Enerpac Tool Group Corp (EPAC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation's third 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 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 on Wednesday, June 20, 2012.

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

Good morning and welcome to Actuant's third quarter 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 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.

Consistent with prior quarters, we will utilize the one question, 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 joining us on today's call. We are very pleased with our third quarter results, which came in pretty much in line with expectations. Given the macro headlines, volatility in some of our end markets and FX headwinds, the third quarter was a great example of the performance consistency you get with a diverse portfolio like Actuant. We called for moderating growth rates up against a strong third-quarter comparison of last year, and that's precisely what happened.

On the top line, we saw the most growth from the Energy segment, up 23% for the quarter. Industrial and Electrical also delivered solid core with Mastervolt now in the calculation and contributing nicely. Engineered Solutions, as expected, was down due to European truck and auto. EPS was at the high end of guidance, driven by margin expansion, even with the FX headwinds. Finally, our free cash flow was outstanding.

We completed the acquisition of Turotest for the quarter, nice tuck-in for Maxima platform and an important addition as we try to grow Actuant in Brazil. Finally, we completed a number of capital structure actions during the quarter to take advantage of historically low interest rates and putting Actuant in great shape to fund both organic and acquisition growth for the foreseeable future.

We'll cover all these topics in more detail on the call as well as add some color to our 2013 guidance we've provided. At this point, I'll turn it over to Andy to go through the specifics for the quarter. Andy?

Thank you, Bob, and good morning, everyone. It was an all around good quarter with strong execution, evidenced in our operating results, acquisitions, stock repurchases and refinancing activities. I'll first dissect our operating results.

Sales of $429 million were at the high end of our guidance range and up 4% core above last year, excluding the impact of acquisitions and foreign currency headwinds. Operating profit grew 17% year-over-year, faster than the overall 9% increase in sales, meaning we once again had operating profit margin expansion this quarter. Our net income and earnings per share were both adversely impacted by the $17 million pre-tax refinancing charge in the quarter related to converting our former 2% convertible bonds into stock, retiring the old 6.875% senior notes and canceling an interest rate swap agreement in conjunction with the refinancing.

On an after-tax basis, this was a $10.5 million charge or $0.15 a share net reduction to EPS. I'll cover the details on the refinancing later in the call. Excluding these charges, EPS was $0.60 a share, up 18% over the comparable prior-year period.

Now I'll provide more color on our results, starting first with the sales line. Third-quarter sales in total were up 9%, consisting of 4% core growth and 8% from acquisitions, the combination of which was partially muted by 3% foreign currency rate headwinds. The 4% core growth was in line with our guidance and our internal expectations and a clear moderation from last quarter's strong 8% core growth. All three geographic regions, being the Americas, Europe and Asia-Pac, showed year-over-year growth with the Americas, not surprisingly, leading the way. Growth did moderate in Europe as the quarter progressed, and we expect this to continue in the fourth quarter. From a segment level perspective, Energy was a clear leader with 23% core growth followed by Electrical at 10%, Industrial 5% and Engineered Solutions, down 11%. I'll provide more color later on the call by segment.

Operating profit margin grew nicely overall, up 100 basis points to 15.8%. This was our 10th consecutive quarter of year-over-year margin expansion, the result of increased volume, price increases in the last year and restructuring savings. Favorable mix also benefited margins with increased growth in innovation spending and restructuring costs offsetting some year-over-year improvement.

Now I'll provide some color on results by segment, starting first with industrial. Industrial again generated year-over-year sales and margin growth against its toughest comps in the last year. Core sales growth was 5% while operating profit margins expanded 50 basis points year-over-year. At almost 28%, operating profit margins are the highest we've seen in some time.

Regionally, the Americas had a good quarter, while Europe moderated slightly as the quarter progressed. Asia and emerging markets showed modest growth with challenging economic conditions being encountered in BRIC countries. Enerpac's IS, or Integrated Solutions business, had a very strong order intake quarter, including a $10 million order from Russia, $4 million follow-on order from Italy and some nice gantry wins in Asia.

We're pleased with the momentum and market share gains being realized by Integrated Solutions, which reinforces the strategy we developed for the 2010 acquisitions of both Team Hydrotec and Hydrspex.

Moving on now to the Energy segment, core sales continued to be very robust in the third quarter with 23% growth. We once again saw growth in both Cortland and Hydratight and across all regions and markets. The strategy to expand our market share in power gen products, such as nuclear plant projects, is also paying off. Additionally, we're seeing success in expanding share in Asia with incremental project wins.

On the margin front, the news is also positive for Energy with solid expansion. Its operating profit margins jumped 180 basis points in the quarter to 19.2%.

The Electrical segment also had solid growth in both core sales and profit margins. Core sales were up 10% year-over-year, reflecting increased demand in solar, utility, OEM transformer, retail and Internet channels. Solar in particular was encouraging in double-digit growth over last year's weak comparable. Operating profit margins were up nicely in the quarter as well to 10.3%, which was 350 basis points better than a year ago, reflecting improvements in both Europe and North America.

We are optimistic that we'll continue to see decent growth in Mastervolt's residential and light commercial solar markets for the next several quarters, now that we've reached grid parity in many of these markets. Going the other way, we expect utility and OEM marine demand to be modest headwinds in the next few quarters. While still not back to the sales levels we saw before the great recession, we are encouraged by the continued progress being made by the Electrical segment.

Now onto our final segment, Engineered Solutions -- the report here is pretty similar to last quarter with headwinds in convertible top and European and China truck markets dragging down decent results in other markets. Segment core sales declined 11% while operating profit margins were 13.5%, down from last year's record quarter. Lower production volumes in our Power-Packer manufacturing plant, which supplies the automotive and truck markets, accounted for most of the year-over-year decline in margin.

Other markets continue to do very well and better than the segment overall core sales would indicate, indicating solid demand from the global ag and North American truck and construction equipment markets.

So that's it from the segment level. Turning back now on the detail and focusing on a few high-level metrics, you can see in this table that Actuant in total continues to perform well. While our year-over-year growth rates continue to moderate from some pretty heavy quarters, the bottom line is we're continuing to drive growth across the businesses. Fiscal 2012 will be a record year for sales, EPS and free cash flow at Actuant, and despite moderating economic growth, we're projecting new record highs again on these metrics in 2013 as well.

We had a very busy spring from a capitalization standpoint, highlighted by a record $82 million free cash flow quarter as well as major refinancing. We also repurchased about 725,000 shares of Actuant's stock in the quarter, representing about a $19 million use of cash. The net result of all of these activities was a dramatic improvement in our liquidity and capital position. Our net debt to EBITDA ratio declined to a new all-time low of 1.1 times, as did our debt to total capitalization, which ended at 23% at the end of May.

We have been monitoring our 2% convertible bonds for some time, looking for the right window to convert them into equity. That opportunity presented itself shortly after our last quarterly earnings call. We forced conversion of the convertible bonds, thereby reducing debt and increasing equity by an offsetting amount. That enable us to get upgrades from both of our rating agencies, which in turn helped us reduce our borrowing costs on a new 10-year bond issue.

The resulting capital structure consists now of the $300 million 5.625% 10-year bond, our existing $100 million bank term loan and, finally, our $600 million revolver. At the end of May, we had $80 million of cash on the balance sheet. None of the $600 million revolver was drawn, so we're in great shape. From a liquidity standpoint, we only have $29 million due in principal payments over the next three years.

On that positive note, I will turn the call back to Bob.

Thank you, Andy. I wanted to spend a minute putting our current capital structure in perspective. As most of you know, Actuant started 2000 as a much smaller company with debt leverage of four times EBITDA. Here we are 12 years later, almost four times the size after deploying about $1 billion of capital on acquisitions and our net debt to EBITDA is down to about one times. Clearly, this is the best capital position and interest rate environment in our history and sets us up well for capital deployment and growth initiatives as well as having a conservative balance sheet in the event the economy changes drastically for the worst. We continue to opportunistically repurchase shares, as you saw us do this quarter, and believe we have plenty of capacity to do both share repurchases and business acquisitions.

Now let's turn to the Turotest acquisition. We closed this $13 million transaction at the end of March, our first in Brazil. Turotest provides gauges and instrument panels, primarily for agriculture and other industrial customers and a nice tuck-in acquisition for the Maxima business. It adds to the agriculture platform we've identified as a key growth end market. We intend to leverage Turotest's assembly and office footprint in Brazil to extend our capabilities to many other Actuant businesses outside of Maxima.

I was recently in Brazil and spent some time with our energy team. What struck me when talking to them and customers like Petrobras was the sheer size of the investments in energy that are being made. Petrobras mentioned something like 54 vessels scheduled to be built, a total committed capital of $250 billion for their offshore initiatives, just a staggering number and great opportunities for Hydratight, Cortland and Enerpac. We see robust activity in Brazil as well as other geographic areas helping to drive our Energy segment sales.

The Gorgon LNG project in Australia is executing well and we've received a letter of intent on another new large job in that region. We remain excited about such consulting opportunities, and customers have confirmed that the cost of our work pales in comparison to the cost of rework, downtime and emergency repairs that result after the fact. This speaks to the value proposition Hydratight provides.

We see a lot of acquisition opportunities in Energy providing geographic expansion as well as product line and service extensions. We continue to have a robust funnel of activity in Energy and in the other segments and remain disciplined in our approach. We have several interesting acquisition opportunities that are being pursued and I want to stress -- that is not due to lack of ideas or activity. We are confident that there are acquisitions in future quarters.

Now let's turn to guidance. As we discussed in the release, the macro environment is softer than three months ago, Europe and China in particular. This is what we expected this year, moderating growth as the year went along, and this is essentially what has happened. Many of you have asked us but we do not see anything like a repeat of the great recession in 2009, for a number of reasons.

First, the North American economy is growing, albeit at a slower than expected rate compared to other previous recoveries. Second, there's significantly lower inventory levels in the channels we serve, particularly the vehicle markets. Correction of inventory levels played a sizable role in the last recession. Using Actuant as a reference point, given our diversified portfolio, we've only added back about a third of the inventory we took out of the base business in 2009. I think a lot of our customers are in the exact same situation.

Third, housing played a huge role in the great recession. Housing is still close to the bottom and most of the data points show a slow recovery rather than further decline. This impacts our Electrical segment directly, but the overall economy indirectly. And finally, as Andy covered, we have a vastly improved capital structure.

In terms of our fiscal 2012 full-year guidance, we're zeroing in on a sales range of about $1.6 billion to $1.61 billion, reflecting the recent headwind from currency translation. We are narrowing our full-year EPS guidance to the higher end of our previous range, taking into account the third-quarter performance, near-term outlook and current FX environment. This EPS of $2.03 to $2.08, which is up at the midpoint about 20% from last year, excludes the one-time costs of the debt refinancing previously mentioned.

This equates to a fourth-quarter sales of $400 million to $410 million and a corresponding EPS of $0.50 to $0.55 a share. Foreign currency rate changes have a meaningful impact to the fourth-quarter comparisons to last year with a substantially weaker euro. Last year's fourth-quarter EPS of $0.50 share would have been $0.05 lower if you used today's FX rate.

On the third quarter earnings call, we traditionally provide our first views of the upcoming year, and it seems like the norm over the last few years that we're looking through a fog bank. Despite the current macro and European uncertainties, our robust forecasting process and end market diversity give us confidence with our ranges. We expect fiscal 2013 sales to be $1.665 billion to $1.7 billion range and an EPS of $2.15 to $2.30 a share, with free cash flow in the $195 million to $200 million range.

There are a couple of important assumptions we base these estimates on, and I'll walk you through them, but keep in mind that we won't provide segment-level detail until our next quarterly earnings call.

With regard to our end market mix including the later cycle Energy segment, we expect core growth to grow about 3% to 5%. This assumes a global GDP forecast of 1% to 2%, pretty similar to today's environment. Acquisition revenue carryover will be about $25 million. Offsetting this will be the negative impact of the weaker euro. We are assuming a euro-to-dollar exchange rate of 1.25, well below fiscal 2012's average, and this will reduce sales and EPS by $25 million in sales and $0.05 a share, respectively.

We will continue to invest in growth and innovation and emerging market initiatives in fiscal 2013, which will have longer paybacks. These actions will drive sales and earnings growth into the future but will mute 2013 margin expansion to 25 to 50 basis points. Based on our forecast, financing costs should approximate $26 million and the effective tax rate should be 22% to 23% range.

Questions we have been increasingly fielding from investors in the last 45 days relate to the impact of the weak euro and contingency plans. We've included this slide for you to consider our guidance based on various foreign currency rate assumptions. Regarding the question on contingency plans, they are a way of life at Actuant both on the cost avoidance and cost reduction standpoint. With our asset-light business model, I think we've demonstrated in the past the ability to react quickly to whatever the market gives us.

In summary, Actuant will continue to deliver growth in 2013 for shareholders. This will come from a combination of core sales growth, acquisitions, continuous improvement projects, stock buybacks and refinancing savings.

Finally, as always, future acquisitions and stock repurchase activity are not included in our guidance. But, as we've already discussed, we have a robust pipeline and expect to deploy capital on both of these initiatives as we move forward.

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

(Operator instructions) Charley Brady, BMO Capital Markets.

With respect to the commentary on Brazil, it sounds like there's a lot of activity going on down there with respect to Energy. Can you give us a reminder as to what is Brazil in terms of total sales, and I guess specifically on Energy today? And where do you see that going over the next three to five years?

Yes, why don't -- I'll let Andy noodle on getting you the numbers and I'll just talk more generally and then we can bring the two comments together.

Brazil today is primarily a Hydratight business and Enerpac business and the little bit of [capital] business that we did for Scania and one other truck customer. We were handling this out of a couple of smaller facilities. With the Turotest acquisition, I think we're looking that this is going to be a broader initiative.

Energy is our biggest business down there. We do a lot of rental tools. We sell them both to Petrobras on a tier 1 basis, but also to quite a bit of the sub suppliers that fall under those guys.

In terms of sales, Charley, with Turotest we do about $30 million-$35 million of revenue down in Brazil.

Okay, thanks. And just as a follow up on the Energy side of the business, can you give us some granularity between the growth rates of Cortland and Hydratight in the quarter?

They were actually quite similar in the quarter, I think within a couple hundred basis points, within 200-300 basis points of one another.

Great, thanks, I'll hop back in queue.

Deane Dray, Citigroup.

Hi, good morning, James Bank filling in for Dean. I was just wondering if I could get a better sense of both the European and the China landscape. It looks like it's really impacting your OEM heavy truck space. I think you mentioned in your prepared remarks that electrical was good, if I'm using the right word. I was wondering if you could give us a bit more color in terms of north-south regions and maybe how broad-based the weakness is, or if it's just really in that vehicle space for you.

Okay, well I'll start, and Andy, help me on some of the details. Europe in total was up. A lot of people lose that fact, but we actually had core growth. It moderated a bit from the prior quarter, but we also had some pockets of pretty good strength. Energy represents a big chunk, 25% or 30% of the European market, and obviously the trends we saw in Energy were strong everywhere.

We don't do a lot in the southern countries. Ours is Germany, Holland, the UK, a little bit in France. But by and large, we are in the northern climates there. So we saw great results. Mastervolt had a great quarter, admittedly a weak comparable last year, but it was great to see the recovery and the channel inventory issues that we've seen in the past have dissipated. I think we told you that a couple quarters ago, that we thought we were at the end there.

So the last thing I'd say about Europe is IS has been a big positive success for us. A lot of the orders we've talked to you about, the Venice moats project, a number of others, are in the revenue stream and are offsetting some of the weakness you've got in the general industrial tool portion of Enerpac.

As for China, the weakest spot, we were weak in both Enerpac and in truck, but truck being the weakest. Now, in China, we're mostly with CNH TC, so it's a single customer. We are in launch mode with FAW. I think that will start offsetting that because, obviously, we didn't have sales in the prior period. So I think we're expecting this to be an improving picture as you go out in the quarters in front. Anything you want to add, Andy?

No.

Yes, that was very helpful. And just for -- the second is just the M&A pipeline. We're hearing that's robust from a lot of the other companies here in this sector. And as you mentioned, your capital structure is as good as it's ever been. But we are really only seeing some bolt-ons here, some tuck-ins there. I'm just wondering, is there anything going on with the sellers or strategics maybe bidding up some stuff so you guys walk away from it, or maybe some of these sellers are rethinking exit strategies? I'm just wondering if there's anything more to the timing, or that's just coincidence?

I think nothing to call out, nothing unusual out there. There are certainly some deals that get pricey and you just walk away from them, but nothing out of the ordinary here. It's -- people should not read into the fact that we've only closed on two small deals. There's plenty of activity out there and I just remind people that in 2010 we did $40 million of acquisitions and in 2011 we did $300 million and this year we are at $35 million or $40 million. Next year -- or we could end up -- certainly there's a possibility here something happens this quarter, if not this quarter, next year. But it's not for lack of activity. It will happen.

Size of some of the things in the funnel -- our target would be kind of $50 million to $100 million. That would be where we'd like to be. We have things that are smaller than that. I think the largest thing in the funnel now is $250 million or $300 million. But it would be in that perspective that the items are in there, and I would say primarily focused on Energy and Industrial. Those are the two areas that most of activity is going on.

Robert Barry, UBS.

I know you are planning to give us more segment level detail on the next call, but I was wondering if you could just give us any kind of high-level color about where you're thinking about growth rates by segment. I thought the core growth outlook seemed maybe a little bit light, especially because it seems like things are accelerating in Energy and we are probably moving past the real trough on the truck side. So any high-level color on growth rates by segment would be helpful.

Well, I'm really not going to give you any specifics. Let me just take it in the context of the quarter that we just reported. I think we believe that Industrial will hang around what it did this quarter. There might be a quarter that's higher and a quarter that's lower, but I think kind of two times GDP feels about right for us in that business across the diverse landscape we are in.

Energy is not going to do what it's doing right now, next year. We are not saying that's going to be up 20%, 23%. So what is it going to be up? You're going to have to wait until next quarter to get some data.

Conversely the other way, I think our view is Engineered Solutions will be bouncing along the bottom and will probably be positive to this year's running rate, and Electrical, probably somewhere in the middle, probably not at 10% but probably not at GDP, either.

I think what I would add to that, add a little bit of context, again, and just step back from the detail, the quarter we just delivered was 4% core growth. On a year-to-date basis, we're a little over 6% growth right now and we're talking about next year as 3% to 5%. So we're not talking about a significant change from the pace we're at right now on this stuff. It's just we saw moderation as this year went along, largely because we're up against much more difficult comps. And you saw that come through this quarter in particular. Engineered Solutions and Industrial last year had absolutely blowout quarters from a margin standpoint and, in the case of Industrial, from a revenue standpoint.

So I don't want people to read into this too much. We're expecting growth next year, as we talked about. It's just -- it's not -- we don't have the benefit of a very robust -- look at the chart that I put up there, in terms of the last nine or 10 quarters. We're just not projected having double-digit growth overall in the first half of the year. That's essentially the difference.

Right, right, okay, well, that all sounds very fair. Just in terms of the follow-up, I was wondering if we could, just on slide 17, which is very helpful, I was wondering if you could give some color on kind of during the quarter as you saw momentum build, Energy is a pretty late cycle end market. Are you seeing orders pick up there? If you could add any color just on some of these main slices, up versus downstream, on what you're seeing in the end markets, that would be helpful. Thank you.

I would say Energy was pretty reasonable during the quarter. There's always some lumps within it, but nothing that I would say is something gained momentum during the quarter. In some cases, these are projects out there, and depending on when we are scheduled on a given rig on this or working on a project. No real change in I would say pace during the quarter, it was pretty solid last quarter to this quarter. So I think 27 last quarter, 23 this quarter, boy, not a lot to complain about from our standpoint.

And very broad-based, very broad-based.

Ajay Kejriwal, FBR Capital Markets.

So maybe just a clarification. I think in your compared remarks, you mentioned Industrial moderated as the order progressed. Was that a comment for Europe or overall Industrial? And then if you can, provide any color overall for Industrial through the quarter.

Well, the comment was for overall Industrial, although the same trends followed in both North America and in Europe, the moderation that we talked about.

So overall, Industrial was about 5%. Was May a lot worse? If it's moderated, is that the takeaway?

No, I think a lot of this, again, is whether the order rates coming in -- sometimes, there can be differences between order rates and when you're shipping the product out. But just in general, I think just a general trend of activity and quotes and feedback that we're getting from customers is -- was more the direction in terms of moderation in the quarter.

It wasn't like it was plus 11 in the first month and then minus 5 by the last month. It was not dramatic at all. It was very minor.

If anything, we had some price increase activity that happened late in the quarter that actually made the last month a little better. So there was no big falloff. There was no big change. I tend to look at the 3-12-12-12 pressure curves more than the one month that you're talking. And it was moderation across the quarter, pretty much in line. And again, as Andy's comment before, a lot of this moderation had more to do with the exceptional sales volume last year in the third quarter than it does sequentially from quarter to quarter.

I think just a summary comment that might put it a little bit to bed -- I know you all would like to hear what happened incrementally in the last month versus prior. There was not a big falloff in any of our businesses. There wasn't a dramatic change from April to May. It's just looking over the whole quarter in terms of activity level, just slight moderation and activity level across our businesses as the quarter moved along. But there wasn't this, a-ha, the light switch flipped and everything suddenly softened. That is absolutely not what we're seeing.

And that didn't happen in Europe, either, which I think a lot of people worry that's what's happening in Europe, and that is not what we're seeing.

And Duignan, JP Morgan.

Could you give us a little bit more color on the markets that you said showed strength? You talked about US construction and global agriculture. And then could you also comment or give us a little bit more color on your comments that the solar industry is reaching grid parity in certain regions? Could you just expand on both of those? That would be great.

I'll handle the grid parity. Andy, why don't you handle some of those markets? Give you a second to reflect on that.

When we refer to grid parity, we think most of southern Europe is now at grid parity. About half of Germany, most of Italy. It varies country by country because of the cost of current utilities, and that's a big calculation as part of grid parity. What's driven that down, Ann, more recently, and it's a year ahead of when people thought that it was going to be there, is the fact that the cost of panels has dropped drastically over the last two years. So all of a sudden, even with feed-in tariffs declining, you're still getting there because the cost of the panel is declining.

We saw some moderation in our pricing. It was more to do with the inventory glut a year ago than it is anything going on. So again, we like the fact we are at the inverter side. It's more a technology sell, it's more the brains of the system, and it doesn't have the same cost pressures that I think you're seeing in panels. So that was one of the positives and that should have answered your grid parity question.

Yes, in terms of your second question, Ann, in terms of where are we seeing good demand out there, certainly ag was good demand, construction equipment, North America, any kind of off-highway market was doing pretty well. Ag, construction equipment, what not -- Integrated Solutions with Enerpac really all over the globe was strong, especially in Europe. I think we had an all-time record order quarter in this quarter. I called out a couple of the projects. Mining still continues to be very good. That's in a lot of -- that touches a lot of our different businesses there, but still very, very steady demand in these businesses.

And are you seeing any of those businesses accelerate, or are we just kind of leveling out at a decent level in each of those end markets also?

I would say where that growth is higher, it's due to share changes that we've won, more than anything that's specific to the whole industry.

Jeffrey Hammond, KeyBanc Capital Markets.

Just clearly -- you give a lot of good color on the balance sheet restructuring and where the leverage is. And clearly, the pipeline seems active. But as you kind of mature in this share buyback philosophy, just talk about how you are thinking about balance between acquisitions and maybe more permanently giving back some of that free cash flow to shareholders.

Yes, so let me stick with a couple of things here. One is we're not going to give any guidance on what we're planning on doing for share buyback. So you guys are just going to have to wait until the actuals when we report. Today, we look at the fact that Actuant stock is valued somewhere around seven to eight times EBITDA. I think we look at that as a valuation that we are willing to acquire businesses at, and we're certainly willing to acquire ourselves at.

If you look at our forecast for $190 million to $200 million of free cash flow next year and the fact we're at one times leverage, we see absolutely no constraint on acquisitions even if we want to buy back the rest of the authorization. So I think you should look at it as not an either/or. We will probably blend both.

Okay, great, just a couple finer points. Could you talk about what was in the $2.6 million of other expense? Is that one-time? And then just any real surprises in Europe truck, good or bad?

Sure, I'll handle the first one, that $2 million, $2.5 million -- that's all foreign currencies losses. I think people have kind of missed that thus far, is currency moved significantly from April until May and is having a significant impact on our fourth-quarter guidance as well. A year ago, the average exchange rate was $1.44, the euro to dollar. Now we're projecting $1.25. So that has impacting on our fourth quarter, it certainly had impact in the third quarter. That was essentially re-measuring inter-company loans and third-party payables and receivables. That would have been denominated in currencies outside of the functional currency of the given business. So that's entirely what it was.

And obviously that was a couple of cents headwind just there, in addition to the translation impact as well.

As for the truck side, I think our view is full Volvo, Scania, Vaico, DAF -- these are all our kind of big customers. They've been pretty consistent with what they've been out, somewhere between down five, down 15, somewhere in that ZIP code. They do not have big inventory corrections that we are hearing about or seeing in any of their ordering patterns. It seems like that's what they're forecasting for 2012. Haven't got any guidance from them for 2013, but it seems like it's a very in-control situation in Europe.

In North America, it's better, it's positive. Heavy-duty truck affects our Gits business a little bit and our Power-Packer business here in the US.

Jamie Sullivan, RBC Capital Markets.

You mentioned that the growth moderated throughout the quarter. You kind of expect that to continue but stabilize at current rates, sort of where we are today. I'm just wondering what gives you the confidence in that. Is that just maybe that the comps get smaller as we go forward?

Well, I don't know how to read your question that well. That's just what we are seeing with the geographic spread, 1 to 2 times GDP or 1% to 2% GDP growth next year, and with our growth in innovation, etc., we're 3% to 5%, think that that's what's there.

You know, I'm probing your question thinking that, boy, things must be worse in Europe. How can you think we're going to be the same? I'll remind you, a piece of our business in Europe is Energy and then the IS stuff is projects that we have in the backlog. We know they're going to offset and be stronger, and very hard for these projects to get slowed down. You've got construction crews on sites, things like [Navarka], the big thing in Russia, is going to happen.

So I guess we just look at our roll-up, we analyze, we debate, we talk to all the business presidents, and we're pretty comfortable that this is the range we're going to be in.

That's helpful, and then just to follow on, on Energy -- I guess three months ago we were in crude in the $100 to $110 range, we're now in the $80 to $85 range. I'm just wondering how your customers to sort of -- what price levels you start to see changes in their behavior.

We've never had a great correlation with oil prices. We've looked at this about every which way you can analyze it, and there just isn't that great of a correlation with energy prices. When I talk to customers, it's more adjunct, but it's in the kind of $60 to $70 range is where they start thinking about shutting in things. (multiple speakers) That's on new projects.

What we saw the last time that we had a close down, that our sales actually improved, because when they shut them in, they want to do more maintenance. So it's not a great correlation for us, Jamie.

[Mike Reely], Janney Capital Markets.

Good morning, guys. I just had a question for you on the Mastervolt profitability. You said that that improved, and I was wondering -- was that most of the upside in the Electrical margins during the quarter?

No, it was both. Year over year, clearly, that was a big contributor. But both businesses were up year-over-year.

And can that profitability be in the double digits in 2013, for Electrical?

Sure.

I guess the follow-up question I had was on the debt leverage. So you talked about you're down to about one times debt to EBITDA, but you also said that you could spend all the share buyback authorization and still do M&A. So I'm just wondering what do you see as the optimal debt leverage?

1.5 to 2 times GDP.

Debt to EBITDA.

Sorry -- debt to EBITDA.

Not about GDP.

Yes, I'm sorry (multiple speakers) 1.5 to 2.5 times debt to EBITDA.

Scott Graham, Jefferies.

So the only question that I really have is about the contingency planning. Again, as Karen will elaborate and you guys have throughout, it doesn't look like there was any type of sea change that occurred from the beginning of the quarter to the end. So I guess all I'm really saying is, if you look out into 2013, and I think everyone's crystal ball in Europe is a little cloudy right now. But what triggered some of the contingency, Bob? And where would that come from? Would it be some of the growth in innovation strategies? But what are some of the triggers that would have you pull back?

I think I can just jump in here and Bob can kind of shoo in on the back of this thing as well. I think we would see a significant change in tone in the end market in terms of suddenly there's a falloff in incoming orders or customers are signaling something different to us as far as they're going to adjust their inventory levels, as an example, or their own forecasts. That would obviously send us moving, very, very quickly within, say, the Industrial business or more the hand-to-mouth type businesses. That would be a big one.

We really do watch pressure curves on our sales, rate of change curves on a three-month basis, what is happening there. I think those are probably the biggest, and if we are suddenly seeing some kind of big change, I think, in pricing and demand from pricing where customers are demanding unusually large reductions or something like that, that would also signal it. But absent that, that's really the thing that I would --

Yes, but as my comments said earlier, we have contingency planning. With our diversified business, we don't have a contingency plan for overall action, but we have a contingency plan that's built up business by business. Okay? So you've got some businesses that are down year-over-year that are probably -- that are already implementing some contingency planning. I think we've talked to you guys in the past about electrical and that we are moving some things from Lumberton, North Carolina, to Mexico. So there's a contingency plan that we executed nine months ago, so there are various plans. I would venture to say -- what do you think, Mark, maybe 15 different contingency plans that are already not in place to drive, but have been thought through, debated. Some are in action. And we call that quiet restructuring. We're doing it all the time.

And so -- and that funnel grows and shrinks, depending on what's happening. So I don't think there's one event that I would look at to say, hey, there's the canary in the coal mine; now I've got to implement this master plan. We're doing it all the time. It doesn't have that same flavor as maybe somebody who's in a single industry and they've got to make big bets. We are making very small bets. They tend to have a one-year payback and that's what we're looking at.

I guess the way I would articulate it is the contingency planning is part of our normal forecasting process. Each of the businesses are thinking through some of those scenarios, and then they've got that top-drawer action plan that they can take out and implement if needed, when needed, and that's pretty much where we operate.

Thank you for that. I did have one small follow-up question as well. Your body language toward a potential -- I know you're not giving segment guidance yet. But it did suggest that maybe Engineered Solutions potentially has an up year next year. Is the thinking still internally that the auto cycle for Actuant at least, the convertible cycle, is a big driver to that? Are we still looking at that starting to pick up in the second half of the fiscal year, in 2013?

Yes. I wouldn't say it's a big driver, but I think auto, given what we've talked to you guys about and the fact that there were a number of conversions that didn't repeat and stuff that ran through this year, that that's in there. Probably the largest piece would be in truck. We've got an FAW launch going on. We've got an India launch that won't be that much revenue next year but will start into an Indian truck. I would venture to say truck and off-highway will be probably the stronger two chunks that go in there. But I think a lot will participate.

(Operator instructions) Charley Brady, BMO Capital Markets.

Sorry if I missed this, but on the G+I spend, did you quantify what the margin headwind was on that and quantify what that looks like going forward in terms of spend and maybe margin impact?

Yes, I'd say we probably -- when you look at this year versus last year, we are probably up $2 million a quarter or so in terms of spend. We're probably approaching a $25 million run rate right now, and there are some additions. We haven't nailed them all down. That's what our planning process, kind of the plan review process which we'll be going through in the next month here will really zero in on which of those we want to proceed with and which not. But that's where definitely where the headwind is.

Part of G+ I, as well, is geographic expansion, so that's where India comes into play. We are doubling, essentially, our footprint down in India and our headcount down in India. We'll be doing some additional things in Brazil. We added a country leader in India this past year, built a team around him. There will be a similar expansion going forward in Brazil in the future as well. So that's part of it, as well.

All right, and then just back to the comment on the Energy segment -- I think it was Bob's comment about it won't maintain, obviously, the pace that you saw in the third quarter of 23%. But would you still expect that business to be in a double-digit rate in 2013?

I'm not going to give you that, Charley.

I had to try, Bob. (laughter).

James Kawai, SunTrust Robinson Humphrey.

My question is really focused on the Electrical segment. I know it's been asked already, but just the sequential pickup in margins was pretty impressive. You also had good organic growth last quarter, but definitely there was a step up. I was wondering if you guys could provide a little more color there. I know it's measurable, maybe going to Gardner Bender and the Acme business, and maybe to the extent that -- is this a step up in margins here, or were there some one-timers as well? Just a little more color would be helpful. Thank you.

Yes, why don't I start and Andy can add a little color in the back behind me. Electrical had a really good quarter, and Andy didn't give his gold star that he's given in the past, but I think the reason for that was they've been late to the recovery party and haven't really gotten to their prior peaks the way we would've liked at this point. But it had a great quarter, and I think we've been telling you, we're doing quiet restructuring. It impacted the margins in earlier quarters. And this was -- we're starting to see the lack of some of that -- some of those one-time things in this quarter, combined with margins and a recovery in solar.

And some of this business comes with a fixed cost structure. And when you get the volume leverage, it comes through. The 10% at core was pretty broad-based, as we talked about. It was in solar, it was in retail, it was in utility, it was in a lot of different pockets that did pretty well. So we view that as a real positive sign. And certainly, there's a play there within this kind of housing recovery that you hear about a lot, and I think we are a -- this is the business that has a little bit of a proxy for that, for us.

If you look at year over year, we were up close to 100 basis points in the North American business from a margin standpoint. And in Europe, more than that year-over-year, in the Mastervolt business, so Mastervolt a year ago was essentially the worst quarter we've seen since we've owned the business. It was a very tough quarter. Revenues -- it was essentially a low water mark last year from a margin standpoint, so we rebounded very well. We were up a tick from -- sequentially from a margin standpoint as well, so that's where it's coming from. It's a combination of them.

Yes, and I know we're not talking about 2013 specifically, but structurally the Electrical business has always been kind of a high-single-digit margin business. But we haven't really seen what it could do with Mastervolt layered in, with decent end market conditions. Can you speak to structurally where margins could go, now that Acme is also going to Mexico as well? Should we think of it as structurally a higher-margin business over the next three to four years, or two to three years?

That's certainly what we're working on. I think the North American business has been a mid-teens type EBITDA business overall. There are certainly pieces of it that are more profitable than others, but it's in that range. Mastervolt has been below that since we bought it, and it's starting to inch its way up. Certainly, there's no reason why we wouldn't use that as the same goal and then try to improve North America as well. But yes, that's one of our opportunities from a margin expansion standpoint over the next three to five years. Clearly, it's here; this is the one business that's probably underperforming from a margin standpoint when you look over the last couple of years. And we're starting to head in the right direction, so it's good news.

Thank you, and there are no further questions at this time. I'll now turn the call back over to Ms. Bauer.

Great, thanks for joining us on the call today. Just a note to mark your calendars that our fourth-quarter call will be held on September 27 this year. And we've also set October 2 as our annual investor day to be held in New York. So look for more information on that to come. We'll be around all day to take any follow-up questions you have. Have a great day.

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