Enerpac Tool Group Corp. (EPAC) Q2 2009 Earnings Call Transcript

Karen Bauer – Director, Investor Relations Bob Arzbaecher - President and CEO Andy Lampereur - EVP and CFO

James Lucas – Janney Montgomery Scott Jeff Hammond - KeyBanc Capital Markets Wendy Caplan - Wachovia Securities Charles Brady - BMO Capital Markets Scott Graham - Ladenburg Matt McConnell – Robert W. Baird Jamie Sullivan – RBC Capital Markets

Welcome to the Actuant Corporation earnings conference call. (Operator Instructions) It is now my pleasure to turn the conference over to Karen Bauer, Actuant’s Director of Investor Relations. Please go ahead.

Good morning and welcome to Actuant’s second quarter fiscal 2009 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant’s 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 on the Investor Relations section of our website at www.Actuant.com. Before we start let me start let me offer the following cautionary note. During the 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. Those factors are outlined in our SEC filings. With that I would like to turn the call over to Bob.

Thank you Karen and good morning. By about any financial metric other than cash flow our second quarter was pretty tough. Core sales were down 27% but due to absorption and a rapidly changing delivery schedules with customers the profit impact was much greater. Only our energy segment grew for the quarter which was up 5%. While the positive growth from this was welcome news this business did moderate its growth rate from the first quarter. Lastly, our vehicle businesses were particularly weak with truck, auto, RV and off-highway all contributing heavily to the sales decline. As you will learn today we have responded aggressively to these end market headwinds. We are rapidly reducing our inventory, facility costs, headcount, corporate and SAE expenses. When you see such a dramatic top line decline the costs never catch up with the revenue in the quarter but we are confident this will happen as 2009 progresses and we will discuss the major components of this later on the call. The highlight for the quarter as we expected was cash flow. We generated $28 million of free cash flow for the quarter and believe we are on track for cash flow of about $110 million for the year or conversion of about 175% of net income. Both inventory and receivable reductions contributed significantly to this cash flow and we would expect this to continue as the year progresses. With that as an introduction I am going to turn it over to Andy to go through the details of the quarter, our cost restructuring initiatives and then I will come back at the end and discuss guidance and a number of other topics. Andy?

Good morning everyone. As Bob mentioned our second quarter results reflected the poor economic conditions as well as the costs for restructuring actions that we have taken to better position Actuant for the future. The decline in core sales we reported in the first quarter accelerated in January and February. Customers in virtually every market and geography cut back purchases to reduce their inventory and in some cases shut their plants down for several weeks or even months. This resulted in a significant reduction and reduction in sales for us and an urgent need to accelerate cost reductions everywhere we could and resulted in $3 million of restructuring charges. It also meant reductions in manufacturing output and fixed cost absorption which meant high decremental margins. The end result is that over the last 90 days we saw big declines in our sales, earnings, employment and working capital. I will cover each of these in today’s prepared remarks starting first with sales. Overall, our second quarter sales declined 25% with a core decline of 27% which was somewhat offset by a 6% growth from acquisitions of Cortland in September and Superior Plant Services last spring. The stronger U.S. dollar was also a 4% headwind to our top line. From a geographic standpoint all regions weakened from the first quarter with Europe falling the most for us. In order to illustrate how quickly things deteriorated during the quarter our consolidated core sales were down 19% in November and December and then accelerated between 9% down and 30% down in January and February respectively. From a segment perspective, three of our four segments experienced core sales decline during the quarter. The first was the industrial segment. This segment consists of Enerpac, Milwaukee Cylinder, Simplex, TTF and Precision Sure-Lock. It started okay in December and then hit a wall in January which continued into February. Industrial’s year-over-year core sales declined from plus 9% in the first quarter to a 13% decline in the second quarter. Most of its product lines and all of its geographic areas reported significant declines. Next I will provide some sales color on the energy segment. As a reminder this now includes Hydratight and Cortland. Core sales growth moderated in this segment from plus 18% in the first quarter to plus 5% in the recent quarter. We attribute most of the lower sales growth this quarter to a very strong second quarter comp a year ago when sales were up 31%. While it is not included in the core sales figure on account of being acquired this past fall, Cortland also performed well during the quarter slightly better than Hydratight and was within striking distance of our expectations. Looking forward, we are starting to see the initial signs of slowing investments in large project work in this segment such as in exploration which is going to impact Cortland first. Let me remind you the majority of the volume is maintenance oriented especially as it relates to Hydratight where we don’t anticipate any big drop in demand during the balance of the year. Within the electrical segment all product lines saw incremental weakness in the second quarter relative to the first. Our harsh environment electrical product line which generates about 2/3 of its volume from the marine channel saw the biggest sequential decline as a result of the marine OEM demand pretty much drying up. We were down 80% year-over-year on a core basis. Finally, the engineered solutions segment experienced the biggest overall decline from a segment standpoint in year-over-year sales with terrible conditions in all vehicle markets. Sales to the auto, truck, construction, AG, RV and other vehicle markets were off substantially as OEM’s purged inventory from their systems which led to a 42% core sales decline in the quarter versus a year ago. I would like to shift away from sales now and discuss margins which were also adversely impacted by the weaker than expected core sales. Including our restructuring costs in both years our operating profit margins were down 670 basis points from 10.7% in the second quarter to approximately 4% this year which you can see on this slide. Although I will provide more color the simple explanation for the decline is that we could not reduce costs as fast as the sales declined. This slide attempts to explain the decremental margins in a little bit more detail, looking at just gross profit margins and SAE expenses. First, I will talk about gross profit margins. As I mentioned earlier we had substantial under absorbed overhead in the quarter on account of much lower production levels. We did rip out a lot of manufacturing, warehouse and overhead costs but not enough to keep up with the reduced production levels. While it may not sound that difficult to adjust production and overhead to meet the reduced customer orders just think about this example. One of our $5 million a year customers notified us in an email late on a Friday afternoon with no advanced notice prior to that all of its plants would be closed for the next six weeks, starting on Monday. You just can’t rip out costs quick enough to offset lower production like this without adequate warning. In this example, unfortunately it was just one of many during the quarter. In addition to lower customer orders we also produced less that our sales in an attempt to reduce our own inventory. We were successful in doing this as inventory came down about $15 million in our base business excluding currency. The down side of reducing inventory is lower production which also leads to lower overhead absorption and that hits margins. Despite lower overhead costs our net under absorbed overhead increased by about $7 million versus a year ago and when you consider our $300 million in revenue for the quarter this fact alone essentially accounts for the entire reduction in gross profit margin. Now a couple of comments on selling, admin and engineering expenses. The good news is that it did decline during the quarter 10% year-over-year despite $4 million being added from last year due to business acquisitions. However, this 10% decline was not enough to offset a 25% decline in sales resulting in SAE as a percentage of sales increasing 400 basis points from last year to 24.9%. So in summary, these two items, lower gross profit margins and higher SAE as a percentage of sales as well as year-over-year changes in the amortization and restructuring expenses account for essentially all of the 670 basis point decline in the margins this quarter. Operating margins. This is not a result of not being aggressive enough in reducing costs in our business. I will provide more information on that in a few minutes. Now it is very easy to focus on the negative when it seems like everything is going wrong but we have seen good progress on a number of fronts over the last 60 days, the first of which is working capital management. I am very happy with the job our employees are doing managing working capital in this bad environment. During the quarter we reduced primary working capital significantly including our receivables, inventory and payables. Unfortunately our payables have declined the most as we have pretty much shut off all purchases in the last 60 days of the quarter and we paid for our prior purchases as they came due. We expect to see additional progress in working capital reductions in the balance of the year which certainly will help our free cash flow for the year. One of the many challenges in the downturn and managing customers is managing customer receivables and credit. We are definitely seeing an increase in customer bankruptcies in this environment. During the quarter alone several good sized customers filed for bankruptcy including Fleetwood, Monaco and Country Coach in the RV market which are three of the top seven players in the industry; Edscha and Saab in automotive and a number of other marine customers including Odyssey, Bentley and Boaters World. This group of customers accounted for over $30 million of revenue for us last year yet we managed down their exposure to just $1 million. This $1 million charge is also included in our SAE expenses for the quarter. In addition to customers we also had a few competitors seek bankruptcy protection in the last month including one of Kopps in Europe. Hopefully this will result in future market share gains. While effectively managing down receivables and inventory obviously is critical for cash flow, despite a weak earnings quarter on account of the economic environment we are happy with the $28 million of free cash flow this quarter. That led to a net debt at the end of the quarter of $658 million or about 2.7 times EBITDA, pro forma for acquisitions. From a debt amortization standpoint our capital structure is in good shape. We have just $9 million in scheduled debt repayments over the next 18 months. We have received calls from a few investors asking about our debt covenants in light of the current economy. Our credit agreement has two primary financial covenants, maximum leverage at 3.5 times EBITDA and minimum fixed charge coverage of 1.75 times. We are in compliance with both measures and with the strong cash flow forecast for the balance of the year and a number of other levers to pull if things get tight we feel pretty good about compliance with the covenants. Most importantly from a debt and capital standpoint, at the end of the quarter we had over $175 million of financial liquidity available for our businesses considering existing cash on the balance sheet as well as current revolver availability and we are forecasting about $70 million or so of free cash flow during the balance of the year. The second good news call out I wanted to make is our progress on cost reduction efforts. There are so many detailed projects going on I am just going to cover a few of them in a summary here. During the second quarter alone we reduced headcount by almost 800 employees or 10%. On a year-over-year basis, excluding the acquisitions, our headcount is down 17%. While reducing employment is not something we enjoy, next to materials it is our biggest single cost and it has to be reduced if our volumes decline. In the electrical segment alone our headcount is down 30% year-over-year. Headcount in some of our hardest hit businesses such as RV and marine is down over 50% just this year-to-date, six months to date. We have reduced employment even further from the end of the second quarter and this will continue over the balance of the fiscal year. Now part of the headcount reduction is tied to facility consolidations. We closed ten small facilities in the first half of this year and we are working on a similar number for the balance of the calendar year. We are also utilizing rolling furloughs in some of our businesses to reduce compensation costs. This is unpaid time off to retain employees in cases where the headcount has already been reduced to a mission critical level. For example, a number of our sites are working 3-4 day work weeks. We have also reduced executive salaries by 10% effective March 1 and we implemented a 5% reduction for other highly compensated employees on the same date. These two actions generate annual savings of $2 million. Incentive compensation expense obviously is way down as well. We have also suspended our annual 401K core contribution for essentially all of our U.S. employees a few weeks ago, an action that will save us $4 million a year. In addition, discretionary spending in all areas has been slashed. Just as a quick example, travel and entertainment was down 1/3 from a year ago. We have a ways to go on our cost down efforts and there is more coming. I am expecting an additional $12-14 million of restructuring charges during the balance of this fiscal year and an additional $5 million or so hitting in the first half of next year. Pay backs on these projects vary project-by-project but on average probably are about a 12 month pay back. These restructuring costs and the benefits from them are incorporated into the guidance we provided in this morning’s press release. That is it for my prepared remarks this morning. I will turn it back over to Bob.

Thank you Andy. While you might question my positive attitude today, I think Actuant is operating in a relatively high efficiency in an absolutely horrible economic environment. While we can’t change our served end markets in the short-term we can manage items that are under our control. That is what Actuant is doing. As Andy just reviewed with you, we have reduced headcount, compensation, facilities and working capital on a year-to-date basis and are working on many more projects for the second half. This work is never fun but it is what Actuant does well and it does it quickly thanks to our variable cost business model and our talented management team which has a bias for action. My goal as the leader of Actuant is to balance these aggressive cost down actions with growth initiatives that will position us to be stronger when the economy recovers. I want to cover a few of those with you today. Continuing to expand our energy platform is a key initiative with the company. This now includes Cortland and Hydratight. Despite the weaknesses we have seen in other markets this year we have opened a new office for Hydratight in Mexico and Angola and have committed capital expenditures for umbilical and cable armoring capability for Cortland and have invested in new rental equipment for Hydratight in many emerging markets. During the quarter we invested $3 million to buy a small Hydratight distributor, an acquisition that will provide us greater access to the European and Middle Eastern markets. Within the industrial segment we have continued to focus on expanding our Enerpac Integrated Solutions business. For those of you new to Actuant this is the product line that focuses almost exclusively on large infrastructure programs on a global basis. We won a contract for our European wind farm in the second quarter and are excited about a number of large initiatives that will get awarded as the year progresses. We believe some of the U.S. and China stimulus packages will impact Integrated Solutions in a favorable way. We have just completed a review of our human capital, our HCAP review for Actuant. This is our second year in this process in which we specifically focus on our top talent, their development and succession plans and how we can continually raise the bar on our organizational competencies. I was quite pleased with the results from this. Lastly, we continue to invest in opportunities for our engine emissions business, the GITS business. While some of the engine manufacturers have moved to SCR systems to meet the 2010 requirements, it doesn’t mean GITS won’t have a meaningful roll to play either in the engine or in different valve solutions whether that is on the turbo charger working in tandem with EGR or SCR engines or on the engine itself. We have won three programs to date with this product line including two in Europe and we remain very excited about the prospects of this business. In summary, our 27% core decline for the quarter masked some excellent opportunities for long-term growth. There has been very little market share loss other than the fiscal 2008 Lowe’s business which we have discussed with you previously and is about to anniversary in May. My expectation is that continuing to fund our growth initiatives, coupled with our aggressive cost reduction actions that Andy discussed, is going to make Actuant stronger in the future. With some of the facility consolidation and relocations my belief is our cost structure will become even more variable and our cash flow generating ability will even get stronger. Now let’s move to acquisitions. As you might expect in this turbulent economy, acquisition activity has diminished considerably. First, because it has moved to a buyers market and there is not much for sale. Second and probably more important it is very difficult to diligence the future earnings and cash flow of any potential acquisition in this unsettled economy. Lastly, liquidity is king right now. But that doesn’t mean we are not going to do opportunistic things. I just discussed the small Hydratight acquisition we completed during the quarter. We also added a small product line in another business during the quarter, the result of a bankruptcy of a competitor. While there are a few small things we will work on I think it will be pretty quiet on the acquisition front the next six months as our preference is to use our cash flow to reduce debt and wait for the earnings and cash flow pictures to become more predictable on acquisitions. Now moving to our earnings guidance, given the dynamic nature of the global economy right now it is difficult to provide any earnings guidance with a great deal of confidence. The full year guidance range we endorsed in today’s press release, EPS of $0.85 to $1.00 on sales of $1.3 billion, excluding the asset RV impairment charge in the first quarter, this is wider than would be normal with only two quarter’s to go in the fiscal year. But given the dynamic nature of many of our end markets and the short nature of our order-to-sales cycle we think this is appropriate. For the third quarter we are endorsing revenue guidance of $300-320 million and EPS of $0.12 to $0.20 per share. Let me quickly review some of the key assumptions that go with this guidance. We expect a similar quarter in terms of 25-30% core sales decline in the third quarter with this improving to around a 20% decline in the fourth quarter as we anniversary the start of the decline in our marine and RV markets a year ago and the Lowe’s loss in electrical. The big variable here is our sales forecast where the customers and the end markets are in terms of the inventory levels. Andy talked about this earlier and this is more pronounced in our truck, auto, RV and marine business but does impact some of the other ones also. Our guidance assumes the recession continues until fiscal 2010 and the inventory correction lasts until the end of the fiscal year in most of our served markets. We are expecting restructuring costs to accelerate in the next two quarters to around $6-8 million in each of the next two quarters. This is included in our guidance range for EPS. We would expect EBITDA margins to improve sequentially over the next two quarters to low double digits as our cost reduction efforts begin to take hold and the absorption issues moderate. Interest expense we think will be a little over $9 million in the next two quarters with an effective tax rate of about 25% for the balance of the year. We are expecting full-year cash flow of about $110 million meaning we are expecting $35-40 million per quarter in each of the next two quarters. We will likely use this cash flow to reduce our outstanding debt. Before opening the line up for your questions I wanted to summarize a couple of other thoughts for you. As one of Actuant’s largest shareholders, I am as unhappy as anyone with the rapid decline in our sales and earnings and the resulting effect on our stock price. But I remind myself we are not alone here and that there will be plenty of industrial peers alongside of us as the March quarter unfolds for calendar year companies. Actuant’s goal is to execute on what it can; cash flow, costs, capital deployment and internal growth initiatives. I believe that our future is quite bright and that we are navigating the current economic headwinds with speed, agility and an eye towards making Actuant stronger for the eventual economic recovery. We have always had a cash flow [inaudible] focus and that business model is on display in 2009. Cash flow of $110 million equates to 175% conversion of net income and represents a cash flow yield of about 20% based on today’s stock price. We obviously need to deliver this forecast, navigate any turns in the road the economy throws at us and if we do this we are confident that you as shareholders will be rewarded in the long-term for staying invested with us. Operator, I would like to now open the call up for the question-and-answer session.

(Operator Instructions) The first question comes from the line of James Lucas – Janney Montgomery Scott. James Lucas – Janney Montgomery Scott: In your cash flow what are your CapEx assumptions for the full year?

We are looking at about $30 million for the year. It will be a little bit higher than the $5 million we had this quarter for each of the next two quarters. James Lucas – Janney Montgomery Scott: What is that in maintenance versus growth?

Probably maybe half of that, $15-20 million is maintenance.

It depends on where you put computer systems. A pretty good chunk in that number is computer upgrades whether that is maintenance or growth is a little bit debatable. James Lucas – Janney Montgomery Scott: Speaking of the energy segment now that you are breaking that out in your prepared remarks you referred to a majority of the volume in energy is maintenance related. By majority, what is that on a percentage? Is that 2/3? 3/4? I’m trying to just understand now that you are breaking that out separate of what is specifically maintenance related?

For the Hydratight business it is 75-80% maintenance. Cortland, which is about 1/3 of the size of Hydratight, probably half of it is maintenance. It is somewhere about 2/3 in total.

Some of that Cortland that is not maintenance is in the non-energy field. We do some stuff for defense and some other holes there. James Lucas – Janney Montgomery Scott: Specifically with the margins in the energy segment could you speak to the mix issue of just trying to understand the margin profile of how much Cortland is below Hydratight and what the opportunities are there?

If you look at what Hydratight did last year from a margin standpoint Cortland is probably running about 500 basis points behind that in a normal environment. It is very difficult to look at the second quarter as normal because it is definitely the low point for Hydratight. Seasonally there are very low rentals going on. In the second quarter we tend to have some of the fixed costs of the service techs out there. We have to hold onto them for the entire year, a certain base layer of them, hold onto them for the base year so our margins tend to get beat up in the second quarter relative to other quarters. If you had those dynamics going on this quarter. James Lucas – Janney Montgomery Scott: Finally, I think you did a good job of laying out the profile of what we are hearing from everybody in terms of you getting to be lucky in having a February quarter and spilling the bad news first. Can you talk about, I know we have only had a couple weeks of March here, but are you seeing any sort of stabilization or can you just talk about the overall environment and what you have seen in early March?

I think it is along the guidance we gave which is a similar month that we saw in February. The key ingredient as I said in my prepared remarks is when do you start getting through the vehicle inventory. When does Volvo and Scania and some of the big guys that we sell to, a lot of the European guys, when does this volume turn on? It is normal for those guys to have a weaker quarter because December is in there and January but it has lasted longer and it accelerated. I can’t tell you that I have seen anything in March that would say that has ended. If I want to put my more optimistic hat on this is the spot where you get a little more spring construction season and we have got a lot of industrial businesses whether it is Enerpac, trucks, RV’s, marine. A lot of this stuff is purchased in kind of the spring season. So if you look back historically this has been the area where you would start seeing that improvement. We are probably a little early for it but April/May time frame that is usually where we start seeing a little bit of a pick up there.

A positive from that standpoint as well is those tend to be our higher margin businesses so there is a little bit more favorability from a margin standpoint in the back half of the year as well.

Let me hit one last comment and then I’ll let you follow. My last comment on that is obviously our guidance is somewhat of mirror image of the third quarter to the second quarter. We are not forecasting this thing. We are optimistic as we just discussed but it is not what the guidance is comprised of. James Lucas – Janney Montgomery Scott: Specifically to Enerpac, given a fair amount that goes through distribution do you have a feel for what the channel inventory looks like? Trying to understand has the channel brought down inventory too far?

Enerpac channel inventory is probably the hardest number in all of Actuant to try to quantify. You are talking about 1,200 independent distributors all of which have their own appetite, their own capital structure and their own strategies on inventory. It is very global. So it is not something I can give you any comfort where we are at in the cycle. What I would tell you is they do not stock a ton of inventory. They stock a couple of months of turn normally. We have no idea where they are at in that cycle but this is not a business like trucks, RV or auto that you have a big couple of layers of inventory between the manufacturer and the end user.

The next question comes from Jeff Hammond - KeyBanc Capital Markets. Jeff Hammond - KeyBanc Capital Markets: Andy you laid out the debt covenants well. Can you, on those debt covenants, tell us where you stand today? At least on the more restrictive one. Maybe as you look out on the full year where you see EBITDA troughing out and where you would fall within those covenants? Also, can you just explain how the calculation on debt to EBITDA is calculated, what is included and excluded?

The bank covenants, the two of them again are fixed charge coverage and the leverage maximum leverage. Out of the two the fixed charge coverage has got plenty of room. I am not concerned about that one at all. It is just so far over. The leverage one is pretty much in line with what I mentioned earlier. 2.7 to 2.8 somewhere in that kind of range right now. The actual calculation there is a lot of puts and takes in this thing. What I would really recommend you do is go out and take a look at the document. It is out in our filings and stuff. There are add backs in there for acquisitions and FAS123R and stuff like that. It is more detail than I want to get into on this call but clearly the driver of it is debt and EBITDA and every restructuring action we do works against us on this stuff. So we want to be sure we have quick pay backs on these projects. This is important that we generate a lot of cash flow for the year and that we rip costs out and we feel comfortable that we should be fine. With the forecast we laid out and some other levers that we can pull as I mentioned on the call. Jeff Hammond - KeyBanc Capital Markets: The 2.7 to 2.8 is on the last 12 months?

Yes it is a trailing. Jeff Hammond - KeyBanc Capital Markets: Back of the envelope what would it look like based on your new fiscal 2009 guidance?

Why don’t you follow-up off line on that. I don’t have the numbers in front of me. We are somewhere in the 2.7 to 2.8 range right now. Give me a buzz. Jeff Hammond - KeyBanc Capital Markets: I just want to understand how the cost savings flow through. How much cost savings are you really getting in the second half of the year from the headcount reductions, restructuring, what kind of annualized savings into fiscal 2010?

It is really difficult to put a number on this because part of the headcount that is coming out is direct labor and by definition it comes out directly with the sales number on this thing. The timing as well as when you pull the trigger on this is relative to when the savings come through. On average we are saving, we have a 12-month pay back on the restructuring charges we are taking so if we are going to have $15-20 million come through this fiscal year in theory there is $15-20 million of savings coming through from those restructuring items as well. Again, it is predicated on where your production volume is and all sorts of things. It is difficult to pinpoint it. We are definitely seeing savings coming through. I saw it come through in the back half of January and February in particular on the SAE lines. We just announced a number of new projects in the last two weeks as far as cost reduction activities and restructuring and RIF’s and that sort of thing so I am confident we will see the savings going forward.

Just to add a little more color and I think Andy said this in his prepared remarks, it is somewhere around a year. I think the smaller pay backs are in six months. There are some like comp reductions that are immediate with no one-time costs but the majority of them six months would be fast and two years would be slow. You get into some of the European Workers Council issues and it takes longer. If it is north of two years candidly Actuant doesn’t…we kind of challenged the businesses and over two years it is not worth doing. Obviously it is at a 20% [hurdle] we throw on the businesses but in this time we are really challenging businesses. It has to be under two so it is balanced. The other thing I would mention is we can move pretty fast. Actuant is not a place with a lot of legacy costs. We have some unions in a couple of the smaller businesses but by and large it is employment without contract so we can flex this and have flexed this pretty fast, I think in comparison to most industrial companies.

The next question comes from Wendy Caplan - Wachovia Securities. Wendy Caplan - Wachovia Securities: Does this environment push you to think about your portfolio businesses in terms of a strategic sense? That is as you kind of scope across the businesses do you get to the point where you are thinking we should exit some of these businesses or conversely some that you wish were bigger in this environment?

I think in the economy now obviously tests your whole diversified profile thesis and portfolio management. We go through that with the Board annually. We actually went through that in December with them, kind of right in the middle of the storm. It certainly does get attention probably with a little finer lens in this kind of an environment than others. But the reality is now is not the time to worry about portfolio management. Now is the time to really take the costs you can do and take on the things you can really affect and drive there. I was looking at some slides recently, what we have done in portfolio management towards the oil and gas space, towards more industrial tools, towards some of the electronic things with Maxima, I am sure glad I am running the portfolio I am today rather than the portfolio we inherited at the spin off back in 2000. I think our mix is must steadier. It is more global. It fits more of a growth profile than it did back there. Wendy Caplan - Wachovia Securities: As you look at the cost reduction efforts can you speak to geographically whether you are getting any traction in Europe given some of the social cost issues and some of the issues we have had with the Kopp business for example. Can you speak to that versus how successful you have been in the U.S.?

The answer is I think we got an early head start on the European thing with Kopp. That was really more of a 2006 announcement, 2007 and 2008 implementation of the Kopp restructuring. I am sure glad that is out of the way and those savings have been coming in as we expected during this year. So not by any forecasting this decline but just doing what we do that one we got a head start on. I think the other items in Europe we have been working on. We have been working on a number of the vehicle markets trying to move more of the assembly and manufacturing to low cost countries. We have moved a number of things to Turkey where we have a facility. We have moved a number of things to China and into the new Taichen facility. So those processes keep going. Every time you announce one of those you go through it with your Workers Council and you get approval. Some of that has been done and some of it has not. We continue to accelerate those kinds of things. The other place where in Europe we are pretty strong is in the oil and gas and Enerpac. Obviously those businesses are a little more sturdy. We continue to have growth at Hydratight so it has been less of an issue. Wendy Caplan - Wachovia Securities: Regarding your outlook for the year in terms of earnings I am a little confused. This $0.85 to $1.00 range excludes or includes the $0.12 to $0.15 I’m guessing would be restructuring for the balance of the year?

It includes it. It includes that and it includes the savings from that in the stuff we have done already. So clearly predicting improved margins in the back half of the year because of those savings as well as just the normal seasonality and mix of our business.

The only thing it does not exclude is the asset impairment charge in the first quarter. So it does not include that. Wendy Caplan - Wachovia Securities: Are there any big chunks in that $6-8 million in each of the next two quarters in terms of restructuring? Is there anything you haven’t tackled yet or is it just taking pieces out across the board?

The vast majority of them have been announced. I would say you are probably looking at something like $8 million in the third quarter and maybe $4 million in the fourth. So out of the two probably the third quarter is a little bit bigger as far as the hits.

The next question comes from Charles Brady - BMO Capital Markets. Charles Brady - BMO Capital Markets: With respect to your comments about bankruptcy at customers can you just comment on what steps you are taking to make that process, bad debt expense reserve, just the whole monitoring process so you don’t really get caught with someone who is not going to pay you?

It is essentially monitoring those receivables on a daily basis and putting customers on credit holds if they are falling behind on payments. We have very little tolerance right now for that. We have several big customers we put on credit hold that did not go bankrupt during the quarter, just trying to be sure that they understood we are not going to get stretched out on receivables. In the case of some of the customers that went bankrupt during the quarter especially in the RV space, in some of those we didn’t ship them anything for 60 days even if they would have been open the entire time. They were on credit hold the entire time because of payment concerns that stuff like that. I think we have done a good job of monitoring and crediting them down and keeping them tight. You just have to do it in this environment. When I look overall at our aging from a what is current today versus current a year ago, what percentages, we are at the same percent today as a year ago so the overall quality of our receivables is very strong. We just have to have increased diligence on it right now.

It takes a little bit of courage to put a customer that is ten times your size on credit hold but we have done that with some of these OEM’s. It is somewhat of a simple discussion, harder to implement, but the discussion is hey we agreed to contractual terms whether they are 30, 45 or 60 days and if you are a day late we are implementing credit procedures. The other thing I think outside of receivables that we do well and is part of our lead process is the one-piece float. We don’t carry a ton of investment in inventory or tooling or other things for these customers. When you have a lot of OEM customers the receivable risk is one thing but you run a pretty substantial inventory risk if you are trying to supply OEM customers. That is the area I think our lead process pays some dividends and minimizes the impact of a bankruptcy. Charles Brady - BMO Capital Markets: Can you give us a sense of where you are running on kind of a capacity utilization base across the firm? Maybe even by segment?

I can’t give you that. I would say it is a combination of declining revenue and declining capacity and we don’t keep a scorecard of that.

It is not a metric that we track. Clearly anything vehicle oriented is much lower than anything else. We are running under 50% in all vehicles right now.

If your question is…I don’t know where your question is driven on. The businesses that have growth potential like Enerpac gets some of the big growth initiatives we have not cut capacity where we are going to have to add it back within the next couple of years. We would add people back but we wouldn’t add brick and mortar back. I don’t see anything where if the volume went back where it was, $1.7 billion or $1.8 billion on an annual basis that we would have a lot of brick and mortar or any brick and mortar to add back. I don’t know if that is where your question was going but on our variable cost model that is not a big issue for us. Charles Brady - BMO Capital Markets: When you get these calls on a Friday saying don’t ship on Monday and you are talking about that with your customers are you getting a sense that in the future there is a way to minimize the shortness of lead time in those calls as you talk with your customers? Do you have a better sense of are they giving you some indication we may be calling you back again four weeks from now? Or is it completely dependent upon where we are in four weeks?

This is a whole new world concept for us. I don’t know how else to describe it. We have typical lead times of 30-90 days on a lot of the OEM accounts and those bets are just off. They have been off since September/October. You can bitch. You can yell. You can put them on hold. You can do a lot of things but that isn’t going to change the reality. They have just shut off orders. They are doing it on their own terms as are we with some of our vendors and it is just a new world order where you are going to run into that. I don’t see a solution to it. If it continued to happen time and time again I think you look at the customer and think about trying to exit the relationship but I don’t think you do that in a six month period of time as quick as this has all happened.

The next question comes from Scott Graham – Ladenburg. Scott Graham - Ladenburg: I just wanted to ask you are really putting the knife to your cost structure here and I’m just wondering, I know how quickly you can do this. You are very proficient at it. That has improved over time. How do you balance that with recovery?

I tried to cover that in my remarks. We are trying to do a skilled, surgeon’s removal of cost without impacting the rest of the patient. I think we are ready to come back when it comes back. I think we are still investing in the pockets of growth we see out in front of us and we are doing a good job of balancing some of those growth initiatives.

I would say we are being more cautious in markets that are down 70-80% but when you see something discretionary spend like RV and marine we are erring on the side of ripping out costs there and not betting on the recovery. Much different situation in our more established…I say more established but much more stable businesses. We are erring on the side of conservatism on the more stable businesses.

You have been around me long enough to know that I have had concerns about the North American consumer for awhile. Andy is absolutely spot on. I think these big discretionary items our view is this is going to come back slower than other businesses and I think we take more of a let’s take the cost out now and we might be here for awhile in some of those businesses. That would be auto, RV and marine would be the big three I would put in that camp. Scott Graham - Ladenburg: So you would be willing to essentially potentially cede some market share here in an up cycle? At the end of the day some of these businesses when they pop they can really pop.

I don’t know if it is cede market share. I think in RV two of the top three customers we have, Monaco and Fleetwood, filed for Chapter 11 in the quarter within a week of each other. At the same time that was happening we were in dialogue with Winnebago about some additional business. So I don’t look at it as we are ceding anything. Andy went through the bankruptcy in Europe, one of our largest competitors a company called [Dubet] in Germany. Just closed down its DIY line and we had immediate discussions with customers. If anything I think the strong survive and we probably view that as more of a positive not a cede market share. Scott Graham - Ladenburg: So you are thinking that business ultimately could end up going to the customers that you are maybe better aligned with?

Yes. I think on the OEM side obviously the key is to bet with the right customers. That is not always an easy bet to figure out. That is what you have got to do. Scott Graham - Ladenburg: Let me ask you another strategic question here. A lot of what you do manufacturing wise is assembly. That has always worked for you. In this situation it is kind of working against you because you can’t dial the production down as quickly as you would like. Are you thinking differently on vertical integration versus assembly today?

No, I am thrilled that we don’t own machine shops because I think we would be writing off fixed assets because we weren’t utilizing them. We would be moth-balling our fixed costs. Those ten facilities that Andy referred to that we are closing, our closure cost tends to be the lease payment not a bunch of other asset write offs. I think actually the more variable model will be more successful at converting cash flow than the non-vertical model. The non-vertical model that we have with lack of fixed assets will be a better model. Scott Graham - Ladenburg: Regarding cash flow, this is a time that you guys typically shine on the cash flow side and I don’t think there is any worries me or anyone on this call. The question, is this a situation where now you pay down the debt that you can and then you build some cash on the balance sheet for when the skies are a little bit brighter and what have you and you kind of kick back into acquisitions in calendar 2010? What is the thinking on the use of cash from here?

If we are generating this $100 million in cash flow we have a couple of years of cash flow we could pay down senior debt. There are no prepayment penalties and no issues. So I don’t think this is a build cash, it is just prepay senior and that is what our game plan is. In fact the most recent facility we put in September was skewed towards a revolver because we thought we would be using the cash flow to pay down the revolver. So it is skewed in that direction.

The next question comes from Matt McConnell – Robert W. Baird. Matt McConnell – Robert W. Baird: There has been a lot of talk about the financial health of your customers but how about your suppliers? Have you run into any problems there and do you have alternatives in those situations?

We do. Just because a lot of over the last 3-4 years we have moved a fair amount to China so we have a lot of dual sourcing that goes on. I think we are comfortable at where we are at there. It is not without its challenges. We have a monthly call with the China sourcing team and they are kind of knock on wood holding it all together. Some of the reports you read in the paper about people just shutting down their sourcing operations over there and you can’t find them is actually a true statement. You have to work through those kinds of things. Literally that is not a top ten issue that myself or the executive council worries about.

The next question comes from Jamie Sullivan – RBC Capital Markets. Jamie Sullivan – RBC Capital Markets: I thought I would ask about what you are seeing in the quoting activity and order patterns on the E&P side of the business in energy?

Again, it is a very small piece of the energy segment, the exploration and production. Ours is more the maintenance side. Those orders come monthly. As we said the growth has moderated but we continue to expect that the maintenance focused area of our business will survive pretty well.

It is about $20 million of our revenue in terms of last Q. It is not a big number. It is almost all vested in Cortland. They are reporting that some of their exploration on seismic side some of their customers are throttling back yet they have other customers that say they don’t see any softness at all and they are still going. So there is some mixed signals there but we are expecting a weaker back half of the year.

It is probably more of a 2010 thing we will pay attention to. There is a little bit of a back log on that E&P stuff as you are building those FPSO’s and things like that. Not a big issue right now. Jamie Sullivan – RBC Capital Markets: Curious at what point portfolio management would be more appropriate or more of a focus? Would it be more when valuation seems to stabilize on some of the properties? Just your thoughts there.

Like I said it is a continuous process here where we present that and have good discussions with the board. I would tell you already if there was a market I didn’t like a year ago we would have gotten out of it. That is a discussion that happens on a continuous basis. Yes, it would be better to sell high and not sell low. It would be better to do this in higher markets. In retrospect you look at some of the vehicle stuff and you say boy maybe we should have monetized it. But that is kind of arm chair quarter back. I don’t know how else to describe it. We do have a few small things that we look at from time to time. You have been aware of that. We have a few small businesses and if the right buyer came along for some of that we would probably be a little more motivated now than we were a year ago on some of that. It is pretty small potatoes in terms of the total portfolio. Jamie Sullivan – RBC Capital Markets: One last clarification, what did you say for the tax rate we should use going forward?

It is going to be in the neighborhood of 25%, a little bit lower than what we have said in the past.

Sir we have no more questions at this time. I will now turn the call back to you.

Thank you for your patience and your interest in Actuant in this difficult time. We really do appreciate your interest. If you have follow-up questions Andy, myself and Karen are available the rest of the day. We are doing some investor relations activity. We are going to be in Denver late this week and then the east coast and some of the Midwest locations. If you are interested in trying to get a face to face talk to Karen Bauer and she can see if there are slots available. Otherwise thanks for your patience and have a great day.

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