses tied to the consumer that have really felt the body blow of the thing.

I believe the recovery is going to be much slower than traditional industrial markets. That belief, and I am not alone on that, is what led to the impairment charge in the first quarter on RV and led to the Marine OEM impairment charge in the quarter. Auto doesn't have as much goodwill, so you are not likely to see an impairment in that business because it's a more historical business that's been around for longer time.

So yes, we are focused on things that are not so uniquely high-ticket items to the consumer as these three businesses. Is it permanent impairment? No, I don't think it's permanent. But I think we are sizing these businesses and combining these businesses where we can look at these more like product lines. So if the volume in RV stays off, you can use the workers and the facilities to do things for Power-Packer, where we've got a Stewart & Stevenson program on actuation where the technologies are reasonably similar. So that's what you're seeing us do is to try to combine these with existing other businesses where you can leverage the cost. Obviously, from an acquisition point of view, this is not an area we are focused on.

Sure. I have two other questions for you. Similar, although much less concerning in terms of how the market shakes out, is the DIY business where I am sure you recognize that the margins in the do-it-yourself business have really just collapsed over the last year or two.

Particularly, my question is more about Europe. I am just wondering if, here again, is this a potentially not permanent but a significant reduction that might stay with us for a while in the margin in the Electrical business? These margins were -- back in the old Gardner Bender days, obviously, these margins were -- the margins today are much lower. But certainly the bigger concern that I have is the European margins and where that business is going. Kind of the same question.

Scott, you don't have visibility to the margins by Gardner Bender. You have visibility to the numbers on overall Electrical.

The marine thing you just got done talking about significantly impacted those margins. If you look at the OEM marine business, it's down 80%. That is affecting those margins that you're talking about.

When I look at these businesses and I think about the outlook for the businesses, I am not as concerned about the DIY channel as you are. Depot and Lowe's both kind of hit their guidance; it was down guidance but they both hit it. They are calling for the consumer to kind of get back into the store, and they are a little more optimistic.

In Europe, we've done the major restructuring. That program is right on plan. Everything seems in order there.

I think we told you guys early on that we thought we could target Europe to a 10% EBITDA. It's out there a little ways, but we still feel comfortable with that.

So I guess I just don't view it the way you do, and I don't think you should run to the conclusion that -- I think the words you used, "the margins have tanked in Gardner Bender." They are down, but if you separate the pieces of Electrical, Gardner Bender margins are -- in the DIY channel -- are down but not horrendous.

That's good to hear. Then I can trace a lot of this then to the marine business and the European business, which feels better.

The last question is about the Enerpac business with the decline in organic sales that we saw. I agree with you; there has to be some type of destocking element to it. I guess I'm wondering why kind of the same question that I asked previously about -- you've got really great relationships with a bunch of distributors out there, 1200 of them. What are they telling you about what they are seeing out over the next 12 months in terms of their business and opportunities?

Well, they are all feeling the same body blow that we are. So it came very quickly and very suddenly. They are scrambling to find new applications for things. There are some really interesting ones that have shown up. Enerpac might play a role in some entertainment type environments as we come up here. I'm not ready to talk about it any more than that, but there are different markets that we are finding to try to augment the base business.

When you look at the base business, Scott, I think you've got to recognize most of Enerpac is this MRO-type environment. When you look at a Chrysler and a General Motors, and you look at what's going on in factories, and you look at the amount of destocking and lower manufacturing that's gone on over the last six months, it's understandable that Enerpac is down.

I think you are starting to bounce along the bottom. I think you are starting to see more OEMs talking about producing at the level of shipment. That's going to be a good sign for some of that MRO-type environment.

That's helpful. Good answers. Thank you.

Chris Weltzer, Robert W. Baird.

Good morning. Just so we're all on the same page about including and excluding restructuring charges, when the time comes, is it your intention to talk about a fiscal year '10 outlook excluding restructuring expenses, or including them?

Both.

You'll know what it is (inaudible).

Okay. I was wondering. Your markets are obviously in different stages of their decline; some have -- are just seeing inventory destocking accelerate now; some have seen inventory destocking for several quarters. I was wondering if you could go around sort of business by business and give us a sense for where you think we are in the inventory destocking cycle in each one.

If I could do this, I'd be Alan Greenspan's next heir apparent. But I will give it a whirl. I always try to answer the questions you guys ask.

Truck in Europe, a big market, not sure we are at the bottom of the destocking. Even though they don't have the financing and the floor planning that the US truck market does, I think we've got a ways to go. Auto -- clearly a ways to go. Convertibles I don't think are any different than that general auto feel.

Enerpac -- don't know. I gave you the answer, you've heard all the questions, so I don't really have any more to add to my already comments.

Energy, we don't have a lot of inventory. We sell -- as you know, it's a third rental -- a third service and a third product. That third product doesn't have a lot of inventory. So I don't see any issue there.

DIY, we don't have -- in the electrical aisle, they don't keep a lot of inventory. There is a move afoot at Home Depot to go to a centralized, more regional approach where they have regional warehouses and less in the stores. I don't think it's going to affect the electrical aisle a great deal because, again, we don't have a ton of inventory there. So I can't attribute much of the DIY side to that.

When you go over to the professional electrical, yes there is destocking. You've got the [Gray Bars] of the world who carry inventory of transformers and that type of stuff. I'm sure there is destocking. My guess is we are in the middle to late innings there, but that would just be my best guess.

On the marine side, still a lot of boats out there in the OEM side. When you go to Wes Marine and things like that, not a lot of destocking. That seems to be kind of demand pull right now. Did I miss any major ones, Andy?

No, I think you got them all.

That's the best I can do for you, Chris.

That's very helpful; I realize that's a difficult question. Then last call, you talked about CapEx actually increasing a little bit in the 3Q and 4Q. It looks like it actually went down quite a bit. Was there some project that got pulled or delayed and how are you thinking about the year now?

We are estimating the full year probably to $20 million to $22 million. I think we got $17 million or so through the nine months. I would, say when you look at the third quarter, there was a pretty good-sized ERP project that we pushed out one quarter from essentially starting in Q3 to Q4. There's also a pretty good-sized CapEx within Cortland that we expected to come in Q3. It was delayed in delivery; it's coming in Q4 here. But -- I'm not -- I don't recall a big -- I guess a step-up in CapEx in the back half of the year last time. But the punchline here, we are looking at $20 million to $22 million for the year. Important projects that need to be funded are being funded. There's no question about that.

Steven Fisher, UBS.

Good morning. Andy, you mentioned you've been rightly focused on the debt covenants. But what at this point would you have to achieve in terms of cash flow or balance sheet or earnings to kind of return to the more typical approach to M&A that you guys have had over the last decade?

I think clearly in the last six months, we have not completed any kind of even sizable bolt-on type acquisition because we've been very focused internally. Secondly, there's not that much out there that's been for sale that was of interest to us.

We certainly are not shut out of the market right now. There's a couple of different ideas that we are looking at, albeit they are smaller, $20 million to $30 million, $40 million type ideas. I wouldn't expect anything to close real quick on those, but I wouldn't say we've been out on the market.

Certainly, if you're talking about a couple hundred million dollar deal, that was not in the cards at all in the environment we're in today. The environment we have been in in the last 90 days, we are looking at the fourth quarter here, so I guess I would look at that.

There is a restriction within the agreement, the credit agreement, that if we are pushing leverage at a 3.5 or higher range, we do have some limitations on acquisitions and what we can do. But I think, from our forecast internally, what we are looking at, we don't see this as a big handcuffs on us as we look into 2010.

Let me add a couple of color to Andy's comments, and probably color you can appreciate. While some of the ideas we are looking at are coming at a lower price, so EBITDA multiples have come down, the quality of the stuff that's out there now, unless you're in a dire situation, most people are not monetizing assets at this point in the cycle. That is particularly true with some of the private equity guys who have covenant-like deals. They've probably got another couple of years before they're pushed to the point where they are going to have to do something.

So our goal in this credit agreement clearly was to provide some ability to do the smaller things that have made Actuant very successful here. I think we have accomplished that, maybe not at the $150 million to $250 million level that we started the year guiding you guys towards, but I certainly think we could peel off some smaller deals within the covenants.

Then the question is really the cash flow coming in, in the future. If you look at the year at $125 million, we are not going to give you guidance for next year. But I don't expect -- we are still prone to have quite a bit of cash flow coming in if you look at some of the levers on sale-leasebacks and other things we talked about. We are expecting to be back in the acquisition game, albeit at a smaller kind of smaller deal level, Andy talked about $20 million to $40 million. But we expect to be there. It's a key ingredient of the Actuant business model.

That's very helpful. Bob, you mentioned, or you made reference to the Chinese stimulus program. What are your expectations for the US program? If I remember correctly, maybe you have some exposure through DL Ricci on the highway side of things.

Yes, I think we will pick up some of that in Wisconsin here, the major freeway between Wisconsin and Chicago getting torn up as part of the stimulus package. Clearly, our distributors will play a role on that.

I don't think it's going to be the big infrastructure type projects that we will see in China. I don't see monster bridges and other things. I guess we've got that one in Kentucky still floating around that's pretty big. I don't know that's going to hit the stimulus package. But there are -- I guess I am more optimistic. We will get benefit for it, but it will come through distribution. It's probably not going to be as identifiable as some of the bigger things in China.

Great, thanks a lot.

Is that it, operator?

That was the last question.

Great. I have some summary comments. Thank you for your interest in Actuant. It's obviously been a difficult economy and it's served us all a pretty serious curveball. But the base attributes of Actuant that have created shareholder value over the last decade or so are still alive and well. We've got superior cash flow and a very focused return on invested capital business model; leading market share serving a diverse group of industrial markets; a continuous improvement mentality, driven by our lead business system which has demonstrated long-term benefits both in margins but probably more important in asset efficiency; and finally, an experienced, motivated management team aligned with shareholders for long-term value creation. So the big attributes that really have driven Actuant over the last decade are still in effect.

If you have any follow-up questions, contact Andy, I or Karen. We are available all the rest of this week. Thank you and goodbye.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation, and ask that you please disconnect your lines.