Enerpac Tool Group Corp (EPAC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation's second-quarter fiscal 2012 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. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, March 21, 2012.

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

Good morning, everyone, and welcome to Actuant's second quarter of fiscal 2012 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 would like to point out that our earnings release and the slide presentation supplementing today's call are available in the investors section of our website.

Before we start, let me offer the following cautionary note. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Investors are cautioned that forward-looking statements are inherently uncertain and that there are a number of factors that could cause actual results to differ materially from these statements. These factors are outlined in our SEC filings.

Consistent with prior quarters, we will utilize the one question and one follow-up rule in order to keep today's call to an hour. Thank you in advance for following this practice. And with that, I'll turn the call over to Bob.

Thank you, Karen, and thanks for taking the time to join us on our second quarter call today.

We are very pleased with our performance in the second quarter, including robust core sales growth and a new record in terms of second-quarter EPS. Our financial performance topped our expectations on a number of fronts, including EPS, cash flow, and higher core sales in electrical. We had great execution, as evidenced by a 190 basis-point improvement in EBITDA margins.

The recently acquired Mastervolt and Weasler businesses both exceeded expectations on the top and bottom line, and Jeyco, which was acquired in February, added $1 million in sales in February. That was not in our original guidance.

As I reflect on the first half of fiscal 2012, multiple factors are driving our performance right now, and they bode well for the future. Our topline is experiencing strong growth, a combination of acquisitions, growth in innovation initiatives, and a great mix of the Actuant portfolio of later-cycle energy and industrial businesses. We are generating strong year-over-year margin improvement, driven by our lead OpEx process for continuous improvement, the benefit of our lowered cost structure from the 2009-2010 restructuring initiatives, as well as incremental growth contributions from our higher-margin businesses.

Finally, the combination of solid margin improvement and our asset-light business model is driving huge cash flow, up significantly from last year. This strong cash flow has reduced our net leverage down to 1.6 times pro forma EBITDA, giving us ample financial flexibility to fund our future growth.

With that overview, I'll turn it over to Andy to go through some specifics for the quarter, and then I'll come back and go into a couple other topics in detail. Andy?

Thank you, Bob, and good morning, everyone. We're really happy, as Bob mentioned, with the strong second-quarter results from our businesses, and we're pleased to have momentum in our favor as we move into the second half of the fiscal year.

Sales of $378 million were above our guidance range despite currency headwind. Three of our four segments generated double-digit core growth, each slightly better than forecasted. Our operating profit grew 33% year over year, which is faster than sales, meaning we once again have profit margin expansion.

Importantly, our two highest margin segments, Industrial and Energy, continued to generate year-over-year margin expansion.

Now, similar to the last several quarters, the combination of the topline growth and the margin expansion resulted in strong EPS growth. We generated second-quarter earnings per share of $0.43 a share, compared to $0.30 a year ago from continuing operations, which was a 43% improvement.

So let's get a little bit more granular now on the income statement, starting first with the sales line. Our second-quarter sales in total were up 14%, which included 8% core, 7% from acquisitions, as well as a 1% headwind from currency. Our 8% core growth was a modest acceleration from the first quarter.

Overall, sales were ahead of our forecasts with favorable core variances from Industrial, Energy, and Electrical.

From a geographic standpoint, North America led the way with double-digit second-quarter sales growth. Europe grew in mid single digits on a core basis, while the growth in the Energy -- with growth in Energy more than offsetting the declines in Europe that we saw in Engineered Solutions from the automotive and truck markets.

Acquisitions added about $26 million to our second-quarter sales, which included Weasler, Jeyco, and Mastervolt, the latter of which has now passed its first anniversary with Actuant and will be included in our core sales measure starting in the third quarter.

We reported our ninth consecutive quarter of year-over-year operating profit margin expansion this quarter. Consolidated margins were 13.1%, up 190 basis points from a year ago. Now as a reminder, our margins in the second quarter are typically the lowest of the year on account of normal seasonal trends in our businesses, so the sequential decline in the first quarter in operating profit margin was expected and normal.

More importantly, second-quarter margins were up year over year due to the higher sales volume, operational improvements, and favorable mix.

We also had a favorable downward adjustment to an earnout accrual in the quarter for a past energy acquisition for a few million dollars, which helped out Energy segment margins, but this was pretty much offset with Electrical plant closure and restructuring costs and other smaller one-time items in the quarter.

In total, our margins were up nicely, and we expect continued year-over-year expansion in the back half of this fiscal year, although at slightly lower growth rates due to tougher comps.

Now I'll provide some color on the results for each of our four segments, starting first with the Industrial segment. In a nutshell, it was an exceptional quarter for Enerpac and Industrial. Core sales grew at a robust 11% clip and operating profit margins were up over 400 basis points year over year.

We saw solid growth in the base industrial tool product line, especially in North America and Europe, during the quarter. We benefited from sales into the Middle East and sub-Sahara Africa region, as well as strong shipments to energy-related customers.

The integrated solutions, or IS, portion of this segment once again booked some nice infrastructure orders in the quarter and continued to show year-over-year margin improvement, both facts boding well for future prospects.

Now moving on to the Energy segment, core sales were a very strong 27% year over year, showing the typical lumpiness of this segment. We saw growth in both Cortland and Hydratight and across all regions and vertical markets. North America was particularly strong with significant power gen and nuclear maintenance projects continuing to drive outsized growth.

Second-quarter Energy operating profit margins popped nearly 400 basis points year over year, due in part to the earnout adjustment I mentioned earlier, but were up even without this, so it was a good quarter from a profitability standpoint.

We remain enthusiastic about the Energy segment's outlook for the balance of the year, given its later-cycle orientation, solid quoting activity right now, current oil prices, and overall industry maintenance and investment levels.

The Electrical segment repeats were the biggest upside surprise for the quarter. Again, it posted much better than expected core growth this quarter at 14% year over year. Now going into the fiscal year, we were anticipating full-year core sales growth in Electrical in the low single-digit range, 1% to 5%, and this segment is on track to exceed that based on the 11% first-half core sales growth rate base.

The strong growth in North America came from several different channels, including utility, do-it-yourself retail, electrical distribution, Internet, and OEM customers. Our electrical transformer line, in particular, generated some outsized growth as demand accelerated as the year has unfolded. We also believe that part of the growth we're seeing in the retail DIY and electrical distribution markets is a start of a recovery in housing and commercial construction markets off of previous trough levels.

Meanwhile in Europe, Mastervolt had an improved quarter as prices stabilized sequentially. We expect second-half sales to grow on a core basis.

On the operating profit front, we saw year-over-year margin expansion despite headwinds from planned closure and other restructuring costs included in the quarter in the Electrical segment. We're expecting continued margin improvement in this segment in the second half, benefiting from increased volumes and continued disciplined pricing.

Rounding our segment financial review, Engineered Solutions came in pretty much in line with our expectations. It reported a 9% decline in core sales in the quarter, on account of lower OEM production rates in Europe from the auto and truck OEM customers and continued lower demand from China truck. Other markets in this segment are doing much better than this segment's overall core sales rate would indicate, including strong demand from the global agriculture and North American truck and construction equipment markets.

Operating profit margins in this segment were down, due to lower absorption associated with reduced production levels, but were still respectable in a seasonally weak second quarter.

Now before moving off the income statement, I wanted to just step back and review the significant quarterly growth that we've achieved over the last couple of years. Sales have grown substantially since the great recession through a combination of robust core growth, you see here, and the benefit of acquisitions. We're starting to see some of our growth in innovation investments pay off.

Operating profit margins are also near record levels, reflecting the improved leverage from incremental sales volume on our improved cost structure, as well as better pricing discipline. This is evidenced in the robust year-over-year margin expansion you see here.

This consistent combination of core sales growth and margin expansion, as well as acquisitions, have delivered significant EPS growth over the last nine quarters, which has averaged over 50% year over year.

While we're not forecasting this kind of growth at the same rates for the balance of the year, we remain optimistic on our future prospects.

Now a few comments on cash flow and capitalization prior to turning the call back to Bob. Our second-quarter cash flow was very strong at about $33 million. Increased earnings and effective working-capital management drove the year-over-year improvement. Combined with the first quarter, our first-half cash flow in fiscal 2012 aggregates $58 million, over three times what we generated a year ago.

We did not repurchase any stock during the second quarter, but we did deploy about $20 million in the Jeyco acquisition and applied the rest of the cash flow toward debt reduction. At the end of February, our net debt to EBITDA leverage was 1.6 times, near the bottom of our stated leverage comfort zone. Importantly, we're in great shape to fund additional growth and innovation investments in the future, as well as additional strategic acquisitions like Jeyco, which Bob is going to talk about next.

That's it for my prepared remarks today. Bob, back to you.

Thanks, Andy.

So I wanted to start with a quick overview of Jeyco, a tuck-in acquisition completed in the quarter. Jeyco is located in Perth, Australia, and generates about $20 million in annual revenue. They provide highly engineered mooring, rigging, and towing solutions for the oil and gas, commercial marine, defense, and mining industries.

We like Jeyco for a number of reasons. First, they serve the fast-growing end markets, markets that align with our macro trends we've been focused on. Their geographic footprint in Southeast Asia is attractive to us as a base for many of our energy product lines, and they have a strong technical and management team who work closely with their premier energy customers.

Finally, we see lots of opportunities to tie this geographic location and product line into many of our energy-related businesses, and even Enerpac engineered -- integrated solutions product line as well.

Jeyco's margins are attractive, just above Actuant's line average. We've been adding some costs initially to bolster the sales and finance teams at Jeyco, but believe the revenue and margin profile of this business will justify that investment quickly.

Jeyco was our second Cortland tuck-in. The first was Selantic. I thought it would be good to spend a minute to talk about the Cortland platform and the opportunities we continue to see for this business.

When we acquired Cortland in 2008, we talked about the positive macro view of deepwater oil and gas, as well as the diversity of the end markets that Cortland participated in. As you can see on the graphic here, Cortland participates in a number of different areas of offshore energy and marine markets. From exploration to construction to production and maintenance, our umbilical and rope solutions are critical to the asset owners.

Bottom line, we're excited about the opportunities to grow Cortland platform within the Energy segment.

Investors frequently ask us about the diversity of our Energy segment. While we don't specifically capture the sales data in this manner, we've done our best here on this slide to provide you a rough cut of the size of each of the geographic regions and end markets.

Recall that when we started Energy, we were looking at a $200 million market for hydraulic torque wrenches for Enerpac. Seven years and nine acquisitions later, we now participate in a $4 billion served market for joint integrity and rope and cable solutions.

The takeaway here is that we touch a lot of different parts of a broad energy space, both upstream and downstream, maintenance and capital projects, tools and services, oil and gas, power gen, renewables. The list just goes on and on. This level of diversity of our Energy platform serves suits us well. We're not counting on any one platform for success, just a lot of bunts and singles in a growing energy market.

We are concentrating on geographic areas and end markets that we believe are growing the fastest. A great example of this is Gorgon, which we talked about on the last call. The Southeast Asia region is ripe for LNG projects that are being developed to provide energy resources to China and other emerging markets.

We have a number of ways we serve that region, with Hydratight consultancy services, Cortland and Jeyco products, Enerpac integrated solutions systems for infrastructure projects, and ongoing maintenance and repair product lines for both Enerpac and Hydratight.

It's a great example of what we at Actuant call an acquisition platform. Start with a business that we believe plays in a great macro trend, which was Energy; add numerous acquisitions to grow that served market. Seven years later, it now comprises 20% of the overall Company.

We continue to view energy as one of Actuant's best prospects for growth, both organic and acquisitions. It's gratifying to see how well this segment has done, now growing at double-digit rates on a core basis.

Now turning to guidance. We went into fiscal 2012 with a fair amount of momentum, and our key expectation was for moderation, but still growth to record levels of performance on a number of key financial metrics. While we had some concerns about Europe, we thought our diverse end markets would more than offset the small pockets of decline, and we built this into our guidance. From our vantage point, we've been pretty accurate in terms of our economic outlook.

As you saw in today's press release, we've increased our earnings guidance for the full-year EPS now to $1.98 to $2.08 per share. This is the second time we've raised our guidance during the fiscal year, and it is largely driven by our strong first-half performance. Our sales guidance has been narrowed to $1.6 billion to $1.625 billion, based on the first-half results and the strong FX headwind of nearly $40 million on an annual basis due to the weaker dollar versus the euro.

There are a number of items we look into when we -- sorry. There are a number of items we took into account when we evaluated our guidance, including the strong second-quarter results, the momentum of our business, the addition of Jeyco, offset by the stronger U.S. dollar forecast. We expect margins to continue to improve on a year-over-year basis in the second quarter -- from the second quarter of 2012, but, as Andy mentioned, on a more modest rate than in the first half.

Our core sales growth estimates remain at 5% to 8%. On a segment basis, we've modestly increased our core growth rates for Industrial, now 8% to 10%; Energy, now 15% to 20%; and Electrical, now 5% to 10%; and we've kept Engineered Solutions in the same decline of 3% to 6%.

For the third quarter, we're endorsing a sales guidance of $420 million to $430 million and EPS of $0.55 to $0.60 a share. We are projecting full-year free cash flow of $170 million to $175 million, a $5 million increase over our prior estimate.

Our leverage and capital structure is the most conservative shape in our 12-year Actuant history. We have ample availability to execute on acquisition and growth in investment -- and investment in growth and innovation initiatives. Acquisition ideas remain plentiful and will continue to follow our disciplined approach of criteria and valuation.

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

(Operator Instructions). Deane Dray, Citi Investment Research.

Thank you. Good morning, everyone. Those are solid numbers, and I apologize to focus in on the one area that's soft. And I know it's not surprising to see the weakness. It's been well forecasted in the Engineered side. But what is the visibility on the European truck and car production, because we see that there's been some more cuts to this? Just give us a sense of, is this a quarter to quarter phenomenon or how do you project for the balance of the year?

So, let me give an update, and then maybe Andy can just talk about our process of coming up with guidance and the reforecast for the back of the year.

But the first -- we saw quite a bit of slowdown in our second quarter we just finished. A lot of the truck guys took the opportunity to take an extended Christmas vacation. So we saw a fairly significant drop.

We're seeing orders that are out, Deane, usually two to three months ahead of what they're actually in sale. That's kind of the lead time we get. So, we get some visibility of what they're doing. They can change that at the last minute, but when you go across a whole portfolio of customers, it gives you some confidence.

So, I think we've seen that. I think we expect another quarter of kind of high single-digit, low double-digit declines, and then starting to get a little bit better in the back half of calendar 2012. Andy, anything you want to add to that?

Yes, I would say that I'd definitely echo Bob's comments. I think guys went out of their way around the holidays to reduce the build rates.

I would say near the end of the quarter, we were having a little bit more optimism that they were inching up the build rates from where they had been. Part of what we're seeing in truck right now is China as well. A lot of focus on Europe, but China was down quite a bit more than Europe, and it also had to do with build rates -- schedules there.

On the auto front, it's a combination of the market -- production rates being down. First half last year, we had some new platforms that ramped as well. There was a couple of platforms that wound up on power lift gate as well, which are impacting our revenues.

But for the balance of the year here, I think you're still going to see down year over year. I don't expect it to get noticeably different than where we are at right now in terms of the pace that we came out of the quarter with, which was a little better than the overall result for the quarter.

And just to size this for people who might not be as accurate with our businesses, we are talking about $200 million of a $1.6 billion Actuant platform here between those two European truck businesses -- truck and auto businesses, and while meaningful in total, it gets overwhelmed by energy and other segments.

Absolutely, and then just my follow-up question, on the industrial side and Enerpac in particular, just any additional color of what you're seeing through distribution. Is this still MRO activity? Are there any new projects that you would highlight? Anything that might be in the funnel in terms of bidding on?

You know, strong MRO quarter that we just completed, strong order patterns for the third and fourth quarter, very diverse, Deane, from a geography point of view and a product line point of view. IS had a reasonable quarter, but a lot of the bigger projects we've talked about are more in the future than in the past.

Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys. (Multiple speakers). On the Electrical side, could we get just a little more color on the DIY channel and your commentary around potentially seeing the beginnings of a pickup of commercial construction and resi construction?

Yes, I would say when you talk about retail, it was pretty solid across all customers. This wasn't a situation where a single customer had a special promotion going on, an end cap or something that drove a lot of volume.

We saw decent core growth from the big boxes, the Home Depot, the Lowe's, the Menards of the world as well, as well as the hardware co-ops, Ace, True Value as an example of those, as well. Some of the bigger retail merchants as well. So it was pretty broad-based across it, which is encouraging to us.

Certainly some of it is price. We talked about that last quarter, but prices is probably 20% of what we're seeing in growth in that segment. So very encouraged right now by what we're seeing.

Yes, but I think (multiple speakers)

Go ahead, Charley.

I was just going to ask, what kind of visibility are you getting from the big-box retailers?

You don't get a lot of visibility, I guess, is the bottom line (multiple speakers)

Yes, mostly EDI orders, so we're refilling, replenishing based on activity at the tape.

If they're resetting something, certainly we know that's coming because there's a lot of logistics that goes into that, but day to day essentially we can watch their point of sales for our products and see what is moving off the shelf. But beyond that, it's not something that they order, you know, far ahead that gives you a lot of visibility.

Ann Duignan, JPMorgan.

Good morning. This is Ingrid Aja standing in for Ann. Can you talk a little bit more and with a little more color about your outlook by region? The recent macro data suggests that industrial activity is gaining momentum and Europe is likely stabilized. Maybe a little bit what you're seeing and what you're seeing thus far in March?

Yes, I'm probably not going to swing at the March comment, just because we're so close and we're in the middle of a month. I think our guidance incorporated what we're seeing, moderated growth, and I think March will play out that way.

When I look regionally, I think we're feeling pretty much where we thought we were going to be. I think if you go back to the last conference call that we had with you, I would tell you most investors had a more dour view of Europe than we did, and maybe that's because of the fact that you were looking at overall Europe. Most of our sales are in northern Europe, so we do a lot of UK, a lot of North Sea with the oil and gas, Germany, Holland. These countries are just doing more robust than some of the southern countries. We don't do as much down there.

So, I think we went into the quarter feeling like -- and I think you probably can hear my comment from the last script where I said I didn't think Europe was going to go into a recession, and I think I was pretty much -- most people were saying that's too optimistic. I think now people are looking at that as probably the likely outcome, slowing growth but still growth, probably not a recession, particularly if you have the right mix at the top.

So, that's how we look at Europe. I think it's tracking what we thought. I don't think there's been really much change in the last quarter from us.

China has been tough for us on the truck side and in some of the industrial. I think they tapped on the brakes six months, eight months ago, and they are starting -- it feels like it's starting to free up a little bit. So I think we're kind of through the worst of that and it feels like that will get a little stronger.

Southeast Asia doing quite well, and I think all of our due diligence around Jeyco gets us excited about that part of the region. Doing good in -- the Americas is really a strong region and is absolutely in a broad-based recovery, and we feel that across most of our businesses. Already talked about Electrical, but we're feeling that in Enerpac, in vehicles, off-highway vehicles, our major businesses. Hopefully that answered your question.

That was very helpful color. And then, if we could just turn maybe to the energy business, natural gas rig counts are down in the U.S., but offshore exploration is very strong. Can you just maybe give us a little color what you're seeing in the gas industry versus the oil industry overall?

Very hard for us to split that because we don't really do that much pipeline, so to speak, in natural gas. Most of our natural gas would be coming into either a chemical processing plant or some kind of refinery type operation, so I would say the lion's share of our activity is oil, not gas. I don't think I can give you much granularity between the two.

But overall, customers seem positive about their future spending plans?

Absolutely.

They absolutely are, and I think -- we're in the time of the year here where this quarter, a lot of our MRO-type sales are based on annual plans, so you have a lot of December 31 customers that are finalizing their budgets and their maintenance schedules for the following year, and I think that's what gives us confidence. We saw some of that in this quarter, but probably more in the future quarters. We feel pretty good about that. I think most of the asset owners are reasonably happy with their lot in life right now.

Robert Barry, UBS.

I had a question on the gross margin. It looks like for the first time in 10 quarters it's ticked down a little bit year over year, and I was just wondering if there was anything you wanted to flag there, what the outlook is for that? The gross margin piece?

Yes, I don't think it's any kind of a predictor of what is going on. I think the piece that you are seeing come through there is probably the influence from Engineered Solutions where the absorption came off quite a bit because they had a weaker result in [odenzo] in particular, which is our truck and automotive plant, so I guess I would not read into that.

Again, we also had a big service bent toward our revenues within Energy. Service does not carry as high a margins, and let me also remind you that sequentially when you look that, margins in the second quarter, particularly in Energy, are going to be quite a bit lower than the other quarters of the year, so I think it's a combination of those things. But certainly nothing that I am flagging internally that I'm concerned about, based on the trends I'm seeing right now.

You know, what I would add to Andy is -- with our diversity, it's not a metric that, on a consolidated basis, I spend a lot of time looking at.

We look at it individually by business, and there aren't any glaring things that I've seen in any of those metrics that worry us. When you look at it on consolidated, I think our approach has always been you've really got to look at operating profit and EBITDA margins because that tends to do it.

The thing I'm thinking about is we had very good results in Electrical, and that is a segment that carries lower gross margin, but accordingly lower SAE, and when you boil it all together, it comes together. So, the mix just affects you a lot on that, Rob, and I wouldn't draw a whole lot of negative conclusions to it. I think if you focus on the bottom-line EBITDA and operating margins, you'll feel better.

Yes, no, I think that sounds like a fair comment.

Just to drill down then, as the follow-up, on Industrial and Energy margins, I know in the past, I think, Andy has talked about being maybe 100 to 200 basis points of additional room for improvement there, and of course that was much larger this quarter. I understand there is some lumpiness, but is there reason to think that, for this year at least, there is optimism around more than a 100 to 200 basis-point margin improvement in those two segments?

No, I think that's still a fair comment. I would say all the stars aligned this quarter, in particular with regard to Enerpac (multiple speakers) said, they had a blowout quarter. Margin -- mix was very good for them.

I know they will be investing more in some of our growth and innovation in the back half of this year. So I still feel good, [but] my comment, 100 to 200, you should not straight-line off of the 400.

Fair enough, thank you.

Ajay Kejriwal, FBR Capital Markets.

Good morning, guys. So on Energy, really strong organic, and I know you mentioned lumpiness and nuclear maintenance. Maybe a little bit more color on the lumpiness, what's -- is there anything going on in the Gorgon project or any impact from the milder weather in Europe?

I don't -- certainly Gorgon is coming on, but it's been -- we've been recognizing revenues on it for six, nine months now, so I don't think it's that factor.

It's just -- our comment on lumpy is our core sales in the first quarter, I think, were up 12 or -- 11 or 12 with energy, and then, boom, we go up to 27%. It's really that item.

I think the energy business, because of the project-oriented nature of it, you can have maintenance pushed out a quarter or pulled in, and that just tends to make it pretty lumpy. If you have a big subsea connector or a couple of them happening at one time, that can pop sales as well.

We've got some pretty nice long-term contracts that we are working our way through, down in Gorgon, as you mentioned, and also down in Florida on a couple different power gen and nuclear plants, so we feel pretty good about that going forward.

But I wouldn't bank on 27% growth, straight-line that either going forward, because that's how we came to our original 10% to 15% growth was, gee, first quarter you were light, and now we're a lot heavier. So it's just the nature of the business.

Just to amplify Andy's comments, because this is a business that's lumpy and it will lump the other way in the third quarter, if you go back to last year, we grew 4% in the first, 5% in the second, 22% in the third, 27% in the fourth.

So, we're up against much tougher comps in the back half of this year, and thinking that 27% that what we just did, that's just not a realistic assumption to be in that kind of range in the back half. So, some of the lumpiness is due to the fact that it was a seasonably pretty weak second quarter last year, much stronger this year.

Thanks for the clarification. And then, just on Electrical, good to see business coming back. It's been down for a long time. So maybe if you can remind us where revenues are versus where they'd peaked last cycle, and then, what's the margin potential as these revenues come back? You've obviously done a very good job of taking costs down in that business for the last couple of years.

So I'm going to let Andy spend a second and noodle about how he's going to answer that. It is tricky because we -- does the peak include Europe electrical last year, which we discontinued, or not include it? When I look at in total, we kind of traded assets. We traded the Europe electrical asset for Mastervolt, and we are very happy with the trade we made there, but that does affect the numbers. And I don't know if you're talking pre- or post-discontinued (multiple speakers)

Yes, just the North America electrical, if you will, please.

Just North America.

We're still down. Karen is running to get some precise numbers here, but we're still down probably 25% from the peak in this business.

It's coming back, certainly, in some of the end markets. I would say that -- or some of the product lines. The one in particular that is doing well, as I called out, is the Transformer product line. This business peaked out in 2007 at about $360 million or so. We're still well off that, so I think this -- the 20% or so is -- 20% or 25% down right now off a peak is still good.

In terms of the margins coming back, this thing does not carry the same incremental margins on the way back up as, say, some of the other businesses because it tends to be more of a buyout type product, a buy and resell type product, as opposed to something that you're going to get tremendous leverage from an absorption standpoint through your manufacturing plant. So you're probably looking at, realistically, a 20% incremental EBITDA coming up on this thing.

But there is nothing in there that tells us it can't get back. I mean, I'm trying to think across the portfolio. There might be a couple of product lines we've discontinued or things, but that -- I think that's just where we're at on the housing, commercial construction cycle.

And we've seen modest improvement a couple quarters in a row here, but compared to where it went, a very gradual decline that started a year earlier than the recession, we've got good opportunity in this segment to see incremental sales and margins.

Thank you. Good quarter, guys.

Jeff Hammond, KeyBanc Capital Markets.

I just had a few cleanup clarification items. Are you able to quantify the earnout and the one-time items in Electrical?

Sure, yes. We were talking about a couple million -- $2 million adjustment or so on the earnout. Restructuring, going the other way, was a little bit more than half of that, then we had some items in some of the other segments as well, kind of chunky a $0.5 million here, a $0.5 million there. So they pretty much offset the pickup, pretty much offset the other one-time items.

Okay, and then, just a clarification on the core growth number for Electrical. How is Mastervolt a negative number in that bridge?

That's a great question. We kind of struggled on how to show that -- or how to communicate with it because how do you have carryover -- negative acquisition carryover?

Essentially what it's saying is we are up against some very strong numbers right when we bought it a year ago, and then it started falling off. So we have got three months of results in this year. Last year, we had 2.5 months of results. The 2.5 months last year were stronger than the three this year, and it was -- primarily the difference was December. This is a business where you will see positive -- you will see core growth in the back half of the year coming through because we were up against -- we were falling significantly last year as solar (multiple speakers)

It was an inventory correction.

(Multiple speakers) with the inventory correction, and now we've got more stabilized. You know, I think we feel pretty good right now about the direction that this thing is going. I would say it's -- not too sound like it's where we want it to be, but it made, in my view, quite a turn in the last 90 days.

You know, it's -- and you guys have lived this with us, but it did not have the first year we had expected.

Most of that is inventory correction in the entire industry. It is not a Mastervolt-specific item. It started with some feed-in tariffs in Germany and then France, and then led to some overcapacity in the industry.

It hurt the panel guys a lot worse than the inverter guys, which is the brains of the system. I think that inventory is pretty well cleared through the system. There might be a few pockets that are still out there, but as Andy says, now we're on the other side of that. We're up against some very forgiving comparables, and we think this thing will be contributing fairly meaningfully to the electrical core growth going forward. Not as meaningful to Actuant's, but it will add a little bit to Actuant in each of the quarters going forward.

Good to hear. Thanks, guys.

Scott Graham, Jefferies.

Hey, good morning. The questions are just surrounding -- really twofold. The first one is surrounding the big three businesses, industrial, energy, and North American truck. We've covered European truck, so that's fine.

I was just wondering if you could give us anything -- as far as the orders as the quarter progressed, anything to call out there specifically, and any additional color you could give would be great.

And the other thing, of course, is the acquisition pipeline. Been a little slower than what we've seen. I know that there's been more of a strategic effort to find more growth-y types of acquisitions. I was wondering if that was maybe slowing down the pace.

I'll handle the trend and Bob can cover on the acquisitions.

I would say for the most part it was a pretty consistent trend across the quarter. We had a couple of exceptions. I called out solar just now where solar was probably a little bit better in the last two months than the first month on a year-over-year basis. I also called out that truck and auto felt a little bit better as we were coming out of the quarter than going into the quarter, not so much that our sales were up but some of the signals that we were getting from changes in schedules that were coming from some of the OEMs.

Enerpac ended probably a hair stronger in the back half of the quarter than the first half. The other callout, I would say in general, which would impact for us our industrial segment as well as engineered solution and truck, is we are seeing signs of life in China right now. Bob mentioned the fiscal constraints that were -- had been clamped down for the last six or nine months, and we're starting -- they had started to ease up on the reserve requirements in the banks over there. And we are seeing it not only in discussions and RFQs, we're seeing it in payment patterns from our customers as well, so I think -- we are optimistic that we are going to see a better second half in core growth in China, in all of our end markets that we're in China, all the different product lines in China, than the first half.

For the acquisition question, Scott, what you call slow, I call robust. You know, we looked at numerous assets, probably more than we have looked at in a single quarter in four or five years.

We saw assets that are both from the strategic people in the industrial industry that are kind of cleaning up their portfolio and we saw quite a few with PEGs, private-equity groups, that have had -- their investments underwater during the recession are now starting to peek out of that and are looking to monetize those things. Those people tend to get impatient with their assets on a four- or five-year cycle, and that's what we're seeing going on now.

So there's plenty of items we're looking at. The funnel is quite full with things that can close in the foreseeable future. It's focused on energy and industrial, the two areas we've been telling you it's been focused on.

And then, the last comment would be there are some bigger deals, as well as some of the tuck-ins that have been -- that are in the funnel and also a part of that activity that I talked about for the quarter. So, again, while it might look slow in terms of what is reported, it's anything but slow in terms of what's going on in the business.

That's very helpful, Bob. Thanks.

Jamie Sullivan, RBC Capital Markets.

On the energy segment, that was the biggest change in the revenue outlook that you gave. Just wondering, Bob, maybe if you look at the slices that you broke out in the slide for end markets, which ones have -- the one or two that have kind of outperformed your expectations? And are there that give you more visibility or confidence as you're going into the back half of the year?

So the first area, I would say, would be North American. That was -- anything that was in that bottom chart there on North American was very robust.

That tends, from a product line point of view, was very strong in power gen; a lot of re -- retrofitting and normal maintenance and repair turnaround at power stations. And that is big business for DL Ricci. I don't know if you remember that asset, our machining business, but that's doing really well in there.

The second is nuclear, and it's not new nuclear. It is maintenance and repair of existing nuclear. And I don't know if that is related to the tsunami and everything that happened in Japan, or if it's just normal old maintenance and repair, but our activity there has been great. Biatch really helped us on that. The timing of that acquisition was perfect for this kind of change and event.

Outside of that, I would tell you southeast Asia where Gorgon is and some of those projects continue to bubble along. There's just great activity going on there. Lots of capacity, lots of things moving there.

I wouldn't say we've seen much from frack gas. I think that's out in front of us still in terms of our initiative there. It will probably be more pipeline infrastructure on that for us, not really the actual generation of that. So that's the color I would give you on that.

That's very helpful. Then I guess just the follow-on would be on the Electrical side. Andy, when you talked about the business activity relative to peak, you talking about the North American distribution retail business. Just wondering how much that portion of Electrical helped in the upside in the quarter. Was that sort of the big delta for you? And do you feel that the warm weather at all helped in North America, given it was an unseasonably warm winter?

It was broad-based. Certainly, weather doesn't hurt DIY and it can help, and as people -- the beautiful day like we have in Milwaukee today, 80 degrees in March, by the way, it -- that certainly gets people moving. It gets houses moving and whatnot.

But our other areas are not impacted by that, like the utilities, which was up over 20%, which is transformers, which has nothing to do with residential, it's up 20%. That stuff is doing well.

We've got some new marine products that we rolled out, some new ship/shore power cords [that yield], as an example, that we rolled out. So it was pretty broad based across a lot of different end markets within Electrical, so it feels pretty good.

(Operator Instructions). Rob McCarthy, Robert W. Baird.

Good morning. This is Mig Dobre sitting in for Rob McCarthy. Congratulations on a great quarter.

I guess for me, it's kind of a high-level question. I'm looking at your full-year core sales growth of 5% to 8%, which you guys have maintained, and year to date you're performing at a very high end of that, and your commentary seems to point to acceleration in some end markets that are quite important. We're talking a little bit better trends like China, perhaps some improved activity in construction in North America.

And I guess I'm wondering here, as you're looking at that core growth guidance, what are some of your, perhaps, elements of conservativism that you're building for the second half of the year? And I understand that energy, for instance, has a lumpiness to it. That's clear, but I'm wondering if there's something else, perhaps, that we should be aware of.

No, I don't think so. I think it's a question of, like you say, I think you picked on some items that were strong positives, like China, but I also told you energy is up against a very tough comp, highest comp we had last year. Enerpac is up against a pretty tough comp in industrial against last year.

So I think you're going to see absolute growth. We don't question that. It's just at a moderating area. I also talked about truck in Europe. Probably got at least another quarter in auto -- it was our first question that we've probably got another quarter before those are turned around.

So while you're picking on some positives, they're much smaller pieces than the half -- a lot of revenue that I just went through with Enerpac, Energy, and truck and auto. So I think it's just the combination of that whole flux.

And I think against comparable peers, 8% year to date, 5% to 8% for our fiscal year, looks pretty darn good. I think our mix is performing as well and probably better than most of the diversified industrial landscape.

Great. And also, perhaps a little more color, in industrial you highlighted growth and innovation in that segment specifically, and I was wondering if you can provide a little more color there, as well as progress in some of your other segments.

Yes, growth and innovation initiative within industrial has been an area we have done quite well in. I think we have started with a much stronger emerging-market focus in that space. We've added a new India leader to really try to drive both industrial, but really overall Actuant area.

We've brought out a number of new products in terms of products for that space. We've got a steel hand pump that is being launched as we speak.

Emerging markets in South Africa added about $1 million. Not the biggest number, but it was starting at a very low base, so it is up over 100%.

Mining verticals is a big space for us. We have been really going through mines, really, globally, and what we're finding is we've got a lot of safety issues in mines. They're doing lots of maintenance and repair on vehicles and things in a very unstable environment, and they're very excited about some of the things we can do within Enerpac, both within integrated solutions on kind of a strand jack, but also in just different jacking systems. That is the core product for Enerpac.

So I boil all that together. They've got a lot of activity in the growth and innovation in that segment really across all of Actuant. Mark, maybe any comments you'd like to add about that initiative across the business? Maybe talk a little bit about the worldwide meeting (multiple speakers) focused on.

Sure, as Bob indicated, there's a lot of small victories going on in the various businesses that are contributing to some of the core growth you're seeing and to the cultural change that we're trying to drive here across the enterprise.

We've got a standard growth and innovation process that is in place across the businesses. We've put governance in place around prioritization. We've added people in sales, marketing, engineering, and other critical customer-facing areas. We're on the second iteration of the strategy plans under G&I. There is much more market segmentation, voice to the customer, that type of activity going on.

We just came off of a worldwide meeting. We had 220 of our global leaders in, and really focused around growth and innovation. Three primary areas. One is growth in emerging markets, second is innovation, third is under leadership.

So just a lot of activities going on. A number of pressure tests, which are -- a lot of small tests going on, much more quicker to market thinking than we've had in the past. So a lot of small activities going on across the enterprise.

It doesn't come without a cost. If you've seen our SAE costs, we have grown. We've been deliberate about it. We're looking at paybacks.

We're being very careful where we add bodies, but our focus is on adding individuals in growth and innovation. Added a little over 100 people last year, probably on track for at least that amount of people this year, and really excited about that initiative.

We will probably by the end of the year, certainly by our investor meeting, I think, we'll be quantifying some of those wins for you. Today, it's still a little early. You don't see a lot of sales -- incremental sales revenue from these initiatives, but boy, I do see a lot of requests for quotes, new products being shown to customers, lots of new initiatives, and I'm really excited where that can go.

I think we've told you guys that that could be a couple hundred basis points of core growth over the long term, and there is nothing to dissuade us today that that is not a realistic target.

And there appears to be no further questions at this time. I'll now turn the call back over to you.

Great. Thanks for joining our call today. Just a note. You see on the slide here, our third-quarter call will be held on June 20. We'll be around all day to answer any follow-up questions you might have. So have a great day.

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