Actuant Corporation - Special Call

Jun. 3.13 | About: Actuant Corporation (ATU)

Actuant Corporation (NYSE:ATU)

June 03, 2013 11:00 am ET

Executives

Karen Bauer - Communications & Investor Relations Leader

Robert C. Arzbaecher - Chairman, Chief Executive Officer and President

Andrew G. Lampereur - Chief Financial Officer and Executive Vice President

Analysts

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Welcome to today's call for Actuant Corporation. As a reminder, this conference is being recorded Monday, June 3, 2013. It is now my pleasure to turn the conference over to Karen Bauer, Actuant's Director of Investor Relations and Communications. Please go ahead, Ms. Bauer.

Karen Bauer

Great. Thanks. Good morning, and welcome to today's conference call regarding our intention to divest the Electrical segment. 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. Our press release and the slide presentation supplementing today's call are available in the Investors section of Actuant's 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, including those about the planned divestiture of the Electrical segment, the timing thereof and the prospects and expected financial results of Actuant after the planned transaction. 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.

[Operator Instructions] With that, I'll turn the call over to Bob.

Robert C. Arzbaecher

Thank you, Karen. As you saw in today's press release, we are starting a process to divest the Electrical segment. This decision came after a great deal of thought, discussion and analysis and really comes down to portfolio management, which we review with on a regular basis with the Board of Directors. These discussions revolve around where we think our served markets are going over the longer term. We have increased focus on what we call macro growth drivers, markets that we think will match up well with our portfolio and markets that have an underlying faster growth potential. Electrical, while it's got its own growth initiatives, has increasingly become an outlier from these macro growth drivers. More on that later in the call.

First I'll turn it over to Andy to walk through some of the various financial implications of today's announcement. Andy?

Andrew G. Lampereur

Thanks, Bob. I'll try to be brief this morning and focus on 3 items, the write-down, the use of proceeds and the restated results. First, the write-down and now I'm on Slide 4.

We announced this morning that we will be taking a noncash net charge of approximately $150 million to reduce the carrying value of the Electrical segment. Generally accepted accounting principles require a review of estimated proceeds to net book value, which drives the write-down in the third quarter. A lot of adjustments required in the calculation and the only thing that I'm certain of is that there will be a true-up to this write-down in the future to take into account the actual proceeds from the sale, the result in income taxes and the associated expenses, which are first recognized upon completion of the sale. The M&A market will determine the actual fair value of the Electrical segment, and we won't be providing estimates or discussing specifics today on the estimated proceeds.

That leads to the second topic, which is the use of proceeds. Actuant's balance sheet has never been in better shape. Given the low interest rate environment and our 1.5% incremental borrowing cost today, we don't intend to retire or repay existing debt with the proceeds from the transaction. Instead, the proceeds will provide more dry powder that we will either be deployed in acquisitions or returned to shareholders in the form of common stock buybacks.

Now on to Slide 5. We have attached to this morning's press release adjusted Actuant quarterly results for the last 6 quarters to give effect to the reclassification of Electrical segment results to discontinued operations. This will provide a view of our financial profile, which results in changes in a few areas that I will cover here. First, we believe that our core growth should improve without the Electrical segment. Second, our operating profit, EBITDA and net profit margins, will be higher than what we have historically reported, including the Electrical segment. Roughly speaking, 100-basis-point increase in EBITDA margin. And finally, our effective tax rate without the Electrical segment will be lower on account of lower pretax earnings in the U.S. that are taxed at above average rates since most of the profits from the Electrical segment were generated in the U.S.

While our sales and EPS from continuing operations in the short term will be lower without Electrical, the proposed divestiture will create value in the long run, as we redeploy the proceeds into other growth opportunities. What won't change is our business model and the focus on growth in sales, earnings and cash flow.

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

Robert C. Arzbaecher

Thank you, Andy. First, let me talk about our Electrical segment, which I am covering here on Slide 6. The roots of the Electrical segment date back to 1988 with the acquisition of Gardner Bender, and the segment has grown both organically and through acquisitions over the past 25 years. Today, it's roughly a $300 million segment with low-teens EBITDA and primary operations in North America and Western Europe. It's a healthy business, has a great management team, recognizable brand names, good channel presence and will make a great asset for the buyer focus on the Electrical marketplace.

But for Actuant, our growth is elsewhere. I'm now on Slide 7. We have 2 areas of emphasis: first, high-growth markets of China, India and Brazil; and second, macro growth drivers, which I'll cover in a minute. The Electrical segment has less fit with these 2 growth drivers versus the other segments within Actuant.

First, let me talk about our high-growth markets. As this slide shows, our sales in the rest of the world are about 20% of our total. This includes Brazil, China and India, where we want to grow significantly faster in the next 5 years, first organically through growth -- through core growth and supplemented with the acquisitions. We've added to our "boots on the ground" capability in both India and Brazil in the last 12 months and have reenergized our third-party sales efforts in China. Our belief is that these 3 markets will grow much faster than the mature markets of Europe and North America, and we're focused on capturing this growth with the 3 remaining segments.

Second, let me discuss macro growth drivers. With our diverse portfolio of products and services, we serve a tremendous number of end markets within the broad definition of global industrial products and services. Our objective has been to narrow to a more identifiable markets that we want to focus on, subsets of the broader industrial market that we believe will grow faster over the next decade. Today, there are 4 of them: energy, infrastructure, farm food productivity, and mining and natural resources. Sales of these markets account for well over half of Actuant's current sales and remain the primary focus of our organic and inorganic growth initiatives.

In addition, to our focus on other markets, there are a number of other additional reasons why monetizing the Electrical segment makes sense. We simplify our business profile for investors and other stakeholders. As Andy mentioned earlier, many of our financial metrics improved: operating and EBITDA margins, return on invested capital and cash flow as a percentage of the revenue or profits. Actuant's EBITDA margins are already in the upper quartile of diversified industrial companies, and with the revised 19% EBITDA margin profile, they move even higher. And finally, the proceeds from the sale of the Electrical segment provide additional financial flexibility to fund our growth plans or buyback shares.

That concludes our prepared remarks. Operator, I'd like to turn it open to the phone lines for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes the line of Charley Brady with BMO Capital Markets.

Unknown Analyst

This is Andrew Geronimo [ph] for Charley Brady. I was just wondering if you might have any kind of comparables or -- for the Electrical segment or anything that might kind of lead to some sort of what we may expect from some of the proceeds.

Robert C. Arzbaecher

Go ahead.

Andrew G. Lampereur

We do not have anything that we're going to prepare or provide you guys with out there. I think that we will let the market, the M&A market, determine what the fair value of the asset is, but we're not going to get into evaluation expectations and proceeds expectations.

Unknown Analyst

Okay. Great. And I guess what are some of the future growth drivers that you guys see in the Electrical segment then?

Robert C. Arzbaecher

Well, the growth drivers in Electrical tend to be a focus on our recovery in the -- some of the core markets, so there's a big remodeling aspect. So when you look at Depot and Lowe's, Ace,TruServ, some of that remodeling revenue we expect will kind of come off the bottom. I think, in general, we've seen more of a disconnect with housing than just with the remodeling. So that's a piece that as housing comes back, we might see a little, but it's more really on the remodeling. We've got a pretty good focus on our Del City business, which is kind of a direct to the end user piece of the business, and so I think that is a focused driver. Our Turner business plays a little bit into the Electrical grid in North America. So there are chunks of growth. It's just not aligned with the 4 macro growth drivers I talked about earlier.

Operator

And our next question comes from the line of Ann Duignan with JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

I'm just curious why now and why at this early stage in the process versus you've decided whether who the buyer is and the business has been sold before going public with this. I'm just curious what the rationale was.

Robert C. Arzbaecher

Well, you think we are a pretty transparent organization for employees and other stakeholders. We thought it was important to tell people what we're doing. We -- if you've been to Menomonee Falls here, we share a campus with the electrical people, they're right across the street. And I think we felt an obligation to do that. The process -- when you go through a sale process, people -- trying to do it quietly. You're not sure you catch every potential party, that's another reason. But I'd say the major one is really just that transparency.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

And I thought you might say that, and then that leads me to my follow-up, which is, is there any risk to the Electrical business right now, as employees become distracted or start looking for new jobs? I mean, are there any risks to the business operating performance going forward as you go through this process?

Robert C. Arzbaecher

Obviously, we spend a lot of time thinking about that, making sure that we communicate well. Our business is here because of our kind of a limited corporate. The segments operate pretty autonomously. So I don't think people are going to look at it as somehow I'm -- I've got that big of a change. It all reports under David Scheer, who's the President of Electrical. And we would not expect any. Again, as I my comment said, this is a pretty healthy business from an electrical point of view, low-teens EBITDA margins for Electrical's probably in the middle of the fairway, and we really do expect this will be an important asset for somebody.

Andrew G. Lampereur

I think one of the other items, Ann, is we learned back when -- at the time of the spinoff when it was very public that the business was being sold or spun off, the transparency, the communication to employees, we really did not see a significant turnover. As a result, employees appreciated the heads-up. As long as they knew what was going on, they stuck with the business. So we definitely relied on that as well.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. I don't want to hog it, so I guess my other question would be a little bit more strategic. I mean, there is a lot of talk out there right now whether or not natural resources is in D-Day growth sector. Could you just comment on that, Bob, on what your feeling is in terms of Actuant's position in that segment?

Robert C. Arzbaecher

Yes. I think -- I understand how people look at mining particularly and have some issues. I will tell you, our mining business is doing well. Now part of that is we started with very little market share. Okay, so us introducing products like the dozer lift, even if the market's not growing, it's a new product for a served market. We do a lot of MRO, so you don't need necessarily growth. It -- you need equipment to be operating and be working. Safety, reliability, getting this equipment back up and running are all things that we're kind of focused on how do you help the minds do that. So last piece of the natural resources that I think is important is some of the -- what's going on in Australia with the LNG build-out that you see in that upper coast. That's where Gorgon is, and there's a number of them behind that. Whether that's energy or mining natural resources, it's really right down the middle of our growth fairway.

Operator

And our next question comes from the line of Allison Poliniak-Cusic with Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Bob, could you just give us an update since you talked about proceeds going to potential acquisitions, sort of what you're seeing in the environment right now and where you guys stand?

Robert C. Arzbaecher

Yes. I think I'm going to beg that question off until our quarterly earnings. It isn't a big change from what we've communicated publicly in the past. There is no huge deal around the corner that's immediately going to use up these proceeds. That's got nothing to do with the announcement that we made. I think I'll give a more complete update when we get to the quarterly call.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Okay. And then Andy, you may have a similar comment, but any color on what's left on that share authorization you have outstanding at this point?

Andrew G. Lampereur

Based on what we had completed through the last quarter the -- being the second quarter that we publicly talked about, we had purchased roughly 3 million of the 7 million, so there's about 4 million shares remaining under that authorization.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Okay. And then one last question, you talked about rest of world, like, obviously, being a high-growth area for you. Any sort of goals that you're looking to reach in terms of a percent of sales? Or is it just sort of fluid at this point?

Robert C. Arzbaecher

It's fluid. I think we will update that as we did in last year's investor -- Annual Investor Meeting where we focused a little bit on those markets in a little more detail. I think we'll do that again. But if we believe the base business is going from 1.5 to 2x kind of core growth, we would expect those Asian markets given we're in the early time for us over there. We'd expect those to grow to 2x, 3x faster. So it's in that zip code.

Operator

And our next question comes the line of Ajay Kejriwal with FBR Capital Markets.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

So Bob, maybe just one of your comments, I think, you have that on Slide 9, transformational change in portfolio and obviously, divestiture. You're -- This morning, I'm viewing that as part one of maybe a 2-part strategy, the other part being acquisitions, and then you commented no huge deal around the corner. But just maybe help us kind of think about acquisitions here. You've been a little bit quiet few months, maybe talk about what's in the pipeline, why have we not seen deals? Is it valuation? Or you've been wanting to do larger deals? Or -- what are the -- and then post this divestiture, you'll be like a 3-segment company, so what are your thoughts around adding a new leg to the stool?

Robert C. Arzbaecher

Okay, great question, Ajay. I would start by saying a couple of things. Number one, there's really no change in our acquisition strategy. I think we've been talking to you guys for year, 1.5 years about our focus in Industrial and in Energy, and this divestiture doesn't change that focus at all. I think we've gotten a lot of feedback from stakeholders, investors particularly, about -- that the story is a little confusing with 4 segments and seeing how it all integrates together. I think people are much more comfortable when you look at the remaining 3 being a hydraulics and infrastructure tool, MRO-type side of the business. So I think we believe that, that fits together and will be a more succinct story. Why haven't deals gotten done? I think I was pretty clear on that in the last call. We're disciplined. We had one major deal that we would have liked to have done this year. It was right down the middle of our fairway, and we believe the integration risk due to the fact that it was part of a public parent was going to be very difficult. We've had a couple that have gone by the wayside due to pricing, and we are ROIC focused, and we run into issues associated with the price. The funnel is full. There are things in there. When I say nothing's imminent, I was trying to make the comment that this deal is not -- this disposition is not tied to an acquisition. It's not like we're saying, we have to take from Peter to pay Paul. That is not where we're at. With our leverage levels now, we could have done all the acquisitions that are in the funnel and still held on to Electrical, not needing to monetize that proceed. So I guess I'm trying to leave you the message really not any change from what you've heard from us publicly. The transformational portion is really that we're taking a business that we've had since 1988 out of the portfolio. I think we view that as pretty transformational.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Got it. That's helpful. And then maybe one follow-up for me. The $150 million after tax charge, what's the gross-up number on that, please?

Andrew G. Lampereur

There is not a significant tax piece on it now. It really comes down the road with the...

Robert C. Arzbaecher

Yes, when you pin it all one by one [ph] ...

Andrew G. Lampereur

When you complete the -- when you complete the deal.

Operator

And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Just a couple of quick ones here. So one, do you -- would you anticipate at selling as a whole? Or do you have to kind of move this business out in pieces? I know there are some kind of distinct and separate businesses. And just on the buyback, are you restricted in any way during the process?

Robert C. Arzbaecher

We would expect to sell it as a whole and there are no restrictions on the buyback.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And if I can just sneak one more in, I know you're not prepared to guide, but how should we -- I mean, so the -- but the guide, when we get it on the earnings call, would x this and not taking into account any offsets, buyback or otherwise.

Robert C. Arzbaecher

I think that's right, Jeff. We might put some kind of a tail-in, so you can see the effect of various scenarios, but I think that's the case. And certainly in the third quarter, we want to be able to reconcile you from the guidance of the totality. So you're going to kind of pick up both Electrical and the total thing when we announce in 3 weeks.

Operator

And our next question comes the line of James Kawai with SunTrust.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

My question is, I know you articulated no change in the overall strategy relative to cash flow redeployment, but there's a change in kind of the fundamentals here. You're talking about getting anywhere from, I don't know, roughly $250 million to $350 million just to give you a really wide range of potential cash coming in. Could we see within the context of your strategy, there's a pretty fundamental change in your position there? Could we see an acceleration to share repurchase or acquisition appetite? Or is this something where we're going to wait until the proceeds that we're still looking about a year out for this, the redeployment of this pending cash?

Robert C. Arzbaecher

Well, I think we're clear in the press release and in our comments today that we're going to look at both acquisitions and stock buybacks. And I think where we are clear is there is no fundamental change in our leverage profile. We're not necessarily like trying to change to an investment-grade company or a dividend company. We're trying to do the strategy that we have. This -- we're already below the low end of our range. It's a function of great cash flow over the last couple of years and more limited acquisitions. But that change is on a dime, and we've had many years in Actuant's history where it's just the opposite. We targeted to do $200 million a deals, and we do $300 million a deal. So all I would say is I know you guys want to pin me down to a perfect quarterly rollout of acquisitions. It just doesn't work that way. We've got a full funnel. I'm confident we'll get things done. But there really isn't any range in our capital strategy. Anything you want to add to that, Andy?

Andrew G. Lampereur

No.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

All right. That's helpful. And then just as a follow-up on the divestiture, you indicated and I think you're right in that there will be considerable interest in the asset. Do you eventually see it kind of going to a financial buyer? Or are there strategics where you've kind of pre-gained the sale where it might make sense, where there's good fit?

Robert C. Arzbaecher

We're not going to comment on that.

Operator

Okay. And there are no further questions at this time.

Robert C. Arzbaecher

Well, thank you. We have -- we'll be here all afternoon if people want to follow up with questions. Karen, myself and Andy are all available. Thank you for attending the call on such short notice. Bye-bye.

Operator

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

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