Q&A with Robert C. Arzbaecher, President and CEO of Actuant Corp.Posted on Written by Reagan Haynes
Robert C. Arzbaecher has served as president and CEO of Actuant Corp. since 2000, when it split from Applied Power Inc. The $1.6 billion Wisconsin business is a diversified industrial company with operations in more than 30 countries.
With hands in several industries, Actuant’s marine businesses include Marinco, which makes marine shore-power and electrical products; Mastervolt, which makes power products, including batteries, battery chargers, inverters, monitors, digital switching and integrated systems; and BEP Marine Ltd., which specializes in marine electrical distribution products.
The Actuant businesses specialize in niche markets, including branded hydraulics, electrical tools and supplies; specialized products and services for energy markets; and highly engineered position and motion control systems.
Arzbaecher, the son of a professor, moved around as a child, even spending a year in Amsterdam. He attended the Tippie College of Business at the University of Iowa, where he now serves on the board of visitors, before starting public accounting for a firm called Grant Thornton.
After that, he held finance jobs at Farley Industries and Grabill Aerospace. He moved to Applied Power, the predecessor of Actuant, in 1992 as corporate controller. He moved to vice president of finance and later was chief financial officer until Actuant was split off in 2000, and he helped turn it into the multibillion-dollar company it is today.
He has three daughters between the ages of 14 and 22 and lives in Brookfield, Wis., a suburb of Milwaukee.
Q: It sounds like you don’t get a lot of spare time between running Actuant and raising three daughters. But when you do get the chance, what do you like to do?
A: I’m an active golfer and sailor, with sailing probably being a higher passion than golf. I own a Beneteau 40.7 that I race pretty competitively on Lake Michigan. So that’s what I do in my spare time. It gives me a good feeling for running the marine part of Actuant. Even though it’s a smaller piece — something like 5 percent of the total — it’s obviously still an area I have a lot of experience in.
Q: I saw a mention of a rescue. Can you tell me about that?
A: Yeah, it was last year’s Chicago Yacht Club Race to Mackinac.
There was a very large storm in the middle of the night, and as we came out of the storm we heard a whistle and saw a faint light, probably about a half-mile away. We diverted from the race to go over there and found a boat upside-down. We rescued six people that were on board; there were two missing. It turned out the two that were missing were harnessed underneath, so there was nothing that we could’ve done about that. But the boat had totally turtled, and so we spent most of the night out there waiting for the Coast Guard and keeping the guys warm and ended up taking them to Charlevoix, Mich. That was the end of our “Mac” for that year. We were really at the right place at the right time and alert enough to hear the whistle and see the light.
Q: There seems to be a real camaraderie in sailing. How do lessons from this experience, and sailing in general, translate into the bigger picture?
A: The high seas are a dangerous place and everybody needs to show that camaraderie. There’s no question that when you get into a race like Chicago-Mackinac with 300 other boats, it’s a pretty tight community. A lot of people go every year and you end up knowing a lot of the people. People ask all the time [about the rescue], ‘Well, what about the race?’ We just had to investigate. There was no other reason for there to be a light out there. We had just come out of this terrible storm. To me, it wasn’t even a decision, it was just a reaction.
Q: Maybe this is a good time to talk about your involvement in the America’s Cup.
A: Yeah! We are a technical supplier for the Oracle team. We supplied power electronics and battery systems on their boats, both their tender boats and the regular boats. Michele [Goldsmith, PR manager] and I were able to watch some of the AC45s race in Newport a few weeks ago — great, great experience. It was good to see our product in action, but also a thrill to support Newport and the American campaign.
Q: I’ve heard that when Actuant split, some doubted its ability to succeed. Can you talk about the changes you’ve made along the way and how you’ve been able to turn it into the $1.6 billion business it is today?
A: At the spinoff in 2000 it was right in the middle of the dot-com craze and tired old industrial companies just weren’t in favor. So the strategy was to monetize that value to spend it on the electronics side of the spinoff called APW. We did that by basically loading Actuant up with all the debt and pushing it out to the shareholders as kind of a leveraged buyout. So we came out with about $400 million in sales and roughly an equal amount of debt. It was a public LBO in every sense of the word. What I think really resonated with me, the team, the board of directors and shareholders in general was the high-quality, leading market shares [we had] in a lot of the businesses. They sustained the economic fluctuations really well, so we were able to pay down the debt reasonably quickly — within two or three years — and then we started doing acquisitions. That’s where some of the marine brands came from — first Ancor, then Marinco, BEP and most recently Mastervolt, with its marine and solar business. So we’ve expanded our marine electrical platform quite a bit since 2000.
Q: Was that a result of your passion for the marine industry?
A: No. Marinco was part of the acquisition of Key Components, which included several businesses. We knew Marinco would complement AncorMarine, which we already owned, and it was very similar to our Gardner Bender electrical business. So it was an expansion of what we had already done well in electrical for other markets. As we built it out, we recognized that Marinco had a powerful brand name and controlled a strong share of the retail marine market and the professional boatbuilder market. When we began to look for other acquisitions we started a dialogue with the owners of Mastervolt. About two or three years after we started that dialogue we were able to put together an attractive offer and buy the company. It all started with a harsh-environment electrical strategy.
Q: Can you talk about the business throughout the recession and how it’s been able to grow?
A: One of the hallmarks of Actuant is what we call our continuous improvement strategy, or L-E-A-D. That stands for Lean Enterprise Across Disciplines. That strategy has led us to a business model that generates a lot of cash flow and, in the recession, even though our sales dropped by 20 percent, the cash flow was always very strong. We generated over $150 million of cash flow in both 2009 and 2010, the two years of the recession. Yes, the earnings did fall, but the cash flow stayed solid, which allowed us to reinvest in the business. As we’ve come back from the recession we’ve now passed the prior peaks in sales and profitability, and the cash flow’s continued to grow, too. It’s up to about $190 million this year.
Q: I know a lot of businesses sought to trim and create more cash flow throughout this entire downturn and become leaner, but I don’t know that many have been able to exceed prerecession peaks. Can you give specifics on how exactly you were able to make that happen when so many others have struggled?
A: Well, I think it starts with [this]: You can’t create cash flow unless you have robust sales and then the profits that go with it. Cash flow is a byproduct of those two things. We’ve continued to acquire companies, continued growing the top line and we’ve expanded in some of the emerging markets, like China, India and Brazil. We’ve been growing geographically in some of our other businesses, like energy. We have an energy joint integrity product and service business that’s been a high-growth business. And then we have this continuous improvement process that I referred to, and that really focuses on one-piece flow, kanban, kaizen — some of the Japanese Toyota production techniques.
It’s all about velocity of turns and being able to pick something up once, complete it, ship it to the customer at the end of the line with a lean inventory, creating a demand-flow environment. Also, we decided early on that real estate wasn’t a great investment, so we do sale-leaseback transactions on most of our facilities. As North American real estate has declined, we have been insulated from that. So there are a lot of attributes that allow us to generate cash flows in good times and bad.
Q: You mentioned emerging markets. Where are you seeing some of the most robust growth?
A: China would probably be our best example and the Middle East region is probably where we see our strongest growth. Brazil and India are also seeing some growth.
Q: Is that also true for marine?
A: It depends. Marine isn’t that well-established in China. It’s not a big boat market today. I think everybody’s watching that and expecting that as leisure lifestyles generate traction in China, it will become a great boat market, but today it’s pretty small. Brazil, on the other hand, is a good boat market today and we are growing our marine business there, establishing distribution and service channels.
Q: Are you seeing any pockets in emerging markets for the marine industry specifically?
A: No, not really.
Q: What are you seeing in terms of the general U.S. recovery, and specifically the marine industry recovery, and how does the marine industry compare to others?
A: We’ve enjoyed two or three years of economic recovery after the recession and it’s been steady in North America. We’ve had kind of a consistent — somewhere around 10 percent — core growth as we’ve recovered from the recession. That is starting to moderate in the last six months, but it’s still positive, and if you look at the geographies around the world it’s still our strongest area of growth in total. Marine follows that same trend. I think it’s a little stronger in the aftermarket, so people like West Marine and our wholesale distributors are a little stronger than some of the OEM boatbuilders, but I think both markets have been recovering from the base of the recession.
Q: And you see that recovery as being sustained in the marine industry?
A: I believe people either are going to put money into their existing boats or upgrade boats so, yes, I continue to believe that it’s a sustainable market. It’s got some cyclical tendencies, but it’s still sustainable. It’s driven by the 50-year-old-plus baby boomers, and there’s still a lot of wealth in that area and a lot of retirement leisure spending that fits well for the marine industry.
Q: Can you speak to concerns that baby boomers might age out of the boating market in the foreseeable future?
A: I don’t know. The Chicago Tribune has the 85-year-old guy who’s done 50 Macs sitting on the front cover. People like to boat well into their retirement years.
Q: You mentioned you thought the aftermarket segments were doing a bit better than the overall industry. Are there other areas you see rebounding more quickly than others?
A: I think there’s a trend for some product areas that we’ve been investing in — for instance, digital switching, digital control of instrumentation, circuits and electronics on the boat. I think there’s a real push toward giving users information where, when, and how — the user wants it. If the boater wants to see if his bilge pump is running, and he wants to do that from his iPad in his living room, how do we make that happen? If he’s on the third bridge of the boat and wants to turn on a fan two levels down, how do we make that happen? I do think there are some moves afoot that play into our product family and some of the technology and products we’re introducing to the industry.
Q: Some are concerned about a softening due to the election and problems in Europe. What do you see happening?
A: I think it’s moderated growth, but there is still growth in North America. Maybe in Europe it’s a little tougher because of eurozone challenges.
Q: So the softening everyone is talking about hasn’t happened for marine?
A: Maybe I’m simply referring to our own portfolio. We provide both the aftermarket and OEM. We supply a wide variety of boats, from fishing boats all the way up to very large performance yachts, through our Marinco, Mastervolt, BEP and Ancor product lines. We are diverse in terms of the boating industry and we are not seeing the softening across the industry as a whole. If people have an existing boat they’re going to want it to run and they’re going to put items in. That’s where some of the aftermarket players will be successful. The larger OEMs clearly are tied to wealthier income and may see delays as people look at the presidential situation, but is that going to affect the guy who likes to go out and fish on weekends? I don’t know. I’m cautiously optimistic that they can eke out some growth in the next year and that the industry is not going back to a dramatic decline. Maybe it softens, but it’s not as dramatic as it was in the past.
Q: How important is diversity, particularly when you’ve got an unsure market?
A: I think diversity is very important. We work very hard at Actuant to have a lot of diverse businesses, where we have marine on one side and energy tools and industrial tools on the other. We’re doing things for a lot of different markets. I think that diversity is what makes Marinco and Mastervolt stronger. They have a parent company that does have a lot of different businesses, and all our eggs are not in just the marine basket. We’ve spent a lot of time trying to look for macro growth themes and try to have a diverse portfolio geography-wise, product line-wise, and customer-wise. We try to keep it so no one customer or industry is so much of our total that it would have a dire impact if it went down. I think that has been very successful for Actuant.
This article originally appeared in the September 2012 issue.
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