Enerpac Tool Group Corp (EPAC) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Actuant Corporation fourth-quarter fiscal 2012 earnings conference call. During the call, 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 Thursday, September 27 of 2012.

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

Good morning, and welcome to Actuant's fourth 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.

For purposes of today's call, all references to financial results exclude the Mastervolt non-cash impairment charge. We have provided reconciliations from GAAP to non-GAAP measures in the supplemental schedules attached to this morning's press release that remove the impact of this non-cash item.

Finally, 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 will turn the call over to Bob.

Thank you, Karen, and thanks for joining us on our year-end earnings call. By all measures, it was a solid finish for 2012. We delivered fourth-quarter sales and earnings in line with expectations and better-than-expected cash flow despite weakening economic environment. We achieved strong cash flow in three of the four segments, with Engineered Solutions down, but in line with our expectations.

EPS before special items was $0.55 a share, at the top end of our guidance range and 10% higher than the prior year. The fourth-quarter comparisons were by far the toughest of 2012 from a foreign-currency standpoint. If we had stable FX rates from last year, our fourth-quarter EPS would have been in the mid-teens.

Last week, we announced the Mastervolt impairment charge of approximately $63 million. We have been clear over the past two years that this business's performance has not met our expectations. Solar inverter market demand and profitability has deteriorated, as has the overall economic environment for Europe since we completed the Mastervolt acquisition in 2010. While our solar sales have improved over the last few quarters, long-term profit margins and growth expectations have been reduced since the acquisition and this impacted the impairment calculation.

The impairment charge was non-cash in nature and has no impact on sales, margins or liquidity. While clearly disappointing, I believe our organization has learned from this acquisition and continue to believe our two-pronged growth strategy of acquisitions and core growth has and will continue to add value and create value for shareholders.

I will turn the call over to Andy now and go through some quarterly details, and then I will come back and answer a few topics after Andy, including guidance. Andy.

Thank you, Bob, and good morning, everyone. Fourth quarter came in pretty much as expected, and I will provide some additional detail on that from what you read in this morning's press release.

Summarizing our results for the fourth quarter at a high level, we generated sales of $405 million, which is right in the middle of our guidance range. Due to strong currency headwinds in the middle of the quarter, sales were up less than 1% from last year's $403 million.

Our fourth-quarter operating profit margins increased 20 basis points from a year ago to 14.3%, and our diluted earnings per share from continuing operations were up 10% year over year to $0.55 a share in the fourth quarter. Cash flow was better than expected and put an exclamation point on 2012's full-year free cash flow of $196 million, which easily was a new record for Actuant.

Now I will provide more color on our results, starting first with the sales line. Fourth-quarter sales were up less than 1% in total on account of a 5% foreign currency headwind from the weaker euro. Our average dollar to euro exchange rate in the quarter was about 1.24 compared to 1.43 year ago, creating a $15 million sales headwind.

Acquisitions added 2% to the year over year sales comparison, while core sales increased 3%, which was in line with expectations.

As expected, we saw moderating demand from the third quarter driven by weaker conditions in Europe and continued softness in emerging markets. North America held up the best in the quarter.

From a segment level perspective, Energy again led the way with 14% core growth, followed by Industrial and Electrical, which each generated 7% core growth. Engineered Solutions, our earliest cycle segment, experienced a 14% year over year core sales decline on account of continued weak demand in the convertible top market, as well as the European and Chinese truck markets. I will provide more color by segment shortly.

Our consolidated operating profit margins expanded year over year for the 11th consecutive quarter, but at a more modest pace and in line with what we had guided in our last earnings call. The 20 basis points operating profit margin expansion results from slightly higher volume in the current year, which improved operating leverage, but was largely offset by the impact of the weaker euro on dollar-denominated purchases by European businesses.

Additionally, although our sales mix between segments was a net positive in the quarter, our sales mix within the segments was unfavorable and reflected higher growth from our middle to lower margin product lines.

On a full-year basis, we had 110 basis point improvement in operating profits, which was well in excess of the original guidance that we provided for the year and reflected strong execution across our portfolio of businesses.

Now for some color on results by segment, starting first with the Industrial segment. It had a good quarter with 7% core sales growth and 40 basis points of margin expansion. Sales mix within the segment was unfavorable, with higher growth coming from the Integrated Solutions product line, which generates margins below the higher-margin industrial tool product line.

Geographically, North America had a robust sales quarter and offset Europe, which was down year over year, reflecting the more challenging economic conditions there.

Globally across the segment, we continued to see the best performance from the energy and mining vertical markets.

Shifting now to the Energy segment, market conditions there remained quite positive. Core sales continued to be robust with 14% core growth. We once again as core growth in both Cortland and Hydratight and across all served regions and markets, with Cortland continuing to outpace Hydratight.

On the margin front, the segment posted its best margin quarter of the year at 20.2%, with 70 basis points of EBITDA margins expansion for the full year. We continue to be bullish on Energy given the continued increases in oil and gas investments, especially in offshore projects, as well as the aging infrastructure that requires higher levels of maintenance. Both trends should benefit our segment in 2013.

Similar to the Industrial segment, Electrical also had solid core growth of 7%. We saw increased solar demand in Europe as well as most channels in North America, including retail, the Internet and marine. Our operating profit margins were in the same range as the third quarter and were up nearly 200 basis points from a year ago. We anticipate realizing additional margin benefits from the recently-completed consolidation of all transformer manufacturing into our Mexican plant.

Now on to the final segment, which is Engineered Solutions. As we've seen for the last several quarters, our segment core sales profits have been adversely impacted by lower OEM truck build rates in China and Europe, as well as lower shipments of convertible top actuation systems in Europe. Ag and off-highway equipment demand was respectable in North America during the fourth quarter, but did moderate as the quarter progressed.

Before turning the line back over to Bob, I will quickly wrap up with some additional details on cash flow and our liquidity. We finished fiscal 2012 with fourth-quarter free cash flow of $56 million. During the quarter, we also repurchased about 900,000 shares of Actuant stock for $24 million and we deployed about $40 million of capital on acquisitions.

For the full fiscal year, we generated free cash flow of $196 million, which was a new record. Excluding the non-cash impairment charge in the income statement, our free cash flow conversion to net income was over 125%, which was the 12th consecutive year of at least 100% conversion since the spinoff.

Our year-end net debt of $329 million was $150 million less than we started the year. Year-end net debt to EBITDA leverage of 1.1 times was an all-time low. We have almost $70 million of cash on our balance sheet and nothing drawn under our $600 million revolver, and therefore are well positioned for the future.

With that, I will turn the call back to Bob.

Thank you, Andy. Year-end is a good time to review how we did executing our business model. As you can see on this slide, we had very strong performance in 2012, driven by execution of our strategic growth initiatives, capital deployment and continuous improvement actions.

Highlights for the year include core sales growth of 5%, 110 basis point improvement in operating margins, $70 million of capital deployed on acquisitions, and $63 million in stock buybacks. Collectively, these actions drove 24% year-over-year EPS improvement and record free cash flow.

We did pretty much everything we set out to do plus more, including improving our capital structure. We initiated a stock buyback program to capitalize on a stock price that we believed was dislocated relative to the improved operating results. We bought back 2.7 million shares of Actuant stock during the year at an average price below $24 a share. As the stock rebounded, we took the opportunity to convert our then-outstanding convertible bonds into equity, which reduced our debt leverage and created more borrowing capacity.

We then used the resulting credit upgrades that we received from the rating agencies to refinance our 10-year notes and reduce interest expense. The result of all of these actions, fewer shares outstanding, less debt, less interest expense and extended maturities. In the end, we believe increased shareholder value.

Now let's turn to the CrossControl acquisition, the second tuck-in for our Maxima business, which we completed in late July. CrossControl is a display and software business based out of Sweden. It serves the global equipment market, primarily OEMs, selling into the Europe and Asia with a product for the markets of forestry, cargo handling, mining and rail. We believe our existing construction and ag equipment markets are going to be a great opportunity for CrossControl's advance display product line. We expect to leverage our position we have with Maxima, Turotest and Weasler customers.

This is really a great example of how our Growth + Innovation initiative has added to the funnel of acquisition opportunities as well as driving core growth ideas.

As part of our strategic planning process for Maxima, we look to enter this faster-growing display market, and essentially came down to a make-versus-buy exercise, which ultimately led to the CrossControl acquisition. Sixty days into the integration process, we are enthusiastic about the sales and cost synergies for this platform within Engineered Solutions.

A quick comment about Actuant's overall acquisition activity and our funnel of opportunities. Things are pretty similar to last quarter, with a robust pipeline of actionable targets. Some are auctions, some private deals. Most of them are focused around Energy and the Industrial segment. We continue to maintain our ROIC pricing discipline, particularly in this economic environment.

Now let's turn to guidance. We see the global economic conditions today being generally softer than they were 90 days ago. Europe has slowed, China and other emerging markets have been slow to recover, and we are seeing OEM build rate reductions from off-highway equipment customers. Despite these pockets of weakness, Energy growth continues strong, as does Enerpac North America. And there are indications of improved residential housing, which should benefit our Electrical segment.

Other factors impacting the 2013 guidance we provided to you back in June include the CrossControl acquisition and share buybacks in the fourth quarter. Foreign currency has also bounced around significantly during the last six months and negatively impacted the fourth-quarter results. We continue to base our 2013 guidance on a euro being worth an average of 1.25 for the year, which is slightly weaker than where we are today.

Taking all of this into account, we have adjusted our 2013 guidance modestly, with the sales now in the $1.68 billion to $1.72 billion range and EPS at $2.20 to $2.30 a share. Additionally, we are projecting approximately $200 million in 2013 free cash flow.

Potential future stock buybacks and acquisitions are not included in this outlook.

Diving down a little deeper, in total, we expect core sales growth to be in the 3% to 5% range for fiscal 2013. We expect to start the year at the low end of that range and improve as the year progresses due to easier comps and as we see growth from our past growth in innovation investments.

Moving by segment, for the Industrial segment, we expect decent US demand, execution of our growth strategies and Integrated Solutions project backlog as the major factors driving our 2013 core growth guidance range of 5% to 7%.

The leader in core growth is expected to be the Energy segment, which is enjoying solid activity levels globally. We expect the growth rate to moderate from the strong double-digit rates that we saw in 2012 as we begin to anniversary the big [Gorgon] project, and now we are expecting the full year to come in about the 8% to 11% core growth rate.

For Electrical, we are expecting 3% to 5% core growth, moderating a bit from what we saw this year. We expect the marine and solar markets to see softness on weak European consumer demand. We think the North American consumer and construction-related markets will continue to improve from the 2009 lows, but at a modest pace.

Finally, in Engineered Solutions, we expect the global truck, auto and off-highway equipment product lines to continue to be headwinds for the first half of this year. We see these headwinds from the first half -- we also see headwinds from the first half from our ag replacement business due to the drought in North America. China, Europe truck and auto should see easier comps as the year progresses. As a result, we are expecting ES core sales to continue to be in negative territory for the first half of the year and then improving in the second half. In total, we expect ES core sales to be down in the low single digits.

Now turning to our first-quarter guidance, we are projecting sales in the range of $390 million to $395 million, with corresponding EPS of $0.48 to $0.52 a share. The first fiscal quarter will be the most difficult comparison for Actuant from both a foreign currency and a tougher prior-year comparisons basis.

As mentioned earlier, we expect to see incremental softness from the OEMs that have signaled lower bill rates in the next few months.

So to summarize our guidance for fiscal 2013, we expect record operating performance despite a low growth environment, with some stronger and some weaker areas. Our 6% to 11% EPS growth guidance considers this, as well as the carryover benefit from the 2012 acquisitions, the stock buybacks, refinancing and finally adjusted for the currency headwinds. Given the current economic environment, we feel there is an equal probability of hitting the top and bottom end of this guidance range.

Despite the sluggish economy, our strategies remain consistent. We continue to support both our growth and innovation and operational excellence initiatives. As always, we remain nimble and ready to go whatever direction the economy heads. Our balance sheet today is in better shape than it has ever been. As we start 2013, we will work hard to build on our track record of year-over-year sales, earnings and cash flow growth.

That is it for my prepared remarks. Operator, please open up the line for questions.

(Operator Instructions) Allison Poliniak, Wells Fargo.

On the Energy and Industrial segments, you cited mix obviously impacting margins this quarter, and it has been. How should we be thinking about that as we head into 2013? Does it get less, the same, worse?

Andy, you want to take that one?

Sure. The margins were up for the quarter year over year in Industrial 40 basis points. I would expect to have that same issue next year as we move forward in terms of mix being slightly unfavorable on it. That being said, I think we will still eke out some margin expansion for the full year, but certainly don't expect -- don't expect anything robust year over year because of that mix. Margins are great in the base business; there is no issue there. It is purely a mix issue.

With regard to the Energy, they were down year-over-year. However, I want to point out year over year we had a huge margin quarter -- in the fourth quarter of last year, it was the best margins I believe we had in the last eight quarters. And the fourth quarter this year was the best we had this year. So certainly not too concerned about it.

It will be lumpy as we move along, based on mix and whatnot. Again, I expect slight margin expansion in this business going forward in the Energy segment, given the incremental volume. But I don't -- I think the days that we had earlier this year when we were enjoying 100 basis points, 200 basis points of margin expansion, you will not see that clearly in 2013, given tougher comps and lower overall growth.

The only thing I would add to Andy's comment is that the IS, the Integrated Solutions margin in the Industrial segment, this is a high-class problem to have. The fact is is that business is growing faster than the base business. Its margins have improved over the last year and it is way over its cost of capital. So while it drags down our very, very good base Industrial businesses, it is accretive to just about any kind of metric you want to look at -- the kind of Actuant level margins, and certainly from a return on invested capital point of view.

Okay, thanks. And then on that note, too, I know Growth + Innovation has long-term benefits coming for it. Has the impact to margins in those segments been meaningful at this point?

(multiple speakers) Yes. No, it is the right way to look at it. Growth + Innovation, I would say, since we've launched it only two years ago, has been a drag to margins overall at Actuant. Now, we paid for some of that growth by the $40 million permanent cost take-out that we took out in the 2008 and 2009 recession. So I wouldn't say the Growth + Innovation initiative has been favorable to margins; it is really focused on how do we get more core growth. I think the business we are winning is at line average. I don't think there is any deterioration in the types of things we are winning. Mark, anything you would like to add to that?

No. No, I think it is the right way to look at it. After two years, I think I would say that the core processes we put in place are really part of the culture of the Company right now. It is a little harder to pull out, but it should be exemplified in core growth as we move forward.

You are going to see some great examples of that in the Investor Day next week, and I think it is a great place to really touch in there on that issue.

Okay, perfect. Thank you.

(Operator Instructions) Robert Barry, UBS.

So just wanted to dig into the outlook a little bit more versus what you provided last quarter. It sounds like broadly speaking, Engineered Solutions is weaker, Energy perhaps tracking a little bit stronger. Can you talk regionally, Europe and China, if during the quarter what got weaker, if anything stabilized?

Yes. You know, I think from the guidance we gave a quarter ago, I think you have tapped on it pretty well. I would say Engineered Solutions is a dot weaker. You certainly -- I don't think that is a surprise to anybody who is reading some of the announcements that are coming out of the large OEM vehicular guys, whether that is on-highway or off-highway.

We think that that is somewhat transitionary, that they are setting up for a 2013 that is going to be not bad. You have a major change coming in emission standards as you go into 2014, which we think will result in some kind of pre-buy. So I don't think we are doom and gloom about it. I think we think they are managing their production levels pretty well. But I would say it is a little bit weaker there.

I would say Energy is about the same, no real big change. I would say Industrial, about the same, with some mix where Europe is a little weaker and US is a little stronger. Andy talked about the fact that that was negative year over year in his prepared remarks.

In Asia, really haven't seen China come back; it continues to be bouncing along the bottom. I don't think it is getting tremendously worse, but it is just bouncing along the bottom. So hopefully that answered your geographic outlook there.

Yes, okay. And then just -- thank you -- just wanted to also dig in a little bit more on the margins. And maybe Andy touched on this a little bit earlier with intra-segment mix. But when I look at the growth you are expecting in Industrial and Energy, those are the much higher-margin segments and much stronger growth outlook. It seemed like there would be somewhat of a margin tailwind from that.

And then also, I kind of thought you would start to see some relief on the (inaudible). So I'm a little surprised that maybe the margin outlook -- it sounded like it got a little bit less robust versus 90 days ago.

I would -- I guess I would have two comments on that, Rob. First, there is no question on our last call I indicated that margins going forward, we would not see the type of expansion in this quarter and going forward that we enjoyed the last three quarters. So this is not a surprise. I think some of you are surprised by it. Go back and take a look at the transcript from last call.

Secondly, the things that I think you guys are missing is the currency piece. A year ago in the first quarter, and really in this quarter as well, margin -- excuse me -- the euro was worth about (technical difficulty). Today it is $1.45. Keep in mind that we are buying a fair amount of components and product that is dollar-denominated coming out of the US, coming out of China as well. That has quite an impact from a currency transaction or an unfavorable purchase price variance coming through; that is absolutely weighing on the margins right now.

The third piece I would say is the volumes coming out of Engineered Solutions. Again, you are looking at plants that are not running at capacity because the volumes had come off. We are largely single plant locations in those. So if the volume isn't there, the absorption is not there, it impacts margins.

So those are the factors that are out there. I agree from a mix standpoint, when you look at Energy, if you look at Industrial, those are our higher-margin, but you have got those other factors that are weighing against them.

Yes. I don't know if we are reading too much into the language. In the last deck, you said 25 to 50 basis points; this time, you just said modest. So I don't know if you really meant it's kind of the same thing as last time or not, but that was kind of the genesis of my question.

Yes, I don't think in this dynamic economy, we can articulate whether it is going to be 25 or 50 basis points and that kind of granularity. It is pretty difficult to do.

Yes, no, fair enough. Okay, thank you.

Charley Brady, BMO Capital Markets.

Just on the Industrial Solutions business, what is the -- that is obviously impacting the mix going into fiscal 2013. I guess what is kind of the backlog on that business and how long does that mix headwind affect 2013?

I think it is going to -- when we look at the growth of the Industrial Tools business, which is the 80% of Enerpac, if you will, we just expect that will grow next year, but it is not going to grow at the same pace as Integrated Solutions. We expect Integrated Solutions to grow faster than it all year long. So it is not just a matter of what is in backlog right now, it is the full-year expectations.

The activity is very strong, we feel we are taking market share there. So that will be with us as we move forward. The difference is not huge, again, in terms of the growth differentials between the business. It's not one is going to be 1% and the other is going to be 10% on that, but it does have an impact.

I mean, you guys are losing the focus. This business was up 200 basis points, 27.1 to 29.1 EBITDA. I don't know what you guys expect. We have explained to you a lot of times that the base core business is at record numbers, north of that number. That the IS business is in the mid-teens and it is getting stronger. We expect the combination of the two to continue to be great.

But to sit here and look at that as something that was wrong or bad, it is up 200 basis points year over year. I don't know how much better you can expect.

No, I wasn't being critical, Bob. I am just (multiple speakers) --

I'm sorry I am sounding negative, but this is our best asset, and I just refuse to let it get trashed on a margin discussion.

I didn't think I was trashing the business. It's obviously a great margin business. I am just trying -- for modeling purposes, trying to get a sense of if there was a large part of the backlog that was doing the mix in the first half or the second half, if that had an impact, just kind of modeling it out. That is all. It is obviously a great business. I wasn't meaning to try and trash it.

Hey, as we switch gears, on the Engineered Solutions segment, in the release, when you break out core sales, acquisition impact and currency impact, I think maybe I am missing -- those numbers don't seem to add up. You have got total sales down 10, plus 5 from acquisitions, negative 5 from currency. What is the piece I am missing there?

Yes, Charley, I can take this off the call. It really has to do with the fact that Weasler has been in for almost all of last year in the fourth quarter. And so the math just gets funky in terms of the denominator we use for core growth in terms of taking out literally all the sales from last year, all of the sales from this year and dividing those numbers. So it is a lower denominator coming up with a higher percent.

I agree they don't add -- you can't add those percentages, but we try to get the true year-over-year change in the base businesses identified in that 14%.

Okay, thanks.

Deane Dray, Citi Research.

I had a question on the Energy business, the visibility. So if you just give us a sense of what quote activity has been like and maybe some commentary about the mix between MRO and project, that would be helpful.

Pretty strong across all the product lines. So I don't see anything that I would even call to mention that would be ahead or behind one or the other.

I think Andy's prepared remarks, Cortland was a little ahead, and that is obviously more of a capital project, exploration type spending. But MRO was strong both ways.

It is not a backlog business, so I don't have any metric to give you on whether that is growing or shrinking. Strong results in really all corners of the globe. Refinery, nuclear, PowerGen, offshore, onshore, just not seeing a lot of things that are trends -- sub-trends that are going on.

Great. That's helpful. And how about some commentary on leverage? I mean this really jumps out, especially for people who have followed the Company for a long time --, 1.1 times leverage. And is this -- how much is this more a result of any sort of more conservativism and the balance sheet versus the -- you being more disciplined on price and availability of attractive businesses on the M&A side?

That's a great question, Deane. I think we did get more conservative coming out of the last recession. We lowered our debt leverage ratio from two to three times debt to EBITDA down to 1.5 to 2.5 times debt to EBITDA. So I think we did get conservative, but it was really a couple, three years ago when we did that.

Since that point, I don't think there has really been any change in our complexion. I think Growth + Innovation is obviously something we have added to our quiver of continuous improvement things. And I think we are funding that aggressively and like what the results are after a couple of years. I don't think it has affected our acquisitions. I don't think we have changed the valuation metrics that we follow; we are still doing the same ROIC, we are still trying to get to that modified CMM return within -- kind of by the end of the first year, getting into the second year.

So I don't really feel like there has been a change. It is just a function of very strong cash flow this year and the converts coming out. And the combination of those two put us below the range at 1.1, below that 1.5.

Yes, I would like to have more leverage than we do right now, honestly. From an acquisition standpoint, I think it is -- if we are on the same spot a year from now that we're at right now, I think a little bit more of a fair question on it. But bear in mind, we are one quarter removed from the converts coming out, and that's -- absent that, we would be right at 1.5 right now. So certainly no change, no change.

That is great to hear. And we characterize this all as a high-quality problem and just you have got lots of firepower available. So thanks for the color.

Ajay Kejriwal, FBR Capital Markets.

So just following up on that question of Deane's, so you are forecasting a solid $200 million free cash flow next year. And then 2012 fiscal for you was the first year where you spent a sizable amount on buybacks. So maybe any thoughts on how should we be thinking about buybacks versus acquisitions. Is share purchases going to be a more regular part of your use of free cash?

Yes, I don't think there has really been any change from when we put this in a year ago. I think we -- with the cash flow that we have right now, we have the luxury of really funding all the kind of acquisition activity that we normally see. Obviously, a real big deal might change that. But the normal kind of fairway type deals of $50 million to $100 million, we can fund the activity we want to fund and still do some buybacks.

I don't think we are going to give any more guidance than we have given in the past, which is when we think the stock is dislocated, we are going to buy back shares. And we obviously have that luxury to do when we are leveraged at 1.1 times.

It's certainly good to have that luxury on a day like today, where stock appears to be dislocated. But maybe if I can ask a question on the guide. So you took the bottom end of your range -- EPS range for next year up a little bit. So is that just a fine tuning of the model? Because to me, it sounds like when you look across the segments, you're forecasting ES a little bit weaker than where you were a couple of months ago. So is it that there are offsets to the weakness that you are seeing now, or is it just a fine tuning of the model that is resulting in you taking up the bottom end?

I would point to two items. The first is the buyback. We bought back roughly 900,000 shares in the quarter that was not incorporated in our original guidance. So that adds a penny or so.

The second item is the CrossControl acquisition; that was not in the original guidance. So the two of those are the primary thing.

I would say that the third is probably more of a just general comfort level, that the bottom end of that range is, given our forecast, we think is achievable, and our comfort level in that. Not ready to take the top end up. We will see as we move through the year; that has certainly been our track record. If we do more deals or if currency benefits us or the economy benefits us, we adjust guidance. And last year, we did it essentially every quarter. So I would expect no different behavior out of Actuant than in the past.

I like hearing that. Thank you very much.

Jeff Hammond, KeyBanc Capital Markets.

So Energy, it sounds pretty broad-based and you feel pretty good about it. What in your mind really derails kind of the momentum there? And I guess if you look within some of the sub-verticals, where do you see potential cracks forming there?

You know, I don't think there is any -- without sounding too arrogant, I don't think there is anything to derail it because it is so broad-based in so many different markets. If you go back to 2008, 2009, what we saw was that as the rest of the markets crashed, we saw some shut-in of assets by the OEMs. And we actually saw a brief period, six months or so, where we actually had a pickup, because they were doing maintenance and repair while it was shut in so when they opened it back up, they didn't have any work to do.

So if you go back through the last recession, we actually had that thing a little bit countercyclical, where it was kind of climbing in growth rate. And then as the other businesses came back, it fell off.

So I think what you would see would be -- you would get some visibility of some kind of activity that was going on before shut-ins. And we haven't seen any of that. I am pretty sure there is none of that in today's core growth running rate. But I think it would be something like that, Jeff. I think you would get a little visibility similar to the last recession.

I think the other comment I would just add to that is, remember, this is and can be a lumpy business. And we can have a quarter that is a blowout quarter, where they pull some work in; the next quarter, they push work out, just based on -- maybe it might be another service company that is doing some work elsewhere on a rig, and that happens on a regular basis. That actually happened a little bit in the fourth quarter, where there was a little bit of a push-out into Q1, we saw a little bit of a pull-in to Q3 actually this year. So it's just something to be aware of and not overreact to a single quarter.

But it feels good right now with Energy. I mean, we just don't see -- we don't see and are not hearing areas where people are cutting back.

Okay, great. And then just on that North America Enerpac tools business, as we hear from other companies with kind of this industrial MRO in North America, and even in some of our Enerpac checks that we did, we were kind of hearing about some of this consternation and sitting on hands and short-cycle stuff getting pushed. That doesn't seem to be showing up in your business. Are you hearing prospectively anything about that? Do you think you are picking up share with some of the new wins? Or maybe just a little more color there.

Yes, I would say what we have heard is pretty well aligned with what you got in your channel check. So I don't think we have heard anything different. I was out with some major distributors, and it was along the same lines as what you said.

So, that -- we do expect the business to moderate; that is part of the guidance that we've said for next year.

Where we are having a lot of success is in the vertical markets. Okay? When I say a vertical market, what I mean is we are looking through distribution and we are looking at specific applications. One you will hear about next week at the analyst call is a dozer lift for the D11 dozer that Caterpillar has. And we found this business not by working through our normal channels, but by really going right to the end user and seeing how the actual work is done. And then creating an application out of -- starting with standard product, but then creating an application to do the work. And we are finding a lot of success there.

Now, is that market share? I think it is. But it -- a lot of that business was also coming through distribution. Maybe we had half the content, because we didn't have the rest of the system; somebody else was cobbling it together.

But nevertheless, we've seen a lot of success in some of those vertical market strategies. We started with mining. We are starting to look at some of the other verticals. Energy is a vertical they are spending time on, and a number of other things.

So I am excited about kind of that new way to look at it. It came right out of the Growth + Innovation tools and things that we do as part of Growth + Innovation, and I am really excited about where that goes.

Okay, that's great to hear, thanks.

Jamie Sullivan, RBC Capital Markets.

Sorry if I missed this. Did you mention your expectation for core growth in the first quarter?

We didn't. We said it was going to be at the lower end of that 3 to 5, so I think I am just going to stay with that comment.

Okay. And as we kind of look at the full year, Bob, you mentioned the macro a bit softer, pretty consistent with what we are hearing from a lot of other companies. And in your core growth outlook for the year held intact, should we think about that as conservatism in the original outlook that has proven to be a good call, or maybe some other things that we are missing that are maybe helping a little bit to offset some of the caution you mentioned?

I think when you look at 2012, we are about where we expected to be -- actually, I think at the lower end, right. We started at 5 to 8, and as the year moderated, we kind of brought that in a little and ended at 5.

So we got our 24% earnings improvement from below that number, not at that number. We got it from a lot of other places.

So, this year, I think we are comfortable with the 3 to 5; it is what we see. It's based on a bottoms-up review of the businesses. And then we do a tops-down, looking at all the end markets that we serve and outside external data. And I think we did it in the same way we have done prior years. So I think we have taken into account everything we are going to and it is that 3 to 5.

Okay, great. And then just one last one on -- any other margin issues? You mentioned the plant consolidation. Anything else that is in the works right now that we should look for?

Yes, we always call it quite restructuring; we don't specifically call it out on the face of the income statement. I mean this past year, we had, I think, $4 million flowing through the books on that. There will be similar items next year, some plant moves, that sort of thing. Don't want to lay out details at this point. But it is smaller moves that it is right to do. It creates lower cost in some cases on this stuff. But nothing major outside of that range.

But it is all part of our continuous improvement process that we drive through LEAD and operational excellence. So that is something that the businesses are looking at on a day-by-day basis to help drive efficiency, productivity and cost.

Thanks a lot.

Scott Graham, Jefferies.

Question about the Industrial margin -- I am just kidding. What happened to the auto business? Is that really just a European situation that just maybe was meant to happen? And it looks like it fell off a lot.

Well, it has, but it has fallen off kind of as we expected it to fall off. We had a liftgate program that ended, and that was some of the falloff. And then just model changeouts that we have been communicating to you guys. There is a bit of a hole in that in this particular point in time. There are some models coming later that we have been awarded and --.

So I think it is kind of normal, Scott. You have been around the story a long time. We have had these in the past, where you just get periods where it is weaker or stronger.

There hasn't been any market share shift; it's us and [Heuberger], as it's kind of always been. Convertibles as a percentage of auto have grown over the 15 -- 10 years we have been doing this. And it is getting to a point now where it is starting to flatline. It is somewhere around 3% of auto, something like that.

It will be interesting to see whether the Asian markets, whether convertibles take off. That is something that some people are predicting; we will see. We have had a few Asian models go into that market. So I think it is kind of normal for us. It wasn't a -- it certainly wasn't a surprise for our year, and it is something we have done before. We have been taking cost actions to try to mitigate the effect of that.

The one additional comment I will say is we thought 2013 -- as we look forward to 2013, we thought it -- and tail end of 2012 -- we thought it would be better than it was because there were -- going into fiscal 2012, there were a number of launches that were going to be taking place about this time. What has happened is the OEMs have pushed that out a year or haven't even set a new start date, and that is purely economic-driven right now.

They are looking at what is happening in Europe right now, and they are just saying, look, I don't want to invest in all this new stuff. We are just going to roll -- use this model one year longer than we had before. So you had a bit of that push-out, and that has influenced the view for the tail end of 2012 and into 2013.

But structurally, I absolutely agree with what Bob's comments were -- there is no change at all in share or dynamics in the market, I would say.

Okay, very good. Just on the cash flow, the guidance for 2013, that is a nice number. And I was just wondering, you had your all-time high free cash flow in 2012; you benefited some from reductions in primary working capital. But as I look at your schedule here on page 23 of the handout, is there a different bucket where you are going to get to the $200 million from? I mean, in other words, could it be cash taxes or something? How do you get back to $200 million, having already sourced almost $20 million out of permanent working capital last year?

Yes, it's a good question. I think the two areas is -- I am not expecting a source of cash again from working capital, as you mentioned. That was just excellent execution by the businesses.

Next year, I think our cash taxes will be a little bit less than they are this year. If you noticed in the fourth quarter, in isolation, we had some extra taxes going out because of the convertible bond conversion that happened back in the third quarter that happened in the fourth quarter on that. It will be coming from there, as well as the increase in earnings. We are looking at $10 million increase in EBITDA or so range-wise. So that will be the other piece of it.

But again, great cash flow forecast. It is a extremely high-class problem to have. And we are -- is something we push like crazy in here with our ROIC focus.

No doubt, thank you.

Mike Wherley, Janney Capital Markets.

I just had a question about -- I know you guys have talked about your European exposure and sort of why it is not maybe quite as big as what it looks like on first look. And one of the things that you have talked about was the large -- the larger projects in the Integrated Solutions business. And I was just wondering if there is any -- have there been any delays or cancellations on any of those bigger projects?

There have not.

And then -- I mean, on the other part of it, what about on the Engineered Solutions, as far as the exposure to exports to other markets? Do you still sort of feel that it hasn't shifted any and it is still about half of your auto volumes going out of Europe?

Yes, it is probably less than half as we look at it; that is a very hard number for us to get. But I think our belief is it is less than half.

I think the big piece that has been beneficial in Europe is really the Energy segment, which is -- had a pretty strong quarter, double-digits in Europe, and was able to largely offset some of the other places where we had degradation.

Solar has helped the last -- Mastervolt has helped the last six months as well. But I mean, to put things in perspective here, Europe and total for us was down 1% this past quarter in terms of revenue, so this was not a train wreck.

What you had happening is you had Energy being up double-digits, you had Electrical in Europe being up double digits, and you had Engineered Solutions, as you can imagine with auto and truck being down quite a bit, Enerpac was down in single digits. So overall, this balance, I think that should be a pretty good -- it should be a pretty good proof, that 30%, I think if you look at other companies, they are going to say, gee, we were down more than that overall. So we think that is a good proof that the exposure is reasonably balanced.

Okay, great. That is very helpful. And then just on the M&A pipeline -- or maybe not necessarily the pipeline, but just how you are thinking about Energy and Industrial as sort of the key markets you are focused on. I mean, they are both pretty broad. And I was wondering if you might be willing to give any more color on different parts that you are looking at.

Yes, when you look at Industrial, we are looking at things that improve productivity, improve safety and are niche professional tool or product applications. So that is a mouthful. It is not going to be in high-force hydraulics, because we really dominate the market. But it is going to be things that could run alongside of that, potentially sharing distribution.

So think about a Grainger catalog, some of the more professional tools you would see in there. Think about other value-added distribution channels and things that could go through that, that is kind of the stuff we are interested in.

When you go to Energy, it is really -- it is within our current strategy. We have the line that we use around here where we say, how do we get on the pipe earlier and stay on longer? You know we do the joint integrity. So how do we do things -- using that joint integrity, how do we do things earlier? [Gorgon] is a great example of us getting on the pipe earlier. We are doing consultancy work, helping that customer before the thing is even assembled, making sure that the joints are within the precision that they want. So good example there.

There is more we could do in consultancy to get on the joint earlier. There is more we can do in terms of gaskets or sealing material or looking at the pipe or doing things to determine whether there has been any corrosion inside the pipe, or emergency type pipe repair and sealing. So a lot of different areas there, but really all around getting on the pipe earlier, staying on it longer, right in the middle of our joint integrity strategy.

So what you see there is one is more of a new platform side, that is Industrial; it will be something running alongside of Enerpac. And the others is going to be something that really ties to exactly what we are already doing in the Energy space.

Ann Duignan, JPMorgan.

Hi. Good morning. This is Damien Fortune on for Ann. Just quickly going back to your Engineered Services segment, can you tell us what you are hearing from the truck OEMs about their outlook for next year?

Yes, we are mostly -- most of our focus is in Europe, because that is where most of our business is. I think the Europeans are going through a period here where they truly do expect a meaningful pre-buy going into 2014. That will probably affect our fiscal 2014 more than our -- sorry -- our calendar 2014 more than our fiscal 2014.

But most of them are expecting a meaningful pre-buy. They are working with their suppliers to make sure that whatever volume comes that people can keep up with. At the same time, as we talked earlier, they're being very careful and trimming their current inventory. So you have got kind of a both sides of that equation going on.

I think the releases you see out of Volvo we're very aligned with. I think that is what we are expecting. And that is a big customer of ours and we are pretty much in step with what you are seeing from them publicly.

When you go to China, we picked up a brand-new customer in [FAW]. It is in launch mode right now; it is small, several million dollars. But we think it has the potential to be the same size as our CNHTC business there, and that would be a great upside. And then we have a launch going on in India also with Volvo.

So feeling pretty good with the European truck side. And on the US truck side, again, it is not a cab tilt market. Our product tends to go into the emission side. And candidly, we are doing more work really in the off-highway equipment side of that more than the truck. So I don't have much guidance to give you in North America; I don't think it will affect us that much.

I think when you boil it all down and you look at the various truck markets, we are expecting China certainly to be down, Europe to be down first half, possibly a little bit of a benefit second half. North America, probably down; it is declining right now. A little bit of a -- I would say probably an inventory adjustment, if you will, going on; they are throttling back on it. So, for our guidance, full-year truck, weaker first half, maybe a little bit more growth back half of the year.

James Kawai, SunTrust.

This is relative to acquisitions. When I look at your free cash flow, $200 million, and potentially -- the commentary regarding adding some leverage. So if you assume a half turn, you are talking about something well over $300 million of buying power.

And I was wondering if you can kind of compare that to -- or give us some color relative to your acquisition pipeline, like how much line of sight you might have to putting those dollars to work. Like what portion do you have decent line of sight on now in the pipeline; it was characterized as quite strong. And how you see that kind of -- that pipeline maturing over the next couple quarters?

Well, the pipeline is full now, as I said in my prepared remarks. Not a huge amount of change from last quarter, other than things are moving further down the pipe. So the fact that the backlog didn't decline means we are still in the game and things are still for sale and we are still in the range and they are still actionable items. So I feel good about that part.

By definition, what I am saying there is you should see some activity in the next six months. It is always tricky to guess when, but similar to CrossControl last quarter, it comes out the other end of the pipe.

I think when you are talking about size and what could we do, we have modeled deals north of $500 million and staying within our fairway of 1.5 to 2.5 times debt leverage. When you pile $200 million of free cash flow next year, some margin improvement and what the business brings, meaning what is the EBITDA it brings, it really is that kind of a number without doing anything outside of our fairway.

Now, I wouldn't want -- I think our target is not to do that in one transaction. There are a couple that size in the funnel. But our typical transaction would be in the $50 million to $100 million, and if Ted Wozniak could comment on it, he would say I want to do three or four of those, spread around my risk between some of our end markets and do that in a year.

So we have gotten away from kind of telling you what we think we are going to do in a year, so I don't want to comment on a target range. I think we were pretty confident we will do things next year, and capital will not be the issue.

Daniel Holland, Morningstar.

Can you talk a bit about the new role in your leadership team mentioned last week in the press release? I believe it is just heading the LEAD initiative. It kind of looks like you are a giving a little bit more structure to that function and consolidating some other corporate initiatives going on. Just curious what you see for the role and kind of what are some of the first priorities for Mr. Thomas.

Yes, I can address that. We have had the LEAD office since 2007, and we're really focused primarily on operational excellence and really looking at moving that into business process. And then more recently, the last two years, adding Growth + Innovation to that.

And as we added Growth + Innovation to that, it was evident that we needed to put both operational excellence and Growth + Innovation under one umbrella, which is our LEAD continuous improvement process.

And so with that, we moved John Thomas, who was leading our Cortland business and had exemplified being able to link Growth + Innovation with operational excellence, into this role to help us really get it to the next level and more closely match operational excellence opportunities on quality, service and delivery into Growth + Innovation. And so that is what John's primary focus is as he moves this process forward for us.

Rob McCarthy, Baird.

Hello, this is Mig Dobre for Rob McCarthy. Good morning. I guess my first question goes back to the Energy segment, a little clarification on the margins. In the press release, you mentioned some unfavorable mix impact in the quarter, and I am wondering if you could provide a little more color there.

And also, just kind of given the current quoting opportunities that you see out there, is there a potential for mix shift going forward that could impact margins? How should we think about margins going forward?

Within the quarter, we had a little bit more growth coming -- as we had the last couple of quarters, we have had a little bit more growth coming out of the Cortland business than the Hydratight business, a couple hundred basis point differential. Cortland runs roughly 500 basis points or so lower margins than Hydratight; they are both above our overall EBITDA margin for Actuant. So you had that little bit of mix going on.

The second piece I would say is within Hydratight itself, we had -- there are certain product lines in there that carry bigger margins than others. There's the labor; generally, the service work is a little bit lower margins if you have a heavy month of that or a heavy quarter of that, which we did. We had a lot of service work going on with some of the nuclear projects in North America in particular. So it's those types of things.

As we move forward into 2013, I expect margins to continue to do well in this business, as we get volume. Again, Cortland, I'm expecting a little bit more growth out of Cortland next year than Hydratight. So you are still going to have a little bit of pressure from a mix standpoint there. But despite that, still expect expansion as we inch forward. So there is room to go in Energy. We are happy that we delivered overall margin expansion for the full year in each of the last two years, and we would expect that that will continue as we go forward.

Thank you. That is very helpful. And my last question is, talking a little bit about the ag vertical. If I recall your comments, you are expecting slight declines in the first half due to the drought, but a resumption of growth in the back half. And I am wondering -- is it that you are sort of seeing some inventory liquidation, or is it you are expecting some sort of acceleration -- real acceleration in the market in the second half of the year?

No, the drought impact is really the aftermarket piece of this business. So Weasler has got about 40% of its sales going to the aftermarket. This would be somebody like Farm & Fleet or Tractor Supply.

And what happens is during a drought, obviously, you are not cutting as much hay, you are not processing as much stuff, the shaft doesn't get beat up in its normal course like it does, and we see less replacement volume. So it snaps immediately back once the drought is over and once things happen. Farm economics are terrific; it is not a dollar issue. It is just they don't need to replace it because it didn't get beat up.

There are no further question at this time. I will turn it back to you for your closing remarks. Thank you.

Great. Well, thanks for joining our call today. Just a couple notes from a calendar standpoint. Our first-quarter call will be held on December 19. And coming up next week on Tuesday is our annual Investor Day in New York City. So if you have not registered or need information on that, please give me a call today or send me an e-mail. Be happy to give you information. And we will be around all day to take any follow-up questions you have. 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.