Enerpac Tool Group Corp (EPAC) 2010 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Actuant Corporation's Fourth Quarter Fiscal 2010 Earnings Conference Call. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details.

During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder this conference is being recorded Wednesday, September 29, 2010.

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

Good morning and welcome everyone to Actuant's Fourth 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 on 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 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.

Today we're excited to talk to you about our results for the fourth quarter and fiscal 2010 for Actuant, as well as our outlook for 2011. In many ways, 2010 felt like a return to normal theme for Actuant after the recession of 2009. While we are not back at our prior peak in terms of sales and EBITDA, we made solid improvement in 2010 with more coming in 2011.

For me, the highlights include the following. First, a return to predictability. We met or exceeded our guidance in each quarter in 2010 as our diversity of businesses and geographies again allowed us the positives to offset the negatives. Starting in the second quarter, we began to see sizeable earnings growth excluding restructuring from continuing operations. With core sales growth beginning in the third quarter, EPS from continuing operations for the year was up 15%, excluding restructuring; in the final three quarters it was up 75% from the prior year.

Next, the aggressive restructuring of our cost structure that we began in 2009 was largely completed by the end of 2010. We removed 25% of both headcount and facilities globally in the past two years. As the economy recovers we've been cautious about adding resources back and thus margins improved substantially. EBITDA margins were up 70 basis points for the year and over 200 basis points in the last three quarters. Free cash flow was also a big highlight in 2010, at $145 million, it was one of the best on record for cash flow and cash flow conversion. Improving EBITDA margins, the lack of capital expenditures, and outstanding working capital management all contributed to this achievement.

In 2010, we resumed acquisitions with four transactions totaling $45 million and deployed capital; and last but certainly not least, 2010 marked the tenth anniversary of the spinoff that created Actuant and the hundredth year since our founding. We created -- we celebrated these anniversaries by ringing the closing bell at the New York Stock Exchange with our Management and our Board of Directors.

The best benchmark that really stands out for me was Actuant's total shareholder return for this decade. Over 400% return compared to basically flat performance of the S&P and the Russell 2000 Index. With those opening comments, I'll turn it over to Andy go through the numbers in detail.

Andy?

Thank you, Bob. Good morning everyone.

Bob covered the highlights for the year and I'll cover highlights for the quarter, but first as a reminder, all of the financial results I'll be talking about today, unless I specifically called them out, will be from continuing operations and therefore exclude European Electrical. We adjusted the historical sales and earnings data to remove European Electrical and these restated results were included in last Wednesday's press release.

Overall, it was a great quarter with sales, earnings, and cash flow above our guidance. Year-over-year, core sales growth increased sequentially from 17% in the third quarter to 18% in the fourth quarter. We did better than forecast in our Industrial and Engineered Solutions segments which both grew on a core basis, well in excess of this overall 18%. Operating profit margins were up 360 basis points from a year ago and overall margins were roughly in line with last quarter. Our diluted earnings per share from continuing operations, excluding restructuring costs, were $0.31 a share, which was a 82% improvement from the prior year. Our free cash flow for the quarter was also great at $48 million and well above our expectations. And lastly, for those of you that are keeping track of our fourth quarter guidance, had we not removed European Electrical to discontinued operations, our sales and EPS for the quarter would have been about $335 million and $0.30 a share, both above the original guidance.

Before diving into sales and margin data, I wanted to quickly review the comparison of fourth quarter earnings per share from continuing operations given the special items both years. Last year's fourth quarter GAAP EPS was $0.06 a share, but that included $0.09 of restructuring and a $0.02 debt extinguishment charge. Excluding these items, last year's EPS was $0.17. This year's fourth quarter GAAP EPS was $0.29 a share; excluding the $0.02 of restructuring costs, EPS was $0.31 and this represents an 82% gain over the $0.17 from last year. This was driven by year-over-year margin expansion and higher sales which I will now review with you.

Our consolidated sales for the quarter were $310 million, about even with last quarter and up 19% year-over-year. The momentum that we talked about last quarter continued into this quarter with core sales growth of 18% compared to 17% last quarter. With the exception of our Energy segment, all segments again posted core sales gain, lead by 37% and 33% increases from Engineered Solutions and Industrial. Current year acquisitions added 4% to our top line growth but the weaker dollar cost us 3%. In addition to robust growth in Engineered Solutions and Industrial, another positive on the sales front in the quarter was a sequential improvement in year-over-year sales and our Energy segment. I'll provide more color on sales by segment in a few minutes.

The combination of the 19% overall sales growth with the restructuring-driven cost savings in the quarter resulted in a 64% increase in operating profit this quarter, excluding restructuring costs. Our consolidated operating profit margins were up 360 basis points year-over-year to 12.9%, but were down 50 basis points sequentially due to normal seasonality, caused by the European plant holiday shut downs in summer. Similar to last quarter, all segments except for Energy reported year-over-year operating profit margin expansion.

Now, I'll review our fourth quarter results by segment starting first with the Industrial segment. The Industrial segment had an outstanding fourth quarter with an acceleration of core sales growth from 20% in the third quarter to 33% in the fourth quarter. Notably, core sales were up sharply in all geographic regions. In addition to core sales growth in the base industrial tools productline, we also saw the integrated solutions or IS portion of the Industrial segment generate strong sales in order growth as well. Things also went well on the margin front. Industrial segment margins were up over 300 basis points year-over-year reflecting the benefit of cost restructuring actions and were relatively consistent with the high margins that we generated in quarter three.

Stepping away from the most recent quarter and looking back over the last two years, our single biggest surprise has been the speed and depth of the sales decline in Industrial in fiscal 2009 and then the sharp rebound we've seen over the last six months. We attribute this to the nature of the great recession; it hit globally and was the worst we've seen in our lifetime. It's difficult to predict how long the current rebound will continue, but it is a lot more fun scrambling to keep up with increased demand today than reacting to falling demand a few years back.

Turning now to our Energy segment, it too saw improving top line trends in the fourth quarter. While sales were still down year-over-year on a core basis, at minus 7%, this was an improvement from the 11% to 14% declines we've seen over the last four quarters. Refinery related demand was still weak in Europe and North America, but we saw more quoting activity in some other markets and continued growth in the emerging markets that provide optimism for fiscal 2011 that it will be better from a sales standpoint. Operating margins in Energy were up modestly from last quarter to 13.5%, but similar to last quarter were down year-over-year on account of the lower revenue base and unfavorable sales mix.

Turning now to Electrical. This segment also had a good quarter with year-over-year growth in both sales and margins. Core sales were up 7% year-over-year and benefited from strong demand from the marine and transformer customers. Demand in other end markets such as commercial construction and utilities continue to be weak, but appeared to stabilize at the low levels during the quarter while do-it-yourself retail volume was relatively flat year-over-year. On the margin front, the Electrical segment continues to enjoy the benefits of restructuring. Year-over-year, operating profit margins were up nearly 600 basis points. During the quarter, the last of the Electrical segment's major facility consolidations took place and was completed with the relocation of all Wisconsin operations into a single facility.

Our fourth and final segment is Engineered Solutions, which again reported some breath taking results. Fourth quarter core sales were up 37% and operating profit margins expanded nearly a thousand basis points. The majority of the top line growth came from the same auto, European, and China truck and RV markets that have driven a lot of the growth in the prior quarters; however, the ramp up in orders and sales that we're seeing now in off highway markets such as construction equipment, agriculture, material handling equipment, as well as defense, is pretty encouraging. Margins continue to be very robust, as I mentioned, up a thousand basis points from a year ago but down sequentially due to summer holiday plant shut downs in Europe and higher incentive compensation expense this quarter. We believe we'll continue to enjoy a nice tailwind in this segment in 2011 as growth in these vehicle markets and North American truck accelerates.

That's it for my prepared remarks on our sales and earnings. Now, I'll cover our free cash flow and financial position.

Cash flow in the fourth quarter was exceptionally strong and well ahead of our expectations, due to both the higher earnings and the fantastic job by our businesses in managing working capital. Our primary working capital metrics at fiscal year end were at their all-time best, including inventory and receivable quality. Fourth quarter free cash flow $48 million brought our full year to $145 million, and this marked the fourth consecutive year of free cash flow in the range of $150 million in our tenth consecutive year of free cash flow conversion in excess of net income. Our year-end debt to EBITDA leverage ratio stood at 1.7 times the lowest since before the start of the great recession back in 2008. We're in great shape from an availability standpoint as well with $40 million of booked cash in our entire $400 million bank revolver untapped.

I have one final topic with regard to capital structure that I'll be covering before turning it back to Bob. Our 2% convertible bonds will reach their first call and put date in November. Bondholders will have the ability to put the bonds back to us for cash at par in November. After that, they have additional put windows in November of 2013 and November of 2018. Today, the bonds are trading well above par, around 115, so we view it as highly unlikely that they would be put back to us in this quarter. Regarding our call right, starting in mid-November, we have the right to call the bonds back in for cash at par. In the event that we would call in the bonds, the bondholders would most likely convert the bonds to equity at that time to capture the excess fair value above par.

Given the fact that the bonds are essentially cash flow positive to us, due to certain tax features associated with them, and the fact that our total leverage is within our desired 1.5 to 2.5 times leverage zone, it's unlikely that we'll be calling the bonds in given Actuant's current stock price. From an earnings and EPS standpoint, there is no additional dilution, if any of the new shares of stock were issued for the bonds as the underlying shares have been included in our EPS shares outstanding calculation for years; so the bottom line is we expect the put date to come and go with no impact to our capitalization or earnings per share.

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

Thank you, Andy.

Let me start by spending a few minutes on our decision to exit the European Electrical business. Our original strategic rationale for the acquisitions of Comp in 2003 and Dresco in 2004 was that the large US big box retailers were going to consolidate and expand on a global basis, and we needed to establish a European presence to support and maintain our market position with them. Over the last seven years we've owned these businesses, this simply didn't happen, and they currently have no expressed interest in doing so. While Europe Electrical will be a great asset for someone looking for a strong European brand name with manufacturing and distribution expertise, this business does not meet our ROIC hurdles and it's time to move on and divest it. We are in the early stages of the sale process of this business and don't have much to add to our prepared remarks. The timing of this sale is quite dynamic and the financial impact is not expected to be material for Actuant in total.

As for the remainder of the Electrical segment, it is performing well and is pursuing a number of strategic growth alternatives that we're excited about. Electrical grew core sales in the last two quarters of 2010, and we expect growth in both sales and margins in 2011. We're looking at acquisitions that would add product, geographic, and market diversity to our current electrical platform.

Now let's turn to acquisitions. 2010 was somewhat disappointing to us in terms of the amount of capital deployed in acquisitions. We had been targeting approximately $100 million of acquisitions and we completed four transactions for $45 million. As we said many times in the past, being able to predict the timing of acquisitions is highly uncertain and 2010 was no exception; however, M&A activity is brisk and our acquisition funnel is full. In the fourth quarter, we passed on a number of acquisition opportunities that we looked at, either because we didn't like the valuation, didn't like the long term growth rates of the end markets, or didn't like the profitability of the business.

For us, it comes down to ROIC and sales growth. We have lots of acquisition ideas in all four segments ranging in deal size from $10 million to $50 million in deployed capital for tuck-ins and a few larger ones that expand our served markets. The bulk of our focus continues to be on the tuck-in acquisitions in the $25 million to $50 million range and our target for 2011 is to deploy about $100 million to $150 million on acquisitions, effectively spending our current year free cash flow.

In addition to seeking new acquisition opportunities, Actuant employees have been busy integrating the four deals we completed this year. We are very happy with the acquisitions we completed, namely Hydrotec, Hydrospex, Biach, and Selantic. All four were tuck-in acquisitions to existing strategies in both the Industrial and Energy segments and each has completed the 90 day AIM integration process. We are seeing early wins from some of our efforts to leverage customer relationships and footprint from these new acquisitions across the rest of Actuant and vice versa. We mentioned last quarter the combination of Enerpac and Hydrospex and Hydrotec was critical to securing the large Mamut order. We received a follow-on order from Mamut this quarter as well.

Biach has secured two large tool orders in the nuclear industry since we've acquired them, including one $1 million deal in Asia. Similarly, both Integrated Solutions in Cortland have been working with the Selantic management team to develop a heavy integrated, heavy lift, rope and sling system. I was able to visit Selantic in Norway last week and believe this platform will accelerate our heavy lift business globally. In summary, we are pleased with the strategic nature of these acquisitions and excited about the progress they are making in integrating them, particularly in our ability to grow.

Now, let's move to guidance for 2011. As a reminder any guidance needs to be taken into account that we've accounted for the European Electrical disposition, which meaningly impacts our previous sales guidance. Today, we endorsed our revised 2011 sales range of $1.225 billion to $1.275 billion and increased our guidance on EPS from continuing operations by $0.10 to $1.30 to $1.45 per share. The 2011 EPS guidance represents a 20% to 35% growth over 2010, continuing in the recovery trend that started in the second quarter of 2010. We've also increased our cash flow forecast, now expecting $130 million to $140 million in 2011, equating to a free cash flow conversion of about 130% of net income.

These changes in guidance reflect the combination of higher core sales growth due to the stronger momentum we saw in the fourth quarter, lower borrowing costs, and the lower effective tax rate, and to clarify, the increased guidance does not relate to the discontinuance of Europe Electrical. In fact, Europe Electrical is expected to be accretive to earnings in 2011 given the restructuring initiatives that they participated in in 2009 and 2010. For the first quarter, we expect sales guidance of $315 million to $325 million range and EPS of $0.29 to $0.34 a share. This contemplates consolidated core sales in the mid-teens. At the mid-point of this earnings range, this equates to EPS growth of over 50%.

Before getting into any expectations by segment, let me give you a few more assumptions that accompany our guidance. First, operating profit and EBITDA margins are expected to increase in each of our four segments next year benefiting the overall margins of Actuant by 75 to 125 basis points. As has been our practice in the past, our guidance does not contemplate any future acquisitions, a conservative assumption given my earlier comments about the acquisition funnel, and as Andy reviewed earlier, we are assuming that our 2% convertible bonds remain outstanding for the full year.

Now back to the full year guidance. Our overall sales growth includes a core sales growth of 6 % to 10% with approximately $40 million of carryover effect from acquisitions offset almost dollar for dollar by a same amount for currency. We expect our core sales will be stronger in the first half of the year and then moderate due to tougher comps in the back half. Looking at the individual segments in context of the 6% to 10% growth, we offer you the following color on core sales. We believe Industrial will be at or above the 6% to 10% consolidated range with first quarter, in particular, stronger and then growth moderating meaningfully as the year progresses due to the tougher comps. The global economic recovery continues for Enerpac and we've seen no signs of slowing orders at this point. Our focus on large integrated solutions projects continues. In fact, we're going to get some visibility from a major lifting project in the New York Bay Bridge in San Francisco in the next month.

Energy continues to be the hardest to predict in terms of guidance. There are a lot of variables at play in this segment, maintenance levels and intervals of turnarounds, capital spending on new programs, and seismic exploration activity. Given that the core sales is still negative in the fourth quarter, we believe this segment will generate a slower core growth rate than the Actuant overall, but moving positive for the year. Electrical will be following more of a North American trend than in previous guidance, given the European Electrical divestiture. We're expecting low single digit growth, below the consolidated levels, but still positive. This is in line with the most recent comments from the big box retailers we serve as well as the outlook for commercial construction and utility demand.

And finally Engineered Solutions. This segment has the biggest tail wind left from 2010. We expect this growth rate will moderate as the year progresses, but will still be better than the consolidated 6% to 10% core range average for Actuant. This is the result of higher production levels in Europe, truck, and auto as well as additional sales in emerging brick markets.

Our last piece on guidance relates to the assumption for currency. We have maintained our full year FX currency assumptions for the Euro and the pound of $1.25 and $1.45, respectively, against the dollar. We have updated the slide you saw last quarter to show the sales and impact of movements in these two currencies. Our guidance is shown in the green boxes. With the removal of Europe Electrical now from continuing operations, a one point move in both the Euro or the pound exchange rates now equates to $3 million in annual revenue.

Operator? That's it for my prepared remarks. I'd like to open it up for the question and answer session.

Thank you. (Operator Instructions).

Our first question coming from the line of Ann Duignan from JPMorgan. Please proceed with your question.

Good morning, guys. It's actually Greg Williams sitting in for Ann Duignan. Thanks for taking my questions.

Good morning.

Just a quick question on what your outlook is for the automotive business in Europe and North America, given that production expectations for 2010 have been revised down lately?

Yes, several years ago, we stopped giving specific guidance by the individual product lines of truck, auto, RV, et cetera, and I don't think we're going to start re-engaging in that practice, so I come back to the overall thing that we really have a good tail wind behind us from 2010 in the fourth quarter.

We have a couple of new convertibles going out, the Camaro is one and a couple other facelifts that are going on in Europe. Convertibles has always been a subset of automotive that hasn't always transcended dollar for dollar with production levels. Most of ours is in Europe again, not in the US, so I think we're comfortable with automotive within our guidance for the year.

And talking about other discretionary spending, you mentioned convertibles. How about RVs and marine?

I would say in general, some of the more discretionary markets that we're in, RV, marine have actually fared very well. RV has essentially doubled year-over-year for the full fiscal year from a production standpoint and we've talked about marine leading the pack within our Electrical segment as far as being a good grower, particularly in the aftermarket-side, which is where the vast majority of our revenues are in that space, so that really continued in the fourth quarter as well, no change.

Yes, I guess the way I'd say -- these -- is these came down during the recession as consumer confidence came down very hard, but have stabilized now probably for three or four quarters and we've seen more upside than downside; and we're not back to the prior peak, so we're not that hung up on the risks there. I think certainly in the marine space and with people like West Marine, that's been a great business for us.

Okay, great. Thanks guys.

Thank you.

Our next question coming from the line of Jim Lucas from Janney Montgomery Scott. Please proceed with your question.

Thanks, good morning.

Good morning, Jim.

First question, Energy.

In the prepared remarks, you talked about seeing some improvement in quoting activity and was wondering if you could expand a little bit on what exactly you're seeing on the quoting side? What pockets it is and is this a short-term or long term project activity?

Okay, let me put it all into context. I think we went into the quarter expecting this business to be minus 5 to plus 5 kind of neighborhood. It was worse than that. It was minus 7, so, marginally it's a little worse than we expected going into the fourth quarter. We don't really attribute that to a ton of things. I think probably the biggest single factor continues to be the refinery activity being down and that being the largest piece.

We had a major management meeting in Europe a week ago and we were at the Cortland facility. They're starting to see some more quoting activity and request for proposal in the seismic piece of the business. They're seeing a little more in Diver and Rover Umbilicals. We're seeing a little more in the heavy lift area, I talked about Selantic working with Cortland on some projects, so it certainly feels to us like we're off the bottom and that it's improved a little bit. I think the capping and the die down of some of the crisis going on in the Gulf will be helpful.

We stand by our statements in the past, so I think it will lead to more maintenance and more repair, more regulation associated with routine maintenance, and all of those things play well into both Hydratight and Cortland.

Okay and sticking on the theme of energy, with it still being relatively newer segment and getting the feel for the margin variation quarter to quarter, looking for that to get back to some of the more traditional high teen type margins that have been seen there, is it more a function of the top line or is it mix or is it combination?

It's certainly a combination, but I'll say it right now, the bigger piece, Jim, is the sales mix. I mean, we've seen lower revenues from a product sales standpoint than from a rental standpoint. As well rental margins are very high as you know, so that's unfavorably impacted the overall margins, but the volume certainly impacts it as well. We have taken costs out of this business but not enough to offset the impact that we're seeing from mix.

Just to add a little color to Andy. We have a 600 person technical sales force that really sells it. They basically are the ones who use the rental tools in most of the cases. We've downsized that group from probably closer to 700 over the last year as this recession has taken hold in Energy.

I think we've done that in a smart way. We did that based upon the performance evaluations of these employees, but you do get to a point where we just have critical talent that we can't afford to lose and so there's a little more of a fixed element.

What I'm saying there then is as the volume comes back, I would expect the margins to come back because that is a fixed cost that we're willing to spend today knowing that we're not getting exactly the ideal utilization of the technicians, but these are just important guys. A technician who's got offshore North Sea experience is just not something you can turn on a dime and find at a temporary agency, so we really are focused on that group, and I think this business more than others will be tied to volume for margins.

Okay, that's helpful.

And final question, on the integrated solutions business, can you remind us the margins for this business compared to the segment average, so as you're growing this project business going forward, how to think about the margin contribution?

Yes, the overall IT side, the industrial tools side traditionally has been around a 30% EBITDA margin. The integrated solutions is a mid-teens type business and certainly we have hopes and aspirations and goals here that we can take the margins up from that, but it's fundamentally different. It's a different business, so think about mid-teens in that business versus almost 2X that in the base industrial tool.

Okay, great. Thank you.

Thank you.

Our next question coming from the line of Wendy Caplan from SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. Good morning.

Good morning.

To follow-up on the integrated solutions question, are you operating it separate -- as a separate unit from the rest of industrial, specifically Enerpac? My question is based on, of course, we don't want to hurt the very high Enerpac margin. Can you help me understand that please?

Yes, it is operated as a separate unit, as a separate management team, a separate finance group. They're located in the Netherlands, in Europe on a global basis. There are places in the globe where salespeople and a small office -- if you went to Korea, for example, you would have Enerpac sales personnel that would probably represent both product lines. If there was a big project they then would grab some resources from that global organization to service.

They're very different businesses, Wendy. The integrated solutions side of the business is really an OEM business. We are selling right to bridge builders, construction companies, very large contractors. These people generally don't like to deal with distribution. They want to deal with the OEM, the technical aspects. The safety aspects of what they do are very important to them and they want to go to the horses mouth.

The rest of Enerpac goes through distribution and that is where you see the higher margins, so I think there's very little pollution that happens between those two channels, those two sales cycles. We have not really seen one affect the other.

Okay, well put. Thank you very much, Bob.

And can you just give us a quick update in terms of any pricing pressures that you're seeing in terms of your products or conversely, pricing opportunities? And any raw material issues that we should know about?

It was one of the more quieter quarters on record for all three of those, Wendy. We did not see a lot of raw material price inflation, and if we did see it, it was in things that were tied to contract, terms that we can pass on. We did not see a lot of pricing pressure from OEM's or competitive situations, but conversely, we haven't been successful in getting a lot of price increases from those same OEM's either.

It's where it normally is where they're looking for it to be flat or down and you have got to use your lead process to drive that down, so a pretty quiet quarter from a sourcing purchasing of commodities and also a quiet quarter from a pricing side.

And should we anticipate your saying a similar thing in the next quarter at this point, given what you know?

Well, we implemented a price increase in Enerpac that started September 1. There are other ones within the business that have also had price increases, but I don't expect those to be meaningful in terms of changing the margin picture of any of the segments.

Okay, thanks, Bob.

Thank you.

Our next question coming from the line of Jeff Hammond from KeyBanc Capital markets. Please proceed with your question.

Hi, good morning.

Good morning, Jeff.

So, just on the guidance revision, you raised the guidance by $0.10. It sounds like there were three things, core growth, tax rate, interest expense, so just from a housekeeping, what are you thinking about for a tax rate and how should we think about for interest expense for '11? And then maybe just speak to where you were most surprised, maybe it's obvious that it's Engineered Solutions and Industrial.

Sure.

Tax rates for fiscal '11, think about the 25% to 26% an effective rate from an interest expense standpoint, essentially all of our debt today being the convertible bonds and the high yield is fixed rate in nature, so it's pretty much nailed down already -- it's going to be around $30 million give or take $1 million.

Where do we, where is the upside or where does it come from relative to our guidance lift? Clearly, it is industrial and engineered solutions. That's where we've got much more momentum coming into the year than we originally anticipated. That's really the punchline.

Yes, if you remember last quarter, we were at a 17% core and we were saying how we thought it was going to moderate and that just didn't happen. We had a very strong quarter, even the Europe shut downs in truck were not nearly as dramatic as they've been in the past, so there just were a number of reasons why we've got that momentum carrying into September and resulted in the guidance raised.

It also I think signals with our leverage, with a 17% EBITDA margin, but more importantly the variable margin associated with additional sales you get a lot of leverage and you can make up a $0.05 to $0.10 pretty fast and that's what you saw in our guidance.

Okay, and then maybe this correlates well with your sales growth assumptions, but Bob, can you maybe run through by segment how you're thinking about profitability improvement or EBITDA margin improvement by segment relative to that 75 to 125 basis point band?

Well, I'm going to let Andy give the original color on that and I'll come behind, because I've been known to put my foot on my mouth in these kind of questions in the past.

I'm more than happy to give you a little bit of color without giving specifics.

What we said on the call here is that we're expecting improvement in all four segments, overall impact 75 to 125 basis points. Part of that is carry over benefit from restructuring actions, so where did that happen? Well, when you get more carry over benefit than in other areas, it's what you've heard, thus far its been Engineered Solutions, carry over that's very close to playing itself out. You've seen a number of quarters now with very nice margins there.

Electrical we still have another couple of quarters here before we anniversary the higher range side. I think you'll see a little bit more expansion coming out of those two in particular, a little bit less in the Enerpac or the Industrial side. Candidly, the restructuring actions there were less significant than we saw elsewhere.

That being said, if we get more volume through the industrial platform as we are expecting, the incremental margins there are quite high, so we do expect the mix from that segment to help the overall consolidated margins more so than the other segments.

I think Andy stated -- I think that the segment that probably is least impacted by sales volume to get to its margin improvement is electrical where we did consolidate into one facility. That didn't happen until later in 2010, so there will be incremental margin in that business without a lot of volume increase.

The other ones, you've got to get to that 6% to 10% core growth to get the results and as Andy appropriately said, the best place for that to happen is in Industrial. I talked earlier on Wendy's comment about the margins in Energy and we clearly need volume with that fixed direct sales force; and then engineered solutions, just great performance during 2010.

It's already at our long term rate or goal of mid-teens, 15% EBITDA margins. It's darn close to that already, and there are places within that segment that are not performing as well as others, so we're comfortable that all four have margin improvement, but I think with that, you're going to get about as much color as you're going to get out of us on that.

Okay, great. Then just final question.

Bob, you mentioned $100 million to $150 million of spend on acquisitions, in line with your free cash flow, but the pipeline sounds pretty full. What do you need to see -- is it just how things fall out? What would push you over that $100 million to $150 million and push the leverage a little bit?

Well, as Andy said our leverage is at 1.7 times. That includes the convert which is there, and as Andy talked about, there's a put call feature where you could reduce your leverage just by calling it in, so I guess I don't see a scenario that's really going to push the leverage outside of the range we're talking about.

I did mention in my prepared remarks there are a couple of bigger things in there, so if you clipped off something that was $100 million or north, obviously we would have to readjust that guidance. It's not our target area. Our target area is really that $25 million to $50 million, but there is a scenario there where if you did something bigger plus some of those tuck-in, you'd be north of that $150 million.

Okay, great. Thanks guys.

Thank you. Our next question coming from the line of Deane Dray from Citi Investment Research.

Good morning. This is Matt McConnell in for Deane.

Hi, Matt. How are you?

Good. To follow-up on the previous question, could you give us an indication of either markets or geographies where you could pursue targets above the $50 million range, so specifically that part of the pipeline what you could be looking at?

I don't think we're going to get into that specificity, Matt. What I would tell you is probably more than many times over the last three or four years, we have acquisition ideas for all four segments. I think in the past we've said we've been predominantly focused on industrial and energy, and I think during the recession we were almost uniquely focused on just industrial and energy. Today, there are opportunities at all four segments. But I don't think we want to get into which ones are the bigger segments.

I think we still have aspirations to book more and to leverage that Enerpac brand name, so, obviously, Industrial is a place that sees a lot of activity. I think the oil and gas market is very diverse that we serve. It always ends up having a lot of things in the funnel, but I don't think I want to get anymore specific than that.

Okay, understood.

And just broadly on the landscape, have you seen any change in the involvement of private equity bidders over the last four quarters or any other meaningful change in seller expectations or any other changes on the margin we should be aware of?

Yes, I think they're back. I wouldn't say they are back with a vengeance but they are back. One of the acquisitions that we took a pass on this quarter was a valuation issue and a private equity group had a staple financing, got a staple financing, allowed them to bid, so we have seen them back, but happily, I think you're not seeing monster staples.

You're not seeing six and seven times leverage staples that existed back in '07 and '08, so as long as the staples stay under control, we're at a little bit of a disadvantage' because we're not willing to leverage it 4 times. But, we have other synergies that tend to drive more of an equal footing in that negotiation process, so they are clearly back. It's just I wouldn't say they are back with a vengeance.

Okay, great. Thanks very much.

Thank you.

Our next question coming from the line of Ajay Kejriwal from FBR Capital Markets. Please proceed with your question.

Good morning, thank you.

Nice performance in Enerpac and it looks like you have a good problem there keeping up with demand, so maybe if you can provide any color on what you're doing in terms of production capacity, have you started hiring, is that potentially -- could that potentially be an issue for you trying to keep up with demand? Anything we should be knowing?

Yes, I think we have been hiring. A lot of that product gets assembled in China and I think we've added resources there. Probably the bigger challenge than the assembly labor within our factory is what's going on with the supplier base. And a lot of Enerpac, if you think about Enerpac, a lot of those cylinders really have to be cast and then machined before they show up at our assembly; and the lead time there is not measured in days like some of our other businesses, so we have been adding, poring a lot of effort into ramping up that production, particularly of what we call top products, the top 200 SKU's within Enerpac. But with the volume we've had, we've been chasing, its been a nice problem to have, but we've been chasing to try to get our inventory levels up there.

We've done a little more air ship than we'd like and that's a drag to earnings but something we do because the incremental margins and the needs of customers just overweigh the fact we can't put it on a five week vote. So, again, I think these are all manageable issues, but its been a challenge and our purchasing people are burning the midnight oil trying to keep all that together and aligned. It's really not just Enerpac. The same thing is existing in power pack or with the convertible top and the truck, same issues.

Good.

And I know a lot of what you sell is through distribution on Enerpac, but curious to hear your thoughts on what your -- any inventory restocking that could be going on, and then maybe any color on end markets or geographies that are doing particularly well for Enerpac?

Yes, the distribution channel doesn't hold a great deal of inventory, so we don't think there's been a lot of inventory restocking in this number, but it's hard for us to put our arms around that with 2,000 independent distributors; and they aren't tied together on any system or anything, so you really don't get visibility to how much restocking. You just get anecdotal information and our view is it's not much.

From a regional point of view, very broad based, strong everywhere. Strong in all the markets. Asia being the strongest, but strong in Europe and strong in the US.

In particular, I'd say the biggest noticeable change from Q3 to Q4 was how Europe really ramped up in Q4. There was a noticeable shift as the quarter rolled out, so we saw Europe demand in industrial strengthen.

And some of that is IS, too. We know we shipped something like 20% of the Mamut of revenue was recognized, so we know some of that was driven by some of the big IS projects.

Got it. Maybe one more on Enerpac.

So when I think about your outlook for next year, looking at above that 6% to 10% range, organically, and then first half strong, but second half maybe a slowdown, so how should I think about second half? I know you're doing a lot in terms of integrated solutions and other acquisitions, so would you be growing above IP 7% to 8% the second half or would it be a bigger slowdown?

I think our guidance is more conservative than that. It wouldn't be above 7% to 8% in the back half of the year. The comparables are going to be pretty tough. You just finished a couple of quarters in the 30s and very difficult to say you're going to stay up in that kind of range with Enerpac.

If it happens we'll all be high fiving each other, but I think our guidance is more conservative than that, so it's going to start out quite strong, double digits, mid-teens at least in the first quarter and probably the first half and then start moderating, pretty significantly, and that's what the guidance assumes.

It assumes mid-teens in the first quarter?

Yes, the total Company in Enerpac will be higher than that.

Consolidated core first quarter probably mid-teens we expect Enerpac to be better than that.

Yes, but my question was--?

What happened it was it was the second quarter when we noticed really January, February when we noticed a noticeable shift within Enerpac demand while we were down I believe, 3% or 7% in the second quarter for industrial core sales. Much stronger back half of that quarter versus first half, so I think we've got another quarter here that should have very nice growth in Enerpac and then it will moderate pretty noticeably, pretty meaningfully already in the back half of the second quarter.

Ajay, we're going to move on to the next question, okay?

Thank you.

Our next question coming from the line of Jamie Sullivan from RBC Capital Markets. Please proceed to your question.

Good morning. This is [Michael Schlitzbi] sitting in for Jamie today. How are you?

Doing well, thank you.

Most of my questions have been answered. Just have one or two more.

Just first question is about your inventories. There was obviously a bit of a drop between Q3 and Q4. You had mentioned there was some issues with keeping up with demand in the Industrial segment. Would you tell us maybe perhaps just how much of the drop off of about $15 million in inventories was due to just regular seasonality and how much was due to surprise on the upside from demand?

Sure.

I think one issue that your question raises here, just to state what's happened. The balance sheets that are attached to the press release, the 8/31/09 data is the historical balance sheet. We have not restated that balance sheet for the decision to divest the European electrical business which is GAAP. That's the way it says.

When you look at fiscal 2010, it has been removed so the big reduction that you're seeing there really is driven by the movement of COP out of the balance sheet, so it's an apples and oranges comparison. Our inventory sans that -- if you pull that out, our inventory grew, I'm thinking somewhere in the $3 million to $7 million -- it grew $5 million, actually Karen has got the number here. It grew about $4 million in the quarter on a core basis, if you do like-for-like type things,

Enerpac we've been able to hold the inventory there. I think the -- so it's not like we're having issues or that sort of thing. We don't want to leave you with that impression. Now would be a great time to be able to throw an extra $3 million or $4 million of inventory on the shelf with that business, so it is not probably what you might have thought when you look at our balance sheet.

Got it. Got it. Thank you.

And then speaking of inventories again, what are you seeing as far as US DIY retailers? Are they increasing their inventories in the last few months or do you find them trying to keep things flat?

Well, because of the low purchase price nature of the tools and supplies nature of our electrical business with them, a lot of things under $1.00 in the aisle, we don't -- we are not an area that they target for either ramp ups or specials or promotions or Christmas or Father's Day. It's not an aisle that gets shopped for promotional items, so we don't see a lot of spiking and others.

Basically, they keep one or two boxes on supply in the stores and then immediately as the techs become empty they order it back from their warehouse or directly from us, so that is a generalization. It doesn't work for every single customer, but, in general, I would tell you no change in our stocking policies. I wouldn't say any of our core 7% growth had anything to do with an inventory change in policy.

Got you. Thanks, and if I could just ask one more here.

Anything you're seeing in September here as far as are any segments outperforming others here or anything outperforming your expectations when you first started the quarter about a month ago?

I think the overall trend I would say is pretty similar to what we saw in the fourth quarter. We haven't even closed the books yet for September, but what we're hearing is pretty consistent with the fourth quarter numbers.

Andy and I just agreed on the guidance a week ago, so there hasn't been any change in the week. Let's put it that way.

Thank you.

Our next question coming from the line of Chris Weltzer from Robert W. Baird. Please proceed with your question.

Good morning, guys.

Good morning.

Wondering if you could quantify a little bit the impact, the EPS impact you had from European electrical built into your guidance previously for fiscal '11?

Yes, I think when you look at European Electrical year-to-year, look at -- and I'll do it more on an operating profit basis as opposed to an EPS standpoint, excluding restructuring, we saw it going from a modest operating profit drag to a modest operating profit gain, so we're talking maybe minus $2 million or $3 million to plus $2 million or $3 million, year-to-year, so it was that kind of magnitude. It wasn't a huge rebound.

But just to add to that, and as we announced the discontinuance last week, everybody was attributing part of 2011 to not having it in there, from a ROIC point of view, that's absolutely true. Our ROIC will be better, but from an absolute amount it was contributing to the EPS in 2011 and you're going to, I think you're going to see that provided the numbers stated, you're going to see that in discontinued flowing through the financials. So there's going to be visibility to that, but we have, as Andy said, we had incremental improvement in that business, so the increase in guidance and the change in guidance had nothing to do with Europe Electrical.

Pulling them out was actually a headwind to our old guidance, that is probably a summary. That's about it, in summary.

Got it. Okay

What changed on the tax rate side? If I'm remembering, you guys we're talking about something in the like 27% range previously, what's changed on that front?

Just tax planning initiatives going on, that sort of thing.

Okay.

And then last question, when you look at your oil and gas customers, now that the well is shut in and now that you see this morning some of the things that BP is doing, have their attitudes changed at all about -- are they still playing the wait and see what new regulations may come or are you seeing people start to try to get out in front of this a little bit, have better maintenance standards in place before the government gets around to mandating them? Is it a function of -- have you seen any visibility of 2011 maintenance budgets at this point?

No, and we're probably a quarter early. A lot of the maintenance is appropriated around annual planning and so that what will happen in the fourth quarter as locations, as assets are submitting their plans to the parent company. So BP, a location in Kazakhstan is putting its maintenance budget in front of the corporate groups -- that would be an example. So, I think we're a quarter away from having good understanding of what they're thinking about for 2011.

Everything that we've gotten since the cap has happened has been anecdotal. I wouldn't say we've seen any change in behavior other than maybe some of my earlier comments where we were at Cortland and there was a little more quote activity, but I wouldn't attribute that to any breakthrough transformational change in their thinking.

Thank you.

Our last question coming from the line of Charlie Brady from BMO Capital Markets. Please proceed with your question.

Thanks. Good morning.

Hi, Charlie.

Bob, have you looked into your supplier base? I'm guessing you're starting to ramp up and see some of the core sales growth from the bottom particularly this past quarter. As you've gone through your supply base have you seen any surprise in terms of some of them struggling or their ability to keep up with your demand that you're pulling in from them? So how does that look today going forward into next year?

Well, the way I would answer that, Charlie, we were really paying attention to our supplier base when we were down 30%, making sure that we communicated with them, making sure that there was capacity not being permanently taken out of the system, but rather mothballed and that they could get back up and running. And so, I think, a lot of our pre-planning has paid dividends, meaning we -- if there were issues associated with capacity we dealt with them when the sales were down, not during this recovery.

I would say that as a general rule and not just within the Industrial segment, some of our Chinese suppliers really pulled back, as did the rest of China during the slowdown here, and they're very cautious about adding a lot of fixed costs back into the system as are we; so they're trying to say is this real or not during this process. We're saying go, go, go, go, so there's some convincing that has had to go on that way and that's pretty consistent with what we hear from peers when we talk to them as well.

But again we're not to the prior peak, so it's not like we're asking them to build a new building. We're just saying, do you got the employees to stay up with today's reality versus six months ago?

Great. Thanks.

Thank you.

Ms. Bauer, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Just in closing I want to thank you for joining us on the call today. As a reminder we're going to be hosting our annual Investor Day on October 12, in New York City. We hope you'll be able to participate in that event. If you need information on that, send me an e-mail or give me a call. If you have any follow-up questions on today's call, we'll be around the balance of the day to answer those.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.