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Actuant Corporation (NYSE:ATU)

F2Q10 Earnings Call

March 17, 2010 11:00 AM EST

Executives

Karen Bauer – Director, IR

Robert Arzbaecher – President and CEO

Andy Lampereur – EVP and CFO

Analysts

Scott Graham – Ladenburg Thalmann

Jamie Sullivan – RBC Capital Markets

Tom Brinkman – BMO Capital Markets

Ingrid – JPMorgan

Jeff Hammond – KeyBanc Capital Markets

Robert McCarthy – Robert W. Baird

Joe Mantello – Sidoti & Co.

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Actuant Corporation second quarter earnings conference call. Today’s participants are Mr. Robert Arzbaecher, President and Chief Executive Officer; Mr. Andy Lampereur, Executive Vice President and Chief Financial Officer; and Karen Bauer Director, Investor Relations.

As a reminder, this call contains forward-looking statements subject to the Safe Harbor language in Actuant’s press release issued today in the Actuant’s filing with the SEC. We are conducting a live meeting, so coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details.

As a reminder, this conference is being recorded Wednesday, March 17th, 2010.

It is now my pleasure to turn the conference over to Mr. Arzbaecher. Please go ahead, sir.

Karen Bauer

Actually, it’s Karen Bauer. Good morning and welcome to Actuant’s second quarter fiscal 2010 earnings conference call. On the call with me today are Bob Arzbaecher, Chief Executive 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.

With that, I would like to turn the call over to Bob.

Robert Arzbaecher

Thank you, Karen, and Happy St. Patrick’s Day. As you have seen in our press release this morning, we reported results better than our guidance. EPS excluding restructuring was up 73% compared to last year with improved operating profit margins in all four segments and sequential improvement in three of the four segments. Importantly, our 12 months trailing EBITDA excluding restructuring is now on an upward trajectory increasing $10 million in the second quarter alone.

It’s worth noting that essentially all of the year-over-year earnings improvement this quarter came from Electrical and Engineered Solution segments and not from our higher margin Energy and Industrial segment. This is not to snub Energy or Industrial, which both did a great job of keeping detrimental operating profit to under $1 million on their combined $8 million sales decline.

But the results were really driven by the combined $11 million operating profit improvement in the Electrical and Engineered Solutions segments. This improvement was the result of cost savings generated from restructuring actions as well as improved sales trends in the earlier cycle markets that these segments play into.

As Andy will explain, we expect all four segments to contribute in the second half earnings growth, reflecting higher sales volume on a lower cost structure. Overall, very pleased with the quarter. Improving sales trends, significant margin expansion, strong working capital management, and decent cash flow.

With these opening remarks, I will turn it over to Andy to go through the quarterly results, and I will come back and cover a few topics including guidance at the backend. Andy?

Andy Lampereur

Thank you, Bob, and good morning, everyone. As Bob mentioned, we had a good quarter with year-over-year and sequential improvements evidenced in a number of places. To recap the quarter at a higher level, second quarter sales were approximately even with the year-ago at $294 million, but down 3% core when you factor out currency, acquisitions and divestitures. This compares to a 20% core sales decline in the first quarter.

On a GAAP basis, we reported diluted EPS from continuing operations of $0.10 a share compared to $0.08 last year. These results include restructuring cost in both periods. If we exclude these restructuring cost, to be consistent with our guidance, our second quarter EPS was $0.19 a share compared to $0.11 in the prior year or a 73% improvement. As we predicted on our last quarterly call, this is the first quarter of year-over-year EPS improvement in the last five.

Before diving deeper into second quarter results, I would like to provide an update on our restructuring activities which will provide you with the better understanding of some of the factors that influence both our results and our outlook.

In our last quarterly earnings call, we indicated at a number major restructuring projects were forecasted to be completed near the end of the second quarter. This did happen and is the primary reason for the large restructuring provision in the quarter. In total, we recognized approximately a $9 million of restructuring cost, about $1 million of which are included in cost of goods sold.

Of the approximate $9 million total, $3 million of it was new, which related to fixed asset write-downs mostly to due to market-to-market accounting on recently closed facilities and assets that are now held for sale with the balance of the cost primarily being severance provisions.

During the quarter, we substantially completed the consolidation of three of our North American Electrical offices into one. The transfer of all marine electrical manufacturing from California to Mexico, the consolidation of Simplex’s manufacturing into existing Enerpac plans, and the finally the consolidation of Kopp Czech plant manufacturing into Tunisia. Overall, these projects will complete in on-time and budget, and will generate the forecasted cost savings we are looking for.

Due to the continued softness in our Energy segment, we launched several restructuring actions during the quarter in this segment aimed at reducing permanent cost including combining North America regional management and consolidating a UK manufacturing plant.

During the quarter, in the Electrical segment, we also sold the Kopp’s bike and plumbing product lines and subsequently made the decision to consolidate Kopp’s Holland distribution center into its central warehouse in Germany.

The cost of these new actions and the residual costs from in-process restructuring projects are in the neighborhood of $5 million and will be coming through the P&L over the next six months. Payback on these actions is pretty attractive and will be realized over the next 12 months.

Given our second quarter results, there should be no doubt that we are seeing the benefits of our restructuring actions come through. Our core sales were down $10 million in the quarter year-over-year, but our operating profit excluding the restructuring cost was up approximately $10 million. This explains the 330-basis point improvement in EBITDA margins with all four segments reporting margin expansion. It’s also evident in the margin trend from the first to second quarter this year. We normally see a sizable decline in margins, seasonally from the first to the second quarter, but this essentially we were essentially flat at 13.2%.

Over the remaining two quarters of this fiscal year, we anticipate year-over-year margin improvement as well, although the rate of improvement will moderate given the fact that we started realizing savings from restructuring activities already in the back half of last year. Sequentially, EBITDA margins should increase nicely in each of the next two quarters.

In addition to improving margins, we are also encouraged by the consolidated sales trends in our business. Sequentially, the year-over-year core sales decline improved from 20% in the first quarter to 3% in the second quarter. While they correctly point out that the second quarter sales were lower than the first quarter. You need to remember that is due to seasonality. We always see a falloff in sequential sales as well from the first to second quarter.

Again, despite this normal trend this year, three of our four segments reported the improved core sales sequentially from the first quarter to the second, a positive sign of recovery. One last comment on sales before discussing results by segment, this trend of improving sales also continued within the quarter as we ended on a positive core sales on a consolidated basis in the month of February.

Now let’s discuss the results for the quarter by segment starting first with the Industrial segment. The Industrial segment is clearly seeing improving trends both in sales and margins. The graph in the lower right corner of this slide shows the year-over-year core sales trend in the green line. You can see noticeable improvement. In absolute dollars, sales actually increased sequentially from the first quarter to the second. This is the blue bar on the graph, which is pretty unusual again, given the seasonality within the Industrial segment.

As called out in this morning’s press release, Industrial core sales improved as the quarter progressed and we ended flat for the month of February versus the 7% decline for the quarter as a whole. We have also seen about six consecutive months of positive book-to-bill in this segment, providing us with confidence that the demand is continuing to improve. As a result of these trends, our second half sales forecast for industrial has been increased by 2 percentage points to 3 percentage points and we expect it to deliver solid core growth in the remaining quarters.

Operating profit margins in the Industrial segment grew both year-over-year and sequentially to about 23% and are expected to continue to rebound with the savings from the Simplex plant consolidation and the increased volume in the second half.

Turning now to our Energy segment; this was the last of our four segments to feel the brunt of the recession and not surprising it’s the last to see a recovery. Sequentially, year-over-year sales declines have been stuck in the low teens range for each of the last three quarters. For the second quarter, we expected to see improvements due to the service and turnaround work schedule in place at the start of the quarter.

However similar to what you have been hearing from other energy service providers, customers have delayed maintenance projects. This has been most pronounced in the mature refinery markets, especially in the UK, Europe, and the Gulf of Mexico regions. We are expecting sales growth in the second half of this year in the Energy segment, but now at a lower growth rate than previously contemplated.

Our full-year core growth for the Energy segment now is minus 5% compared to our prior view of flat to minus 5% going into the quarter. As a result of the deferrals in the more modest future outlook, we launched the restructuring actions that I discussed earlier in the second quarter.

Our EBITDA margins will rebound considerably from the second quarter levels over the next two quarters, the combination of normal seasonality in this segment as well as the savings from restructuring actions.

Turning now to our Electrical segment, its year-over-year core sales were down 9% in the quarter, much improved from the 18% decline last quarter. Not surprisingly, the improvement came from higher sales in the earlier cycle of markets in this segment like North American DIY retail and marine aftermarket.

Our European DIY demand continues to be week and domestic commercial construction markets will continue to be a headwind during the back half. Overall, we expect flat-to-low single digits second half or sales growth in the Electrical segment.

Profit wise, the segment posted nice year-over-year profit improvement with an approximate 6% operating profit margin the second quarter. This earnings growth on lower sales is entirely attributable to a lower cost structure from the restructuring we have completed over the past year. Electrical profit margins are expected to continue to improve in the third and the fourth quarters.

Our fourth and final segment is Engineered Solutions which again receives the gold star for most improvement this quarter. Core sales jumps to positive 16%, representing the first core sales growth in this segment in nearly two years. This reflected strong demand from vehicle markets, notably automotive, European and Asian truck, as well as RVs in North America.

Sequentially core sales increased from minus 37% in the fourth quarter to minus 18% in the first quarter and now to positive 16% this quarter. This reflects the combination of easier comps due to the destocking last year as well as new platforms in market share gains. Well, most vehicle markets were up, many other markets at Engineered Solutions serves were still down on a core basis, including North American truck. But we expect sales growth to accelerate in the third quarter, before moderating for European auto and truck summer shutdowns in the fourth quarter.

Profit wise, Engineered Solutions segment rebounded sharply with $9 million in operating profits growth from a year-ago. Similar to the Electrical segment, it enjoyed a lot of benefits from the improved cost structure this quarter. However, it also had the benefit of higher sales volume across this lower cost base resulting in significant improvements in profits.

That’s it for segment results. Now, I will talk a little bit about our debt and cash flow. Cash flow during the quarter was in line with our internal forecast. Second quarter free cash flow of $9 million coupled with net proceeds from product line dispositions, resulted in a $14 million reduction in net debt to $377 million at the end of February.

Our net debt leverage declined during the quarter to 2.4 times trailing EBITDA excluding restructuring cost. At quarter-end, we had just $25 million of our $400 million revolver debt, leaving plenty of capacity to fund future internal growth as well as acquisitions.

Through the midpoint of the fiscal year, we have delivered now $51 million toward a $110 million free cash flow target. And given our historical backend loaded cash flow patterns, I feel very confident about the full-year target.

That’s it from my prepared comments today. I will turn the line back over to Bob.

Robert Arzbaecher

Thank you, Andy. Hopefully by now, you now have a better understanding of how – why we are so positive about our operating leverage as we emerge from this global recession. Last quarter I talked how important it was for Actuant to return to a higher level of predictability that are set, manage, and deliver philosophy is something investors care about and leads the shareholder value in the long term.

Given the improvements over the last three quarters, I can somewhat confidently say we are back. What do I mean by that? It means that we are back to spending more time focused on growth initiatives and less on firefighting, back to spending more time on portfolio management and acquisitions and more time on training and development of our people.

Let me give you an example. Prior to the recession, our ability to deliver predictable, consistent sales and earnings growth was primarily attributable to the diversity of our end markets, our geography and the customers we touch. While diversity didn’t help us in the synchronized global recession we just all endured, its benefits are back as evidenced by our improved second quarter earnings.

Earnings improvement came from Engineered Solutions and Electrical on the second quarter and help mitigate lower sales in the later cycle Industrial and Energy markets. Industrial is trending better as Andy went through and Energy will come back. Maintenance can’t be deferred indefinitely and the global energy needs continue to increase. The point here is that the diversity to manage through our normal cycles which has been a hallmark of Actuant is back and delivering value.

We may only be one quarter into this trend, but we are committed to rebuilding that credibility that came with 28 consecutive quarters of year-over-year earnings growth prior to the recession of 2009. We are more focused than ever on internal growth initiatives.

Actuant has great operating leverage given our higher incremental margins and the structural cost reductions that we have made over the last year. We are consciously spending some of the restructuring savings to fund internal growth initiatives across Actuant’s four business segments. This includes investments in new products, expansion to serve market and penetration of emerging economies.

Let me give you an example of a growth investment that we launched this quarter. For years we have talked about integrated solutions, the large infrastructure projects buried within the Enerpac organization. This is also always been managed regionally within Enerpac. This quarter we created a new organization to drive this integrated solutions globally under Peter Caruso's leadership in Europe.

While this requires incremental resources and increased cost within Industrial, we believe it is smart investment in an underserved market within the industrial tool business and one that we believe will lead to higher sales. There are many similar examples across the Actuant platform, it’s a good example of how we are trying to exit this recession stronger with a heightened focus on growth.

Now let’s look at acquisitions. We did not complete any acquisitions during the quarter. Frankly we were less like a groom at the alter on a transaction that was scheduled to close. The private owner decided at the last minute he wanted more money. This is not the first time we have dealt with this problem. Sometimes you capitulate and sometimes you don’t. This time we held our ground and didn’t complete the deal. We also lost an acquisition of a product line that was part of a bankruptcy situation as a late bidder came in and outbid us.

While we are slightly disappointed that we didn’t complete any deals thus far in 2010, rest assured we have plenty of activity going on, and we are not reducing our emphasis on acquisitions. We continue to see great prospects in the $10 million to $50 million purchase price range. They are mostly focused on Energy and Industrial markets with some smaller attractive niche opportunities that fit the Electrical and Engineered Solutions segments. Finally, you should gain some comfort in the fact that we are delivering at or above earnings guidance without the benefit of acquisitions.

Speaking of guidance, I would now want to review with you our updated outlook for the year. As I mentioned earlier we tightened our full-year revenue guidance to $1.225 million to $1.25 billion. We expect overall second half sales growth to be in the 7% to 9% core range, with our prior view being 6% to 8%.

This improvement is muted by the recent strengthening of the US dollar and given half of our revenues was outside of the US, that’s an approximately $25 million sales headwind in the back half of the year. Some of the core growth is due to easier comps, some of it is due to the end of destocking that plagued us last year and some of it is just pure market growth.

EBITDA margin should continue to improve as Andy mentioned on a year-over-year basis in the back half of the year with sales growth leverage and the benefits of streamline cost structure continuing that we saw in the second quarter.

Based on these factors, plus our second quarter results, we tightened our EPS guidance to the high end, excluding restructuring costs in the $0.87 to $0.97 range, up from the previous range of $0.82 to $0.97. As usual, potential of future acquisitions are not included in this guidance. Finally, we continue to expect full-year free cash flow of $110 million as Andy mentioned.

Looking specifically at the third quarter guidance, we are forecasting sequential sales increase to $310 million to $320 million and EPS in the $0.24 to $0.29 per share. Relative to the second quarter, year-over-year EPS growth in the third quarter is impacted by an increase in our effective tax rate from an unusually low 20% rate last year. As well as anniversarying some of the restructuring savings from last year’s actions.

As we discussed last quarter, the improvement we are seeing our business this fiscal year is being impacted by our August 31st year-end and when compared to other industrial companies.

As you can see in this table, we know show solid earnings improvement in the three quarters that fall into calendar 2010. When you take this into account, we think our results stack up very well against calendar year peers showing good return to year-over-year improvements in sales and operating profits and earnings.

From an earnings and guidance perspective, we also believe we are getting back to normal. We have met or exceeded our quarterly earnings for the fourth consecutive quarter; we have returned to positive EBITDA and EPS growth on a quarterly basis, cost and capital structure improved, acquisition activity is picking up and sales trends are improving. We are optimistic that Actuant will continue to grow and capitalize on these improving trends.

That’s it from my prepared remarks. Operator, I would like to open the phone lines out for question-and-answer session.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question comes from the line of Scott Graham from Ladenburg Thalmann. Please proceed with your question.

Scott Graham – Ladenburg Thalmann

Hi, good morning.

Robert Arzbaecher

Good morning, Scott.

Scott Graham – Ladenburg Thalmann

A couple of question for you guys. Could you – you talked about the incoming order rate I think in Industrial. I was wondering if you could maybe do the same thing, give us a sketch of the other three segments as well. I am sorry as the quarter progressed.

Andy Lampereur

As a general rule, I am not so referring to the orders but just our optimism because I don’t have those right at the tip of my tongue here. But certainly the optimism in the sales throughout the four segments, throughout the quarters improved – throughout the quarter improved as the quarter went along, Scott. It was not just untied to – it wasn’t exclusive to Energy. We had improvement during the quarter and the trend within the quarter.

Robert Arzbaecher

I guess just to add a little meat to that. Enerpac – and Andy mentioned in this comments, the order rate was ahead of the bill rate and that’s been going on now for three quarters and that continued this quarter. And as we said that, it was positive in the final month.

If you look at the truck data out and we see the same stuff you do. All the truck guys particular in Europe are talking about a pretty strong recovery. It has more to do with the fact that you are up against the destocking comparables in the prior year where they weren’t producing what they ship. So from our revenue stream, a much improved situation.

If you move to Electrical again, Depot and Lowe’s both guidance is talking about positive comps in the back half of calendar 2010. We think we are seeing that same kind of trend as we are going along.

And – and the Energy segment being the one that we really haven’t seen a great trend. It’s been flat, so it hasn’t been worse. But that’s the one where some of that deferred maintenance that we talked about on the call expect to see that hit in the third and fourth quarter, expect that we are going to see a moderating decline of sales all the way up to being positive by the fourth quarter in Energy.

So boil all that together, I think that’s about the best we can give you on your question.

Scott Graham – Ladenburg Thalmann

No, that’s great. That’s perfect. I guess the other two questions that I would have will be number one, you have a number of different businesses that in various ways can cap stimulus package. I was wondering if you were seeing anything on that front, anything you might be able to highlight. And then secondly, obviously with raw materials front and center in the Industrial world, I was just – I know that you guys have a great way of handling that through your overseas purchasing what have you. But maybe talk a little bit about at that you have to – you might – have you raised prices anywhere, you think you are going to have to. How is that for the second half of the year?

Robert Arzbaecher

Well, it’s – with our diversity they are tough questions to answer. The stimulus again, I – there isn’t much that we can really point out in the US and say that was stimulus dollars that we got the benefit for.

I think it’s a little more obvious to us in China, where you see some of the high-speed rail and some of the infrastructure. And as you know, we did the high-speed rail for the mag train and a number of bridge launching systems in China. So we think we are much better positioned for some of that kind of activity.

We have seen some good integrated solutions businesses further down in Asia, down in the Malaysia area, associated with FPSO launching different types of energy things. Again, not stimulus, but maybe somehow tied to infrastructure. So not really any major pickup I would say tied to the infrastructure.

Moving to the raw material side of the equation, I think you are correct. We have a very sophisticated purchasing organization, both here in the US, but also with the 100 – over a 100 people in China that source for all of our businesses. We have not seen a huge amount of price pressure. There is always pressure in some of the raw commodities are going up, so we see a little, but nothing that we haven’t been able to pass along.

We have had some pockets where we have been able to get price increases. I would say in general, that has not been across the platform a big driver, but there have been some pockets where we have been able to affect some price increases.

Scott Graham – Ladenburg Thalmann

That’s very helpful. Thank you. Glad to hear you guys are – we are getting back into the growth mode now after putting out those fires, not a fun time. Thanks.

Robert Arzbaecher

Yes, I mean that’s a great segue, Scott, because I do believe we were very good at executing and we did a very good job of executing a major restructuring effort of, as Andy said now up to $40 million across the Actuant platform, resulted in a lot plant consolidations and things.

But I would rather spend the time on the growth initiatives, on the acquisitions and things that really are growth oriented focus. And we are – we think we have come out of this recession with a much better cost structure where we can afford to do that. And to use Manuel’s line. Well I don’t think we wasted a good crisis. I think we really cut our costs and now focused on using some of that to really try to build the growth initiative around that.

Scott Graham – Ladenburg Thalmann

Thanks.

Operator

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

Jamie Sullivan – RBC Capital Markets

Hi, good morning.

Robert Arzbaecher

Good morning, Jamie.

Jamie Sullivan – RBC Capital Markets

Good morning, everyone.

Andy Lampereur

Good morning, Jamie.

Jamie Sullivan – RBC Capital Markets

Quick question; on the Industrial segment, I was just wondering if you can talk about some of the strengths you are seeing there, is it just your core distribution channel that you are seeing restocking, just to any particular geography that are strong? Some color there would be helpful.

Andy Lampereur

Yes, from the geographic standpoint Jamie, we are seeing good strength all over the place. I would say North America is probably stronger that we are seeing in Europe, what we have seen uplifts going on specifically in Industrial. A big part of what is coming through that we are excited about right now within – with Industrial is core product.

I mean we definitely had a nice pickup in integrated solution sales, some of the big infrastructure sales over the last six months. But it seems in this quarter in particular we had a nice uplift and just standard products which tends to be the bread and butter of Enerpac to higher margin stuff and we are pretty excited about that.

Robert Arzbaecher

This is – in fact, this is a segment I think that is very difficult to figure out how much inventories in the distribution system. I had an anecdote from the world of concrete which I participated in with a couple of distributors where they were very spooked in the fall of 2008, early 2009.

And the typical Enerpac distributor, bread and butter distribution is a $1 million to $2 million account. These people own their business. They are entrepreneurs in the pure sense of the word and they pulled back. And that is the group that seems to be backed by. They are being cautious.

I think one of the analyst does a nice survey of some of those guys and I think the comments are just that that they are being cautious, but they are back to purchasing it and we have seen that. I think you get information on Granger and a number of other people that also gives you a collaborating evidence on that.

Jamie Sullivan – RBC Capital Markets

Okay, that’s helpful, thanks. And what about your own plans for that segment in terms of building inventory? You commented that you were contemplating that. I think last quarter you did update us there.

Andy Lampereur

Yes, good recollection. I was actually going to jump in at the back of Bob’s comment. And I think that the management team in Enerpac in particularly called it a very well. They – in the first quarter, they said we want to consciously take up inventory about 10% of overall which is primarily focused on top product.

And then we want to be sure that when the recovery comes, we have the A items in stock and I think that was a big benefit. During the quarter, we had the product ready for customers.

And actually by the end of the quarter, Enerpac’s or Industrial’s inventory was pretty much flat at the beginning of the year. So they did a great job, that’s a good call. So I think we will be – we will probably be putting a little bit more inventory back on the shelves after a pretty good quarter.

Jamie Sullivan – RBC Capital Markets

Okay. Thanks a lot. I will get back in the queue.

Robert Arzbaecher

Thanks.

Operator

Our next question comes from the line of Charles Brady with BMO Capital Markets. Please proceed with your question.

Tom Brinkman – BMO Capital Markets

Good morning. This is actually Tom Brinkman standing in for Charlie Brady. Just wanted to talk to a little bit about your new restructuring initiatives, the $5 million in costs. And if you could just talk a little bit about the overall program, I guess just remind us of the total savings you expect to yield in the incremental savings from this additional $5 million initiative, second half 2010.

Andy Lampereur

Sure. I will break it in two pieces; first referring to the overall program. We are looking as Bob commented just a few minutes ago, the total restructuring program, our cost estimate has increased during the quarter from $35 million to $40 million as a result of this incremental $5 million that we are looking at.

When I mentioned in my earlier comments, there is $5 million left to go in the back half of the year. That would include some of the stuff for the – some of the charges for the new projects we launched. Some of those were actually included in the $9 million we booked this quarter. And there is a little bit of residual that flows through from the other projects in the fourth quarter. So just to clarify what I said, we are expecting back half restructuring cost to be roughly $5 million in total in the back half.

In terms of savings, the incremental savings associated with the $5 million of incremental cost, the payback on that is a little bit less on the year. So you will see a little – you will see $5 million or a little bit more of a – of payback on that. And just to refresh your memory on this thing, we are looking at about $10 million of our total savings now which we would say would be in the range of $40 million, maybe a little bit more. $10 million of that will be flowing into fiscal ’11 as we go forward and the rest of it would have been already realized either last year or by the end of this year.

Tom Brinkman – BMO Capital Markets

Okay, great. And also if you could talk a bit about new product initiatives; you talked about the Industrial segment how you have some core sales improvement from that. What about the other three segments? And just curious if you are able to continue focusing on that in spite of restructuring efforts?

Robert Arzbaecher

Yes, going to Engineered Solutions which really is almost everything we do in that segment has some kind of a new product, new technology feel to it. Still the lion share of the opportunity exist in the emission side of that business. We have seen very little of that doubling of the business that we expected to see.

Some of that is a function of the recession and when it hit in a lot of these OEMs pulling back. But we are now in a firm backlog situation on a number of European models. We picked up a quite a bit of business with people like Caterpillar that’s in the highway side of the business. Lot’s of good things going on in that segment. It is going to have a big ’11 in that emission side of the business.

We have been doing a lot with Maxima. Maxima is the sensor and display business. Again a lot of big off-highway equipment providers; caterpillar again being a big chunk of that. We have launched a number of things in China that are kind of a standard product; it will work on any machine. So not as highly engineered for a specific machine, but more for a standard product. So that’s very a positive and very strong.

Moving to Energy, we are doing more – and that segment it tends to be more geographic growth. So we have been growing in some of the emerging parts of the market. And even though we have been talking about this mid double digit or kind of low teens decline, we are actually seeing growth in some of the emerging parts of the world. China, for example grew in the Energy segment, so that one would be more tied to emerging markets.

Couple of others I guess I would mention. Andy is writing them down furiously. Lift gate in automotive. Our auto business was up substantially over 50% in the quarter. And a third of that 50% was due to lift gate actuation. So we have talking about that for a few years, but Daimler really took off this quarter and that made a big difference.

In Electrical, you have got things like the cable rafter we talked about in previous calls. We have got some energy efficient transformer opportunities. We are planning around a little bit with electric car plug-in devices that don’t have any orders on that yet, but it’s an area that we are very focused on.

Obviously with the harsh environment connections we already have for boats, it’s a nature fit that we could play a meaningful role. And with the DIY market that’s an obvious fit into people making those changes in their garages and that will fit us. So just a lot of different activity there.

I rambled across the four segments. Happy to follow-up with anything in particular.

Tom Brinkman – BMO Capital Markets

Okay, thanks. Last question; just about I guess housekeeping, if you can summarize the currency impacts by segments.

Andy Lampereur

I think the overall impact of currency was about 4% for the entire company and I think it’s going to be reasonably consistent across our segments here.

Robert Arzbaecher

Why don't I let Andy look up the top line for you? On the bottom line, it was $0.03 or $0.04 of earnings per share. It’s in our guidance for the full year. So – and most of that being back half related. So while – when you look at our press release, you say, gee, they didn’t raise guidance.

If you put it on a same-store currency basis, we actually did raise it $0.03 or $0.04 because we held at a top number even though we are having that pressure. We typically do not give out segment level profit numbers, but Andy is about to read you the sales numbers.

Andy Lampereur

Yes, the currency impact is pretty uniform across the segments. As we look at the second quarter, actually we are ranging from 3% to 5%, 4% in Industrial, 5% in Energy, 3% in Electrical, and 4% in Engineered Solutions. Again pretty consistent. When you look in the guidance as Bob mentioned going forward, our last guidance that we had provided, we assume currency was kind of in the 145 to 150 range.

When talking about that it’s primarily the Euro. Today, the assumption is about 135 to 140, so it’s down considerably. And then essentially the same trend in the Pound as well. So when you look at the back half of the year, it’s somewhere between $15 million and $25 million on the top line. And Bob’s comment on the EPS impact, the headwind associated with that of $0.04 is dead on.

Excluding as said another way, if the currency was where it was at, our currency assumptions were where they are at back at the – back in December when we had our last earnings call, our EPS guidance would be $0.04 higher, $0.03, $0.04 higher than for the full year than where it is right now.

Tom Brinkman – BMO Capital Markets

Great. That’s all I had. Thank you.

Operator

Our next question comes from the line of Ann Duignan from JPMorgan. Please proceed with your question.

Ingrid – JPMorgan

Good morning, this is Ingrid in for Ann. Just wondering if you can give us a little more color on the Energy segment and what gives you some confidence if some of those maintenance projects are going to come back in the back half year?

Robert Arzbaecher

What gives us comfort?

Ingrid – JPMorgan

Yes. I know you said that you feel that they eventually have to comeback. But how is that they couldn’t push them out a little further I guess?

Robert Arzbaecher

Well, they certainly can. It – but it is very difficult to take turnarounds where you have not just us as a contractor, but many, many other contractors all involved in turnaround. It is very difficult to move those entirely out.

There are also all kinds of regulations that that come into play about maintenance and repair after some of the spectacular blowups that happened in Louisiana and then there have been a couple in the North Sea. So a ton of regulation really does drive, so that’s what gives us comfort that has comeback.

We really expected to see some of that in the second quarter. It was marginally disappointing, but you can’t push that stuff out too far. You are getting into more of the spring-summer season where the work is more manageable than in the hostile environment of winter on the North Sea. So these are the things that give us comfort if it comes back.

Andy Lampereur

I would also add to that is in terms of second half growth, our core – the core numbers that I kind of mentioned as far as or as Bob mentioned as far as improving as the third and fourth quarter come along, remember a year ago, we were still positive, we had pretty good core growth in the first half of last year, we were still growing through three quarters. So the comps literally are easier when you look at this year versus next.

And I am looking at my sheet here on what my forecast is in absolute dollars for the balance of the year, year-end, and we are not predicting a significant change in dollars from where we were at even in the first quarter. So we are not – we are not projecting a significant growth year, but we were expecting a big –

Robert Arzbaecher

More easier comps.

Andy Lampereur

Yes.

Ingrid – JPMorgan

Okay. And then I just wanted to revisit the pricing issue. You had said that you weren’t seeing really any pricing yet, and just wanted to hear a little more about that, because Cummins remarked yesterday that they are starting to see some pricing pressure in Europe.

Andy Lampereur

I guess we can only comment on what we are actually seeing. I think from the pricing that Bob talked about earlier as far as what are we passing on to our customers, what are we seeing on the supply chain. Our assumption is going forward there will be some, because steel prices are certainly up from where they have been before.

And I think utilization is going up over in China, this which where a lot of the world steel is coming from. So we are expecting to add more pressure as we go forward. We think that’s built into our guidance on this stuff, but we have not – I have seen increases come through at this point and in a meaningful way.

Robert Arzbaecher

And once you get your comfort on that is we have a very detailed monthly operating meeting that is led by Andy and we cover – pricing is one of the issues we cover. It’s on a standing agenda that goes through those meetings. And we would have heard about it. So I don’t know what Cummins is seeing, but I can just tell you the meeting only happened a couple of weeks ago. And as of right now, our truck guys are not signaling anything out of the ordinary.

Ingrid – JPMorgan

Right. And I guess the last thing, I just wanted to ask about is on the RVs, you said you were seeing some more positive there. And I guess I would have thought that that would have been in a later cycle industry, so I just wanted to get a little more color on that.

Robert Arzbaecher

It – it’s a – it’s all relative. We – our sales have kind of that’s gone from $1 million to $2 million a month, which sounds like an incredible growth except it used to do $10 million a month. So we have just lowered – the RV industry has just lowered this year volume so much that we are seeing great results, but it doesn’t move the needle on the total Actuant family that much.

Andy Lampereur

In this case, it’s clearly the destocking from last year. There was so much burn through of finished goods inventory going on at the dealer level that what we are essentially have seen here over the last six months has been. Dealers are starting to order. The actual details have not come up.

Ingrid – JPMorgan

Okay, that helps a lot. Thank you very much.

Robert Arzbaecher

Yes, good.

Operator

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

Jeff Hammond – KeyBanc Capital Markets

Hi, good morning, guys.

Robert Arzbaecher

Good morning.

Jeff Hammond – KeyBanc Capital Markets

Just to maybe go at the deferred maintenance a little bit different way. As you talk to your customers, I mean are they suggesting that that those turnarounds continually get deferred or is there some suggestion that some of that starts breaking free. And then, Andy, I think you mentioned you are not building much backend, just maybe a little clarification on what you have kind of built into the expectation?

Andy Lampereur

Well, I will take the first part and leave you with the back part. But the – the reality is a quarter ago, we had turnaround schedules. We had guys scheduled to go and those things get move. So they give you a new date. They don’t just say it’s gone. They give you a new date.

And that’s what we are basing – that’s what the Energy segment is basing their forecasts on. So could it move again? Yes, it could, but they have already moved it once and they – as I said, lots of vendors involved in these turnarounds. You can imagine – you can imagine the cost of continuing to move those things. So that’s what gives us confidence.

Robert Arzbaecher

Jeff, I don’t – I honestly don’t know how to answer the question more than what I did before. I mean our quarterly run rate on revenues if you look over the last couple of years or really the last year is about $60 million, a quarter in Energy, and that’s split between the – that is split between the Cortland business and the Hydratight business.

The piece that we are feeling it the most right now are I would say the most recent change has been the portion of the Hydratight business, in particular the refinery side. That doesn’t mean there is softness out elsewhere. But the articles that you have been reading in the journal over the last couple of months, talking about refineries that is what we are – that’s what we saw at the most and it’s in these mature markets.

What I can tell you is we are having very good success outside of some of these more mature markets. Places like Brazil, places like Australia, Malaysia, Asia, China, we are getting penetration in those within Hydratight. And Cortland little bit more optimism I think going forward in the second half year as far as the activity level there.

So I think that’s what we are talking about. If you assume we are at a $60 million and say, gee, sales are going to improve by 5% off of a relatively low basis here, you are talking a couple of million dollars in quarter. So from a quantification standpoint, we are in that kind of ballpark.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then shifting gears; a couple of final point questions in Engineered Solutions. Would you say that the truck improvement is surprising you to the upside? Or I know you had talked about that as being an area of strength coming into the year, but just a sense of if that’s coming in better.

Andy Lampereur

We thought that we were going to have a pretty good year in European truck not as much driven by the end market, but more driven by the crazy levels of destocking that we saw last year, where literally our sales were up 60%, 70% which was 2X what the OEMs were off from a selling standpoint. So we were seeing that improvement coming through certainly in the first quarter and into the second.

More recently we are hearing from the OEMs that they are taking their build rates up in Europe in the back half. I think domestically, North America, we are expecting as most forecasts are indicating later in the calendar year, you are going to see a pickup in North America.

So I would say it’s a modest upside to what our expectations are, but we already had reasonably – reasonable growth expectations for this market irrespective of what the end market was going to do just because of the end of restocking.

Andy Lampereur

The other place we saw great numbers, I mean absolutely great numbers was in China. It’s not a huge piece of the business. It’s $10 million, but it – we saw just a fantastic numbers out of CNHTC and FAW in China.

We also anecdotally like our mix of customers in Europe, Volvo, Avaco, Scania, are some of our big three – they seem to be winning share against more of the regional players that exist in some of the truck markets, that’s playing in our favor too.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then on the auto side, I think you said that business is up 50%. I mean is that sustainable, is that just timing of new platforms? And then just given the commentary out of Europe is that there is some concern that there is tough comps on the stimulus, how should we think about that?

Andy Lampereur

It’s – our auto was up in the 30s during the quarter on a quarter basis. It was more driven – I am sorry, overall vehicles was up in the 30s, my mistake. The growth that we saw Jeff was more driven by market share penetration in new platform.

So Bob commented earlier about the lift gates and how we saw about $3 million of growth during the quarter just on lift gates, so I would say that’s penetration into new area.

But we were – we also saw very nice volume coming through in some of the new platforms, the BMW Z4, the Infinity is coming out – BMW 1 Series as well. We have got a couple more of them that come on later this calendar year which should help out.

As you know with this business, there is definitely load-in factor in the first year when you are launching new platform. So some of this will be a headwind a year out, but there are additional models that are coming on later on, that should offset of it.

Robert Arzbaecher

I have been counseled by you guys not to talk about automotive to talk about actuation. But this is a good quarter to talk about automotive. We had a very, very strong quarter. As Andy said, a bunch of it as lift gate is doing quite well. I don’t know how much more legs that has. We are starting to anniversary some of those.

The new models, there is a bunch of stuff in the hopper, some are not even launched yet. I think some of that got delayed in ’08 and ’09, because people were starting to see a slowdown. And now the convertible theme is coming back on line. So, off the growth, only a small piece was just models we were on year-over-year where there is replenishment. Lot of it had to do with the lift gate and these new models.

Andy Lampereur

Yes, as we look forward here, essentially there is this four platforms that I am looking at here in the next year that will be coming on – you have got Camaro, you have got Murano Nissan, Murano convertible which will be interesting.

The Renault Megane is a replacement and the one we talked about last quarter, the Cherry which is our first – our first Chinese vehicle coming through. So those four will be added as well and those are not in the run rate today.

Jeff Hammond – KeyBanc Capital Markets

Great, thanks guys.

Operator

Our next question comes from the line of Robert McCarthy from Robert W. Baird. Please proceed with your question.

Robert McCarthy – Robert W. Baird

Good morning, everybody. Can you hear me okay?

Robert Arzbaecher

Yes, I can hear you.

Andy Lampereur

Not a Robertson Robert. (Inaudible).

Robert McCarthy – Robert W. Baird

Hi Robert, how are you?

Robert Arzbaecher

I am alright.

Robert McCarthy – Robert W. Baird

A couple of cleanup questions here. Andy specifically how much did you take out of your second half growth forecast for Energy. You mentioned you added two to three points for Industrial?

Andy Lampereur

Yes, I think we – as I mentioned, for the full year, we had taken down the guidance from flat to minus 5, to minus 5 for the full year. When you look from a quarterly standpoint, I would say it’s – it probably came down. In the back half, it probably came down about 5%, our core growth assumption.

Robert McCarthy – Robert W. Baird

Yes, okay. And a similar question for Engineered Solutions, is – are you thinking that the number that you just saw for core growth is a peak number or is it possible that we could see higher comparisons yet before the year is over?

Andy Lampereur

Yes, you will see a higher number. We expect the third quarter to be higher in terms of core growth than the roughly the 16 that we just saw. I will warn you that in the fourth quarter based on what we are expecting now we are going to see that step down still grow in the fourth quarter.

But the wildcard is the – the European is planning to shut downs and a lot of the OEMs shut their plants down. So we are expecting the core growth to peak this year in the third quarter, up pretty nice from what we just reported, if that’s coming down into single digits in the fourth quarter.

I think, yes, I just want to redirect back to that Energy question again Rob, just to be sure that I communicated that right. When I talked about and when we talked about our forecast for the balance of the year, it has come down.

We are – we assumed that this business – when we laid out our guidance in the past, we said this was the wild card segment. We assumed the growth in the back half of the year. What we are building in now is less than we had before. So it’s not necessarily a lowering of where the trend is right now. It is our – we are probably too optimistic previously.

It will be better in the back half than the first half, that’s less better if you will.

Robert McCarthy – Robert W. Baird

Part of the full-year change would be what you saw in the quarter you just recorded? (Inaudible)?

Andy Lampereur

Yes.

Robert Arzbaecher

I think that is correct. Yes, okay.

Robert McCarthy – Robert W. Baird

And then, Bob on a – well, just real quick, I just wanted to ask if you started hiring anywhere?

Robert Arzbaecher

Yes, we have been hiring in Mexico, where we moved a number of product lines. We have been hiring a little bit in China, where we have been doing and we are hiring a little here in Milwaukee where we have our new campus, and they are going to have our centralized distribution center.

Andy Lampereur

Those are – Milwaukee’s replacement that are (inaudible).

Robert Arzbaecher

In total, though we are down about a 100 people in the quarter.

Andy Lampereur

The one that is positive in here Rob is in Europe with auto and truck. We clearly have increased, but that’s substantially all temporary employees or we count that in headcount even (inaudible) employees, so we can track data. But clearly the direct labor count is not there, but they are temporary employees so –

Robert Arzbaecher

And netting it altogether, those are all in and it’s not about a 100 for the quarter.

Robert McCarthy – Robert W. Baird

Okay, very good. The bigger picture question I wanted to ask you Bob is now we have been through most of one complete cycle that that Actuant has been since the company under your leadership. What do you take away from this experience particularly in the need to spend the $40 million and to take out a lot of brick and mortar, not just cyclical headcount reduction, but also space. Actually I am wondering what do you takeaway from this that you can apply in the next cycle, so as to not to find yourselves in a – into position where you have to do kind of like a end of cycle capacity cleanup if you will.

Robert Arzbaecher

That’s a – it’s a great question. It’s one we shared with our Board of Directors in a recent meeting. So I was surprised at how the diversity did not help us in this recession. Now I don’t know if we will ever see another one like the one we just went through. But –

Robert McCarthy – Robert W. Baird

But Bob, don’t you think it did help you? I mean given the circumstances you have a pretty strong performance out of your Enerpac and Energy businesses.

Robert Arzbaecher

Yes, but if I look across the whole platform against other diversified industrials, I got to a lower comp – a core growth of in the 20s. A lot of people didn’t see it that bad. Now, there is I think reasons for that. I had more vehicle exposure.

And one of the things that’s bouncing back stronger and I think people like ITW see what we are seeing are bouncing back. We are going to get the benefit of a stronger bounce back, because we had more vehicle stuff going on the other side.

We don’t have a lot of aerospace in the platform, okay? So that’s an area that hung in pretty well. We don’t have a lot of med tech, that’s an area that hung in a little better. I think if leader cycle is going to feel a little more then we are. But – so there are portfolio management type decisions about that we should hold.

I think we are more aggressive on our acquisitions now. Things like the Simplex closure that Andy talked about. Maybe we should have done that right away rather than wait until the dire economy to force us to do it. So I think we have got a little more teeth on our acquisitions, on our cost structure, and I think that is – that’s the point.

There is no question Rob that overall longer term, you would not have liked to have seen what these results would look like if we didn’t build an energy platform for example. I mean over the last three or four years, we have built a beautiful business there. And that held in there much better than some of the other businesses through the recession, okay?

We built on to the Enerpac, Industrial business by expanding. That held in there better. So I think we did a lot of things right. I think maybe a little more aggressive in terms of costing, the cost you assume with part of acquisitions, and a little more aggressive on portfolio management, looking at really where you deploy the capital, and looking at a more longer term growth strategies than just what’s the thing going to do in the next couple of years. I would put those there.

But there are also some real positives. The positive is Actuant knows how to get after things. We know how to execute when our backs are against the wall or anytime. And this management team really proves out with the restructuring. I mean we are getting the savings as advertised if not better. And that’s affording us this ability to spend some of that incremental money towards growth initiatives.

Robert McCarthy – Robert W. Baird

Thanks Bob. It’s helpful.

Operator

Our next question comes from the line of Joe Mantello from Sidoti & Co. Please proceed with your question.

Joe Mantello – Sidoti & Co.

Hi everyone.

Robert Arzbaecher

Hi Mantello.

Joe Mantello – Sidoti & Co.

Andy, could you repeat how much you have available on your revolver and update us with how much capital you are comfortable utilizing for acquisitions? And then also just give us a level of confidence on if you are going to make – whether you are going to make an acquisition over the next couple quarters and what that confidence level compares to say three, four months ago?

Andy Lampereur

Sure. Yes, our revolver, it’s a $400 million revolver. We only had $25 million drawn at the end of the quarter. We had a little bit of (inaudible). So it’s – about $370 million of it was of unused capacity at the end of quarter on that by the end of this fiscal year I would expect the entire $400 million to be available given the forecasted cash flow for the balance of the year and M&A activity.

In terms of M&A activity, we talked about a $100 million to a $150 million over a 12 months period. I think that’s still where we are at right now. It’s probably difficult to say if we are going to say that up right now since we haven’t done anything in the last 90 days.

It’s certainly is not because there aren’t ideas out there, but you do want to force deals bad deals to happen just to make them happen. So we clearly have a lot more financial capacity to do more than that if we want to. But just from a comfort level where we are at right now in what we are seeing going forward, I think that’s a reasonable number. There is nothing big that we are looking at today.

Joe Mantello – Sidoti & Co.

And then just regarding I guess confidence levels on whether closing a deal in the next couple of quarters, what do you guys think that as compared to say three, four months ago?

Robert Arzbaecher

I was confident I was going to close one last time I got left at the alter. So I am confident. We have got three or four things that are scheduled to close. What does schedule to close mean? It means we are in the process of doing due diligence and we have a date booked on when we think things are going to close. But I had one of those last quarter and actually two of them, you are right, and they went away.

So one thing is for sure about acquisitions, I will close five of them and you will be saying just the opposite. You will be saying how did so much activity happen in this quarter. It’s just the lumpy nature of what you do. And I think the beauty of having a lot in this system is you don’t get emotionally attached to any specific deal.

And when they fall away, it leaves you the opportunity to really look at the thing clear headed. And as I said in my prepared remarks, sometimes you capitulate and sometimes you don’t. When you got a lot of activity, you are less liable to capitulate because there is plenty of other things to look at, plenty of fish in the sea.

Joe Mantello – Sidoti & Co.

All right, great. And then in regards to the restructuring initiatives that you put in place in the Industrial segment this past quarter about $5 million I think it was. What is the payback for that look like? And what is the incremental benefit in this quarter look like?

Andy Lampereur

The $5 million that I referred to Joe was not just Industrial. It was actually not industrial, it was primarily Energy and a little bit, a little bit in Electrical. It’s $5 million, the savings roughly 5 million bucks getting into quarters, not really going to get into that level of detail, there will be I would say probably not that much in the immediate quarter that will be savings coming through in our fiscal fourth quarter and the next couple of quarters after that.

Joe Mantello – Sidoti & Co.

Actually I was referring to the $4.9 million that was the restructuring cost in the Industrial segment.

Andy Lampereur

I am sorry. I was thinking you were referring to the new –

Robert Arzbaecher

The incremental.

Andy Lampereur

Yes, the stuff in the Industrial segment, I apologize, that included the noncash write-down of the Simplex property and some assets there. We did start realizing savings on that this quarter, because that was completed in some of it – some of the movements that were already happening at the end of the first quarter.

It’s – we are probably – at this point, probably a two, three ways away from everything being cleaned out at the back of that facility. So the run rate is there, we have already started to realize dollars. That was already included in our original guidance in terms of the savings on it, so nothing –

Joe Mantello – Sidoti & Co.

So would the payback be roughly a year, so that divided by four should be a rough estimate?

Andy Lampereur

I – yes, I mean, generally speaking, yes. I mean if you look at our restructuring, it’s about a one-year payback. But I will remind you that there was a noncash hit. So you are not really getting a lot of savings off of a noncash hit.

Karen Bauer

Yes, so it’s the way GAAP requires you need to book is from a charge standpoint isn’t necessarily one that costs.

Robert Arzbaecher

If we sell a business – the building in the next six months, you will have a very fast payback.

Joe Mantello – Sidoti & Co.

Okay. And then very lastly, just in terms of the sales guidance for each segment, you spoke of the Energy segment being 5%. Could you give an update on the other three? I am not sure if you have mentioned that or not.

Andy Lampereur

I don’t think I am going to get into specifics on those. I think what I have mentioned on Enerpac is we are up two to three points from where we were at before. Electrical is probably not that far off in where it was. And Engineered Solutions is up probably similar – similar range for the full year.

Joe Mantello – Sidoti & Co.

Okay, great. Thanks a lot.

Andy Lampereur

Yes.

Operator

And there are no further questions. At this time, I will turn the call back to you. Please continue with your presentation or closing remarks.

Robert Arzbaecher

Well, thank you, operator, and thanks for participating in the call. I hope you enjoy your St. Patty’s Day and you don’t spend your whole day in the office, but we will. So if you have any questions that you need to follow-up, please give us a call. Thank you and good-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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