Actuant Corporation (ATU)

Q1 2011 Earnings Call

December 16, 2010 11:00 a.m. ET

Executives

Bob Arzbaecher - Chief Executive Officer

Mark Goldstein - Chief Operating Officer

Andy Lampereur - Chief Financial Officer

Karen Bauer - Director, Investor Relations

Analysts

Wendy Caplan - SunTrust Robinson Humphrey

Robert Barry - UBS

Ajay Kejriwal - FBR Capital Markets

Jeff Hammond - KeyBank Capital Markets

Deane Dray - Citi Investment Research

Jim Lucas - Janney Montgomery Scott

Charlie Brady - BMO Capital Markets

Scott Graham - Jefferies

Robert McCarthy - Robert W. Baird

Mike Schlifke - RBC Capital Markets

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Actuant Corporation’s First Quarter Fiscal 2011 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. During the presentation all participants will be in a listen only mode.

Afterwards we will conduct a question and answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator please press the star followed by the 0. As a reminder, this conference is being recorded Thursday, December 16, 2010. It is now my pleasure to turn the conference over to Karen Bauer, Actuant’s Director, Investor Relations. Please go ahead.

Karen Bauer

Good morning and welcome to Actuant’s first quarter fiscal 2011 earnings conference call. On the call with me today are Bob Arzbaecher, Actuant’s Chief Executive Officer, Mark Goldstein, Actuant’s Chief Operating Officer and Andy Lampereur, Chief Financial Officer.

I would like to point out that our earnings release and the slide presentation supplementing today's call are available on the investors section of our Web site. 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’d like to turn the call over to Bob.

Bob Arzbaecher

Thank you Karen and thanks to each of you for joining us today on our first quarter call. I’m pleased with our fast start for the year, essentially coming together as we expected with strong core growth, good margin improvement and EPS at the high end of our range. There are four highlights I want to call out before turning it over to Andy.

First, our energy segment core turned positive, posting a 4% year over year increase. So now energy joins the other three segments in positive core sales territory with both engineered solutions and industrial segments displaying strong double-digit growth rates. Margins increased as expected with the impact of higher volumes, restructuring benefits and positive segment mix equating to 230 basis points of year over year operating profit margins.

We delivered above forecast EPS, up 71% year over year excluding last year’s restructuring costs. And last but certainly not least, we received all necessary approvals and closed on the Mastervolt acquisition last week. We’re excited about this asset and we’ll talk more about it later in the strategy portion of the call. With that, I’ll turn it over to Andy to go through the numbers in depth for the first quarter.

Andy Lampereur

Thank you Bob and good morning everyone. Similar to last quarter all my comments will be covering continuing operations only and exclude our European electrical business, which is held for sale. We were happy with the way the first quarter came together on a number of different fronts and I’ll try to provide some color on this from our vantage point.

Sales of $318 million for the quarter were pretty much in the middle of our guidance range and were up 17% year over year. I’ll dissect and provide more color on them in a few minutes. Our first quarter EPS of 36 cents was above our guidance range and benefitted from favorable margins at about 2 cents a share from a lower effective tax rate. We’re projecting our effective income tax rate to be in the 22% range for the entire year so we’ll continue to benefit from that going forward.

During the quarter we increased our year over year operating profit margins despite about a penny a share headwind from restructuring and acquisition related costs. Now the 36 cents a share EPS was up 71% from the 21 cents in the prior year with the prior year excluding restructuring costs. So we’re off to a strong start toward our current year EPS targets. On a trailing basis we continue to make ground on the EPS front with our last 12-month EPS increasing during the quarter from $1.08 to $1.23.

Free cash flow for the quarter was on target but lower than in prior quarters. This results from the cash used to fund the approximate $20 million of prior year bonus payments that were made in November that we had discussed on our last earnings call. We’re not projecting our full year free cash flow to be close to $2 a share. Now let’s start dissecting our first quarter results. Our consolidated sales were 318 million, which is up 8 million sequentially and 17% above the prior year.

Core sales were up 14% with all four of our segments reporting growth including the energy segment for the first time since the third quarter of fiscal 2009. Demand in most end markets was strong especially those served by the industrial and engineered solutions segments, which each grew 22% core in the quarter. In addition to the core growth our consolidated sales grew 5% from the benefit of carry over from prior year acquisitions and that was partially offset by a 2% foreign currency headwind.

The combination of the overall sales growth and the 230 basis points of operating profit margin expansion resulted in a 41% increase in operating profit above the first quarter of the prior year again excluding prior year restructuring costs. Consolidated operating profit margins in the first quarter were 13.1%, roughly in line with what we reported in each of the last two quarters. We continue to benefit from cost reductions generated during our restructuring actions from 2009 and 2010.

We’ll be anniversarying the completion on many of those in the second quarter so our year over year margin expansion will moderate as the year progresses. One data point to share with you in cost reductions is whether last year’s headcount reductions are sticking with the rebound in sales. With core sales up 14% year over year in the last quarter we only had a 5% reduction in headcount during the same period. So we’re getting significantly improved productivity, which is driving the margin expansion.

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