Enerpac Tool Group Corp (EPAC) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's third quarter fiscal 2010 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded, Thursday, June 17, 2010.

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 third quarter fiscal 2010 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. 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'll turn the call over to Bob.

Thank you, Karen. As you can see in our release this morning, we reported sales and earnings above the high end of our previous guidance. EPS, excluding restructuring and last year's impairment, was up 45% year-over-year, with 16% core sales growth and solid EBITDA margin improvement. Free cash flow was outstanding at $46 million for the quarter. We continued to do a great job of effectively managing working capital and our capital during this recovery. As you will hear later in the call, we are again raising our fiscal 2010 guidance for free cash flow. We completed four tuck-in acquisitions during the last quarter, or at least since we reported to you last, all in line with the strategic growth areas of industrial and energy segments.

With these opening remarks, I'll turn it over to Andy to go through the quarterly results, and I'll come back and cover a few topics, including our preliminary 2011 guidance. Andy?

Thank you, Bob, and good morning, everyone. What a difference a year makes. It sure is a lot more satisfying talking about improved results as opposed to explaining recession-driven sales and profitability declines. We benefited from 16% core growth and margin expansion this quarter, which exceeded our own guidance and consensus. To recap the third quarter at a high level, sales of $335 million were up 17% from last year, reflecting improving demand in three of our four segments, as well as a net benefit of acquisitions, divestitures, and foreign currency changes.

On a GAAP basis, we reported diluted earnings per share from continuing operations of $0.30 a share compared to $0.06 a year ago. These results include restructuring costs for both years, and an impairment charge last year, and therefore require some explanation. Our restructuring costs in the quarter were in line with the expectations. Last quarter we said it would be about $5 million of restructuring costs in the back half of fiscal 2010, and we recognized about half of those in the third quarter. There are no changes to our restructuring costs or savings estimates that we provided on last quarter's earnings call. If we exclude the restructuring costs and last year's impairment charge, third quarter EPS from this year was $0.32 a share compared to $0.22 a share last year, a 45% improvement.

While we're still below pre-recession business activity levels, we're definitely encouraged by the many positive signs in the quarter, the best sales, adjusted EPS and margins that we've seen in the last six quarters. I'll review sales and margins next at a consolidated level, and then spend a few moments on each of our segments.

Our consolidated sales for the quarter of $335 million were the highest we've seen since the first quarter of 2009. The momentum we reported in last quarter's earnings call continued this quarter, with core sales growth of 16%. With the exception of the energy segment, all segments posted core sales gains, led by a 43% increase in engineered solutions due to a sharp rebound in OEM demand in vehicle markets, as well as a 20% increase in the industrial segment.

Foreign currency was not a big issue for the third quarter, as a significant dollar strengthening happened in May, when two-thirds of our quarter was already in the books. Currency movements actually contributed 1% to overall sales growth in the quarter versus the prior year, but they will be a headwind in the fourth quarter and all of fiscal 2011. We'll provide more color on currency later on the call, when we talk about our outlook and guidance.

The combination of restructuring-driven cost savings that we've talked about the last few quarters, as well as a 17% overall sales gain this quarter, resulted in a 53% increase in operating profit, excluding restructuring and impairment charges. Consolidated operating profit margins expanded 280 basis points to 12.2% from the third quarter of a year ago, and 310 basis points sequentially from last quarter. All segments except energy reported year-over-year profit margin expansion, and all four were up sequentially from last quarter. Equally as important, EBITDA margins exceeded 15% for the first time in the last six quarters, despite less than optimal sales mix.

Now, let's discuss results for each of our segments, starting first with industrial. Sales improved in the industrial segment significantly, with core sales growth of 20%. This compares to a minus 7% core sales growth for all of last quarter, but flat for the month of February. Since then, sales and orders have continued to rebound, especially in Asian and North American markets.

The 26% third quarter industrial operating profit margin was the highest we've seen in the last six quarters. As Bob will explain later, industrial margins were impacted by unfavorable acquisition mix, with the two new acquisitions that we completed in April. Despite this, our operating profit margins in the industrial segment increased 310 basis points sequentially on the higher volume, and 120 basis points year-over-year. Although the rapid increase in production during the quarter had us scrambling to meet demand, the team was able to deliver the goods with solid margin expansion.

The energy segment posted an 11% core sales decline in the quarter, and year-over-year margin erosion on the lower revenue base and unfavorable sales mix. The positives were the sequential improvements in both sales and profit margin trends. Last quarter's core sales were down 14% compared to 11% this quarter, and margins this quarter were up 250 basis points from last quarter. Similar to last quarter, our sales into the mature refinery markets such as in the UK, the US and Europe, continued to be weak, as was seismic exploration, and these combined to drive the majority of the core sales decline. Conversely, we saw very nice sales gains in newer markets for the business, including Asia, the Middle East and Kazakhstan.

Turning now to the electrical segment, year-over-year core sales there improved from minus 9% last quarter to plus 8% this quarter. Not surprisingly, the improvement came from our earlier cycle markets, like do-it-yourself retail and the marine after market. Some of our later cycle markets including commercial construction in electric utilities remain weak, and will probably continue to be a headcount for a little while longer.

Profit-wise, the news in the segment was again good, with electrical segment operating profit margins expanding 170 basis points sequentially, and more than double last year's margins. This reflects the benefits from the restructuring actions in the segment, as well as improved segment sales mix.

Our fourth and final segment is engineered solutions, which again posted excellent results in the quarter. Core sales growth of 43%, year-over-year operating profit margin expansion of over 1,000 basis points, and great cash flow. EBITDA margins in the segment were over 15% in the quarter, driven by the sharp rebound in sales, as well as restructuring benefits. Year-over-year, EBITDA growth in terms of dollars was up $13 million in the quarter alone. The core sales growth reflected strong demand from vehicle markets, notably automotive, European and Asian truck, and RVs in North America.

That's it for my comments on segments. I'll just talk a little bit about cash flow, which was very strong in the third quarter, with $46 million of free cash flow. Year to date, our free cash flow is $97 million, which resulted in us increasing the full year free cash flow target from the previous $110 million, now to $120 million to $125 million range. The combination of the EBITDA growth in the quarter, as well as this cash flow, more than offset the money we used to fund the new acquisitions, driving our net debt to EBITDA down to 2.1 times pro forma for the LTM earnings of the businesses we acquired. As disclosed in this morning's press release, with over $350 million of capacity under our revolver that's unused, we're in great shape for funding future growth.

That's it for today's prepared remarks for me. I'll turn the line back over to Bob.

Thank you, Andy. Today, I'm going to provide some comments on some frequently asked questions, cover our four acquisitions that we completed since our last quarterly earnings call, and provide you color with the preliminary 2011 guidance.

First, our thoughts relating to the BP accident in the Gulf of Mexico and its potential impact on Actuant. Our deep water exposure in the Gulf of Mexico today is pretty small, less than $5 million a year. Our deep water exposure is more heavily weighted towards places like the North Sea, Brazil and Southeast Asia. While the ongoing spill is devastating on a number of fronts, we believe deep water oil extraction will continue, given the simple fact that existing oil reserves are depleting at the same time global energy demand is increasing. Alternative energy, while exciting and beneficial to Actuant, does not create enough supply now, so the deep water reserves must be developed and utilized.

While the incident creates a lot of uncertainty in the short-term, we believe that in the long-term, both Hydratight and Cortland will benefit from the likely increase in maintenance, inspection and regulation. Joint integrity will be even more critical with the new safety regulations that are likely to be adopted. We expect that umbilicals that Cortland makes for deep water applications will be more heavily utilized for inspections, much like the rovers you see every day working in the deep water horizon accident site.

Now turning to acquisitions. If you recall, I discussed last quarter the creation of a stand-alone Integrated Solutions, or IS business within Enerpac. Part of the rationale for the structural change was the anticipation of the Hydrospex and Team Hydrotec acquisitions we completed in April. These two acquisitions add about $30 million in annual revenue to our existing $30 million of IS business. So now in total, IS is about 20% of industrial's $300 million in revenue.

As is typical with large project-based businesses that involve bundling other people's products with ours in a complete solution, the resultant EBITDA profit margins for this channel are similar to Actuant's, mid teens. However, with the synergies we expect to bring from the business, the market share we intend to grow, and the brand equity that these high profile projects provide, we think these margins will expand over time and be increasingly accretive, both from a ROIC and an earnings point of view. These acquisitions bring us geographic breadth, new and improved heavy lift technologies, such as gantries and strand jacks, strong customer relationships, engineering talent to continue to gain in the large civil infrastructure and special project markets. These projects range from bridges, tunnels, dams, railroads, sea ports on the infrastructure side, and large lifting and skidding jobs on the special project side.

Let me walk you through a great example, with a recent win that we had with Mammoet. Mammoet is a large Dutch heavy lifting company that provides customized solutions for technically challenging lifts. During the quarter, IS completed a $1.5 million offshore rig recovery project for Mammoet, and was awarded an additional $9 million contract with them for bogies on a heavy lifting rolling crane stand. You see a picture of the concept of this crane on this slide. The project will consist of developing and supplying eight bogies, each of which can handle an incredible weight of 2,400 tons each. This crane on wheels will be able to handle exceptionally heavy loads, lifting jobs for Mammoet.

If you're keeping score, the largest IS job in Enerpac's history was the Millau viaduct in southern France at approximately $5 million. So this project becomes the new leader in the clubhouse, and will be delivered over the next year. This is just one of many IS bookings that have happened over the last nine months and that earn our funnel of opportunities. We remain very excited about the growth prospects of this subset of the industrial segment.

In addition to the two industrial acquisitions, energy also added two of its own. Biach was completed in May. Biach specializes in nuclear bolting tensioners and other products that are used in approximately 90% of all US nuclear power plants today, but has very little overseas exposure. We believe we can globalize these specialized capabilities, utilizing our Hydratight global footprint and technical sales force, particularly in larger nuclear markets of Europe and China.

The second energy acquisition was completed last week. Selantic provides a European base to accelerate globalization of Puget Sound Rope, one of the Cortland businesses. Selantic's highly engineered slings and ropes are used for heavy lifting applications and mooring applications, and are complementary to the Cortland offering. They also provide additional capabilities for heavy lifting applications within the industrial segment.

Beyond these recent deals, we still continue to see a number of acquisition prospects in the $10 million to $50 million range in our acquisition funnel. We are predominantly focused on energy and industrial segments, but there are also some smaller attractive niches within electrical and engineered solutions segment that are logical places for tuck-ins as well.

Now let's move to guidance. I think what we disclosed in this morning's press release for fiscal 2010 is pretty self-explanatory. We are effectively raising our full year EPS guidance to take into account our third quarter actual results and the acquisitions I highlighted. This raises our guidance to $0.95 to $1 a share on sales of $1.24 billion to $1.25 billion. We expect fourth quarter sales to be lower than the third quarter on account of about $10 million headwind from the stronger US dollar, as well as about $15 million of impact from European summer plant shutdowns.

As Andy mentioned earlier, we expect free cash flow for fiscal 2010 now to be in the $120 million to $125 million range. I have to say I'm more impressed with our cash flow performance this year than I was with last year's strong cash flow results. In 2009, we did a great job of peeling out working capital in a declining sales environment, but in 2010 we've done an exceptional job of managing working capital in a growth environment, a much harder task. I commend the business leaders of Actuant and their teams for this achievement. Given this cash flow forecast, our free cash flow conversion will now be in the range of 165% of net income for fiscal 2010.

Now, let's move to 2011. Our guidance we are providing today is our first look, and we'll be firming this up over the next few months, once our final plans are completed and 2010 is in the history books. We'll be able to provide more color on calendarization, end markets, segment core growth, and margin expectations on our fourth quarter call. While we are pretty comfortable with the visibility to predict the next 12 months, there's still a lot of uncertainty out there, in FX rates, in the European economy, and in the energy segment. So at this point, I would suggest to you we have an equal probability of achieving the low end or the high end of the guidance range.

We are currently expecting consolidated core sales in the 6% to 8% range for fiscal 2011. Completed acquisitions should provide an incremental $40 million on the top line next year. We expect margin improvement of 75 basis points to 125 basis points in 2011, due to the higher volumes in the carry-over impact of the restructuring benefits. Based on our currency assumptions, we are projecting sales of $1.31 billion to $1.36 billion, and EPS in the range of $1.20 to $1.35 per share for fiscal 2011.

We expect our tax rate to be in the 27 to 28 range, and are targeting free cash flow in the range of $120 million to $130 million. This will provide plenty of fuel for future acquisitions, which are not included in our guidance.

Finally, the significant strengthening of the US dollar versus the euro and the UK pound, as had a meaningful impact on 2011 guidance versus just 90 days ago. What we've attempted to do on this slide that you are now seeing is show you how currency changes impact next year's guidance ranges for both sales and EPS. Our guidance is shown in the green boxes.

As a reminder, one point move of both the euro and the pound exchange rates versus the dollar is worth approximately $4 million in annual revenue. With about a 15% EBITDA margin, this equates to $600,000 of EBITDA. Given our FX assumptions of the euro being worth 1.25 to the dollar and the British pound 1.45 to the dollar, currency is a big factor in understanding our guidance, since the average euro in fiscal 2010 was 1.37 to the dollar.

In simple terms, if FX in 2011 were the same as it was in 2010, we would be adding $50 million in sales and $0.08 to our EPS guidance. But even with this FX headwind, we're still looking for EPS improvement of 23% to 38% in fiscal 2011. Obviously on a constant dollar basis, you could add that $0.08 to that and the improvement would even be higher.

That's it for my prepared remarks, operator. I would like to open it up to the phone lines for the question and answer session.

Thank you. (Operator Instructions). Our first question comes from Wendy Caplan with SunTrust. Please go ahead.

Thank you very much, good morning.

Good morning. And welcome back.

Thank you very much. It's good to be back. Since I typically ask, how's Enerpac, I guess my Enerpac question this time will be, can you help us understand what the margin would have been in the industrial segment, had we not had the unfavorable mix of acquisitions. And as we think strategically about growing the industrial segment, I know I've heard you talk a bit about, or a lot about investing in the businesses, and kind of if we were to look at margin, what should we expect, given the increasing investment in the business? And that's the second part of my two-part question.

Okay, well, let me start, and Andy, you clean up this if you need to behind me. But basically, we're guesstimating that if it wasn't for the acquisitions, we would have been 100 basis points to 125 basis points higher in margins in the quarter than what we reported.

There's a number of things going on in industrial that you have to understand. The first is, you are growing the business in the Integrated Solutions part. And that part, which we have owned and had for a long period, has always better than mid teens. It's just not realistic to assume that large projects with a large material content and purchase material from other vendors is going to generate that, even the most profitable ones, like Millau viaduct were only in the mid teens. So, that is a mix that we just have to recognize going forward.

From a ROIC point of view, it's still spectacular, because you don't have inventory in these big projects. You're just running whatever the job actually is.

The other thing that does impact margins, and it's a nice problem to have, is variable compensation. Enerpac, way ahead of its business plan right now, great quarter. You would expect that we're accruing some variable comp that gets paid out after the year's closed out. And that is also impacting the margins on a relative basis. I continue to believe Enerpac will have EBITDA margins 26, 27, 28 neighborhood on a blended basis going forward, and that we're in the early, early quarters of seeing that improvement, obviously up several hundred basis points this quarter.

Okay, thank you. And a free cash flow question, if I might. You talk about the currency issue in terms of -- I'm sorry, I didn't mean to say free cash flow. Excuse me. I was pretty impressed by free cash flow, which made it come out of my mouth. The guidance update for 2010, you gave a lot of information and I just want to understand, so essentially our $0.95 to $1 for the full year reflects a couple points in currency, so it really would have been higher. Is that kind of how we should think about it?

One way to look at it, Wendy, is just what's happened with currency in the last quarter here. We held essentially the prior -- the implied guidance that was out there for the fourth quarter, which was $0.24 to $0.29. Effectively by holding it, we're overcoming about $0.02 a share, or about a quarter of next year's currency headwinds. So said another way, we absorbed another $0.02 of headwind in this thing to stick with that guidance. So otherwise, it would have been probably 26 to 31 on an apples and apples basis.

Okay. That's helpful.

I'd like to say Actuant's alone on this, but you're obviously, ITW has been chirping about currency, Dover is out chirping about currency. This is something that's going to affect everyone. I think given that we're coming out with 2011 guidance in the middle of 2010, just due to our August year-end, is giving it attention. But I think if you step away from it, you recognize, big year next year, 25% to 35% earnings growth with that headwind already factored in.

Okay, and one more, if I might. The engineered solutions segment exceeded my expectations. As we look at that segment in terms of sales trends, obviously early cycle stuff, is it -- should we think about it in terms of restocking, filling lots of RVs, et cetera, versus kind of, quote, real demand? I mean, how should we think about that on a sustainable or going forward basis?

Well, RV, while it was a fantastic quarter, up a significant amount, somewhere around 100%, it's a very small piece of that total puzzle. So I think the better proxy is really Volvo in Europe and European truck. If you've been following the European truck guys, they are forecasting that the back half of 2010 is going to have modest core growth year-over-year, zero to 5% neighborhood.

For us, the key is that they are producing what they are selling. I don't think we see a lot of evidence that they are building inventory. I think what we see is they are producing what they are selling. But nevertheless, that's a big push for us and is equating to a lot of that growth.

Thank you very much, appreciate it.

Thanks, Wendy.

Thank you. Your next question comes from the line of Ann Duignan with JPMorgan. Please go ahead.

Hi, it's Ingrid [Ajin] for Ann. Good morning, I was wondering if we could circle back to the energy business. I realize you don't have a tremendous amount of gulf exposure, but British Petroleum is one of your customers. What kind of exposure do you have to them?

In terms of direct sales, directly to BP, it's probably a couple million dollars a year. That's it. But there are other vendors that we supply product to or we will rent assets to that will end up working on BP assets. So if we take all of those into account, it's probably $6 million, $7 million a year account for us. So it's a sizable account, but it's not a huge part of our overall energy business or certainly Actuant.

Right, okay. And then I know that you've talked about the long-term potential, but in the near term, what is your outlook for rig count and maintenance?

Well, we don't really try to forecast rig count. It's only one variable in a lot of variables that affect our business. We went into the third quarter expecting energy to continue to improve, be less worse. It did in fact do that, went from 14 to 11. The 11 was probably 2%, 3% more than we would have expected. I think we were hoping for kind of minus eight. We're expecting the fourth quarter to continue to move in that direction towards zero. We're expecting 2011 to have that same kind of feel, continue to get less worse. The comps are getting easier. So we're pretty optimistic that we're bouncing along the bottom, certainly sequentially in energy, and it will feel okay in the quarters in front of us.

Okay, great. And then I guess my only other question was if you could talk a little bit about what you're seeing in Europe overall and by segment.

Yes, I get that question a lot these days. With the Greece situation, how's the volume and demand in Europe. Candidly, and we've pulsed this and we have a healthy paranoia about it. We really have seen no indications that Europe is slowing down associated with the Greece thing or the euro thing. That data is pulsed every month, so it's in real time. That's a real time assessment that I'm giving you.

We see that in a lot of different businesses, we see that in the consumer side with the comp business, convertible tops is in the consumer. We see that in the industrial with (inaudible) and Enerpac, and all I can tell you is, it's just not shown its head that it's a negative. The Europe recovery has been trailing the US, but that's been going on for nine months. That's really not much of a new news situation.

Okay, thank you very much.

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

Hi, thanks. Good morning, guys.

Good morning, Charley.

With respect to electrical, could you just maybe give us a little more detail, longer picture strategically, kind of on the growth initiatives or growth outlook for that business, and kind of where it goes and maybe beyond kind of the DIY Big-Box retailers, how you drive that business over time?

Sure. The big story for our electrical platform has been the consolidation of three separate business units into a single business unit in North America. That was a big chunk of our restructuring, and we are in the final innings of putting that together. I would say 95% of it's done with a little bit still left to go.

Now that we're at that point, we've really started organizing the electrical team towards some very focused markets that we believe have above average growth. We are focused on emerging markets of India and China, where we don't do a lot of business today. In fact, none, and we look at those as great opportunities. Lots of parts of those countries are seeing their first electricity, big demand, how to get to that channel is what we have to dissect and get in there. But we bring a lot of product back from those places already, so we think we have kind of a big leg up to start that. And obviously with Actuant's China and India exposure already, it's not hard to add that to the legal entities that already exist.

Another big area of growth is harsh environment. This is where the Marinco business sits, and we're doing a lot more in OEM type applications, places like cologenerators, things like that where we can do more in harsh environment.

And then the last is in e-mobility. I think e-cars are something we're paying a lot of attention to now, working with a number of the battery guys to really look and try to understand how we can play a role in the electric car. We do business already with Tesla, that's a European plug company. Obviously with Marinco, we already have a lot of the shore power cords for the boat and marine industry. We think converting that to auto is going to be not bad. A lot of the charging stations, if you're going to put one in your house, you're probably going to buy it at Depot or Lowe's, it will either be a do-it-yourself or do-it-for-me type of installation, but we think we can play a role there.

And lastly, we have low voltage transformers that have to step down power and that's obviously a key thing to this.

So, those would be some of the places that we're looking to, now that we've got a single business, that we're looking to go after in electrical.

Thanks, Bob.

Thank you. Our next question comes from the line of Ajay Kejriwal with FBR Capital Markets. Please go ahead.

Thank you, good morning.

Good morning, Ajay.

Hi, Ajay.

Good, so nice organic performance in Enerpac and industrial, and it appears you saw growth across geographies. Wondering if you can provide more detail around what you saw in US versus Europe and Asia, if you can parse that 20% across geographies? And then also maybe if you can talk about how much you think restocking have contributed to that 20% number.

Andy, why don't you start and I'll talk about the restock.

When you look across all geographies, we were up the most in Asia, clearly in the 30s, in Europe about 10%. Core certainly benefiting from truck and auto in engineered solutions, and North America was in the teens. So as Bob mentioned earlier, Europe has been lagging -- the recovery there has been lagging the US, but certainly has been steadily improving sequentially each of the quarters that we have there.

I think if you look at just industrial, it's more pronounced. Europe is not as strong as it is overall because we haven't seen the recovery there and we're getting a lot of-- as much recovery in Enerpac, we've been getting a lot of benefit from the engineered solutions. But that's probably as far as we want to go by segment, by geography.

Right.

As for the restocking, there certainly is some there. I happened to be with some of the Enerpac distributors a few weeks ago. I wouldn't say there's a ton. Very hard number to get our hands on. But they were living very hand to mouth during the great recession, and are starting to loosen up a little bit in trying to get top product availability. As Andy said, this recovery happened very quickly and we scrambled a bit to build our inventory and get it in position to be able to go to these distributors. And that also played a role in kind of my feeling that it really wasn't inventory build, because we were just meeting demand and making sure we were taking care of the markets.

I would like to-- .

We're a good proxy actually. If you look at our inventory and you look at our cash, you see on a constant dollar basis excluding acquisitions, our inventory was actually flat, actually came down by $1 million a quarter. So I think it's a-- we're a pretty good indicator of a lot of businesses out there -- businesses are not necessarily building inventory right now. There's real demand growth going on out there.

I would like to see growth you're seeing in Europe. How much of that would be the big projects, impressive win with Mammoet in the quarter, is this broad based that you saw in Europe? Is it based in certain countries? Maybe you can talk a little bit about that.

Well, the Mammoet order is obviously next year, so it was a win, but it's not something that had a meaningful impact. We did shift that other order I talked about with Mammoet, that was just in the normal stream. Our European sales tend to be northern, so Germanic, Dutch, French, UK. Those are the markets that probably I would venture to say are 75% or 80% of our total Enerpac business. The southern region, Spain, Italy, those kind of areas, is a little less, not as much infrastructure down there, not as much big project business.

Good. Then maybe if you can help on the 2011 guidance. By the way, I found the detail on the sensitivity analysis FX very helpful. But maybe if you can talk about what you are assuming for Europe next year overall. I know you provide more detail by segment with the fourth quarter, but just lay out for us, what are the assumptions overall for that geography.

We are not going to go into that granularity at this point, Ajay. What I would tell you is Europe has trailed the US over the last year, and we gave you the 6% to 8% core growth, you should expect US is higher than Europe. That's as far as I want to go on this call.

Okay, good. That's helpful. Thanks.

Thank you. Our next question comes from Jamie Sullivan with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking the question.

Good morning.

On the engineered solutions segment, just wondering, the strong numbers there, just wondering how that came out versus your expectation, and then with, north of plus 40 core, how the various end markets of auto, truck, maxima, et cetera, performed versus the overall segment. Was there particular strength in one versus the other?

Sure. If you remember from last year, you may not remember but on the last quarterly call, I said we expected engineered solutions to grow from a strong second quarter core number into the third quarter. We didn't expect it to grow this much. It definitely exceeded our expectations on that, it grew pretty much across most of the individual markets that we're in from a channel standpoint, stronger.

Clearly the leaders out there without question on a percentage basis is RV, but it doesn't move the needle that much. It's up roughly 100%. You can get into ruck and auto, they are both up 50% type range.

Some of the construction equipment, off-highway markets in North America certainly showing signs of life. They were up double digits as well, but not as high as the other markets. So really everything was up in the quarter. The big change just being the magnitude of the improvement coming out of truck and auto.

Okay.

Now, you go back pre-recession, this was somewhere around a $500 million segment. So we're running $80 million in revenue now, we've run as much as $125 million. So while I am thrilled with the numbers, on a quarterly basis, so while I'm thrilled with the numbers, I look at it and I'm optimistic that the future has a lot of runway left to it.

We've taken out a lot of cost. We're using our lead process to really try not to add costs as we come back. We've been aggressive about moving things to low cost countries in this segment, and my focus is really on that revenue stream. I see very little evidence of market share loss. In fact, with cat and a number of others, it's market share gain. CMHTC in China had a great quarter. So there's just a lot of great feeling on there.

So, Andy gave them the gold star the last two quarters, and even though he didn't do it on the call today, they got it for the third quarter in a row. They just had great results, and there's nothing in our visibility that says that that's not going to continue to improve.

I think the pace of the growth will moderate in the fourth quarter because of the shutdowns, the plant shutdowns, and is really what happens in truck and auto. But we expect a pretty nice runway here going forward into fiscal 2011 with growth in really all the end markets that this segment serves.

Right, and that $15 million sequential impact was pretty much isolated to engineering solutions, right, from the shutdowns?

No, the vast majority, a little bit (inaudible) but the vast majority of it is there.

Right, okay. Great. And then on the energy segment, just wondering, with the deferred maintenance projects that you've talked about the last few quarters, has there been any change to progress there, just whether it was because of deep water horizon or not? An update there would be helpful.

It's only going to be anecdotal update, okay? So don't take this as some kind of a detailed, thoughtful, data-driven analysis. But you've got an all hands on deck situation going on in the energy segment right now. Every major oil company is helping BP try to solve this issue, get this thing capped. Everybody understands the implications deep water has on their businesses and where it's going. So it would be crazy not to think that they're -- if they were deferring maintenance before, that their eye is on helping BP now, not worrying about deferred maintenance.

That being said, more legislation coming. It's very obvious to everyone in this industry that there's going to be some new standards, lots of investigations. I was with some Hydratight guys recently and they said this is very analogous to a major explosion that happened a decade ago in the North Sea. So, we can't help but believe this will be a big focus to somebody like us who really specializes in a very unique thing, joint integrity focus and safety on a rig, on any kind of installation. So I think it's definitely a plus in the long-term, with some kind of all hands on deck focus in the short-term.

Okay, great. And then one last one. I guess just on acquisitions, you talked about the $10 million to $50 million range for a while now. Is that just what's available in the pipeline? Do you consider that more your sweet spot now, just wondered if you could add some color there.

Yes, I think it is our sweet spot, it's probably been our sweet spot for the majority of the last six to eight years. We've always said we liked those $10 million to $50 million deals, with kind of a platform type deal every two to three years around that, and I think we're back to that track record now in 2010. We have looked at some bigger things, and we've been aced out on some bigger things, mostly due to price.

When you go bigger, you start running into private equity groups now. You start seeing staple financing is starting to make a recurrence. You run into bigger strategic buyers. And I think the reason we were successful with these four deals is we're fishing in these smaller ponds that most traditional people that you guys cover, bigger cap guys, that doesn't move the needle and they are not as excited about a $10 million or $20 million deal as we do.

So I continue to believe that it's our grass roots, very targeted effort that happens at the business unit level up to the segment level, is really what's the key ingredient to our success in this area.

Sure, and what are you seeing in terms of multiples across the space now in those smaller deals?

We think 6 to 8 is the fairway. The four that we're talking about, we're at kind of lower end of those fairways. That's a true trailing number, so you then have synergies on top of that and any growth on top of that. The bigger things that we walked away from got north of that range and were one of the reasons we walked away.

Thanks a lot. Appreciate all the time.

Thank you. The next question comes from Allison Poliniak with Wells Fargo Securities. Please go ahead.

Hi, good morning. Going back to the Gulf, given the uncertainty with the moratorium, we're starting to hear talk of people wanting to move their rigs. Is that something that Actuant could benefit through, maybe through Cortland, or how should we be thinking about that?

I think it's a plus for us, just because our mix is not predominantly Gulf-related. So we have more sales, more technicians, more presence in the other parts than we do in the Gulf. It's due to the historical nature of Hydratight and Hedly Purvis, the two core acquisitions which were predominantly North Sea based.

So I don't think the rig movement is a negative. It's probably a positive. It is definitely happening, though. I mean, I know you're reading a little bit about it, but it's definitely happening. I think if you think about rig owners, a lot of these guys are entrepreneurial types. These are big investments. There's other places in the globe that do not have moratoriums, that they were having to wait until their rigs were available. And the rigs find the demand. That's just what's going to happen. And I have some concerns that the US, when they try to turn it back on, is going to have a hard time getting these rigs back. But that's not today's issue. But in any case, I think it's a plus for us.

Okay, great. Thank you.

Thank you. And it appears there are no further questions at this time, I'll turn the conference back to you. Please continue with your presentation or closing remarks.

Yes, in closing, we appreciate you joining us on the call today. Just a heads up for your calendars, we are going to be hosting our annual investor today on October 12 in New York City. So we hope you'll be able to join us for that as well. If you have any follow-up questions after today's call, we will all be around for the balance of the day. So please feel free to give us a call. Thank you.

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.