Enerpac Tool Group Corp (EPAC) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's first-quarter fiscal 2011 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, Thursday, December 16, 2010.

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

Good morning, and welcome to Actuant's first-quarter fiscal 2011 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer, Mark Goldstein, Actuant's Chief Operating 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 filing.

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

Thank you, Karen, and thanks to each of you for joining us today on our first-quarter call. I'm pleased with our fast start for the year, essentially coming together as we expected, with strong core growth, good margin improvement, and EPS at the high end of our range.

There are four highlights I want to call out before turning it over to Andy. First, our Energy segment core turned positive, posting a 4% year-over-year increase. So now Energy joins the other three segments in positive core sales territory, with both Engineered Solutions and Industrial segments displaying strong double digit growth rates.

Margins increased as expected, with the impact of higher volumes, restructuring benefits, and positive segment mix equating to 230 basis points of year-over-year operating profit margins. We delivered above forecast EPS, up 71% year-over-year, excluding last year's restructuring costs.

And last but certainly not least, we received all necessary approvals, and closed on the Mastervolt acquisition last week. We are excited about this asset, and we'll talk more about it later in the strategy portion of the call.

With that, I will turn it over to Andy to go through the numbers in depth for the first quarter.

Thank you, Bob, and good morning, everyone. Similar to last quarter, all of my comments will be covering continuing operations only, and exclude our European Electrical business, which is held for sale. We were happy with the way the first quarter came together on a number of different fronts, and I will try to provide some color on this from our vantage point.

Sales of $318 million for the quarter were pretty much in the middle of our guidance range, and were up 17% year-over-year. I will dissect and provide more color on them in a few minutes. Our first-quarter EPS of $0.36 was above our guidance range, and benefited from favorable margins, and about $0.02 a share from a lower effective tax rate. We're projecting our effective income tax rate to be in the 22% range for the entire year, so we'll continue to benefit from that going forward.

During the quarter, we increased our year-over-year operating profit margins, despite about $0.01 a share headwind from restructuring and acquisition-related costs. Now, the $0.36 a share of EPS was up 71% from the $0.21 in the prior year, with the prior year excluding restructuring costs. So we're off to a strong start toward our current year EPS targets. On a trailing basis, we continue to make ground on the EPS front, with our last 12-month EPS increasing during the quarter from $1.08 to $1.23.

Free cash flow for the quarter was on target, but lower than in prior quarters. This results from the cash used to fund the approximate $20 million of prior year bonus payments that were made in November that we had discussed on our last earnings call. We're now projecting our full-year free cash flow to be close to $2 a share.

Now let's start dissecting our first-quarter results. Our consolidated sales were $318 million, which is up $8 million sequentially, and 17% above the prior year. Core sales were up 14%, with all four of our segments reporting growth, including the Energy segment for the first time since the third quarter of fiscal 2009. Demand in most end markets was strong, especially those served by the Industrial and Engineered Solutions segments, which each grew 22% core in the quarter.

In addition to the core growth, our consolidated sales grew 5% from the benefit of carry-over from prior year acquisitions, and that was partially offset by a 2% foreign currency headwind. The combination of the overall sales growth, and the 230 basis points of operating profit and margin expansion resulted in a 41% increase in operating profit above the first quarter of the prior year, again, excluding prior year restructuring costs.

Consolidated operating profit margins in the first quarter were 13.1%, roughly in line with what we reported in each of the last two quarters. They continue to benefit from cost reductions generated during our restructuring actions from 2009 and 2010. We will be anniversarying the completion of many of those in the second quarter, so our year-over-year margin expansion will moderate as the year progresses.

One data point to share with you on cost reductions is whether last year's headcount reductions are sticking with the rebound in sales. With core sales up 14% year-over-year of the last quarter, we only had -- excuse me, we had a 5% reduction in headcount during the same period, so we're getting significantly improved productivity, which is driving the margin expansion. This is especially evident at the gross profit line, where the first quarter gross profit margin of 38.3% was the highest we've seen in the last four years.

Now I'll review first-quarter results for each of our segments, starting first with our Industrial segment. Industrial had a good quarter again, with strong demand over the prior year. Core sales grew 22%, and orders outpaced those sales in the quarter. In addition to core sales, prior year acquisitions added 13% to the top line, while foreign currency was a 1% headwind. In total, segment sales grew an impressive 34% over the prior year.

Similar to what we saw in the fourth quarter, demand was strong in all geographic regions. This additional volume helped drive year-over-year margin expansion, with Industrial operating profit margins up nearly 200 basis points year-over-year. It also drove great sales mix for Actuant in total, contributing to the consolidated margin expansion. We are optimistic that Industrial will continue to enjoy strong demand as the year progresses, but the core sales growth and margin expansion will likely moderate, on account of having anniversaried the easiest comps.

Turning now to our Energy segment, we were encouraged by the 4% year-over-year core sales growth in the first quarter. As you'll recall from our last quarterly earnings call, we expected core growth to turn positive in the first half of the year, and we were happy to see that it happened right out of the blocks. Quoting activity has picked up for seismic and turn-around services, oil prices have moved to around $90 a barrel, and other positive signs are developing, so we are optimistic that core sales will continue to be positive, and improve in the future.

Beyond the core growth, last year's acquisitions added 8% to the top line, partially offset by a 2% currency headwind. Margins were down year-over-year on a tough comparable, but they're the highest we've seen in the segment in the last four quarters. Sequentially, sales and margins will decline in the second quarter, due to seasonal industry maintenance trend, but we expect to continue to see year-over-year improvement for the balance of the year.

Moving on to our third segment, which is Electrical, core sales there increased 2% year-over-year, benefiting from higher OEM demand. We saw softening during the quarter from the do-it-yourself market and industrial markets. Electrical segment margins were down in the first quarter on account of lower sequential volume, some expedited air freight costs from our China suppliers, as well as growth and innovation expenses during the quarter.

The retail businesses within Electrical went live on a new ERP system during the quarter, wrapping up one more part of our restructuring. We will also be completing the final warehouse consolidation in the second quarter, which will be the last piece of the restructuring program for this segment. We expect margins to improve from first-quarter levels as the year progresses.

Now the highlight for the Electrical segment during the quarter was the completion of the Mastervolt acquisition last week. We will provide more color and detail on that later in the call, as well as an update on the status of our divestiture of the European Electrical business.

Our fourth and final second segment is Engineered Solutions, which at the risk of sounding like a broken record, again, had a great quarter. Core sales were up 22% year-over-year, and operating profit margins were up 700 basis points. We expect continued top line growth, given the strong momentum we're seeing in global truck, off highway, and construction equipment markets. However, future core growth percentages will not be quite as heady as what we have seen in the last few quarters, on account of anniversarying the easiest comps from this vehicle cycle.

Margins in the segment are very strong, and reflect the continued benefit of restructuring savings, as well as the additional volume in our plants. We are encouraged by the robust truck industry, and other vehicle forecasts we are seeing from a number of OEMs covering the next several years, and we expect this segment to continue to have a nice tailwind for 2011 and beyond. So that's it for my prepared remarks on our sales and earnings.

Now I will cover cash flow and capital structure, starting first with our cash flow. As I mentioned earlier, the timing of last year's bonus payouts, and the fact there were none earned in 2009 and paid out in the first quarter of 2010, significantly impacted the year-over-year comparison of first-quarter cash flows. Additionally, during the quarter we increased our working capital on higher receivables and inventory, reflecting the solid growth we just reviewed. Year-over-year, however, our primary working capital metrics showed solid improvement, so we're comfortable with where we're at.

First-quarter free cash flow was about $6 million, reflecting the $16 million working capital build, and about $22 million of cash used in the bonus payments I just discussed. However, for the full year, we actually increased our free cash flow guidance by $10 million to now a new range of $140 million to $150 million. Our quarter end net debt to EBITDA leverage ratio declined to 1.6 times, which is the lowest we've seen in quite a while. Prior to drawing down $150 million on our $400 million bank revolver to fund the Mastervolt acquisition, we had nothing borrowed at all under this credit line.

I wanted to provide a bit of an update on our $118 million of outstanding convertible bonds. Holders of these bonds had their first contractual window to put the bonds back to us at par in the month of November. Only $34,000 of the $118 million of outstanding bonds were put back to Actuant, which I guess isn't surprising, given the bonds were trading at about 120% of par.

So we have a lot of flexibility going forward with respect to these convertible bonds. We can sit tight and do nothing with them, or alternatively, force conversion of the bonds by calling them in, in the event we would ever want to reduce our book debt leverage by about a half a turn of EBITDA. The bondholders don't have another put window until fiscal 2014. This, coupled with strong current year free cash flow forecasts, and about $250 million of availability under our revolver, leaves us in good shape on our capital structure.

So that's it for my prepared remarks today. I will turn the line back over to Bob.

Thanks, Andy. We've now delivered four consecutive quarters of EPS growth, and completed our first sizeable acquisition since the fall of 2008. This return to predictability at Actuant has given us confidence to step up our growth initiatives, first with the growth and innovation program we highlighted for you at the annual investor's conference in October, and more recently the acquisition of Mastervolt. We consider Mastervolt a platform acquisition, as opposed to a tuck-in, because we acquired it with the intention of growing it both organically and through future tuck-in acquisitions, similar to Hydratight joint integrity strategy that we started in 2005, and the more recent Cortland acquisition in 2008.

Given the Mastervolt acquisition, we've already hit our $100 million to $150 million acquisition target for the year. It was a busy quarter from the M&A front, and we did not proceed on a handful of acquisition funnel ideas, this due to a combination of strategic fit, market growth rates, and valuation. My guidance to you is that we will still look to do $100 million to $150 million of tuck-in acquisitions over the next 12 months. Splitting that between fiscal 2011 and fiscal 2012, is not something I am going to predict. As Andy mentioned earlier, our debt leverage is well within our targeted 1.5 to 2.5 debt to EBITDA ratio, so we have plenty of capacity for acquisitions.

Now let's talk about Mastervolt. This is an asset that has been in our pipeline for a number of years. We were initially attracted to it due to its marine and harsh environment electrical products, and the European channel expertise with marine.

Their team was just embarking on the solar strategy, using their inverter technology to penetrate a niche of the fast growing market. And they've executed well, growing their solar business from virtually nothing to about $60 million, or two-thirds of the business today. Mastervolt has focused on on-grid applications in the zero to 10 KVA small inverter space, mostly homes and small commercial applications. At the same time, they've continued to invest in their marine technology, with electric propulsion systems and other new product launches. This marine business comprises the other one-third of Mastervolt today.

Let me spend a few minutes explaining Mastervolt's main product, the inverter. An inverter is essentially the brains of a solar photovoltaric system, converting DC power generated by the panels to usable AC current. The inverter typically is 10% to 15% of the cost of the overall PV system, much less than the solar panels themselves, but high-efficiency, high-yield inverters are critical to the performance of the entire solar system.

Similar to many types of alternative energy markets, government subsidies play an important part of the solar market today, and these subsidies encourage investment in systems at a time when economics don't stand on their own. In solar, the subsidies are called feed-in tariffs. The point at which the cost of electricity generated by the solar system is similar to that of a conventional electrical system is called grid parity. As solar systems become more accepted and closer to grid parity, governments reduce subsidies. This usually causes providers in the supply chain to reduce costs, and become more cost competitive with conventional electrical systems. These price reductions are then offset by cost reductions at suppliers as production increases.

As such, solar results can be kind of lumpy. The periods of rapid growth, followed by moderation, and then other spurts of growth. Despite the possibility of short term volatility, the long term solar industry forecasts are very attractive. Today, 80% of the world's installed solar base is in Europe, where Mastervolt is concentrated. In addition to growing in Europe, we intend to help Mastervolt grow geographically, where the highest industry growth is expected over the next decade.

There are a lot of reasons we like Mastervolt, but let me try to summarize them down to a couple here. First, as I've already discussed, solar is a growth market. It's a big market, and there's plenty of niches and tuck-in acquisition opportunities. Second, it fits well into our asset-light business model, as Mastervolt outsources all manufacturing to contract manufacturers in low-cost countries. Third, it has a proven management team. Mastervolt's CEO, Paul Kenninck, will be leading our global marine and solar business, and will become part of Actuant's leadership team.

Fourth, it brings us a respected brand name in marine, and European distribution network that will be very complementary to our existing marine electrical business. And last but not least, the financial metrics are quite attractive, with EBITDA margins around ATU's consolidated levels, strong growth prospects, and a valuation of less than eight times trailing EBITDA that we've paid for most of our deals, the transaction is accretive to 2011, and should provide a great ROIC for Actuant going forward.

We are really also very excited about how Mastervolt repositions our Electrical segment. We view it as transformational. This acquisition, coupled with the expected divestiture of European Electrical, will result in an Electrical portfolio with much higher growth margin and technology profile.

Now let me briefly update you on our European Electrical divestiture. The process is proceeding as planned, with management presentations to interested parties over the last few weeks. We have received good interest, and are in the middle of the process, and are optimistic we'll complete it during this fiscal year.

Now let's move to guidance. With a strong start in the first quarter, solid momentum in our end markets, a weaker than expected US dollar for the year, a lower effective tax rate, and the accretive acquisition, we are raising guidance. For the full year sales guidance, we're now predicting $1.375 billion to $1.425 billion, reflecting core sales growth estimate in the upper half of our previous 6% to 10% range, coupled with the Mastervolt acquisition.

In terms of EPS, we've raised our guidance by $0.15 a share for the year, now to $1.45 to $1.60 -- $1.45 to $1.60, sorry, a year-over-year increase of 40% at the midpoint. Our forecasted free cash flow is expected to be 10 -- to increase by $10 million to be revised to the $140 million to $150 million range that Andy mentioned earlier, well in excess of net income.

For the second quarter, we will have our usual sequential seasonal slowdown impacting a number of our businesses, caused by the upcoming holidays, and a short month in February, both of which fall in our second quarter. Winter months are seasonably slower for many Actuant businesses, and this is also the case with Mastervolt. We are endorsing a second-quarter sales guidance range of $325 million to $335 million, and EPS of $0.25 to $0.30 a share, representing a robust 30% year-over-year EPS improvement at the midpoint.

Both our full year and second-quarter guidance assumes today's interest rate and foreign currency rate environments, and an effective tax rate of around 22%. As always, we have not included future acquisitions in this guidance.

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

Thank you. (Operator Instructions). Our first question is from the line of Wendy Caplan with SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. Good morning.

Good morning.

Hi. Given that we always start with how's Enerpac, I'd like to ask that question, but more specifically, if you could give us some sense of the outlook for Enerpac as we go over the next -- through the end of this fiscal year. And given that IS mix is somewhat negative, and puts a lid on margin, and the fact that -- as I think it's growing faster than Enerpac. Can you address that mix issue, and whether we can overcome it going forward?

Yes, why don't I start, Andy, and you follow. As Andy's remarks went, and I think it's where we are going to stay, is just, we had orders faster than sales for the quarter. We view that as a very important barometer, very broad based across the businesses. IS grew faster than the base Enerpac, so we were feeling very good about the IS acquisitions, and some of those new programs. You see one get announced today. We got a little press on the wire with the Bay Bridge project. So I think that is where we're at. I think we're feeling very optimistic, and very broad based, so don't see anything that is giving us any alarms in ordering patterns.

IS margins are lower than Enerpac's. That's something that's been in existence. I think over time, those will close. I don't know if they will ever get to the upper 20%s that the Enerpac base business will get to, but I think they'll improve. But Wendy, we're talking about longer timeframes than quarters. It will take a concerted effort over years to do that. They are not bad, they are great from a ROIC, from what we paid for it, but they are not best in class like the distribution margins of Enerpac.

In terms of the sales assumptions going forward for the year, we had laid out last quarter our expectation that, kind of for the full year, looking at 7% to 12% growth, core growth for the segment. We are sticking with that. We think it will probably be in the upper end of that range, as opposed to the lower end, given the way the first quarter came out.

The only other comment I will make as well is, the IS business has a very big second quarter coming at it with a lot of shipments going out. That is going to impact margins in that segment in the second quarter, as well as within Industrial and overall as well. So, that's just another sound bite there.

Okay. And finally, Bob, kind of overall, you sound very optimistic about this fiscal year. Can you just high -- I know you mentioned four things that you found positive in the quarter. What are the two or three things that make you very optimistic about fiscal 2011?

Well, I think number one, Wendy, just the sheer of -- numbers that we put up in the first quarter, and we're endorsing for the second quarter. It's a front-end loaded year. So it's easy to be optimistic when you've just put a quarter of the points on the board in the first quarter. So, I guess that would be the first thing.

The second is just the fact that, I don't think we're -- I don't feel pressured by any one thing. I think we have multiple good things going on. I think we have an acquisition that we really are excited about, that I think is going to add some accretion to the business. I think Energy turning positive was a big plus. We already talked about the Enerpac. The truck business, anything you read from our big truck suppliers, just doesn't look like 2011 is going to be a hard year to keep going. And again, our 2011 ends in August, so we're already four months into the year. So it's kind of easy to be positive when you're already that far into the year.

Anything you could add, Andy?

I think the other thing here is, I'll just say, management attention on growth and not costs. I mean, a year ago, we were stick-handling construction projects through and through and through. And today, much more of our time is spent on growth investments, people development, adding the right people to the organization to support growth and innovation, and acquisitions as well. We've looked at a lot more in the last six, nine months than we did the prior year.

It's really a good point. I mean, with this diverse portfolio, you never have everything -- every end market rolling in the same direction. But just the sheer volume of what Mark and I see every month from the businesses, you just have a great batting average of positives versus issues that you're navigating on the negative. And that gives you a lot of confidence, too.

More going right than going wrong? I guess that's the message.

Right. And it's substantially more than break-even on that, you know?

Okay. Thank you very much.

Thank you. Our next question is from the line of Robert Barry with UBS. Please proceed with your question.

Hi, guys. Good morning.

Good morning.

Thanks for taking the question. First on Energy, I was wondering, if you look within the Energy segment at the principal end markets, the capital projects, a refinery MRO, an oil and gas MRO, I was wondering if you could give us a little more color on what the outlook is in those particular end markets. I know you called out seismic, but just curious about these others.

Sure, I will start off, and Bob will come behind me. I think what we're seeing there is a mix. We are seeing some more capital projects out there. We're hearing of more workover boats, more ROVs, certainly seismic, more activity from that standpoint. There's a lot more quoting on the service work in the last 60 days here, as well. We're seeing it pretty much across the board from a geographic standpoint. A lot of it in emerging markets, that part of it continues as well.

Refineries, I would say not quite as positive, but certainly has not gotten worse than where it was at before. I think we've just -- we've had low refinery numbers in our numbers now for about a year, so we're up against a little bit easier comps, but there's absolutely, I would say, more of a kick in step, I guess, of the Energy guys right now, as far as the quoting that's going on. So just overall increased activity.

Yes, the industry just took a positive bias once the BP thing got capped. Petrobras comes out with a big IPO. GE is doing deals in oil. Oil at $90, Energy needs starting to move up a little bit, demand starting to move up. It just, it's -- all of that has just created a positive bias. And not every particular perfect area, but with our MRO area, it just ends up touching so many different parts that the positive bias has moved it from the negative 7 to the plus 4 for the quarter. And we think that will build as the year goes along.

Got you. And then, on the guidance you mentioned, I guess EPS went up -- EPS guidance about $0.15. Could you break that down into how much of the delta is the tax rate, Mastervolt, what you're seeing on the revenue front, and what you're seeing on the margin front?

Yes, I think you can kind of do the math on the tax rate. What our prior guidance was, was about a 25% tax rate, and we're saying now it's going to be about 22%. So, you can do the math there. It's coming out to $0.04 or $0.05. The currency we gave you last quarter, essentially, we had laid out a graph what a move was, that's about $0.03. And the balance of it is Mastervolt, and the overall outlook for the business. Not really going to provide a split on those two.

Okay, and then just the last question on the Electrical segment, and the margins there -- could you give us some sense of how we should think about how those should track? I mean, when I look back over the past, really, eight or 12 quarters, there's a lot of variety there in terms of which is the strong quarter, which is the weak. Often, there's one weak quarter and three strong, but it's always a different one. I mean, should we think about something in the 7%, 8% range, or the 9%? I mean, any color you could provide there would be helpful.

Yes, probably not going to give you a specific number. I would just say, I would agree that this is probably the disappointing number from our standpoint for the quarter. Margins were not where we needed to be. We had some supply chain issues. We paid way, way too much freight -- air freight getting stuff in here. We had -- we certainly had some increased expenses related to growth and innovation, to just the initial launch of a new computer system as well.

So I expect going forward, this thing is going to improve, especially once we get beyond Q2, because again, we have that seasonal impact hitting us in Q2. We do have a marine business out there. There's not that much that happens in the middle of winter in marine in a lot of different areas. So, you'll see improvement. My expectation is, you have seen the low water mark for the year. You'll see it pop up. But it definitely was kind of a disappointment for us.

Variety is a good term for it. I mean, we weren't happy. And we'll do better than that. We showed good performance last year, as Andy said, number of things that were quarterly specific here. We did have some duplicate warehouse stuff that we knew the first quarter was going to be in.

So, we can see the light back to the double digit EBITDAs that we've broadcast to you guys over time. We still think it's going to be a couple hundred basis point improvement over the year as we rumble along. And we built a little hole in the first quarter we have to dig out of. But it's not anything that, to Mark or I, looks like anything more than specific discrete events.

Okay, great, thank you.

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

Thank you. Good morning.

Good morning.

Hi, Ajay. How are you?

Good. Just following up on that Electrical question, would it be possible to maybe quantify some of those supply chain costs and growth initiatives? Was it sizable? Any numbers you can throw around, that would be helpful.

Well, it was sizeable because our margins were down considerably. I really don't want to map out what the specific items that are out there. But clearly, it was several hundred basis points. You can just see from last quarter (multiple speakers).

Good, and so as we think about the trajectory of Electrical margins, and I'm thinking ex Mastervolt. Mastervolt, I mean, obviously when it comes to blended margins, it will be different, but ex Mastervolt, how should we be thinking exiting the year? And Bob, I know you mentioned double digit at some point, but is it close to double digit sometime late next year, or is it 2012?

I'm talking EBITDA, Andy, so give whatever you're comfortable --.

Yes. I think the EBITDA, our expectations will be double digit.

It has got to be. (inaudible) has got to be.

Sure, in the back half.

Good. And then a minutiae question on the tax rate, so your tax rate going down, maybe help us with any color you can. We are seeing that some other industrial companies' tax rate going up next year. So, is it tax planning initiatives, or is there any discrete items that's helping?

It was clean from that standpoint. It's tax planning. Part of it is where our profits are as well, going forward. A little bit more international or offshore income at lower tax rates in Europe at 25 percentage range, as opposed to 35% range here, so the mix helps out. But there's some planning in there as well, but there's no discrete items.

If I look forward --.

Let me add one thing to that. I mean, tax planning at Actuant is a real -- our ROIC focus, we really spend a lot of time on taxes. And if you've been a long-term follower of the Company, we've moved our tax rate down significantly from high 20%s to low 20%s. Some of that is the mix of businesses on shore to offshore. Hydratight brought more international. There's a number of things that cause that.

But we have very discrete planning things, and this year we just have a number of great things in the hopper. It is not one-time in nature, meaning it's a quarter and then it pops back. It is things that are planned out over the year, and we will try to find another shopping list of the same type stuff for following year.

So, this is very analogous to our continuous improvement in margins. One we're trying to make go up, and the other we're trying to make go down. But this is real stuff. It is not window dressing quality earnings type issues. These are legitimate cash flow tax items.

Thanks for answering that, because that was exactly where I was going. So thinking out to, say, 2012, and I know it's early, if tax rate lower than 25%? I'm not saying tax rate is 22%, but is directionally tax rate lower?

Why don't you talk to Andy offline. I think the answer to that, the complicating to that is what kind of earnings growth do you have. Because obviously -- and where is that earnings coming from? Because statutory rates in a lot of the mature parts of the market are higher than that. So, it's not a discussion you can just have, you have to make a volume assumption. So, I think Andy and Karen are going to have to walk through whatever assumptions you want to make before they can give you any comments on that.

Okay, thank you.

Thank you. Our next question is from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. Just on the organic growth. So, you bumped from 6% to 10%, to 8% to 10%, and I think you touched on Industrial kind of being higher, the 7% to 12%. But at the analysts' meeting, you kind of gave us ranges for each of the four segments, and I'm just wondering how you're thinking about the different segments shifting around? Is it just kind of a wholesale shift to the higher end or are some things getting notably better, some things worse?

I think it's the one that I would say, it's outside of the range of what we had laid out before. We had Energy, I think at the conference, kind of in the 3% to 7% range. I think we're looking 5% to 10% right now. The other ranges are still intact. I would just say we're probably at the -- in a couple of those, we're a little bit higher, in the case of Industrial, in the case of Engineered Solutions, just a little bit further up in the growth range, but no other changes.

Okay. And then, Bob, I think -- to another question on Electrical, you mentioned a couple hundred basis points of margin improvement, is that core Electrical? Is that Electrical with Mastervolt coming in at a higher rate?

That's core, and Mastervolt will be on top of that. Because, as we said, it's more of an Actuant line average.

Okay, and then just finally, a question on Mastervolt. You talked about Europe being a much bigger market, and some of the opportunities are in other regions. And I'm just wondering, how do you pull them into other markets? Do you need to make other acquisitions to access those other markets? I'm just asking because there seems to be some concern that Europe is at least flattening out, and there is some pressure on subsidies, and I'm just wondering how do we get the growth outside of Europe?

These are all valid things, and I think we've tried to cover them in the call. But the thing about -- we think there is growth -- our primary focus for the next 12 months is European growth. We are going to put some investments into growing organizationally in some other parts of the world, China, North America, etc. I don't think it will be meaningful revenue when I'm having a conference call with you in two quarters. So, our growth profile and our focus for 2011 in the integration, is the European markets. And that is France, that's Italy, that's Germany, and the Benelux -- these are the markets they are in.

So, did that answer what you were looking for? I think (multiple speakers).

But growing outside of Europe is a longer term piece of the story, is what you're saying?

Yes, it's not going to happen in the next six months. We will look at both organic opportunities to grow, as well as acquisitions, as well. I think it's just a little bit premature. We have to map that out with the management team. They are talking about it (multiple speakers).

That was really my question on -- my question on Europe, or on growing internationally is, do you need to acquire in those markets to grow, or is there, you can take their technology --?

It's going to be very analogous to how did we grow the service group in Hydratight. We bought DL Ricci, we bought [SPF] --- those were some. We also added some of our own technicians, we brought our own products, we built our own facility. It's going to be a make versus acquire. It's going to be ground up build through our growth and innovation model, versus acquisitions. It will be a blend, it will be different country by country. It will be different size of inverters. As we talked earlier, we're on the small stuff. I think we'll probably stay mostly there, but there are all kinds of niches, as I talked about. There might be things outside of inverters that we want to expand into that are part of the system.

Very similar to what we did with Hydratight, where we started with a torque wrench and a tensioner, and we ended up at joint integrity. So, all of that, Jeff, is the model. And that's what excites me, is we're talking about a space that's measured in the billions with lots of niches. And we're playing a small role and a meaningful role in some countries where we have a great niche product, and now how do we decide where to go next?

Okay, perfect. Thanks, guys.

Lots of farming, to use a Midwest term there.

Thank you. Our next question is from the line of Deane Dray with Citi Investment Research. Please proceed with your question.

Thank you. Good morning, everyone. On the core revenue growth at 14%, I was hoping you'd give just a little more color around maybe geographically how that looked, and what the impact of pricing was?

I will handle the first one. Pricing was negligible, probably less than 1%. I'm sorry, second one. I'll let Andy handle the first one.

From a core growth standpoint it was within a band, I mean, pretty close geographically in Europe and the US. Asia had a very good quarter. The emerging markets certainly growing quicker than that, as well. But I would say Europe was on par with the US for the quarter.

And then given the kind of nervousness we've had about the sovereign debt, European outlook, and you even commented this at the analysts' day, it was a little bit of a question mark, it seemed to be playing out a little better than expected. Is that the way you've seen it, and is that baked into your expectations for the balance of the year?

Correct, Deane. That's exactly right.

Nice. And how about -- Andy, do you think you could give us some color on the incrementals for the quarter? Overall, it came in nicely, but there's some -- you have big swings within the segments, Energy being on the lower side. Was there anything in terms of the comparison to last year that might be swinging that?

Within Energy, we had (multiple speakers).

Very tough comparable last year. We had a very good quarter last year.

We had a good quarter last year, we had mix. I mean, there's different margins, whether it's product sales or core service or rental, and even between Cortland and the Hydratight business as well. So the mix was not optimal by any -- or the mix -- the product mix of sales was not optimal.

Year-over-year, sequentially, it was actually pretty good. Sequentially it looked great. It was guidance that was (inaudible).

We just had a very good mix situation a year ago. Fall through was very good, and Industrial very good, and Engineered Solutions, and we touched on (multiple speakers).

Electrical went the wrong way.

Got it. Thank you.

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

Thanks a lot. First question on the housekeeping side. With Mastervolt in there now, could you give us where you think D&A and CapEx is going to come in for the year?

CapEx, still expecting it to be in the $25 million range. Mastervolt is not a very capital-intensive business, because it outsources most of its product. D&A, historically, we've been kind of in a $50 million range, that included European Electrical. We pulled that out and put Mastervolt in. I think we're somewhere in the $52 million, $53 million range going forward. (multiple speakers) still to do.

Okay. And then from a strategic standpoint, you highlighted the supply chain issues on the Electrical side in the quarter. I was just wondering, as demand continues to come back, and with the improving growth profile, could you just give us an update of how your overall supply chain is in terms to handle this acceleration of growth? And secondarily, I know you covered pricing in the prior question, but any comments on what you're seeing on the material inflation side?

I think from a supply chain standpoint, I think we feel better -- we feel better at the end of the quarter than we did at the beginning of the quarter. We talked last quarter about making the air freight companies a lot of money on the Enerpac side, and some of the truck side as well because the demand was coming back so quickly. Those we feel better where we're at there. I would say even at the end of the quarter, we feel better on the Electrical side. It is just there was -- it was a hole in the first quarter. So I think overall, you see it in our inventories as well, our inventories are up. We built inventories in a few locations to compensate for that, and for demand as well.

And on the material inflation side?

Material inflation, certainly we're hearing and seeing all the headlines on commodities and whatnot, and certainly copper is something that we spend money on. A lot of our contracts are set up in automatic indexes or zones that are tied in, so both on the cost input side where we -- what we pay to vendors and what we sell to there are some automatic adjustments that go on in that.

I think probably the thing that we're watching the most for the full year, and it certainly is not going to impact just us. If it happens, it's going to impact the rest of multi-industry land, is just what happens with the R&B. If the R&B continues to strengthen, that's going to impact us. China goods become more expensive. We're not alone. We will have to address it from a pricing standpoint to the customers, because we are not going to get stuck in the middle.

Beyond that, not a lot. I mean, we had a little bit of a pinch in Electrical from an unfavorable spend type purchase price thing, but beyond that, it was pretty good for the quarter.

Okay, and finally on the acquisition side, Mastervolt, I think you covered it in your prepared remarks. But when you look at that $100 million to $150 million of potential tuck-ins, as you highlighted, when you look at the pipeline today, is there a potential other Mastervolt-type acquisition, or will it be more of the traditional tuck-ins?

Potential, but not a high potential. It will be tuck-in, and it will be probably more Industrial and Energy related.

Great. Thanks a lot.

Thank you. Our next question is from the line of Charlie Brady with BMO Capital Markets. Please proceed with your question.

Thanks. At this point, I just have some clarifying questions. Andy, on Electrical, the -- so I understand, the one-time cost that happened this quarter, particularly with the logistic stuff, that's not expected to repeat in Q2? Or was there some ERP implementation stuff that drags into that?

Yes, I think there will be a little bit of it in the month of December. I mean, today we're over halfway through the month. So we're -- there will be a little bit coming through here. We have got duplicate facility costs. We're in the process of, in the next 30 days, getting out of one our big warehouses as well. So, some of that is -- some of that will be coming through, but I think the --.

Not to the magnitude.

Not to the magnitude that we had last quarter. Unfortunately, the flip side is, usually demand is a little bit lighter in the second quarter. And it's just a shorter month, so you have got the same fixed cost base, but you're just spreading it over less volume. So it just pinches the margins just a little bit from an absorption standpoint.

All right. And, I don't know, did you mention how that Electrical business on the big box retailer side, how that's comping relative to the big box retailers?

Yes, I think we've pretty much tracked them, I'll say very similarly the last nine months or so. Going forward, we're watching it every day. They both -- they had investor days recently, and they both commented that some of the construction-related --- or departments are going to be impacted more than others. We're watching that. We certainly are not forecasting much in terms of growth going to DIY in the next 12 months from an industry standpoint. There's always opportunities for market share and stuff like that, but I think that that is not where we're expecting the top line growth in the segment.

Yes. I would say from 90 days ago, the big boxes have moderated their expectations for same-store sales. And I would say our sales have followed their trend.

That's helpful. Just one more on the Energy side, I want to make sure I heard you correctly. In your commentary on core sales in Q2, did you say you expected core sales to be down year-on-year, or did I mishear you?

In absolute dollars, sequentially from Q1 to Q2, dollars will probably be down, but core sales would still be up, up to 14%.

I think what I want to communicate, and Andy just confirmed I can, is that we did 14%. We think it'll absolutely be positive, so it's not a decline. It might not be at 14%. (multiple speakers) You're talking just Energy? Sorry, I was talking overall.

Dollars will be down year-over-year, still will have core growth.

(inaudible) the other way.

Got it. Thanks very much.

Thank you. Our next question is from the line of Scott Graham with Jefferies. Please proceed with your question.

Good morning. You've done this for two of the segments, so I was hoping you'd do it for the other two, Industrial and Engineered Solutions. Kind of by end market, which were the better end markets, and which were the worst end markets in each of those segments for you?

I think -- Industrial, I would just say, is just very broad -- broad based. Virtually all end markets were looking good. We continued to benefit from our bolting initiatives probably a little bit more than the others, but it's just widespread.

Emerging markets the best, probably US behind, and then Europe third, but all three pretty broad based.

Specific channels doing pretty well. Within Engineered Solutions, certainly leading the pack in terms of momentum is the heavy duty truck. It doesn't matter if it's Europe, if it's Asia, if it's the US, all of them are hot right now. (multiple speakers) the off highway with the AG, the construction equipment, some military work in there is doing well. So the likes of like Maxima and Gits, they both had good profit quarters. So, feel pretty good about the nice tailwind.

On the lighter side, auto, and we've talked about auto, had a great year last year, harder comps that were added. It wasn't terrible. It was at expectations but lower than truck. And then RV, and everybody is talking about RV, are we at a point where you have to see a little more sell through, and for us it was flat.

Okay, that's helpful. Thanks. The other question I had was regarding Mastervolt. Now, as I look at the trading multiples of some of Mastervolt's peers, those multiples are in some cases a lot lower, but generally lower than what you paid. So what I'm wondering is, if you could tell us a little bit about -- you guys are very good at this -- time-proven, acquiring at good prices. I'm just wondering what is it that you saw in Mastervolt that was maybe worth a little bit of a premium versus what those companies are now going for? And going forward, would you say that now that you have this platform type of acquisition, that maybe the multiples that you pay come down on bolt-ons to Mastervolt?

Yes, I mean, it's not an analysis I can spend a lot of time on. I have not followed SMA for any period of time to do that. What I do know that is they have an EBITDA margin that is absolutely breathtaking that people have some concerns whether it holds in there. Mastervolt does not play in those kind of breathtaking margins in those same niches. So it's a very -- I think you have to be careful with SMAs in your camp, and I don't know, who else would be in your camp there?

I just took a quick look at -- my firm covers about five or six of these -- I can send you their names.

So we look at it in the niches. What ROIC, what cash flow is the business going to give us? One-third of the business is marine. We know how to value the marine stuff. It's just our other stuff. We looked at it, and said, what's the ROIC, what is the returns, are we going to get to our 20% modified CMM calculation we've all walked you guys through? That's what we valued on.

We did not pay a lot of attention to third-party things. It's only going to be 5%, 6%, 7% of total Actuant. And I guess we just didn't spend a lot of time. We saw it, but I think we thought it had more to do with their extraordinarily high profit ranges due to some product shortages, component shortages last year, and people believing that wasn't sustainable. It's a very different -- it's not the same issues that Mastervolt has.

From a valuation standpoint, we feel very good about what we paid. Again, one-third of the value here is the marine business on this thing, and we see a lot of opportunity going forward. ROIC on this thing is probably one of the most attractive ones we've seen in the last few years, given the size and whatnot, and that is what drives our decisions.

Okay, that's helpful. Last question is on your indication that you think you can still do another $100 million to $150 million in let's call it the calendar 2011. What I'm wondering is, is this -- are you seeing enough things in the pipeline where maybe it's one big one that you're looking at, or two or three big ones that you're looking at, let's say one or two of which could close that are Mastervolt-type of size? Or do you just see enough $25 million's and $50 million's to kind of give us that confidence in an acceleration?

Yes, three to five acquisitions in the $25 million to $50 million is what we're expecting. As I said, the funnel -- we cleared some things out of the funnel this quarter. I think we were disciplined. I think Mastervolt took a lot of our time, and we were quite picky. And so some things cleared out, and what we're saying is we're kind of restarting the clock now for the next 12 months, and saying $100 million to $150 million is going to be our fairway. And we're thinking it's going to be three to five deals in that $25 million to $50 million, and probably focused on Industrial and Energy.

I think the key message here is, we certainly are not slowing down on acquisitions. You just don't know how to predict these. We worked on Mastervolt three years ago. We had offers on Mastervolt three years ago, and it didn't close because of valuation. It came back to us. That stuff can come and go. It's just very difficult to predict timing of deals like this. We feel very good about just the overall activity in the M&A market right now. There's a lot of ideas out there. I think our message to you is, it's business as usual. We're going to do more tuck-ins than platforms, and that's kind of, I think, the message that Bob is sending.

Yes, and I hope you're pretty relaxed. I mean, we have a great growth and innovation process that we're spending time on. We have good tailwind already at our back on a number of markets, and we have a nice funnel of acquisitions. We do not feel that that is -- we don't feel pressure at all to hit a number. Last year, we were disappointed at $50 million we did, boom, here comes $150 million in one deal. It is the lumpy nature of acquisitions. And what you have with Actuant is enough businesses and enough groundswell of activity, that we never really feel that pressured. And we fish in these small ponds, that we just don't get too enamored with different things going on. And it just kind of feeds itself.

Got it. Very good. Thanks a lot.

Thank you. Our next question is from the line of Robert McCarthy with Robert W Baird. Please proceed with your question.

Morning, everybody. Thanks for taking my questions. Mostly asked and answered. I do have some small things that I want to clarify, and then I have one question. In terms of clarifications, if I understand the earnings outlook and the earnings outlook slide, and the way it's annotated, your guidance fully reflects any and all restructuring expenses for this year, right?

That is correct.

They are included in the number?

What we are contemplating is included in the numbers. If something would come up big, down the road, that's out of it, but our expectation for the year is --- [stuff] is in there.

Okay. Second, corporate expense line probably was a bit higher than a lot of people were looking for in the quarter. Is this a reasonable average run rate for the year, Andy?

It's a little bit on the high side. I would expect $7 million to $8 million going forward. As I called out, we had about $0.01 of headwind in this quarter in transaction costs that were going through there. We spent $0.5 million on growth and innovation stuff as well. We had some restructuring going through a little bit up here. But $7 million to $8 million is what you should think of going forward. It's a little bit on the high side.

So closer to $30 million for the full year?

Yes.

Okay. And third, while I understand you don't want to specifically quantify what you're forecasting for accretion for Mastervolt for the full year, can we assume that it's not making any contribution in the second quarter because of purchase accounting adjustments?

That certainly weighs in on our view for the second quarter. I don't want to say it won't make anything, but it's a bit of a headwind in the second quarter.

Well, I don't think it is going to be a drag.

The currency -- I mean, excuse me, the purchase accounting will be a headwind against its base numbers. We are in the middle of getting valuations done on this thing right now, so we still have to -- everything here is based on estimates on top of estimates type stuff. So we're just trying to be careful.

It's $0.01 plus or minus. It's just not going to be major because of the first quarter. We also didn't get a full quarter of it, either.

Yes, of course. And then the question I wanted -- maybe just a slightly nuanced difference, we're asking about what you had to say about acquisition activity, I hear you cleared out the pipeline, and attribute it to discipline. But there was no element of, we just did a big deal, maybe we should take a breather here?

There are a couple of small things in Electrical that we want them to focus on Mastervolt. They are actually still in the funnel -- they're still in the funnel, they've just pushed out.

Yes, and that's the other thing I wanted to ask about, Bob, the way you're describing the funnel, and you cleared some stuff out. Okay, some stuff went away, but it almost -- when you describe it that way, it makes it sound like the funnel is now empty, and you need to fill it back up.

Yes, well, it shouldn't sound that way. And I think last call we said the funnel was fuller than it's ever been, okay? So now it's not fuller than it's ever been, but it ain't empty. There's -- Mr. Wozniak is sitting next to me. He has plenty of airplane tickets to travel around with.

So, if I may interpret a little bit, Bob, part of what you're telling us is, look, there was some other stuff that could have happened immediately, and it's gone away. And so just don't necessarily look for something this quarter.

I think you guys are just reading way too much into it. We bat about 30% on our deals. That's why we keep a big funnel. This quarter we've cleared out those 70%. They kind of cleared out together, and I said it was a handful. You guys are reading way too much into it. The funnel is a little lighter than it was a while ago. We're guiding you that we are not going to do a $150 million of tuck-in in the next seven months. We did Mastervolt. We met our objective.

It's not because we met our objective that we're stopping, it's just what the funnel looks like. Activity hasn't changed one iota. The process, the flow, the number of things coming in, the market's view, the pricing. I don't think there's any change in any of the underlying fundamental acquisition things going on. We're just giving you a point in time that we're saying the funnel is not as full as it was a quarter ago, and we're staying with the $100 million to $150 million of tuck-in acquisitions, even though we just spent $150 million on Mastervolt.

That's great, Bob, I just wanted to make sure I hadn't misunderstood.

That's fine, thanks for clarifying, Rob. Because I think everybody needed to hear it.

Thank you.

Thank you. And our final question comes from the line of Jamie Sullivan with RBC Capital Markets. Please proceed with your question.

Good morning. It's Mike Salinsky filling in for Jamie today. Just wanted to ask you a quick question on your growth and innovation program. First of all, it was very impressive how you were able to keep headcount down, despite the fairly decent core growth. I was just kind of wondering if any of the products that are sort of in the pipeline or any of the programs that are in the pipeline in your growth and innovation plan, are they going to require some additional headcount, or are you expecting for them to mostly work within your current footprint?

Yes, I think what was impressive about Andy's headcount comments is it did include -- we've added probably 20, 25 people specific to growth and innovation. But we took out more than that in the operational restructuring and downsizing efforts that happened over the last couple of years. So we fed that, and still kept the headcount down 5%.

There are additional heads that we'll be adding during the balance of the year, supporting growth and innovation as well. There will be some savings coming out of some other businesses. We feel good about that. And it's really a deployment -- we are deploying resources out of some back office functions, out of some other stuff by consolidating and putting it on the front end in growth and innovation.

Got it, thanks. I am just going to ask you one or two more questions about a couple of your segments. In the Industrial segment, I kind of noticed there was a bit of a sequential downshift on margins from 4Q to 1Q. I guess I was wondering what was behind that. Was it just even more IS in the mix, or was there anything else at play sequentially there?

I don't think there's anything in particular that I would point to. The margins in Enerpac do wiggle around. It is true that IS mix will impact this thing. But there's nothing that I would call out in particular in the quarter. They were up nice year-over-year, and I think that's our story line.

Got you. Just one final one in your Energy segment, can you just give me a little flavor about differences between your customer outlook on the maintenance budgets from geographic region to geographic region, is it a little stronger in Asia than elsewhere, or emerging markets than elsewhere?

I don't think specifically the maintenance budgets have changed as much as just what is the inherit growth in the markets, and where we might have more refinery based business versus other business. Is there more expansion going on in emerging markets where they are bringing up new fields. Whether you're in Kazakhstan, whether you're in Australia, whether you're in Brazil, it's more that than necessarily maintenance budgets in a given region.

Even that's hard to look at. You have people like BP who make these decisions out of the North Sea for their global operation. If you look at the region, that doesn't mean that's where the decision making or the budget was spent or deployed, so I don't think we are going to be able to give you any granularity that's going to help you look at anything there.

Okay, great, thanks, great quarter.

Thank you.

Just to wrap up, we appreciate everybody's interest in Actuant. We hope you were as pleased with our results in the quarter and the outlook as we are. Just a reminder that our second quarter call will be held on March 17, and we will be around the balance of the day to field any questions you may have from a follow-up standpoint. So, happy holidays to everybody.

Thank you.

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