Actuant Corporation F3Q10 (05/31/2010) Earnings Call Transcript

| About: Actuant Corporation (ATU)

Actuant Corporation (NYSE:ATU)

F3Q10 (05/31/2010) Earnings Call Transcript

June 17, 2010 11:00 a.m. ET


Karen Bauer - Director, IR

Bob Arzbaecher - CEO

Andy Lampereur - CFO


Wendy Caplan - SunTrust

Ingrid Aja - JPMorgan

Charlie Brady - BMO Capital Markets

Ajay Kejriwal - FBR Capital Markets

Jamie Sullivan - RBC Capital Markets

Allison Poliniak - Wells Fargo Securities


Welcome to the Actuant Corporation's third quarter fiscal 2010 earnings conference call. We are conducting a live meeting to coincide with the audio conference. If you would like to view the presentation online, please refer to your meeting invitation for details. (Operator Instructions)

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

Karen Bauer

Good morning and welcome to Actuant's third quarter fiscal 2010 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant's Chief Executive Officer; and Andy Lampereur, Chief Financial Officer. I'd 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 turn the call over to Bob.

Bob Arzbaecher

Thank you, Karen. As you can see in our release this morning, we reported sales and earnings above the high end of our previous guidance. EPS, excluding restructuring and last year's impairment, was up 45% year-over-year, with 16% core sales growth and solid EBITDA margin improvement.

Free cash flow was outstanding at $46 million for the quarter. We continue to do a great job of effectively managing working capital and our capital during this recovery. As you will hear later in the call, we are again raising our fiscal 2010 guidance for free cash flow.

We completely four tuck-in acquisitions during the last quarter or at least since we reported to you last, all in line with the strategic growth areas of Industrial and Energy segments.

With these opening remarks, I'll turn it over to Andy to go through the quarterly results, and I'll come back and cover a few topics, including our preliminary 2011 guidance.

Andy Lampereur

Thank you, Bob, and good morning, everyone. What a difference a year makes! It sure is a lot more satisfying talking about improved results as opposed to explaining recession-driven sales and profitability declines. We benefited from 16% core growth and margin expansion this quarter, which exceeded our guidance and consensus.

To recap the third quarter at a high level, sales of $335 million were up 17% from last year, reflecting improving demand in three of our sports segments as well as a net benefit of acquisitions, divestitures and foreign currency changes.

On a GAAP basis, we reported diluted earnings per share from continuing operations of $0.30 a share compared to $0.06 a year ago. These results include restructuring costs for both years and an impairment charge last year and therefore requires an explanation.

Our restructuring costs in the quarter were in line with the expectations. Last quarter, we said there'd be about $5 million of restructuring costs in the back half of fiscal 2010, and we recognized about half of those in the third quarter. There were no changes to our restructuring costs or savings estimates that we provided on last quarter's earnings call.

If we exclude the restructuring costs and last year's impairment charge, third quarter EPS from this year was $0.32 a share compared to $0.22 a share last year, a 45% improvement. While we're still below pre-recession business activity levels, we're definitely encouraged by the many positive signs in the quarter, the best sales adjusted EPS and margins that we've seen in the last six quarters.

I'll review sales and margins next at a consolidated level and then spend a few moments on each of our segments.

Our consolidated sales for the quarter of $335 million were the highest we've seen since the first quarter of 2009. The momentum we reported in last quarter's earnings call continued this quarter with core sales growth of 16%. With the exception of the Energy segment, all segments posted core sales gains led by a 43% increase in Engineered Solutions due to a sharp rebound in OEM demand in vehicle markets, as well as a 20% increase in the Industrial segment.

Foreign currency was not a big issue for the third quarter as a significant dollar strengthening happened in May when two-thirds of our quarter was already in the books. Currency movements actually contributed 1% to overall sales growth in the quarter versus the prior year, but there will be a headwind in the fourth quarter and all of fiscal 2011. We'll provide more color on currency later on the call when we talk about our outlook and guidance.

The combination of restructuring-driven cost savings that we've talked about in the last few quarters as well as a 17% overall sales gain this quarter resulted in a 53% increase in operating profit excluding restructuring and impairment charges.

Consolidated operating profit margins expanded 280 basis points to 12.2% from the third quarter of a year ago and 310 basis points sequentially from last quarter. All segments except Energy reported year-over-year profit margin expansion, and all four were up sequentially from last quarter. Equally as important, EBITDA margins exceeded 15% for the first time in the last six quarters despite less than optimal sales mix.

Now let's discuss results for each of our segments starting first with Industrial. Sales improved in the Industrial segment significantly with core sales growth of 20%. This compares to a minus-7% core sales growth for all of last quarter, but flat for the month of February. Since then, sales and orders have continued to rebound, especially in Asian and North American markets.

The 26% third quarter industrial operating profit margin was the highest we've seen in the last six quarters. As Bob will explain later, industrial margins were impacted by unfavorable acquisition mix, with the two new acquisitions that we completed in April. Despite this, our operating profit margins in the Industrial segment increased 310 basis points sequentially on the higher volume and 120 basis points year-over-year.

Although the rapid increase in production during the quarter had us scrambling to meet demand, the team was able to deliver the goods with solid margin expansion.

The Energy segment posted an 11% core sales decline in the quarter and year-over-year margin erosion on a lower revenue base and unfavorable sales mix. The positives were the sequential improvements in both sales and profit margin trends. Last quarter's core sales were down 14% compared to 11% this quarter, and margins this quarter were up 250 basis points from last quarter.

Similar to last quarter, our sales into the mature refinery markets such as in the U.K., the U.S. and Europe continued to be weak as was seismic exploration. And these combined to drive the majority of the core sales decline. Conversely, we saw very nice sales gains in newer markets for the business, including Asia, the Middle East and Kazakhstan.

Turning now to the Electrical segment, year-over-year core sales there improved from minus-9% last quarter to plus-8% this quarter. Not surprisingly, the improvement came from our earlier cycle of markets like do-it-yourself retail and the marine aftermarket. Some of our latest cycle markets, including commercial construction and electric utilities, remained weak. And there will probably continue to be a headcount for a little while longer.

Profit-wise, the news in this segment was again good, with Electrical segment operating profit margins expanding 170 basis points sequentially and more than double last year's margins. This reflects the benefits from the restructuring actions in this segment as well as improved segment sales mix.

Our fourth and final segment is Engineered Solutions, which again posted excellent results in the quarter, core sales growth of 43%, a year-over-year operating profit margin expansion of over 1,000 basis points and great cash flow. The EBITDA margins in the segment were over 15% in the quarter, driven by the sharp rebound in sales as well as restructuring benefits.

The year-over-year EBITDA growth in terms of dollars was up $13 million in the quarter alone. The core sales growth reflected strong demand from vehicle markets, notably automotive, European and Asian truck and RVs in North America.

That's it for my comments on segments. I'll just talk a little bit about cash flow, which was very strong in the third quarter, with $46 million of free cash flow. Year-to-date, our free cash flow is $97 million, which resulted in us increasing the full year free cash flow target from the previous $110 million now to $120 million to $125 million range.

The combination of the EBITDA growth in the quarter as well as this cash flow more than offset the money we used to fund the new acquisitions, driving our net debt to EBITDA down to 2.1 times pro forma for the LTM earnings of the businesses we acquired. As disclosed in this morning's press release, with over $350 million capacity under our revolver that's unused, we're in great shape for funding future growth.

That's it for today's prepared remarks from me. I'll turn the line back over to Bob.

Bob Arzbaecher

Thank you, Andy. Today I'm going to provide some comments on some frequently asked questions, cover our four acquisitions that we completed since our last quarterly earnings call and provide you color with the preliminary 2011 guidance.

First our thoughts relating to the BP accident in the Gulf of Mexico and its potential impact on Actuant. Our deepwater exposure in the Gulf of Mexico today is pretty small, less than $5 million a year. Our deepwater exposure is more heavily weighted towards places like the North Sea, Brazil and Southeast Asia.

While the ongoing spill is devastating on a number of fronts, we believe deepwater oil extraction will continue given the simple fact that existing oil reserves are depleting at the same time global energy demand is increasing. Alternative energy while exciting and beneficial to Actuant does not create enough supply now. So the deepwater reserves must be developed and utilized.

While the incident creates a lot of uncertainty in the short term, we believe that in the long term, both Hydratight and Cortland will benefit from a likely increase in maintenance, inspection and regulation.

Joint integrity will be even more critical with the new safety regulations that are likely to be adopted. We expect that umbilicals that Cortland makes for deepwater applications will be more heavily utilized for inspections, much like the rovers you see everyday working in a Deepwater Horizon accident site.

Now turning to acquisitions, if you recall, I discussed last quarter the creation of a standalone integrated solutions or IAS business for Enerpac. Part of the rationale for this structural change was the anticipation of the Hydrospex and Team Hydrotec acquisitions we completed in April. These two acquisitions add about $30 million in annual revenue to our existing $30 million of IAS business. So now in total, IAS is about 20% of industrial's $300 million in revenue.

As is typical with large project-based businesses that involve bundling other people's products with ours in a complete solution, the resultant EBITDA profit margins for this channel are similar to Actuant's mid-teens.

However, with the synergies we expect to bring from the business, the market share we intend to grow and the brand equity that these high-profile projects provide, we think these margins will expand over time and be increasingly accretive both from ROEC and earnings point of view.

These acquisitions bring us geographic breadth, new and improved heavy-lift technology such as gantries and strand jacks, strong customer relationships, engineering talent to continue to gain in the large civil infrastructure and special project markets. These projects range from bridges, tunnels, dams, railroads, sea ports on the infrastructure side and large lifting and skidding jobs on the special projects side.

Let me walk you through a great example with a recent win that we had with Mammoet. Mammoet is a large Dutch heavy-lifting company that provides customized solutions for technically challenging lifts. During the quarter, IAS completed a $1.5 million offshore rig recovery project for Mammoet and was awarded an additional $9 million contract with them for bogies on a heavy-lifting rolling crane stand.

You see a picture of the concept of this crane on this slide. The project will consist of developing and supplying eight bogies, each of which can handle an incredible rate of 2,400 tons each. This crane on wheels will be able to handle exceptionally heavy loads, lifting jobs for Mammoet.

If you're keeping score, the largest IAS job in Enerpac's history was the Millau Viaduct in Southern France at approximately $5 million. So this project becomes the new leader in the clubhouse and will be delivered over the next year.

This is just one of many IAS bookings that have happened over the last nine months and that are in our funnel of opportunities. We remain very excited about the growth prospects of this subset of the Industrial segment.

In addition to the two industrial acquisitions, energy also added two of its own. Biach was completed in May. Biach specializes in nuclear bolt and tensioners and other products that are used in approximately 90% of all U.S. nuclear power plants today, but has very little overseas exposure. We believe we can globalize the specialized capabilities utilizing our Hydratight global footprint and technical sales force, particularly in the larger nuclear markets of Europe and China.

The second energy acquisition was completed last week. Selantic provides our European base to accelerate globalization of Puget Sound Rope, one of the Cortland businesses. Selantic's highly engineered slings and ropes are used for heavy-lifting applications and mooring applications and are complementary to the Cortland offering. They also provide additional capabilities for heavy-lifting applications within the Industrial segment.

Beyond these recent deals, we still continue to see a number of acquisition prospects in the $10 million to $15 million range in our acquisition funnel. We are predominantly focused on Energy and Industrial segments, but there are also some smaller attractive niches within Electrical and Engineered Solutions segments that are logical places for tuck-ins as well.

Now let's move to guidance. I think what we disclosed in this morning's press release for fiscal 2010 is pretty self-explanatory. We're effectively raising our full-year EPS guidance to take into account our third quarter actual results and the acquisitions I highlighted. This raises our guidance to $0.95 to $1 a share on sales of $1.24 billion to $1.25 billion.

We expect fourth quarter sales to be lower than the third quarter on account of about $10 million headwind from the stronger U.S. dollar as well as about $15 million of impact from European summer plant shutdowns.

As Andy mentioned earlier, we expect free cash flow for fiscal 2010 now to be in the $120 million to $125 million range. I have to say I'm more impressed with our cash flow performance this year than I was with last year's strong cash flow results. In 2009, we did a great job of peeling our working capital in a declining sales environment, but in 2010 we've done an exceptional job of managing working capital in a growth environment, a much harder task.

I commend the business leaders of Actuant and their teams for this achievement. Given this cash flow forecast, our free cash flow conversion will now be in the range of 165% of net income for fiscal 2010.

Now let's move to 2011. Our guidance we are providing today is our first look and we'll be firming this up over the next few months once our final plans are completed and 2010 is in the history books. We'll be ale to provide more color on calendarization and markets, segment core growth and margin expectations on our fourth quarter call.

While we are pretty comfortable with the visibility to predict the next 12 months, there is still a lot of uncertainty out there in FX rates, in the European economy and in the Energy segment. So with this point, I would suggest you we have an equal probability of achieving the low end or the high end of the guidance range.

We are currently expecting consolidated core sales in the 6% to 8% range for fiscal 2011. Completed acquisitions should provide an incremental $40 million on the top-line next year. We expect margin improvement of 75 to 125 basis points in 2011 due to the higher volumes and the carryover impact of the restructuring benefits.

Based on our currency assumptions, we are projecting sales of $1.31 billion to $1.36 billion and EPS in the range of $1.20 to $1.35 per share for fiscal 2011. We expect our tax rate to be in the $27 to $28 range and our targeting free cash flow in the range of $120 million to $130 million. This will provide plenty of fuel for future acquisitions which are not included in our guidance.

Finally, the significant strengthening of the U.S. dollar versus the euro and the U.K. pound has had a meaningful impact on 2011 guidance versus just 90 days ago. What we've attempted to do on this slide that you are now seeing is show you how currency changes impact next year's guidance ranges for both sales and EPS.

Our guidance is shown in the green boxes. As a reminder, one point move above the euro and the pound exchange rates versus the dollar is worth approximately $4 million in annual revenue. With about a 15% EBITDA margin, this equates to $600,000 of EBITDA.

Given our FX assumptions of the euro being worth 1.25 to the dollar and the British pound 1.45 to the dollar, currency is a big factor in understanding our guidance since the average euro in fiscal 2010 was 1.37 to the dollar. In simple terms, if FX in '11 were the same as it was in 2010, we'd be adding $50 million in sales and $0.08 to our EPS guidance.

But even with this FX headwind, we're still looking for EPS improvement of 23% to 38% in fiscal 2011. Obviously on a constant dollar basis, you could add that $0.08 to that and the improvement would even be higher.

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

Question-and-Answer Session


(Operator Instructions) Our first question comes from Wendy Caplan with SunTrust.

Wendy Caplan - SunTrust

Since I typically ask how is Enerpac, I guess my Enerpac question this time will be can you help us understand what the margin would have been in the Industrial segment had we not had the unfavorable mix of acquisitions and as we think strategically about growing the industrial segment.

I've heard you talk a bit about or a lot about investing in the businesses and if we were to look at margin, what should we expect given the increasing investment in the business? And that's the second part of my two-part question.

Bob Arzbaecher

Well, let me start and, Andy, you clean up this if you need to. Basically we're guesstimating that if it wasn't for the acquisitions, we'd have been 100 to 125 basis points higher in margins in the quarter than what we reported. There is a number of things going on in industrial that you have to understand. The first is you are growing the business in the integrated solutions part. And that part which we've owned and had for a long period has always better than mid-teens.

And it's just not realistic to assume that large projects with a large material content and purchase material from other vendors are going to generate that, even the most profitable ones like Millau Viaduct growing in the mid-teens. So that is a mix that we just have to recognize going forward. From the (ROEC) point of view, it's still spectacular, because you don't have inventory in these big projects. You're just running whatever the job actually is.

The other thing that does impact margins, and it's nice for them to have, is variable compensation. Enerpac is way ahead of its business plan right now, great quarter. You would expect that we're accruing some variable comp that gets paid out after the year is closed out. And that is also impacting the margins on a relative basis.

I continue to believe Enerpac will have EBITDA margins 26, 27, 28 neighborhood on a blended basis going forward. And now we are in the early quarters of seeing that improvement, obviously up several hundred basis points this quarter.

Wendy Caplan - SunTrust

And a free cash flow question if I might. The guidance update for 2010, you gave a lot of information, and I just want to understand, so essentially our $0.95 to a $1 for the full year reflects the couple of points in currency. So it really would have been higher. Is that kind of how we should think about it?

Andy Lampereur

One way to look at it, Wendy, is just what's happened to the currency in the last quarter here. we got the implied guidance that was off there for the fourth quarter, which is $0.24 to $0.29. Effectively by holding it, we're overcoming about $0.02 a share or about a quarter of next year's currency headwind. So said another way, we absorbed another $0.02 of headwind in this thing to stick with that guidance. So it would have been 26 to 31 on an apples-and-apples basis.

Bob Arzbaecher

I want to say excellence alone on this, but obviously ITW has been chirping about currency. Dover is out chirping about currency. This is something that's going to affect everyone. I think given that we are coming out with '011 guidance in the middle of '010 just due to our obvious yearend is giving it attention. But I think if you step away from it, you'll recognize big year next year, 25% to 35% earnings growth with that headwind already factored in.

Wendy Caplan - SunTrust

The Engineered Solutions segment exceeded my expectations. As we look at that segment in terms of sales trends, obviously early cycle stuff, should we think about it in terms of restocking, selling lots of RVs, et cetera, versus "real demand"? I mean how should we think about that on a sustainable or going-forward basis?

Bob Arzbaecher

Well, RV, while it was a fantastic quarter, up a significant amount, somewhere around 100%, it's a very small piece of that total. So I think the better proxy is really Volvo in Europe and European truck. If you've been following the European truck guys, they are forecasting that the back half of 2010 is going to have modest core growth year-over-year, 0% to 5% neighborhood.

For us, the key is that they're producing what they're selling. I don't think we see a lot of evidence that they're building inventory. I think what we see is they are producing what they are selling. But nevertheless, that's a big push for us and it's equating to a lot of that growth.


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

Ingrid Aja - JPMorgan

Hi. It's Ingrid Aja in for Ann. I was wondering if you could circle back to the energy business. I realize you don't have a tremendous amount of Gulf exposure, but British Petroleum is one of your customers. What kind of exposure do you have to them?

Andy Lampereur

In terms of direct sales directly to BP, it's probably a couple of million dollars a year. That's it. But there are other vendors that we supply product to or we rent our assets to that will then be working on BP assets. So if we take all of those into account, it's probably $6 million, $7 million a year account for us. So it's a sizeable account, but it's not a huge part of our overall energy business or certainly Actuant.

Ingrid Aja - JPMorgan

And then I know that you've talked about the long-term potential. But in the near term, what is your outlook for rig count and maintenance?

Bob Arzbaecher

Well, we don't really try to forecast rig count. It's only one variable. And a lot of variables affect our business. We went into the third quarter expecting energy to continue to improve, be less worse. It did in fact do that, went from 14 to 11. The 11 was probably 2%, 3% more than we would have expected. I think we were hoping for kind of minus-8.

We're expecting the fourth quarter to continue to move in that direction towards zero. We're expecting 2011 to have that same kind of feel, continue to get less worse. The comps are getting easier. So we're pretty optimistic that we're bouncing along the bottom certainly sequentially in energy. And it will feel okay in the quarters in front of us.

Ingrid Aja - JPMorgan

And then I guess my only other question would be if you could talk a little bit about what you're seeing in Europe overall and by segments?

Bob Arzbaecher

Yes, I get that question a lot these days; with the Greece situation, how is the volume and demand in Europe? Candidly and we've pulsed this and we have a healthy paranoia about it. We really have seen no indications that Europe is slowing down associated with the Greece thing or the euro thing. That data is pulsed every month. So that's a real-time assessment that I'm giving you.

You see that in a lot of different business, as we see that in the consumer side with the top business, convertible tops is in the consumer. We see that in industrial with truck and Enerpac. And all I can tell you is it's just not shown it's head that it's a negative. The Europe recovery has been trailing the U.S., but that's been going on for nine months. That's really not much of a new news situation.


Our next question comes from the line of Charlie Brady with BMO Capital Markets.

Charlie Brady - BMO Capital Markets

With respect to electrical, could you just maybe give us a little more details what longer fits strategically kind of on the growth initiatives or growth outlook for that business and kind of where it goes beyond DIY big box retailers and how that you drive that business over time?

Bob Arzbaecher

The big story for our electrical platform has been the consolidation of three separate business units into a single business unit in North America. That was a big chunk of our restructuring, and we are in the final innings of putting that together. I would say 95% of it's done with a little bit still left to go.

Now that we're at that point, we've really started organizing the electrical team towards some very focused markets that we believe have above-average growth. We're focused on emerging markets of India and China where we don't do a lot of business today, in fact none, and we look at those as great opportunities. Lots of parts of those countries are seeing their first electricity big demand, how to get to that channels, what we have to dissect and get it there. But we bring a lot of product back from those places already.

So we think we have a kind of big leg up to start that. And obviously with Actuant's China and India exposure already, it's not hard to add that too, the legal entities that already exist.

Another big area of growth is harsh environment. This is where the Marine Corps business sits, and we're doing a lot more in OEM type applications, places like coal generators, things like that where we can do more in harsh environment.

And then the last is in e-mobility. I think e-cars are something we're paying a lot of attention to now, working with a number of the battery guys to really look and try to understand how we can play a role in the electric car. We do business already with Tesla. That's a European plug company. Obviously, with Marine Corps, we already have a lot of the shore power. Corps cords for the boat and marine industry we think converting that to auto was going to be not bad.

A lot of the charging stations, if you're going to put one in your house, you're probably going to buy the Depot or Lowe's. It will either be a do-it-yourself or do-it-for-me type installation, but we think we can play a role there.

And lastly, we have low voltage transformers that have the step-down power, and that's obviously a key thing to this. So those would be some of the places now that we've got a single business that we're looking to go after in electrical.


Our next question comes from the line of Ajay Kejriwal with FBR Capital Markets.

Ajay Kejriwal - FBR Capital Markets

Nice organic performance in Enerpac and industrial. And it appears you saw growth across geographies. Wondering if you can provide more detail around what you saw in U.S. versus Europe and Asia and parched that 20% across geographies. And then also maybe if you can talk about how much you think restocking has contributed to that 20% number?

Bob Arzbaecher

Andy, why don't you start now, and I'll talk about the restocking.

Andy Lampereur

When you look across all geographies, we're up the most in Asia, clearly in the 30s. We're up about 10% core, certainly benefiting from truck and auto and engineered solutions. And North America was in the teens. As Bob mentioned earlier, Europe has been lagging the recovery. There's been a lag in the U.S., but certainly has been steadily improving sequentially each of the quarters that we've got.

I think if you look at just industrial, it's more pronounced. Europe is not as strong as it is overall, because we haven't seen the recovery there. And we're getting as much recovery in Enerpac. We've been getting a lot of benefit from the engineered solutions; but as far as we want to go, by segment, by geography.

Bob Arzbaecher

As for the restocking, there certainly is some there. I happened to be with some of the Enerpac distributors a few weeks ago. I wouldn't say there is a ton, a very hard number to get our hands on, but they were living very hand-to-mouth during the great recession and are starting to loosen up a little bit and trying to get top products availability.

As Andy said, this recovery happened very quickly and we scrambled a bit to build our inventory and get it in position to be able to go to these distributors. That also played a role in kind of my feeling that it really wasn't inventory build, because we were just meeting demand and making sure we're taking care of the markets.

Andy Lampereur

We're a good proxy. Actually if you look at our inventory and look at our cash, you would see on a constant dollar basis, excluding acquisitions, our inventory was actually flat, actually came down by $1 million a quarter. So I think it's a pretty good indicator that a lot of their businesses are not necessarily building inventory. There is real demand growth going out.

Ajay Kejriwal - FBR Capital Markets

I'd like to see a growth you're seeing in Europe. How much of that would be the big projects? Impressive win with Mammoet in the quarter. Is this broad-based that you saw in Europe? Is it based in certain countries? Maybe you can talk a little bit about that.

Bob Arzbaecher

Well, the Mammoet order is obviously next year. So it was a win, but it's not something that had a meaningful impact. We did ship that other order I talked about with Mammoet. That was just in the normal stream.

Our European sales tend to be northern. So Germanic, Dutch, French, U.K., those were the markets that probably I would venture say 75% or 80% of our total Enerpac business. The southern region, Spain, Italy, those kind of areas is a little less, not as much infrastructure down there, not as much big project business.

Ajay Kejriwal - FBR Capital Markets

Maybe if you can help on the 2011 guidance. By the way, I applaud the detail on the sensitivity analysis, FX rate. But maybe if you can talk about what you're assuming for Europe next year overall. I know you'd provide more detail by segments with the fourth quarter. But just lay out for us what are the assumptions overall for that geography.

Bob Arzbaecher

We're not going to go into that granularity at this point, Ajay. What I would tell you is Europe has trailed the U.S. over the last year. And if we gave you the 6% to 8% core growth, you should expect U.S. is higher than Europe. That's as far as I want to go on this for now.


And our next question comes from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

On the Engineered Solutions segment, the strong numbers there, just wondering how that came out versus your expectation, and then with the north of plus-40 core how the various end markets of auto, truck, Maxima, et cetera, performed versus the overall segment. Was there particular strength in one versus the other?

Andy Lampereur

Sure. If you remember from last quarterly call, I said we expected engineered solutions to grow from a very strong second quarter number to the third quarter. We didn't expect it to grow this March. I mean it has exceeded our expectations. It grew pretty much across most of the individual markets that we're in. From a channel standpoint, stronger.

Clearly, the leader out there, without question, on a percentage basis is RV, but it doesn't move in on that much. It's roughly 100%. You get into truck and auto, they are both up 15% type range. Some of the construction equipment off-highway markets in North America are certainly showing signs of life. They were up double digits as well, but not as high as the other markets.

So really everything was up in the quarter, and the big change just being the magnitude of the improvement coming out of truck and auto.

Bob Arzbaecher

You go back pre-recession, this was somewhere around $0.5 billion segment. So we are running $80 million in revenue now. We have run as much as $125 million. So while I am thrilled with the numbers, I am optimistic that the future has a lot of runway left to it.

We've taken out a lot of cost. We are using our lead process to really try not to add costs as we come back. We've been aggressive by moving things to low-cost countries in this segment. And my focus is really on that revenue stream.

I see very little evidence of market share loss, in fact, with (cap) and a number of others, it's market share gain. CNHTC in China had a great quarter. So there is just a lot of great feeling on there.

Andy gave them the Goldstar the last two quarters. And even though he didn't do it on the call today, they got it for the third quarter in a row. They just had great results. And there is nothing in our visibility that says that that's not going to continue to improve.

Andy Lampereur

I think the pace of the growth will moderate in the fourth quarter because of the plant shutdowns. And this is really what happens in truck and auto. But we expect a pretty nice run rate here going forward into fiscal 2011 with growth in really all the end markets that this segment serves.

Jamie Sullivan - RBC Capital Markets

And that $50 million sequential impact was pretty much isolated to Engineered Solutions, right, from the shutdowns?

Andy Lampereur

No, the vast majority, because there is a little bit of (inaudible).

Jamie Sullivan - RBC Capital Markets

And then on the Energy segment, just wondering with the deferred maintenance projects that (are tossed) in the last few quarters, has there been any change to progress there whether it was because of Deepwater Horizon or not? An update there will be helpful?

Bob Arzbaecher

There is only going to be an anecdotal update. So don't take this is some kind of a detailed data-driven analysis. But you've got an all-hands-on-deck situation going out on the Energy segment right now. Every major oil company is helping BP try to solve this issue, get this thing capped. Everybody understands the implications deepwater has on their businesses and where it's going.

So it would be crazy not to think that if they were deferring maintenance before that they eye is on helping BP now, not worrying about the deferred maintenance. That being said, more legislation is coming. It's very obvious to everyone in this industry that there is going to be some new standards, lots of investigations. I was with some Hydratight guys recently, and they said this is very analogist to a major explosion that happened a decade ago in the North Sea.

So we can't help but believe this will a big focus to somebody like us who really specializes in a very unique thing, joint integrity, focus and safety on a rig, on any kind of installation. So I think it's definitely a plus in the long term with some kind of all-hands-on-deck focus in the short term.

Jamie Sullivan - RBC Capital Markets

Okay, great. And then one last one on acquisitions. You talked about the $10 million to $50 million range for a while now. Is that just what's available in the pipeline? Do you consider that more of your sweet spot now? Just wondered if you could add some color there?

Bob Arzbaecher

Yes, I think it is our sweet spot. It's probably been our sweet spot for the majority of the last six to eight years. We've always said we like those $10 million to $50 million deals with kind of a platform type deal every two to three years around that. And I think we are back to that track record now in 2010.

We have looked at some bigger things, and we've been starting some bigger things mostly due to price. When you go bigger, you start running into private equity groups now, you start seeing stable financing, you start to make a reoccurrence, you run into bigger strategic buyers. And I think the reason we were successful with these four deals is we are fishing in these smaller times that most traditional people like you guys cover bigger capped guys. That doesn't move the needle, and they're not as excited about a $10 million or $20 million deal as we do.

So I continue to believe that it's our grassroots very targeted effort that happens at the business unit level up to the segment level is really what's the key ingredient to our success in this area.

Jamie Sullivan - RBC Capital Markets

What are you seeing in terms of multiples across the space now in those smaller deals?

Bob Arzbaecher

We think six to eight is the fairway. The four that we're talking about, we're at the lower end of those fairway. That's a true trailing number. So you then have synergies on top of that and any growth on top of that. The bigger things that we walked away from got north of that range and were one of the reasons we walked away.


The next question comes from Allison Poliniak with Wells Fargo Securities.

Allison Poliniak - Wells Fargo Securities

Going back to the Gulf, given the uncertainty with the moratorium, we're starting to hear talk of people wanting to move their rigs. Is that something that actually you can benefit through, maybe it's in Cortland? Or how should we be thinking about that?

Bob Arzbaecher

I think it's a plus for us just because our mix is not predominantly Gulf related. So we have more sales, more technicians, more presence in the other parts than we do in the Gulf. It's due to the historical major of Hydratight and Hedley Purvis, the two core acquisitions which were predominantly North Sea based.

So I don't think the rig movement is a negative. It's probably a positive. It is definitely happening, though. I know you're reading a little bit about it, but it's definitely happening. I think if you think about rig owners, a lot of these guys are entrepreneurial types. These are big investments. There's other places in the globe that do not have moratoriums that they were having to wait till their rigs were available.

And the rigs find the demand. That's just what's going to happen. And I had some insurance that the U.S. when they try to turn it back on is going to be hard trying getting these rigs back. But that's not today's issue. But in any case, I think it's a plus for us.


And it appears there are no further questions at this time. I'll turn the conference back to you. Please continue with your presentation and closing remarks.

Karen Bauer

Yes, in closing, we appreciate you joining us on the call today. Just a heads-up for your calendar as we're going to be hosting our Annual Investor Day on October 12 in New York City. So we hope you'll be able to join us for that as well. If you have any follow-up questions after today's call, I'll be around for the balance of the day. So please feel free to give us a call.


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

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