Enerpac Tool Group Corp (EPAC) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Actuant Corporation's second quarter fiscal 2011 earnings conference call. We are conducting a live meeting to coincide with the audio conference. If you'd 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, March 17, 2011. It is now my pleasure to turn the conference over to Karen Bauer, Actuant's Director of Investor Relations. Please go ahead.

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

I'd 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 notes. During this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

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

Thank you, Karen, and happy St. Patrick's day.

We are now halfway through our fiscal year and pleased with our progress towards achieving full year financial results. We accomplished quite a bit this quarter. We completed the acquisition of Mastervolt and are proceeding with our AIM integration process of that deal. We finalized and closed the sale of the Europe electrical business, we amended and extended our current credit facility and added additional borrowing capacity and lowered our borrowing costs.

And last, but certainly not least, we reported another strong quarter of core sales growth of 13% and EPS of $0.30 at the top end of our EPS guidance. Our operating margins increased 90 basis points year-over-year which marks the fifth consecutive quarter of year-over-year improvement. Our free cash flow of $11 million was pretty typical for our second quarter, as we historically tend to be backend loaded.

With that summary I'll turn it over to Andy to go through the quarterly details. Andy?

Thank you, Bob, and good morning, everyone.

Similar to last quarter, all of my comments will be covering continuing operations only and exclude the European electrical business, which is included in Discontinued Operations. Second quarter results came together well and in line with our guidance. Sales of $331 million were near the mid-point of our guidance range and were up 24% year-over-year. I'll dissect and provide more color on sales in a few minutes.

Second quarter EPS of $0.30 a share was at the top end of our guidance range and benefited from slightly better than forecasted margins. EPS and margins were sequentially lower than the first quarter due to the seasonal trends at Actuant. We always see a dip over the winter given seasonality, including the holidays. The $0.30 of EPS from continuing operations was up 43% from the $0.21 in the prior year, with last year excluding restructuring costs. So it was a nice year-over-year improvement again.

On a trailing 12 month EPS basis, we improved from $1.08 at the beginning of the year to $1.32 at the end of February, putting us on track to meet our EPS guidance for the year. We completed the sale of the European electrical business on the last day of the quarter, which resulted in a Discontinued Operations loss. We don't anticipate anymore activity in that section of the Income Statement for the balance of the year.

Now let's discuss results for the quarter in a little bit more detail. Year-over-year, sales were up 24% with an 11% benefit from acquisitions and 13% of core growth. The foreign currency impact on year-over-year sales comparisons in the second quarter was negligible. The 13% of core sales modestly exceeded our expectations. While slightly lower than the 14% core growth we reported in the first quarter, it was a result of tougher comps and certainly not a slowdown in demand.

We had 3 of our 4 segments posting year-over-year core sales growth with the Engineered Solutions and Industrial segments continuing to drive the lion's share of the growth.

The combination of this overall sales growth and the 90 basis points of operating profit margin expansion resulted in a 35% increase in operating profit above the second quarter of last year, excluding prior year restructuring costs. This was consistent with the seasonal expectations that we laid out for you on our last quarterly earnings call. As you can see on the accompanying slide we have now generated margin expansion for 5 consecutive quarters with a rate of year-over-year expansion moderating due to more difficult comps.

Now I'll review second quarter results by segment starting first with the Industrial segment. Industrial had another very good quarter with continuing strong momentum across all geographic regions. Order intake exceeded sales, which supports our expectation for continued year-over-year growth in the second half of this year. Profitability in this segment remains strong with margin expansion in the base enerpac business being muted by the addition of lower margin IS, or Integrated Solutions, acquisitions in the last year. If you recall, we specifically predicted this for second quarter on last quarter's earnings call. We remain positive on the prospects of this segment for the future with expectations of continued top and bottom line growth.

Moving on to our Energy segment, I would describe the quarter as being better than it looks on paper. Second quarter year-over-year core sales growth of 5% was up a click from last quarter's growth rate, but quoting activity and optimism is running higher. We have seen a noticeable improvement in tone of the business as the first half of the fiscal year played out and are more confident of the stronger second half that we had built into our forecast.

Operating profit margins in this segment were consistent with expectations and the margin decline from the first quarter was seasonality driven. We expect them to improve significantly in the third quarter when higher service and rental activities resume in northern climates.

Switching now to the Electrical segment, year-over-year core sales dipped 2% with continued sluggish demand in the retail and commercial construction markets. Overall, segment sales, however, increased 28% due to the Mastervolt acquisition. Last quarter I mentioned that we were experiencing some margin compression in the North American electrical business due to self-inflicted issues involving fill rates in our supply chain. As discussed on our last call, that continued into December. However, we've worked out the bugs since then and things have been pretty much back to normal since January, and we have shown sequential margin improvement in that North American electrical business.

Bob will be providing more color on the Mastervolt acquisition later in the call so I won't add much here. However, one thing I do want to cover is one of expectations for this business relating to seasonality and profitability. I mentioned earlier that Actuant has a marked seasonal slowdown in the second quarter, and Mastervolt only amplifies this, given that it's selling electrical products for solar systems and boats. Simply put, in northern climates, boats are not in the water right now and there are a lot fewer solar systems being mounted on rooftops in the middle of winter. In summary, Mastervolt second quarter was also its weakest of the year, from both a top line and profit margin standpoint. That's important to understand because it impacted Electrical segment margins in the quarter. As we look into the back half of the fiscal year in the North American Electrical markets, we see continued soft retail and construction demand. We also see additional material cost and input inflation and have begun to institute price increases to our customers to mitigate these.

Our fourth and final segment is Engineered Solutions, which continues to post impressive year-over-year growth in both sales and earnings. Core sales growth accelerated in the quarter from 22% year-over-year last quarter to 25% this quarter. This reflects strong global heavy duty truck and off highway demand. Segment profitability continues to improve, with 550 basis points of margin expansion versus last year primarily the benefit of volume leverage. Given strong OEM demand and vehicle and other markets, Engineered Solutions is well positioned for additional future growth.

So that's it for my prepared remarks on our sales and earnings. Now I'd like to cover cash flow and our capital structure, starting first with cash flow. Free cash flow in the second quarter was about $11 million and reflected a $21 million build in primary working capital. Excluding currency and acquisitions, inventories grew $16 million in the quarter as we increased combine quantities and safety stock in our operations to handle higher order rates from customers in the normal seasonal build for the spring selling season. I'm still confident we'll hit our $140 million to $150 million free cash flow target for the full fiscal year, but we'll need improved working capital terms to do so.

During the quarter, we amended and extended our existing bank credit facility, which was set to expire this fall. We added a $100 million term loan component to the facility and increased a revolver from $400 million of capacity to $600 million. We also extended the maturity to a 5 year term and were able to reduce our borrowing spreads by over 100 basis points. At quarter end, we had over $550 million of unused revolver capacity under this facility, with lower borrowing spreads and more capacity on it, we are in good shape to fund future growth.

That's it for me, I'll turn it over to Bob.

Thanks, Andy.

Now that we've completed the Mastervolt transaction and the sale of the Europe Electrical business, we wanted to highlight the profile of the Electrical segment going forward, as the attached slide shows. We've gone from roughly 50% DIY retail electrical products to now 25%. Our exposure is in the more profitable marine market, with increased -- that has increased due to the Mastervolt acquisition and solar that now makes up 20% of the segment sales.

A key benefit of adding Mastervolt solar product line is the diversity it provides to our served energy markets. We're big believers that the global energy needs will grow in excess of GDP as emerging markets continue to mature. The demand will be satisfied by a variety of energy sources -- oil, natural gas, coal, wind, nuclear, solar, geothermal, you get the picture. Looking across Actuant, we have products and services that go into nearly all of these energy or power generation markets. In addition to our Energy segment, we sell energy end markets via solar and electrical utilities in the Electrical segment; wind, oil and gas markets within Enerpac products; and through remote valve Actuation product line for nuclear within our Engineered Solutions business. In total, approximately 25% of Actuant's total sales are now tied to the broad energy market.

Now I want to spend a few minutes providing you an update on the Mastervolt integration. As we discussed in our first quarter conference call, about one-third of this acquisition represents a tuck-in to our marine platform. Our integration teams are busy pulling together the best of both Marinco, our legacy marine business, and Mastervolt. We see both sales and cost synergies associated with creating a single marine platform and are actively developing a global marine strategy to realize these synergies. The marine market is slowly recovering from the recession and we are seeing sales growth, most notably in the aftermarket.

The other two-thirds of the Mastervolt acquisition is focused on inverters for the solar PV systems and represents about 5% of Actuant's pro forma sales. If you follow the solar market, you've undoubtedly heard and read about a number of recent headwinds. This includes a rough winter in Europe, reductions in feed-in tariffs in numerous countries and inventory build at solar distributers. Our geographic exposure in solar is virtually all in Europe, more specifically in 5 countries, with Germany being the largest.

Our solar inverter product line is targeted exclusively at the 20-kilowatt and below solar range, which you would see in a residential or a light commercial application. This is important because a lot of the recent downward trend in feed-in tariffs in Europe are generally not on the low kilowatt part of the market. The tariff cuts are more heavily weighted towards the large utility scale projects.

Feed-in tariffs are an important part of the PV industry. They generate demand when opening new markets, and then as markets mature, feed-in tariffs decline, leading to solar price reductions. Over time, the results get to grid parity and tariffs are no longer a factor. With these recent feed-in tariff cuts don't change our view that long term prospects of Mastervolt -- excuse me, let me try that again. These most recent feed-in tariffs don't change our view on the long term prospects of Mastervolt, but they do create short-term headwinds and some of the lumpiness we've talked about on our last call.

As with Mastervolt's marine business, the integration teams are heavily focused on developing and prioritizing the solar market growth strategy in order to capitalize on long term growth. That's the long-term outlook, plus the ability to reposition our electrical segment towards higher technology growth in margins. That's what attracted us to Mastervolt in the first place.

Now shifting gears, as I noted in my opening remarks, we're pleased with what we've accomplished in the first half of 2011. Sales are up 20%, with core increasing 13%. Year-to-date margins are up 160 basis points. Trailing 12 month EPS has grown $0.24 from the beginning of the year. And first half EPS is up 57%. Leveraging the economic recovery, expanding in emerging markets, focusing on our growth and innovation initiatives, and, finally, acquisitions -- these are all contributing to our first half success.

Speaking of acquisitions, on the M&A front, our pipeline is pretty robust, with quite a bit of activity, including a few potential larger transactions, in the $100 million to $200 million range. We are seeing more auction processes as private equity groups turn over some of their 2006 and 2007 investments, which creates acquisition opportunities for all of our segments. We remain disciplined to our return on invested capital hurdles and are finding potential transactions that are solid fits with our existing business strategies. We have ample capacity with our newly amended credit agreement and when economics and strategic fit make sense, we're going to complete transactions.

Now let's move on to guidance. As we noted in the Release, we are moving up our full-year of guidance towards the top end of our previous range. Our current expectation is for sales of $1.4 billion to $1.425 billion, and EPS from continuing operations of $1.50 to $1.60 a share for fiscal 2011. Our consolidated full-year core growth estimate is now been moved up to 9% to 11% range, up from the 8% to 10% estimate we had on last call, with Industrial and Engineered Solutions core growth more than offsetting Electrical. We are still targeting cash flow of $140 million to $150 million for the year, well in excess of net earnings.

For the third quarter we're endorsing sales guidance of $375 million to $385 million, and EPS of $0.42 to $0.47 a share. At the mid-point, this represents a 30% increase in EPS, excluding prior year restructuring.

Obviously, anniversarying the economic recovery for Actuant's results in a moderating growth compared to the robust year-over-year numbers we've reported to date. The recovering economy has also brought about material and other cost input inflation which must be managed on a price and cost side. This is most acutely noticed for us in the Electrical segment, where copper resident freight are creating some headwinds. But Actuant's had a long history of managing both the price and cost elements of this equation and we are presently comfortable that we have the net effect incorporated into our earnings guidance.

In summary, the fiscal year is half over. We're in great shape to meet our financial targets. We continue to execute our business model, which is investing in growth initiatives, pursuing acquisition opportunities to strengthen our portfolio, and using our LEAD Lean Enterprise to continuously improve our business processes. We believe these activities will enable us to continue to create long-term shareholder value.

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

(Operator Instructions)

Our first question comes from the line of Jim Lucas with Janney Capital Markets.Please proceed.

Thanks, good morning, all.

Hi, Jim.

A couple questions. First, just following on the end remarks there on the M&A pipeline, interesting to hear that there could be some larger opportunities. When you mentioned the $100 million to $200 million, is that purchase price or revenue size?

That would be purchase price.

That would be purchase price, okay, thanks for that clarification.

On the Energy segment -- talk about it being better than what it looks on paper. In particular, on the quoting activity, could you talk about what you're seeing geographically versus what types of projects you're seeing that on? Just any additional color of what you're seeing in Energy and what is making you feel better than what has showed up in the numbers at this point?

Well, why don't I start, Andy, and you could follow me.

It's very broad based. Probably the emerging markets, so in the Middle East and Asia, would probably be the leaders. From an industry point of view, I think we're starting to see some more deepwater activity, seismic exploration activity has been up a bit that we've seen. Even refinery is clearly off the bottom and feels like it's recovering at some level. US and the Gulf of Mexico is probably a little bit behind some of those other ones but it just feels good on a fairly broad based method.

Yes, I'd add to that, Jim, that our more mature markets, the UK, mainland Europe, the US, showing a little bit more signs of life than I'd say six months ago on that. Bob's comment on deepwater is correct. We're seeing a little bit more activity on the seismic side, even the umbilicals, the workover shifts with a little bit more activity going through as well.

Okay, and on the Electrical segment, two particular questions there. One, in terms of you talked about the margin pressure, working through the issues there. Are all of the fill times resolved at this point? And, secondarily, within the DIY market, could you characterize what you're seeing versus share versus retailers managing inventory closely versus demand?

Okay, I'll start with that. From a DIY point of view, I think we're seeing our demand be about equal with the market. We have not seen a lot of share change in the last quarter, or even in the last six months, so that piece of it hasn't really changed. You are correct -- the fill rates are now back to world class standards, what our customers expect.

As Andy said in his remarks, that flipped as we went into the new calendar year and has gotten there. Now, you still have additional costs associated with freight containers and things that are up, so there's some inflation there, but it's not due to fill rates or air freighting things or some of the issues we dealt with in the first quarter.

Okay, great. Thank you very much.

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

Hi, good morning.

Hi, Jeff.

Just a few questions on Electrical. Can you tell me if there are any one-time acquisition costs related to Mastervolt, purchase price accounting, et cetera?And, just given the moving pieces in Mastervolt and the electrical coming out, how should we think of full-year margins for that business?

Sure, two questions. The first related to purchase accounting. There was a little bit of transaction costs flowing through in the quarter, not significant with the transaction itself. Certainly, there's purchase accounting as it relates to amortization, step ups relative to where we were at before related to that, so that's coming through.

I think margins for the full-year, I would say in North America the view is very consistent with what we talked about last year, or last earnings call, that as we rollout into the back half of the year, we expect the margins to improve.

During the quarter we did complete the move of our last facility in the former Glendale facility into Menomonee Falls. That went smoothly.

We're expecting margins to improve. I think the only concern we've got with that right now would just be material cost inflation, input inflation. It is real. It's probably more pronounced in this segment than some of the others right now. We have gone out with price increases here, but that certainly would be the wildcard, if you will, for the back half of the year.

Jim, I think in long-term, we talked about mid-teens being EBITDAS that we thought this segment was achievable. Mastervolt helped that over the longer term. And, again, I'm talking about levels and I think we're still in that zip code. I don't think we feel any change long term. You aren't going to see that, as Andy said, next quarter, but I do think you're going to see that over a period of a couple years.

Are you getting any feedback on your price increases? Is there pushback? Is it going through without issue, or still too early to tell?

It really depends channel by channel. Within electrical -- copper, we've been taking prices up all through the year as copper has popped up to $4.50 a pound. We pushed price increases through automatically, that's accepted. We have indexed-based pricing for a lot of our bigger customers related to copper and other inputs for transformers and cable and stuff like that . So that's going through automatically.

The bigger challenge is just -- when you're going more through the traditional big box, the do-it-yourself channels, that is in the process right now. I really don't want to comment on what the status of negotiations is, but it's in the process right

Other than the fact we've had a long history of doing this, this is not the first time that this channel has seen raw material price increases. It's all about talking to the customers about where they can pass it along. It's all about giving them some timing to work different inventory issues out of the system. Rebranding product, there's all kinds of strategies associated with it that are outside just saying here is the price. So, all of that is under way today.

We have a long history of this, I'm quite confident in the electrical team's strategy. We had meetings on it, this week in fact, and it's moving along.

Just final question, on Mastervolt you talked about some of the short-term headwinds in the solar inverter business. And I think you said, when the deal closed, you thought year one or calendar '11, that business you were thinking about that being flattish. In light of some of the short-term headwinds, how are you thinking about the growth profile for that business?

You talking flattish in what terms, Jeff? Are you talking sales line or profit line?

I thought you said revenue you thought would flatten out into 2011. Is that still how you're thinking about it?

Yes, there was a big surge in what would be our fiscal fourth quarter and the first quarter this past year on solar because there's a big surge in demand at that point in time. I had the tariff changes or what not. When we look for the next two quarters I think our view is we're going to be roughly in line with what we saw last year in solar. Maybe plus or minus 5% or so from what they generated last year, so I think it's still pretty fair comment.

Okay, thanks.

The next question comes from the line of Wendy Caplan with SunTrust. Please proceed.

Thanks, good morning.

Good morning, Wendy.

Bob, and Andy, you've talked a lot about the mix issue in Industrial and you cited mix as a margin detractor in the second quarter, in part the acquisitions related to Integrated Solutions. Just to clarify for us, is this 22% operating margin the new normal for the segment, or is there a reason that, or any reasons, why the segment should be less than 25% going forward?

No, I don't think -- the second quarter itself, Wendy, due to the seasonality, is always an issue. So do not pick the second quarter as the new normal. I don't think we see any detraction in the base Enerpac business.

I think we continue -- and I'm going to use EBITDA numbers rather than OP numbers just because I think I'm more comfortable with that, and with the acquisitions you've got some amortization. But I don't think there's any reason we can't be in the upper 20s as the long term target. So, maybe down 100 basis points from 30, which was the peak, but there's been no change in that, and that is not a change over the last three or four quarters. It's just ever since we've done those deals, we've been communicating that same thing.

I think, Wendy, when you look at it for the first half of last year, our EBITDA margins in Enerpac, excluding restructuring, we're at 24. We're north of 25 for the first half of this year, and there's a heck of a lot more mix of IS-related mix in this than a year ago because of the couple of acquisitions in the third quarter of last year.

So, if you look at the base Enerpac, excluding IS, margins have grown very well year-over-year. They've grown sequentially even as more volume comes through this thing. And we're still well below the peak numbers back in 2008 with the margins here as incremental sales come through it will just lift those margins up. So, this is probably Number 12 on my -- if I have a list of ten worries, this is probably Number 12 on it. This is not something that is really on the radar screen right now.

Yes, I think Andy's peak comment is important. We're still 20% off the peak in Enerpack, and this has got a high incremental margin. So, you've got established sales forces and fixed cost structure that gets leveraged as that volume comes back.

Sure, sure. We just want to be sure that our Enerpac is okay.

And then on the Electrical margin, the before and after pictures, can you talk first of all about what the inflation cost us in the quarter in terms of the margin and that segment specifically, or the Company as a whole, whichever you have? And can you talk about the normal, what we should expect in Electrical in terms of margin going forward in the long-term?

Yes. With regard to inflation, my comment here will be for all of Actuant, not specifically by segment, but all of Actuant. Prices definitely were -- there's pricing pressure during the quarter from our supply chain, not just commodities but also the RMB. The Chinese currency strengthened about 3% or 4% on a fiscal year-to-date basis. So, during the quarter, as the quarter rolled out, there were more suppliers coming in and trying to get price increases. I would say in the quarter, impacting our results on a net basis, probably about $1 million on a pre-tax basis of pressure.

As we look forward for the balance of the year, what we've baked into the forecast is probably $1 million or $2 million per quarter, which amounts to about $0.02 a quarter, relative to where we were at before. So, it is out there. We are absolutely pushing price increases through. It all, again, ends up being a timing situation and what ends up sticking on that. So, I think that's the situation overall.

And consistent with my comment earlier, Electrical is feeling more pressure on this than other segments because it's kind of the double whammy. It's got plastics, it's got a lot of copper. Freight is the big factor for this. Half of our volume that comes in from Asia relates to Electrical. A 40-foot container, sea container, has gone from $2,500 to close to $5,000 over the last two years just on freight, so a lot of input, a lot of pressure from that standpoint.

Your second question regarding long-term EBITDA margins or long-term margins for Electrical, I think it's consistent with what we said earlier. We still believe this is a teens-type EBITDA business. It doesn't mean it's going to be teens in the third quarter, but certainly our view is consistent in the past. That's where this business will be over the long-term.

Okay, that's very helpful. And, finally, there's -- the news is full of all of the geopolitical and natural disasters and unnatural disasters out there. Can you just address both Japan and North Africa and the Middle East in terms of the impact for Actuant?

Yes, Mark, why don't you start there and I'll get behind you on that one.

Sure. Relative to Japan, certainly our thoughts and prayers go out to everybody that's there. We have a facility right outside of Tokyo. We've got about -- we've got an office facility as well as warehouse. We've got about 15 employees. We generate about a little less than $10 million in annual revenue there. We've been in contact with the team since -- over the past week on a very frequent basis, and short-term, there's some rolling power outages that we're working with and that has short-term impacted the business.

Longer term, obviously from an infrastructure rebuild and some of the other activity going on there, we see opportunities. And right now, it's too early to tell relative to the nuclear situation, but from a supply chain standpoint as far as product, there's no risk to us in those areas. So that's on the Japan side.

Middle East side, we're monitoring the situation. A majority of our business is in the UAE areas, and there is no interruption that we see to date. Where there's been issues in Tunisia and Libya and Egypt, et cetera, we have very -- there's very little to no business there. So it hasn't been impacting us at this stage of the game.

We're certainly looking at how that impacts oil and oil pricing, and that can be certainly a benefit to us longer term. We've got about $50 million in revenue in the Middle Eastern areas and certainly it's two-sided. One aspect of it is, they want to pump as much as they can so that there's deferred maintenance. The other side is, it's more capital, more profit in the supply chain. So, we're monitoring that as well, but no impact to date.

Yes, if anything, I think we -- this part of the world grew quite nicely last year, is growing quite nicely this year. I actually have a meeting over there within the next few weeks with a number of the customers, so we really haven't seen any short-term impact at all.

Okay, that's very helpful. Thank you very much.

The next question comes from the line of Ajay Kejriwal with FBR Capital Markets. Please proceed.

Hello. Good morning, thank you. Just wanted to follow-up on your acquisition comments from the $100 million to $200 million sized-deals in the pipeline. Maybe if you can provide more color by better -- interested in new growth platforms? Or these are deals you've been looking to do in adjacent markets?

Well, it's interesting. I talked about some of the private equity guys turning over assets and, actually, one of the more larger deals that we're talking about, we actually looked at when it got bought the first time. So the answer is, I think we're seeing good acquisition activity.

As I said in my comments, it's across all four segments. So, we did Mastervolt and Electrical. There are things going on in the other three that are in the space that we're talking about. They are not new platforms per se. They fit the base businesses. They might extend our fairway a little bit, but they aren't new platforms per se.

Good, and then maybe update us on some of the financial metrics you used and acquisitions. Historically, you've had good return and accretion metrics, but maybe update your COGS there?

Really the only metric that we use is return on invested capital. So, we look at an acquisition, we charge 12% for the intangibles, we charge 20% for the hard assets, and we're looking to have a positive return against those two -- against the purchase price, against those two within the first year. That's always been our targeted goal.

When you're borrowing money at Andy's newly revised borrowing facility, it's almost always accretive if you're getting to that metrics, so that is really the only metric we use. Obviously we talk times EBITDA and other things, because that's what investors are accustomed to, but that's not how we look at it.

Absolutely. I would not expect a change there.

Just on the Energy segment, it looks like you're seeing increased activity across Hydratight and Cortland in mature markets. Maybe talk a little bit about what you're doing in Asia and Latin America with respect to all of the activity that's going on there, and how you plan to capitalize on those opportunities in those markets?

Okay, so both of those markets, our big one in Latin America is in Brazil with Petrobras. We have a fairly robust rental tool product line down there. We've increased that over the last few years to help support some of their offshore initiatives, and the business is doing well. 40 or 50 employee's in total combination of technicians and people who can repair and refurbish some of those rental tools.

When you go to Asia, our biggest market there is in China and we've been doing more business there. It tends to be more sale than rental and service, but we are trying to grow all three pieces of the business. We do that out of our Taicang facility in China and its been a nice growth initiative for us. We've been doing more direct than through distribution, that's been a benefit. And, again, that's what the OEMs and the asset owners want.

Thank you.

Our next question comes from the line of Charlie Brady from BMO Capital Markets. Please proceed.

Hi, good morning.

Good morning, Charlie.

Can you clarify with me -- on the price increases you're putting through, relative to material cost increases, are you expecting to fully cover the material cost increases with price increases?

That's certainly our intention. Reality, just from past experience, the timing never ends up meshing perfectly. There's always some delays, and when the effective date of this is, and stuff. So, yes, we are absolutely trying to recover all of our input costs on this, whether it's corrugated or freight or steel or copper or whatever.

As Andy said earlier in his comments, we think the pressure is getting a little higher in the third and fourth quarter. We think that's incorporated into our guidance, so we got that covered. But -- the sledding gets a little harder in the next two quarters, and you should expect that we'll cover it, but it won't be dollar for dollar.

And can you just -- on low cost country sourcing, can you remind us, maybe talk about across the different business segments where that is today and where you think you can take it over the next two, three, four years?

Sure. It's today about 25% to 30% of our total would be coming from low cost country sourcing. Electrical, as Andy talked about earlier, is number one. Two would be in Truck. We have a facility in Turkey that does a fair amount of our low cost country and then also in China. Energy, because of the fact that there's a service and a rental tool element of the business, has less, has the least amount. And then Enerpac I would say is probably a little bit higher than that average of 25%. So, that would be the rough split by the four segments.

With regard to Enerpac, can you just talk about the Integrated Solutions business -- has your view changed on that? Or, what is your view? Has it gotten any better as you look out over the next 12-18 months?

No real change in the view. The [mammoot], which is the biggest order we've ever had, is the process going through the factory as we speak. A lot of steel in that and a it's big fabrication job. It's given us some square footage challenges, but that's a good problem to have.

It's a global operation. We bought locations in Europe and in Singapore, but we're trying to deploy resources across the full globe. This is the first time we've pulled this team together. They've been together now for about nine months, and we're starting to like what we see in terms of being able to really support big contractors on a global basis. So, no real change, Charlie, in terms of strategy or where we're going there.

Thanks very much.

The next question comes from the line of Robert Barry with UBS. Please proceed.

Hi guys, good morning.

Good morning.

Just to follow-up on Ajay's question on M&A, we've been hearing increasingly that its become more of a seller's market and I was just curious what you were seeing in that regard, how that's impacting how you're thinking about getting deals done?

I think that is true. I think we've seen it become more of a seller's market. Now, I think there's also an increase in assets that are being brought to that seller's market. So, it's a combination of more flow, more opportunities to look at, but also higher price.

We're seeing a number of deals where the bankers have the luxury of short cutting or changing the normal process, so they might try to pick a horse at the front end and just do an exclusive, if they think they can get their valuation. We've seen more abbreviated processes, more processes, the staple financing is back in vogue. So, we've seen staple financing anywhere between four and six times EBITDA, and that helps all the private equity guys try to get deals done. So, it's robust but as we said in our comments and against last quarter, we've got pretty full funnel. It filled up in a hurry from last quarter.

I know you guys like things to be accretive pretty quickly. Do you think that is still possible just given what's happened with the multiples?

Yes.

Certainly with the low borrowing rates right now, that's not an issue.

And then on energy, given the way that's tracking and given what you said about the outlook and how things seem to be getting better there, do you think that a 5% to 10% organic is still the right range for that segment this year? Or, do you think it could be a little higher than that?

I think our view on this one is certainly closer to the high end of that range than the low end. We've gotten increasingly more optimistic as the year rolled out. Originally we had 3% to 7% expectation, we took it up 5% to 10%, and I'm probably parked up near the top of that right now and we'll wait and see what happens.

Obviously, if you're parked at the top end of that, that means you're above that because we're -- year-to-date we're at half of that. So it feels firm.

And then on industrial, I think you mentioned last quarter that there was elevated level of IS deliveries this quarter. Do you think that we could see that grow year-over-year but be down sequentially, because of the cadence of that large IS order delivery?

Probably more in '12 than '11.

Yes, I think we're going to be okay sequentially looking at Q2 and into Q3 because some of the contract is being recognized in both quarters.

Okay, and then, finally, wanted to have my turn at asking about the Electrical business. The margins year-over-year went from $10 million to $7 million. It sounds like if you said $1 million was due to raws and most of that is in Electrical, maybe a third to half of that decline was due to the raws. Was curious if you could help me think about what the buckets are? What drove it from $10 million to $7 million between raws, the operational issue bleeding over from the first quarter, Mastervolt, dilution, et cetera?

A number of different items, I'm not going to try to build you a bridge with exact numbers here, but just concepts and what not. We talked earlier about supply chains, that carryover issue with fill rates from the first quarter being a little bit of a hindrance on the front end. That's a piece of it. You hit the supply chain issue. More of that was probably in the Electrical segment than any other segments in the quarter.

First half of -- first quarter here we probably had less spending on the growth and innovation side and what we're cranking up on right now. Mastervolt certainly is a big part of it in terms of -- from an operating profit standpoint, there's a lot of amortization expense in this business coming through, and you can see a pretty good sized gap between operating margins and EBITDA margins. That is what's driving that.

I talked in my prepared remarks as well about the impact seasonally first quarter to second quarter. It is -- it was always there in the base North American Electrical business because of the marine component, because of the DIY component, which typically is a back half, back end loaded business. That's only exacerbated with Mastervolt, given its marine, again, and solar and the absolute slowest time of the year for solar is over the winter. So, all those factors come into play in this thing when I look from first quarter to second quarter with margins.

It sounds like for the segment margins will be flat, maybe down a little bit, year-over-year. Is that fair? And I'm talking about EBIT margin because that's what you report, especially if raws are rising and even though you're implementing pricing there's some lag on the recovery. Is that fair, or do you think the margin for Electrical can be up year-over-year?

I guess the way I'd like to look at it is break it out by -- we've already talked about Mastervolt separately. I look at the North American Electrical business. Margins in that business have improved recently in the last couple months since that fill rate issue worked through. I expect them to go up in the back half of the year. So, the Mastervolt piece of this clearly is going to impact the comparability when you're looking at last year to this year from an operating profit margin standpoint. Come back to the EBITDA margin again because there was a very big gap between the two.

It pollutes at the operating. Mastervolt pollutes at the operating line.

Yes. Okay, well then on EBITDA. Do you think it will be--?

There's a big gap between those two. I think our view is consistent with what we've been saying all day. This is going to be a teen-type EBITDA business over the long-term, I think you'll see it inching up in the back half of the year. I don't have a lot more to say on it.

Would I like the margins to be better than when they're at right now? Absolutely. But there's -- the stuff that I'm seeing with the numbers is positive but clearly there are headwinds again. You've got material cost inflation and what not.

Okay, well thanks very much for the thorough answers. I appreciate it.

Thank you.

Next question comes from the line of Robert McCarthy with Robert W. Baird. Please proceed.

Good morning, everybody.

Good morning, Robert.

I think the message came through pretty clearly that you had the financial capacity to do two or three of these larger deals more or less concurrently. Integrating one that accounted for that kind of a combined purchase price would be one challenge, breaking it into multiple pieces, it probably gets more complex. Can you talk about your comfort with overall management capacity, whether you intend to send the message that you can do more than one at a time? And you understand the issue, Bob, can you just address it?

Yes, and I think, Rob, you are precisely right. Me and you have talked about it. I think you look at how much you can do from a capital point of view and that ends up being a capital markets issue. And you look at what can you do internally as a management point of view. When I talked about multiple deals over $100 million to $200 million, they're in different segments. I don't think I would attack a multiple big deal within an existing segment.

We might look if it was Energy and Industrial, because those two have a lot of cross-management and maybe you could shift some people from one to the other just for the integration. But I think you are looking at it correctly. We would not look to do multiple things, multiple hundred million dollar deals within a specific segment. So that probably takes the Electrical guys out of the play for a bigger deal for probably the rest of this fiscal year. But obviously Energy, Industrial and Engineered Solutions, all three have availability and that's where these bigger deals are targeted.

Okay, thank you. I insist on having an opportunity to ask about the Electrical segment as well. I'm thinking it might be helpful, Andy, if you could simply tell us what EBITDA margins were in the quarter for the segment, and what the margin was in the year-ago segment? I mean in the year ago quarter?

Absolutely. I will do that. I'm looking at the supplemental page to the press release, so EBITDA margins in the Electrical segment in the quarter were 11.5% compared to 9.1% in the first quarter of this year, so it's up 240 basis points. Looking at a year ago, second quarter 12.7%, first quarter of the year ago 10.5%. So, the 11.5%, while it's less than a year ago in the second quarter, it's up sequentially and it's up over the first quarter of last year as well. So I think that will improve as the year rolls on.

Okay, thank you. I think that's very helpful.

Bob? I'm struggling a little bit with a paradox in something that you've said about Mastervolt. That most of the feed-in tariff changes tend to apply to higher capacity systems, even utility scale, yet you cite that as an issue for why the business will be roughly flat this year. Is it -- do we have to get into the detail? For us on the outside, is it incumbent on us to get into the detail of exactly what the details of the tariff changes are by country?

Yes, Rob, why don't you let us find something we can send you. It's a very dynamic equation, and it's not something you can just pull off a website and understand it, because you're going to hear about roof systems and on ground systems. So we need to put some effort into that and we'll do it for all. We'll have it for everybody within 30 days or so that we can put it together. But the comment I was making was the major European markets. So, if you take France, they just changed their tariffs but they did not -- they brought everything down but they did not hurt the roof top residential system as much as the other ones. And that was the concept I was doing. And that's been true across a lot of the plays and it should make sense to you.

They don't mind helping the consumer, but what they are trying to do is these very big installations that have access to professional financing and other things, they're trying to be careful with that group. So they're fighting between this concept of we want to have renewable energy and what's it going to cost for our government? And these are just push-pull things going on. I was listening to a discussion yesterday that was talking about how Germany, given what's going on nuclear, is actually having a debate today or tomorrow about solar tariffs. So this stuff is just in constant change.

The other -- we're getting a lot of calls that's coming over the wire in the last few weeks on this just because its been more in the press and people are saying they're cutting tariffs, what's going to happen.This is an annual thing. This is something we absolutely expect to happen and to continue happening going forward on this. So certainly some of this is baked in to our view. It's just that I think the magnitude more recently of it, and in more of it being focused on the big stuff as opposed to the smaller stuff. You just cannot peanut butter those headlines that you see out there applying to all different areas of solar.

Okay, and I'm sorry, one last detail. Do I understand correctly that you simply don't want to disclose what the operating income impact of Mastervolt was in the quarter?

Yes, that's consistent with our past practice on all acquisitions. We don't lay out margins business by business. The SEC reminded us of this a few years ago when they asked us to break out 10 segments and I don't want to go back there, Rob. I'm sure all you guys would like to have 15 or--.

It's very important. It's absolutely very important to us.

I don't want to go there. I really don't want to go there. So I hope you can appreciate my comments.

Yes, okay, thanks a lot.

Yes.

The next question comes from the line of Scott Graham with Jefferies. Please proceed.

Good afternoon, what is now good afternoon in New York. A question on Electrical. Just a simple one, and at the risk of asking you to do more segments, would we -- given that Mastervolt in the quarter, seasonally weak quarter, some purchase accounting noise as well, should Mastervolt be accretive to margin in the second half of the year in Electrical?

I would say from an EBITDA margin it should not be a drag. From the operating profit margin, because of the amortization expense, it could be a drag.

Could still be a drag, okay.

From the OP, from the operating profit, right.

Right, understood. So, really the only other question -- I think Bob talked around this a little bit, but one of the things you've done in the past conference calls, and you did it in this conference call on Energy, but Enerpac, obviously still we will look at that as a flagship. What's new and exciting that looks like the numbers continue to be quite good there? You've got this great army of distributor partners out there. What are you hearing from them from the field, new applications, infrastructure?What's new and exciting at Enerpac these days?

Well, a fair amount of stuff. We've got a new line of cylinders that are lighter and more durable, have better side loading, so that's been an exciting launch for us over the last three months. We've got some new railroad alignment equipment that used to be branded Simplex, is now branded Enerpac, and has been improved and that's been pretty exciting. Emerging markets are doing well. Mark, maybe you can comment a little bit about China and our new leader there has really had a good impact?

Yes, we've had a new leader in place for about a year and a half and Kent is just doing a terrific job and reallocating the sales force, training them, more application focused. And we're seeing some terrific growth there, so we're very pleased with what's going on in China.

To me the most exciting thing about Enerpac is the sales keep on growing, the orders keep on out pacing the sales, so it's knowing the profitability of this business that certainly puts a smile on my face.

Understood. Given the global nature of this business, have you seen in the last couple of weeks, off of what's going on in Japan and in the Middle East, any change in the level of order rates?

No.

All right, thanks a lot.

Yes. Thanks.

The next question comes from the line of (inaudible) with JPMorgan. Please proceed.

Good morning, it's Ingrid (inaudible).

Hi.

Hi. Just wondering, since we've covered most of the other segments, if we could talk a little bit about the Energy segment margins and where you think those could go in the back half of the year. Could those be up year-over-year? I know you said they were going to be up significantly. I was just thinking it seems like the trends are better that we could even see a year-over-year improvement in those.

The EBITDA margin for Energy, for the Energy segment in the quarter was 17% again. It's a low quarter. First quarter we were at 22%. I would expect to certainly go up from where we're at in the back half of the year, sequentially up from second quarter and year-over-year I expect to see growth as well in the margins.

Similar to what we talked about earlier. As volume comes back this has got a high incremental of conversion. So, a lot of Andy's comments there is if you're coming up with north of 10% of growth on the top line in the back, you'll get the margin expansion.

Yes.

Okay, great. Thanks. Given everything that's going on in Japan I just have to ask the question. What is your exact exposure to nuclear?

Nuclear Company wide is probably about 1% of revenue. We touched it in Engineered Solutions, and in the Energy segment, a little bit in the Industrial as well.

And then finally -- go ahead.

No, go ahead.

I didn't mean to interrupt you. I thought you were done, sorry.

I was going to add something but I changed my mind.

Okay.

Go ahead, Ingrid.

I wanted to get an idea. I know given with acquisitions it's a little bit harder to quantify, but what kind of incremental do you think longer term Actuant can do?

Incremental margins on acquisitions?

No, on the base business.

I think we still target 75 to 125 basis point improvement in EBITDA margins a year. And we're expecting that that's kind of -- that's what we target for. Do we get there all the way on every segment? No. But that's what our LEAD process is intended to do. Acquisitions, obviously, changed that mix considerably. Depending on the mix of businesses that will effect that, so all of these things go into play.

I would say that typically yours could be closer to the bottom end of that range as opposed to the top end, where top end is more restructuring--.

And mix related. I guess I was taking into account the fact that Energy and Industrial are a focus area for us and they're higher margins.

Okay, great. Thanks so much. All my other questions are answered.

All right.

The next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please proceed.

Hi, good morning.

Hi, Jamie.

Two quick questions . I'll start with Electrical, I guess. Your outlook on growth there for the year. I know there was a range of 1 to 5 on core growth. What's your updated view on

I think it's pretty consistent, low single digits. Same. No change.

Okay. Does Mastervolt have any particularly strong seasonality following the weaker second fiscal quarter here, or is it pretty consistent typically throughout the rest of the year?

I think the more you're into the sunny warm summer, the better from a revenue standpoint.

Okay. And just touching on Engineered Solutions, can you talk about what you're seeing in the auto and truck markets in terms of trends there? Whether it's just the overall market, or geographies as well?

Yes, the truck market has been a great buoyant market for us over the last bunch of quarters. We expect it to moderate. As we've talked about, it actually got a little stronger, you saw Engineered Solutions in total get a little bit stronger.

Our focus is mostly the CapTel business, so that's Europe and Asia, not as much North American based. So you really should be indexing off the Volvo, Scanias, [DAAS] of the world. Those are the customers that we focus on. So expect it to stay positive, probably not at the very high double digit rates its been running now, but we expect it to be buoyant. I think we look at what you can look at publicly in Truck for '11, and we feel pretty comfortable that those are accurate assessments for the market.

For auto, it's a little bit of a different story. We had some launches last year, so we're up against some tougher comparables. There's some programs that are in their end-of-life area, and then new programs come behind it, so you get little bits of gaps. Auto is slower than that. It will be coming down more quicker than that in the back half of the year, not market share changes, just what's going on model by model.

Okay. And the margins in the segment, the revenue was up from the first quarter, the margins came down around 100 basis points. Can you just walk us through what was driving that?

Seasonality and production levels are down because of customers don't want, they're closing down around Christmas and we don't get full absorption through the factories. Nothing more than that.

Okay, thank you.

The next question comes from the line of Deane Dray with Citigroup Investment. Please proceed.

Hi, good afternoon. This is James filling in for Dean. Thanks for taking the call.

Hi.

First question on guidance. So you narrowed the low end of the range up a little bit and on the last conference call you gave an explanation in terms of per share accounting for currency impact, and something, I think it was about $0.04 to $0.05 coming from tax, implying roughly $0.07 to $0.08 from the improvement to your business. So, what I'm getting at is the fact that we didn't take up or you didn't take up behind the range, is that chiefly stemming from these raw material costs that you're seeing and possibly some weakness in Mastervolt, is it the amortization?

Yes, let me give you, again I'm not going to build a bridge for you, but I will give you some of the different considerations that we had when we looked at guidance for the back half of the year. Certainly, we looked at the US dollar being weaker against currency, the euro and the pound, which is actually an upside. We looked at lower interest rates on the new credit facility, but the flip side is we have very little drawn on it, so it doesn't mean a whole lot right now. Looked at the input costs, or material cost inflation that I talked about earlier, and I gave a little bit of view on what that was per quarter. We talked about the unrest, uncertainty -- unrest in the Middle East, uncertainty in Japan, what that could be, what could it mean for the global economy going forward? Higher share count with stock appreciation, more dilution from the impact of stock options as the price goes up. LTIP, our long term incentive plan, similar thing. It's based on stock price that moves around.

Tax rates, no change in the tax rate for the full year, 22% to 22.5%, might be just a hair higher than that in the back half of the year to average out at that range. On a positive, going the other way, at first half momentum, we are at the high end of the range in the first half. So, those are all different factors that came into play, but there isn't a necessarily a bridge for individual ones. Those are the different things that we've got kind of on our paper.

Okay, fair enough.

I would add a couple things to that and then we'll close out the call. The couple things I would add is 30% up against the mid-point of our guidance in the third quarter, still very strong results. We've talked about core growth rates still above most industrial companies. We raised guidance 90 days ago. This is not going to be something you're going to do every quarter. So, when the reality is, when we just look at where we're at, we're having a great year, we don't want to get ahead of our skis and we're just going to go drive the results and expect them to fall within this range or at the higher end of this range. That's what we want to do. So, we didn't feel any obligation to go move up guidance for the year at this point.

Okay, thank you very much.

Yes.

Okay, well I'll give final comment now. Jeff Hammond, sorry we aren't going to take your last call, but give Andy or Karen a call, they will be happy to answer whatever else you wanted.

Thanks for joining us today on the call. As a reminder our third quarter call is on June 16, and we look forward to hearing from you guys and talking to you back in then. We'll be around all day if you have any follow-up questions. Thanks and goodbye.