Enerpac Tool Group Corp (EPAC) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's fourth quarter fiscal 2009 earnings conference call. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation on line, please refer to your meeting invitation for details. Following the presentation we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded Wednesday, September 30, 2009.

It is now my pleasure to turn the conference over to Karen Bauer, Actuant's Director, Investor Relations.

Good morning and welcome to Actuant's fourth 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 in the investor section of our website. 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. Investor's 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, and good morning, everyone. We are pleased to discuss with you the strong completion of our fourth quarter of fiscal 2009 and our outlook for 2010. In some ways we feel a little bit like Rocky Balboa, beaten up in 2009 by the economic environment but still fighting. My four takeaways of the quarter and the year are as follows.

First, robust free cash flow of 140 -- $47 million in the fourth quarter and $150 million for the full year. We've always felt that our asset light business model and our lead continuous improvement culture would maximize cash flow but we really proved that in 2009. We delivered the upper end of the sales and earnings guidance for the quarter, adjusted for one-time items. Importantly, this was sequential improvement in absolute EBITDA levels, as well as improving EBITDA margins in three of the four business segments. We focused on executing our restructuring initiatives during the quarter and the results of this was demonstrated in many important metrics; EBITDA margins, reductions in SAE expense, working capital, headcount, and square footage. Our expectation is these are permanent reductions to our cost structure. And finally, we amended our bank agreement and completed an equity offering, which eliminated the overhang in our stock price due to covenant concerns. This, coupled with strong cash flow and proceeds from divestitures, allowed us to enter 2010 with a very strong balance sheet and capital availability to pursue growth initiatives.

With that introduction I'm going to turn the call over to Andy to go through the numbers and I will come back and discuss other topics with you, including our guidance for 2010. Andy?

Thank you, Bob, and good morning, everyone. Our fourth quarter results are pretty messy, given the divestitures, restructuring, and debt extinguishment charges, and the equity offering. I'll walk through the income statement today and pull these items out to arrive at the results that are comparable with the last quarter and what you should expect going forward.

On a GAAP basis we reported sales and EPS from continuing operations as $290 million and $0.07 a share respectively, both down from last year on account of the economic conditions, and special charges. Our EBITDA included restructuring costs of $9.3 million, or about $0.09 a share. The total restructuring cost on the face of the income statement was $8 million, but we also had about $1 million required under GAAP that was reported in cost of sales. I'll provide an update on restructuring efforts later on the call. Our financing cost in EPS for the quarter included a $2 million pretax charge for early extinguishment of debt related to the equity offering. This is about $0.02 a share. The equity offing and subsequent debt extinguishment were not factored into our fourth quarter guidance. If we focus just on continuing operations and exclude both the restructuring and debt extinguishment charges, our earnings per share would have been $0.18 for the quarter. As Bob mentioned, this is at a high end of our earnings guidance for the quarter.

I'll shift now to a discussion of sales to provide more color of what we saw during the quarter. Our consolidated fourth quarter sales were $290 million, which was a 26% decline from last year. Foreign currency rate changes were a 4% of headwind, while acquisitions provided a 5% benefit. This resulted in a core sales decline of 27%. Sequentially this was better than 32% core decline from continuing operations in the third quarter. Additionally, we've seen stabilization in the year-over-year sales rate of change now in three of our four operating segments, with only the energy segment still hunting for a bottom. Importantly, during the quarter our industrial segment stabilized in the -35% core sales range after significant softening in the third quarter. We're feeling more confident that the third quarter represented the bottom at Actuant in terms of sales. Sales in absolute dollars have settled in at the $285 million to $295 million range in each of the last three quarters, and we think that's roughly where we'll be in the first quarter of fiscal 2010, as well. Over the last 60 days we've noticed a modest improvement in customer sentiment in certain of our end markets, including August sales, which were up sequentially from both June and July.

Now I'd like to shift our discussion to margins. The consolidated EBITDA margin for the fourth quarter, excluding restructuring costs, was 13.3%, essentially even with the 13.4% from the third quarter. This was in line with our expectations and reflected a slight degradation of sales mix away from our more profitable segments and higher inefficiencies in the few businesses that are in the middle of restructuring programs. Both of these negatives were essentially offset by incremental restructuring savings. During the quarter three of our four segments reported sequential EBITDA margin expansion from the third quarter, reflecting the benefits of cost reductions.

And that's a good segue to provide an update on our progress on the restructuring initiatives. We continue to be very pleased with the execution on these projects, as they are come in on or ahead of schedule and either or below budget. As a result of this good progress and the lack of an economic rebound we're taking the opportunity to attack a few more projects that weren't included in our original $30 million restructuring cost estimate. As a result, we think we'll spend an incremental $5 million in restructuring costs and generate an incremental $5 million of permanent savings, lifting the total project savings for all restructuring projects to $35 million in total a year. Most of the large projects will be completed by the end of the second quarter of fiscal 2010, with a few wrapping up later in the fiscal year. The results of our efforts to date have generated sizable headcount, cost and working capital reductions. For example, headcount is down over 21% this year, as you can see in the graph, and inventory is down $70 million, or 30 % this calendar year alone.

Now let's discuss our results for the quarter on a segment-by-segment basis, starting first with Industrial. The headline news for Industrial is is that we feel the year-over-year sales rate of change has stabilized. We seen an increase in integrated solutions projects booked in Enerpac and overall improved customer confidence compared to the third quarter. While down from last year I'm not concerned about the Industrial margins. Why? Well, our third quarter margins reflected great mix while our fourth quarter mix was a little bit less favorable. Additionally, there was some significant manufacturing under absorption this quarter due to a $5 million inventory reduction in the Industrial segment alone; plus we had inefficiencies in learning curves associated with the restructuring where we were consolidating our Simplex manufacturing into Enerpac plants. Most importantly, we have not seen any kind of meaningful price changes in the marketplace and Enerpac has not seen any market share changes, so we should get excellent leverage in the future when our customer demand improves in a meaningful way.

Our Energy segment is the one that surprised us from a revenue standpoint this quarter. We expected core revenues to be flat but they came in down 11%, on account of some large project work being pushed out and some maintenance intervals at some customers being stretched out, as well. Sequentially both the revenues and the EBITDA margins increased in the Energy segment. As Bob will discuss later on the call, Energy is the biggest wild card for us as we look at fiscal 2010.

Turning now to our Electrical segment we're happy to report that the sequential year-over-year sales rate of change improved from -30% to -19% in the fourth quarter. This less worse performance results from a combination of North American retail and marine aftermarket demand improving sequentially in the anniversary of the loss of some of the lowest volume in May of last year. Another positive during the quarter was a year-over-year margin expansion in the segment. This took place despite lower sales on account of the cost reductions we've achieved to date. We're in the middle of restructuring activities in Electrical and look forward to further margin improvements in the next year.

Our fourth and final segment is Engineered Solutions, which has had a tough year due to its exposure to the vehicle end markets. Similar to the Electrical segment we saw a year-over-year sales rate of change improve sequentially in the fourth quarter from the third, with higher sales in the automotive, defense, and RV end markets. Our EBITDA margins also improved sequentially from the third quarter, but we still need volume to return these to normal levels.

Moving away now from the P&L, the big positive of the quarter clearly was a cash flow and debt reduction. Our fourth quarter cash flow, as Bob mentioned, was $47 million and increased our full year of cash flow -- free cash flow to $150 million. This, combined with the proceeds from the equity offering and the business unit divestitures in the quarter, generated $200 million of debt reduction. From our perspective these actions bullet proofed our balance sheet, leaving us with a virtually untapped $400 million bank revolver at the end of the fiscal year.

So just how strong was cash flow in 2009? To put things in perspective we generated $151 million of free cash flow last year, or $1 million more, despite 23% lower sales this year and even a larger reduction in earnings. It was attention to detail by a lot of employees at Actuant to make the cash flow a reality. They reduced inventory 30% during the year on a 23% sales decline, and they improved our receivable agings in an environment when customers are going bankrupt or are dragging out payments. The good news is we still think there's more opportunity for working capital management and any inventory receivable builds during the recovery will largely be funded by these reductions and by corresponding accounts payable increases. Actuant's cash forward in fiscal 2010 and beyond should continue to be robust.

On that positive note I will turn the line back to Bob.

Thank you, Andy. So as you've heard today there are a lot of moving parts in both the quarter and the year. In a year like 2009 it's easy to lose sight of some of the great progress Actuant made on a number of initiatives and I want to take a few minutes to highlight a few of them. The first is our global customer focus. We won a significant new product line with Granger this year, the Acme Transformers. We began shipping this to Granger's web-based division in August and it will be included in the Granger 2010 print catalog. We have long viewed Granger as a excellent Industrial customer and an important sales channel to align with. We now have strong positions with both Acme and Enerpac and are looking to broaden this out even further.

The second customer I'd like to highlight is Caterpillar. Our ability to supply Cat with high-tech, electronic displays for their equipment and doing that on a global basis is just one of the many reasons Caterpillar selected Maxima as its strategic supplier. Additionally, Enerpac supplies Cat with maintenance tools for both the OEM and the dealer service bases. More recently we've added Gits to this relationship, as we have developed some unique proprietary for Cat in their off-highway engine emissions side of the business.

The next highlight I'd like about is the completion and the increased utilization of our Taicang, facility in China. This facility houses the majority of our sales and manufacturing in China for Actuant. Little over a year after its opening, it now houses Enerpac, Power-Packer, Gits, Sanlow, Maxima, Elliott and Hydratight. Additional volume will definitely be added in 2010.

Next, I want to talk about that we completed the Cortland acquisition and added a new energy product line to our portfolios, that being umbilicals. This -- while this product line largely serves the offshore oil and gas market we are also pleased with the strong diversity of other applications that Cortland supplies; everything from medical, to defense, heavy-lifting applications, even for astronauts on the space shuttle. In hindsight the timing of the acquisition wasn't ideal given the worldwide economic slow down, but we are in it for the long term and we're very excited by the Cortland's long-term growth prospects.

And finally, cash flow was the ultimate highlight of the year. Andy went through this with you in detail, but I would just like to make two comments; that it represents a 14% cash flow yield against Actuant's market cap at year end, and it represents 248% conversion of net income and was the ninth consecutive year of free cash flow conversion in excess of 100%. That's every year since the spinoff in 2000.

Now let's move to guidance. As you saw in today's press release we are endorsing sales of $1.15 billion to $1.25 billion with EPS, excluding restructuring costs, of $0.70 to $0.95 a share. Cash flow should be in the $90 million to $100 million range, continuing the trend of cash flow in excess of earnings. A key reality for Actuant is at our August year end, our fiscal 2010 is not the same as calendar-year companies. Even the most aggressive industrial calendar companies are not talking about a recovery and economic rebound in the fourth quarter of calendar 2009. Said another way, if you look at our first quarter guidance this -- of $0.12 to $0.17 versus last year's first quarter EPS of $0.45 you'll recognize the EPS reduction that we're contemplating in our guidance for fiscal '10 takes place in the first quarter. We expect that to be followed by three quarters of EPS growth. So if you were to adjust our 2010 guidance to a calendar basis, instead of a fiscal year, it would show growth if sales, EBITDA and EPS.

Our approach for the 2010 guidance today is to lay out the assumptions that define the low and high end of the range, our goalposts, if you will. Most of the variability relates to two things; mix of sales between segments, and the ultimate sales volume. This variability is likely to occur in the third and fourth quarters of since our sales volume and restructuring savings are back-end loaded. So let's start with the low goalpost; sales of $1.15 billion, EPS of $0.70 and cash flow of $90 million. This scenario assumes limited sequential improvement from the fourth quarter sales volume. In fact, further sequential weakness in Energy, which didn't start declining until the fourth quarter. This scenario leads to a consolidated core revenue decline of about 8%, with each of the four segments being in negative core sales territory. With the sales at the low end of our guidance being down 8% core, EBITDA would only be down slightly because of the savings from restructuring that Andy went through. EPS would be down slight slightly more than that on the additional share count next year. Under this scenario our free cash flow would still be $90 million-, and ignoring future acquisitions our debt leverage would drop below 2X trailing EBITDA.

Now let's discuss the upper goalpost of the revenue range, in effect $100 million of additional revenue. Again, our expectation would be that this is largely back-end loaded. It's our view that this rebound in sales could come from any of the four segments with equal probability, so let me comment on each segment individually. Industrial didn't start declining until January of 2009, but was among the largest decliners as a percentage in recent quarters. Certainly some of this was inventory correction and we believe we are through that. Also, stimulus spending on infrastructure projects could help in 2010, but would likely be second-half related given that there is some lead time inevitable on these big projects.

Now moving to the Energy segment, which, as Andy said, we believe is our wild card for 2010. They came to the recession party late. We saw a slow down in the -- from 3% growth in the third quarter to 11% decline in the fourth quarter. There are lot of variables that play in this segment, including maintenance levels and intervals, capital spending, seismic exploration activity, oil prices, and speculation. We're certain that Hydratight and Cortland will rebound with the global economy just due to production levels of oil, so it's not a matter of if, but a matter of when and how much the recovery happens.

Next is Electrical. The DIY market is our largest served market within this segment and we saw it improve in the fourth quarter. Commercial construction and utility markets continue to be weak and we would expect this to mute some of the DIY growth as we continue in to 2010. And finally, Engineered Solutions. The largest swing factor in this segment is vehicle volumes; will the OEM's produce at the rate they sell? This was certainly not the case during 2009, but a number of OEM's have indicated to us, both publicly and privately, that the inventory correction is over. It is not yet hit our orders rate through late September at this point yet. So that gives you some perspective of revenue by segments.

Some other items that can affect our guidance and you should at least think about, first is the mix of sales between the four segments. Energy and Industrial have much higher margins than Electrical and Engineered Solutions and mix changes between the four have a material impact on the total Actuant results. The second is FX; the US dollar versus both the Pound and the Euro. In our guidance we've assumed the Euro at 1.4 to 1.5 range and the Pound at 1.6 to 1.65 range. Next, executing the restructuring initiatives that generate the cost savings we built into this. We built in $10 million of incremental savings from the fiscal -- in fiscal 2010, for these programs. We will also have carryover savings from some of the discretionary cost reduction actions that we implemented last year, but these will be pretty much offset by variable compensation that we've added back into the 2010 plan. And finally, any further destocking of inventory in the various channels we serve it would affect sales volume and our absorption of manufacturing.

So in summary, sales volume is by far the largest variable to whether Actuant is at the high end or low end of our 2010 guidance. Hopefully I've given you enough data to calibrate your models for 2010 and compare that with what other industrial companies are seeing. I believe Actuant is well positioned to participate in volume upside when it comes. We've reduced our cost significantly with the restructuring and our incremental margins are going to be strong. It's another quarter away but easier comparables are coming, and acquisitions are not included in this guidance and should be a reasonable upside. Finally, our balance sheet is in great shape, regardless of whether the economy grows or shrinks in the next year.

That's it for my prepared remarks. Operator, I'd like to open it up to the phone lines for their questions.

(Operator Instructions). Our first question comes from the line of Jim Lucas with Janney Montgomery Scott. Please go ahead.

All right, thanks. Good morning, all.

Good morning, Jim.

Good morning.

Couple of questions here. First on the Energy segment, could you give us a little bit more color of where the revenue mix -- I appreciate the color you gave us regarding the factors that are out there regarding the guidance, but in terms of the mix of your Energy portfolio today, exploration versus maintenance, any additional color you could provide there?

Sure, JIm. The exploration side of the business is pretty small; it's probably about 10% to 15%, 10% to 20%, and it's seismic, I'd say about 10%. There's another 20% or so of the revenues in this segment that are related to bigger projects, whether it's FPSO's or commissioning of bigger projects, and the majority of the volume that's in oil and gas, which would be, say, another 50% of revenue, would be maintenance, so oil and gas maintenance. The balance of the revenues I haven't covered, about 20%, about half of that, or 10%, is Power Gen on the nuclear side or electric, and the balance just other industrial applications. So the seismic piece today is pretty small, it's about 10%, that's within Cortland. That's the piece we felt slow down the quickest and certainly it's in the worst shape out of all of Energy right now.

Yes, a couple of other comments to add to Andy. I think emerging markets continue to be an area that we've seen decent growth in. As you've been following the Company, Jim, we opened up the a number of offices in Eastern Europe and in Far East. Angola is another example and that is -- those things have been offsetting some of the more mature markets. If you look at where some of the slowdown happened it was more in some of the mature oil markets in addition to the big capital -- what we call capital projects, which are the -- either new installations or like a big new FPSO or a rebuild or something like that.

Have you seen changes on the maintenance side, either projects being pulled forward or delayed?

We've seen both. In total it's delayed a little bit, but we had a great anecdote this quarter where one got pulled forward very quickly , so we see both sides. This maintenance -- and I want to remind everybody. With the safety requirements in some of these refineries in the offshore it's not a question of if this maintenance gets done -- it has to get done on some cycle -- it's a question what quarter that falls in, what month that falls in, and that's where I think we got a little bit of a push to the right at least in this quarter. Now I will always remind you, and you've followed it, Energy is our lumpiest segment. It is the segment that you have to understand that the quarterly data can bounce around around a little bit, both on the margin side, as we have different profitability from rental and service and sales, but also from the revenue side, where some of these things get pushed in or pulled

Okay. And switching gears to the Industrial side, with Enerpac a lot of the focus the last couple of quarters was the rampant inventory destocking. As you talk to the multiple distributors you have out theres where do you see that inventory today and have you -- do you have any anecdotal evidence of the destocking being over at this point?

I think our view is we're getting very close to it being done. We saw -- July and August we saw a little bit of a uptick where it seemed like production was matching the inbound orders that were coming in. We've also -- we're looking at our own business going forward. We're actually looking at adding a little bit of inventory in this own bus -- in our own business and in our back, as well, just based on what we're seeing out there. But it's really difficult with this, Jim, because we're selling to 1,200 distributors and we've got to get below them, as well, to be the end customers. But there just seems like a little bit better confidence level out this in general when we talk to distributors all over the place.

Okay. Great, thank you.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hi, good morning, guys.

Good morning.

You gave some good color on the top line, just maybe to the incremental $10 million restructuring benefit. Can you talk about where that goes by business? And then maybe just directionally, how you're thinking about the margins in each of the businesses, are there any segments where you foresee margins down year on year?

Okay, I think on the restructuring, the $10 million that you're referring to is largely from projects that we already had launched and isn't the new $5 million or so. The majority -- or our biggest restructuring areas are the Engineered Solutions and the Electrical segment. Going into the quarter when we had a $30 million estimate it was $20 million of the cost were in those two segments, so that's where the lion's share of the dollars are going. What's happened more recently, I would say, is we were going after costs in Energy, which was somewhat -- was off limits in the past because the business was still growing and in the fourth quarter we went after some costs there and you'll see more of that going forward.

Margin improvement, as we move forward it can be lumpy, as Bob mentioned earlier on, as relates to Energy, which margins can be, as well, until we actually get done with some of this restructuring. We experienced some of that this quarter actually where you've got inefficiencies going on, you've got duplicate functions set up until you actually pull the trigger and close the former facility for good. I think you're going to have that lumpiness in the next quarter, maybe the next two, but certainly in the back half of the year there'll be pretty meaningful margin improvement in these individual businesses.

Taking it a little further, the Engineered Solutions and Electrical I am confident, whether we're at the low end of our volume or a high end of our volume. you're going to see margin improvement. Now, let's be honest. It's like stepping over a very low bar there, because both of those businesses are in single-digit EBITDA and we are not -- we are absolutely not happy with that and moving them up and that's where the lion's share of the restructuring's going. I'd be surprised if Enerpac would come up with a lower margin in 2010. It would be to be volume related, it would have to be something that is low or even lower than the guidance we just gave you.

And then Energy, again, is the one that probably could move around. I think I'm optimistic it'll grow but it's already at a decent number and given it's in the decline that we saw, the 11% in the fourth quarter, that's the one that I'd look at. The problem you do need to look at in total is the total X, because both Industrial and Energy had big fourth quarter -- or big first quarters this year and we are up against a very tough comp there and that really is what drives some of the discussion I talked about in the formal remarks. EBITDA margins will look bad comparable because those guys came to the party late.

Okay. And then how are you thinking about -- you had some temporary cost take out in fiscal '09, how are you thinking about those temporary costs in '10, does some of that come back?

Yes, we will certainly benefit for that in, I would say, the first half of the year because a lot of that was put in place -- the biggest dollars there were put in place in the February, March, April timeframe of the past year, but some of that will come back. For an example, we had furloughs in if number of locations over the course of the summer, knock on wood we hope we don't have to have them next year. We'd expect some of that to come in. We had salary reductions within the organization. We've lifted some of them, not all of them and we have built in variable compensation, or bonus expense, going forward in the back half of -- or really for fiscal 2010, as well, so year-over-year stuff, but we didn't have anything in '09. So as you move deeper into the year I call those variable savings that we saw are going to start to flatten out and there won't be as much benefit coming through because of the offset by other stuff.

But some are staying frozen at this point. Now, it obviously can change if the year starts unfolding better. You guys -- obviously, the compensation of the NEO's we have to disclose that to you, there's been no change there, so you should assume that the cost reductions that Andy and I took -- or pay reductions that Andy and I took are frozen. Those are continuing to be in existance. The same is true with the 401(k). We will look at this stuff as we go through the year just depending on how the year is coming out, but there's pieces that are frozen and there's pieces that are lifted.

Okay, and then just final question. You commented on August, better than the June/July trend, any comment on the September trend?

I think Andy stated that we're continuing to see -- we expect the first quarter to be a similar to the fourth and that's taking that into account.

It's -- I would say it's similar to August.

Okay. Thanks, guys.

Our next question comes from the line of Ann Duignan with JPMorgan. Please go ahead.

Hi, good morning, everybody.

Good morning, Ann.

Good morning.

My first questions just a little bit dig deeper into some of the comments you gave on your end markets. The first one, I think you said electrical equipment DIY had improved a little bit sequentially, I'm just curious to get a bit more color on that, whether you think it was just your businesses gaining shelf space or whether you think that some of these big bulk retailers are beginning to restock?

Well I think it's a lit official a few things, Ann. Let me go through a couple of things. As you know, we lost some major Lowe's business and we anniversaried that in May, and we have won a number of other market share wins across the channel that was just getting dwarfed by that Lowe's thing. Since we've now anniversaried that, for example, Home Depot was positive comps in the fourth quarter against the prior year. Now the electrical aisle itself is not positive comps. It's similar to the store comps, which are in the high single digit core decline area and so that's market share wins. We picked up cable ties and we've enjoyed a full year benefit of that, some terminals, as Andy's saying. We saw a similar -- we saw a couple of other accounts also grow during the quarter. So the DIY was stronger than what you're seeing and the DIY is only down in the high single digits as it is. So that's where we're saying the professional channel, the transformers, some of the harsh environment going into industrial applications, those are the ones that are still pretty weak.

Right, and that's good color, I appreciate it. And then almost the same question, I suppose, on the Engineered Solutions, except the opposite. You said you haven't seen orders from automotive OEM's yet pick up, can you talk about what you are seeing out there across the universe of the automotive OEM's?

Ann, about 90% of our revenue here, Ann, is in Europe on automotive. We've seen a tick-up in terms of going back four or five months largely because of --

New launches.

-- some of the new platforms that we've launched out there like the --

The BMW and --

-- BMW 1 Series, as an example, and the [Infinite] and what not, so that has continued to come across strong. I wouldn't say there's any kind of meaningful change beyond those out there, it's kind as steady as she goes right now. I would say the Engineered Solutions, the area where we are seeing -- we're a little bit more optimistic, and Bob alluded to, it is the truck side. We are -- we're optimistic, based on discussions with the OEM's, that we will see a little bit of an uptick in the build rates as we get to the end of the calendar year here, but we haven't seen it yet.

Anecdotally, Ann, the issue in truck is just build what you sell. We went through a year in 2009 and because our year ends don't match up it's not going to be an exact number, but I would venture to say what you saw Volvo and Evaco and Scania sell we produced 50% less than that because they just were taking it out of inventory. All of their movements now seem to be that that inventory is gone. Now it hasn't shown up as an order on my desk yet, but the channel evidence, what these guys are saying publicly certainly gives us some credibility that we are going to see that. And candidly, that's all we need is -- to hit guidance that's all we need is to produce what they sell. Even if it doesn't come back just the production level will be very meaningful to Actuant.

Yes, we're hearing the same out of Volvo. When you have a couple of months of negative orders it doesn't help your production level.

Right.

And then just a clean up, are there -- because this quarter was kind of messy, are there any expected nonoperating items that we should anticipate going into next year, any change in tax rate, any changes in nonoperating?

The tax rate, Ann, will be in upper 20s, not materially different than what we've had this past year out there. Again, the guidance that we provided today of $0.70 to $0.95, that excludes restructuring. That would be the thing that we know of right now that we'll be calling out as one time as we walk through the year, but beyond that not aware of anything.

And the incremental restructuring costs that you're going to spend will be balanced, again, between fiscal Q1 and fiscal Q2, or are those projects you're right in the middle of and most of that will show up in fiscal Q1?

Well, when we look at the full year here we're looking at about $10 million to $12 million of restructuring. I would say probably 60% of that will be falling in the first half, probably more in the first quarter than in the second quarter on that.

Okay, but you would expect some spillover into the second half?

Yes, definitely.

Okay. I will get back in line, I appreciate it.

Thanks.

Our next question come from the line of Deane Dray with FBR Capital Markets. Please go ahead.

Hi, good morning. This is (inaudible) on behalf of Deane Dray. I guess my first question is guidance where you have provided really good color just maybe trying to understand the range here a little bit. So the spread on the top line is down 3% to down 8% in comparing that with the range on the EPS line, so I guess is that wider range on the EPS line related to the operating leverage in the Energy business, or is it something else that's driving that range?

I'm not sure, I guess, how to respond to that. Normally we have a $0.20 or so a share range from EPS when we initially lay out our guidance here. Clearly there's operating leverage out there in some of these businesses if they kick in and the mix, again, of businesses where that growth comes in is a big part of it with Energy and Industrial being higher margin. So if those kick in we wouldn't need to be at the high end of that revenue range to drop -- to hit our -- a higher end of the EPS, if you will.

Let me try to add a little color to that. As you work down the P&L obviously you create bigger ranges, particularly when you're starting with smaller numbers less than a $1 at the EPS line. When you look at EBITDA, it is closer to the sales from top to bottom. Maybe the range is ten to -- 10% down instead of 8%, but it's in that same ZIP code. As you come below that then you get into the capital structure issues; interest expense, taxes, share count, obviously we did the equity offering. So as you come down those ranges band out. As Andy said, we're typically a $0.20 range and we went to $0.25 this year just due to some of the dynamics that are going on in the marketplace.

Got it, very helpful. Maybe on the Energy segment, we know there is lumpiness in that business and you talked about postponement in projects. If you could comment on -- with oil, $65, $70 when will you start seeing some help from oil price and orders there?

That's the million dollar question. We tend to view our business as more tied to the production of oil and gas, not necessarily to the actual price. I think the price is what influences the exploration side, which hits our seismic, but as Andy said earlier, that's a pretty small piece of the business. So where I kind of am optimistic about Energy is the fact that if you're buying the fact that 2010 calendar, you're going to see some level of recovery of production, whether that's because inventory came out of the system or whatever, we believe oil production will go up correspondingly with that. It's just a major piece of what creates the energy that allows production levels to increase and that production is what we're looking for, which would define the higher side.

Now, the dark side of that story, and why it is a wild card, is oil tends to have a longer cycle than one quarter, so we went from 11% -- we went from 3% positive to 11% negative, for that to bounce back right way to positive it could happen and the lumpiness could make it happen, but if you look over history those cycles tend to be longer than that. So that's the wild card nature of us trying to predict that business.

If you dial back a couple of years, oil was $60 or $70 a barrel, we were growing 20% a year, so it is not strictly based on oil price, it depends on production and what's happening downstream.

Now there are some market share gains going on in that segment and the market share gains tend to be us opening some of these emerging market offices and being able to support some of our frame agreements on a much bigger bases and having that local presence allows you to rent tools and provide service and do things that you can't really do from an export basis. So I'm optimistic that, if nothing happened on production, you'd still work out some growth just because we've got things that would -- that are geared towards internal growth in that segment.

Great. Maybe last question for me on free cash flow, it's been off the charts this year. Given what you have done on working capital management and commented on permanent reduction in inventory of $15 million, so what does that imply for 2010. Is there still run rate for you to do much greater than 100% conversion, or how should we be thinking about next year?

The guidance that we laid out there, R.J., the $90 million to $100 million, that is -- that's well over -- that's almost like 175% conversion the way it is so I think our string will continue -- our streak will continue from that standpoint. There is some opportunity, as I mentioned, for additional working capital management improvement. I would say it's in the inventory area and the payables. I think a lot of people look at inventory and say it was a huge benefit to cash flow this year. You also have to look at our payables. It came down by exact, almost dollar for dollar amount, so the two of those net together really didn't benefit cash flow that much. It was more the receivables side of it. So I think there's opportunity in the first half of the year. Clearly if revenues pick up as we're expecting in the back half of the year there'll be a little bit of growth on the receivable side, as well, but that's all contemplated, or included already in our $90 million to $100 million and, again, that'll be well over 100% free cash flow conversion.

Got it, thank you.

Our next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Good morning, everybody.

Morning, Jamie.

Morning.

Question on the Industrial segment, wondering if you could give a few more details on what you're seeing on the mix there and how that demand is playing out?

Well, we've had stronger results from our IS, which is integrated solutions. I think there was a blur about -- that you might have been able to see recently where we did the [U2] stage, that would be an example of an integrated solution-type thing. Bridge launching, tunnels, ports, a lot of the stuff that's under the stimulus package. That stuff is good. It doesn't attract the same margins as our distribution only-type sales, so that is the mix that Andy was referring to, that's the lion's share of the piece. When you look geographically it's been pretty consistent. All parts of the geography are tracking pretty similar. This is not a US recession, it's a global, and we're seeing that across the board.

Okay. So haven't really seen any divergence in where improvement is coming geographically, it's still pretty consistent globally?

Correct.

Okay. The comments on the margins that you were pretty comfortable with where the Industrial margins where, Andy, is that to say that we've bottomed here in the fourth quarter and you expect improvement given some of the restructuring inefficiencies you had in the fourth quarter?

Again it's going to be dependent in volume going forward, but --

If you think volume is flat with sequential, yes, we think that's --

Yes, we think it's not going to get worse than that. I think the savings from the restructuring you're going to see Q2, three, four, especially in three and four --

Right.

-- when we wrap up the facility -- the big facility move there.

Okay, thanks, and last one, just on the N&A pipeline , if you can talk about that and what you're seeing on the pricing

Yes, I'd say in the last 60 days M&A has found a rebirth. We're seeing a lot of small stuff; a few bigger things but a lot of small stuff and that's good for us because that's what we're focused on is the $20 million to $50 million tuck-in type things and that seems to be -- a number of those things are shaking loose, even a few things that are smaller than that $20 million to $50 million. Valuation, I think we're seeing things probably from six to eight times EBITDA. You're starting to get to the anniversary of EBITDA so that's starting to become a true trailing number again, probably needs another quarter before it's a perfect true trailing number. But that valuation range is where we've been for most of the last five years. It got a little headier than that in the late '06, early '07 timeframe, but it's a pretty similar thing. I think we're optimistic that the quality of the projects and the things that are coming out are better than they were six months ago and some things that are really right down the middle of the fairway of one of our four segments.

Okay, thanks a lot.

Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please go ahead.

Okay, thanks. Good morning, everyone.

Hi, Charlie.

Good morning.

Just had a couple of questions to round out things. On the Engineered Solutions can you just talk a little bit more about on the automotive side and platforms have you seen any meaningful change, either positive or negative, in terms of -- from the automotive manufacturers, what they're thinking in terms of platforms, what they're going to roll out, are they -- are the percentage are they going to look at towards convertibles versus non, has that changed meaningfully given the industry structure?

I think this downturn happened so quick, Charlie, that I don't think there's any data that we can grab that says that. I think when we look model platform to platform, convertibles have followed normal auto -- have followed the rest of automotive during this decline. So if a regular car is down 30%, convertible's down 30%. We've been offsetting that with the lift gate and the BMW 1 Series and the other launches that we've talked about, but I don't think there is a meaningful change that we've noticed, like a consumer view that a convertible's a different car than before, we haven't seen anything like that.

I think it has more to do just with the health of the OEM. Certainly in the US, with the challenges at Chrysler and GM have had they're not investing a lot right now in new models, where in Europe there's no question they are continuing to bring the next generation of platform out there. We just picked up a renewable platform the Renault Megane that'll help us in 2010, so that kind of activity is going on. So I think it's more driven by the company than more of a broad secular-type shift.

The OEM manufacturers, there's not been a mind shift in thinking of do we what to make convertibles or do we want to make this many convertibles?

Not that we're seeing, no.

And on the engineer -- on the RV side -- if you covered this, I apologize -- you said RF sales were sequentially better, is that correct?

Yes, they were. I just -- I have to say this at this point. RV sales are 1% of revenue --

Right.

-- so we'll gladly answer your question here. We saw an improvement largely because Fleetwood and Monaco came out of bankruptcy in the last 90 days and they start producing again, so essentially we haven't shipped anything to them in the preceding six months. The floodgate opened up so we saw reasonable improvement in volume.

Picked up a little extra volume models with Winnebago, we've been excited about that. That's happened over the last six months. But as I remind you guys, we've really moved this to a product line within Power-Packer and that is our -- that's where we're heading there. We don't look at it as a line of business any more, we look at a product line within Power-Packer.

Do you still view that market as strategic, or a market that still has interest in it given where the market's gone and how small it is as an overall piece of the business today?

I think I look at it the way I look at other product lines, automotive, medical, actuation, how do I share that technology across more end markets and that in that regard RV's just fine. But it is not a -- it's not something where we're doing acquisitions, it's not an area where we're investing in new product development in a -- gee, let's create the air conditioning system for an RV or some other expansion of our served fairway, we're just looking at it just the way we would look at a cab tilt system or convertible top actuation system.

Okay, thanks very much.

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

Good morning, guys.

Good morning, Chris.

Good morning.

Most of my questions have been answered, but getting back to the Energy segment real quick. It's been difficult for us to see because of all the acquisitions you've been doing, but looks like incremental margins on organic basis in the Energy segment have been pretty healthy on the way up. Can you talk a little bit about how flexible your cost structure is there and how we should be thinking about incremental profitability on a revenue decline?

Sure. The incremental margins here are healthier than, I would say, our fleet average. They're not quite as high as Enerpac, but they're -- or Industrial, but they are higher than Electrical and Engineered Solutions. A lot of it it's going to depend on what the mix of revenue is, in particular, in terms of the fall through. If we are looking at a rental asset, as an example, either we're renting or we're not, so we have very significant margins or we don't and it isn't -- there aren't variable costs there so we feel it a lot more if the product isn't out there being rented. Much more variable on the service side, which is the labor side of that, and we have been adjusting that piece of it up and down, as well. I think the product side is pretty similar when you look at both the Hydratight and Cortland business. You've got over $100 million of product sales there.

Has there been any meaningful difference? The weakness in the quarter was it broad-based between the three rental service equipment, or are you seeing one impacted than in the other?

Yes. I think the weakest part of it from a revenue standpoint would have been the product side of it, largely because of the seismic falls in to that piece in there.

Yes, but you have to look at in context. Sequentially this business has gone from $19.3 million EBITDA in the second quarter to $24.2 million to $25.5 million, so yes, it looks negative against the prior year, but you've got the Cortland acquisition, which does not -- is not as high of a margin as this. So I just what to -- when you stay the weakness in the quarter it was a great quarter for energy margins.

Margins were up sequentially in this sense, so I think they're -- I think Phil and J.T. have done a good job managing the costs in these businesses when you've got -- when you shift as quickly as we did from positive sales growth to a decline. And I think there is going to be challenge, certainly in the first quarter. We expect this Energy segment to be down more than the 11%, that we just came -- reported here in the fourth quarter in the first quarter. We expect the back half of next year to be better, but I'm just -- to lay out out there it's going to be weaker in the first quarter than we saw in the fourth quarter from a revenue standpoint, so they are going after costs, as I mentioned earlier.

Okay, that's very helpful. The expectations for the second half seem better in that business, is that based on commitments from customers and scheduling of projects and things like that, or is that more based on just general economic view that production needs to increase in the second half of the year?

Well, there -- and there is a seasonality in this business. You can't work on a rig in the North Sea in the middle of November and December, so there is some seasonality that comes into play in that business, also.

Right, it's probably because there's probably more macro assumptions as we look out.

Okay. And then over the past couple of years your acquisition activity has been concentrated in the Energy and the Industrial business, sort of a -- I think Bob likes to say, feed the eagles. Now that we're at the bottom of a cycle in a lot of your other businesses with maybe better near-term growth prospects, has your acquisition strategy shifted at all? Are you changing what sort of businesses or what segments you're looking at on the acquisition side?

No real change. I think that we've communicated to you guys that the majority of our acquisition focus has been in the Energy roll up, which we've done four or five the deals that now comprise Hydratight and Cortland's got a similar attribute, we think, from an acquisition point of view. Leveraging that Enerpac brand name, being able to sell industrial tools in a broader -- through that global network of distributors, these are our two fundamental core strategies. We are excited and actually pursuing pretty close to a couple of things in the other segments, more to do with electronics and the highly-engineered systems that go into the emissions and thing like that. So, we're looking in all the segments, but I still think it'll be come down to feeding the eagles.

Okay, that's helpful, and last one. CapEx expectations for next year?

We finished this year, I think, at about $21 million, $22 million. We'll be up a little bit, probably in the $25 million range next year.

Okay. Thank you, guys.

Our final question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Allison.

Just a quick question on -- can you just talk a little bit on the European electrical DIY, what you're seeing in that market and the progress of your restructuring efforts there?

Okay. Well the -- Andy, why don't you cover the front end and then I'll cover the restructuring?

From a market standpoint, what are we seeing? Germany is probably holding up better than the rest of our primary markets over there, the other bigger market being Benelux, and Austria and getting into Eastern Europe, Eastern Europe is probably the weakest from a regional standpoint right now. That's been pretty consistent throughout the entire quarter.

From a restructuring point of view the major restructuring we did over 2006 and 2007 is complete, and as we've gone into the downturn we have found a few additional restructuring efforts we are driving and they have to do with moving product between Tunisia and Czechoslovakia and Germany from a manufacturing point of view and trying to downsize some of our warehouse space and taking that meaningful look at SKU reduction, where are we, what our business -- SKUs that we want to stay in and which don't and that restructuring is going forward. But lion's share, the big move, was really going from 2,000 employees down to 1,200, that was the big one that went through in '06 and '07, complete and we're enjoying the improvement from that restructuring.

Okay, great, thank you.

If there's no further questions I'll just remind people, as most of you know, we are having our annual investor conference in New York next Tuesday October 6th. You still have an opportunity attend, just contact me and we'll make sure you get on the list. This year we're doing almost the entire meeting in a breakout format. This will create a small group, informal setting where you can deep dive into the actual segment and business unit strategies with the management teams that run those businesses, so I hope you'll be able to join us. If you have follow-up questions after the call, please feel free to give me a call and thank you for your interest in Actuant. Good-bye.

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