Columbus McKinnon Corp (CMCO) 2004 Q1 法說會逐字稿

Hello and welcome to the Columbus McKinnon first quarter fiscal 2004 investor conference call. Following today's presentation, there will be a formal question and answer session and instructions will be given at that time. Until then, all lines will remain in listen-only mode. At the request of the company, today's conference is being recorded. If anyone has objections, you may disconnect at this time. I would like to introduce today's conference host, President and Chief Executive Officer, Mr. Tim Tevens. Sir, you may begin.

Thank you Good morning and welcome to our conference call this morning. As you might have noticed, we did issue a press release this morning and hopefully you have those in front of you, which we will be referring to as we go through. With me today here in Amherst, NY is Bob Montgomery-Executive Vice President and Chief Financial Officer, Karen Howard, our Vice President Controller, Joe Owens-Vice President and Ned Librock, our Vice President of Sales.

We want to remind you that the press release as well as this conference does contain forward-looking statements in the meeting of the private litigation reform act of 1995. These statements contain known and unknown risks and other factors that could cause actual results to vary. You should in fact read our periodic reports that we file with the SEC to make sure you understand these risks.

Our sales for the first quarter were lower than last year same quarter by about 6.4%. Most of the short fall coming from our more capital intensive product and solution businesses. Overall, our bookings in this quarter for most of our businesses were lower than last year but flat with the fourth quarter of '03, which I think is an important point to note. That fourth quarter of '03, of course, ended March 31. Our valuation of our market share data shows that we continue to lead US hoist chain markets very well and we also have a strong position in the forgings and indoor industrial crane businesses.

Sales in the product segment specifically now for the first quarter were down about 6% compared to the same quarter last year but our gross profit margin was up 30 basis points or so. This is indicative of the restructuring and normal cost control that we have been implementing over the last several years. Consistent with the industrial capacity utilization in the United States, the capital goods portion of this product segment does remain depressed. Contrary to this trend, our wholly owned crane builders have recognized a nice upswing in business, but with competitive pricing pressures still present.

Our European businesses and tire shredder business have seen a slight increase in sales this quarter as well. Our solutions segment sales continue to struggle down 8.8% over the same quarter last year; as higher cost capital equipment sales worldwide are very low at this point. Gross margin and operating income followed these depressed sales.

On a positive note, our debt reduction plans continue to be on track with about $10 million reductions since March 31 of '03 and almost a $22 million reduction since last year same quarter. We also will be closing today on $115 million senior secured note at a 10% rate due in 2010. This will have a favorable impact on our interest expense about $3 million less annually and certainly provide more liquidity and overall lower debt for Columbus McKinnon. At this time, I'll turn it over to Bob Montgomery who will lead us through our financials.

Thank you, Tim. You gave some of the details. The product sales for this quarter were down about 6% from same quarter last year and Solutions was down about 8.8% from same quarter last year. And the total was down 6.4%, and I think you gave that number. We are continuing to see some weakness in the U.S. markets. The recession is still with us. There was a little bit of an uptick in the European markets, I think, but most of that was probably foreign exchange rate based.

The end of the quarter seemed to look a little better than the beginning of the quarter, so if there's some bright spot in this, it is that it's feeling as though it's flattened out some. But still a little down in terms of the numbers. Gross profit bright spot is percentage-wise the products business was 25.8% versus 25.5% same quarter last year and in fact in the fourth quarter was 23.7%. So it's up over both of those comparative quarters. Solutions is down a little from the same quarter last year but up from the fourth quarter of this most recent year. At 14.9% versus 8.6% in the fourth quarter. It was 16.7%, however, in the last year's first quarter. The total remained about the same, 24.3% with the mix between products and Solutions. We are much more heavily emphasizing products these days. Products is about 86% of our business or so. And I think this is where we see the cost improvement efforts starting to show. Much of the cost improvement efforts bring along with them the cost to accomplish them. And so they are masked a little.

We're now past the point where some of the costs are being recognized and the benefits are now beginning to show up. Solutions business had some problems and is rethinking some of its strategies. And as you know, we're analyzing the strategic importance of that. Our strategic alternatives for that business. Selling expense was as a percent of sales a little higher this year. The first quarter this year versus last year first quarter. 11.2% this year and 9.9% last year. Much of that is foreign exchange driven. With the reduction in the dollar versus the Euro. We are also investing in new markets. Particularly in Europe and also in the far east, and that it takes a while to realize benefit from those investments.

This is also an area that's getting continuing scrutiny by management of the company. G & A expense-general and administrative, was down as a percent of sales 5.4% in this most recent first quarter. 5.9% in the same quarter of last year and in fact in the fourth quarter of the year we just finished up it was 7.1%. Some of that is due to the lower investment return. This is an odd concept but a lower investment return on our self-insurance portfolio because as the return is lower, so, therefore, is the loss provision, which shows up in G & A expense. That was about a half a million dollar difference. We also have no bonus being recorded this year, and there was a small one being recorded last year. Restructuring charge is $800,000 this year, this quarter, this year is fairly small. Nothing same quarter last year and $2.9 million in the fourth quarter of the year we just finished.

And most of that has to do -- well, all of that has to do with ongoing projects. I think most of it is the Canadian company, the Canadian facility that is being restructureed. Interest and debt expense this year was $9.7 million and I need to tell you that there's a fee in there of $1.2 million for the First Amendment of our credit agreement that also was recorded in June. So in terms of ongoing interest, based upon the former configuration of debt, you'd have to subtract the $1.2 million. Other income and expense this year first quarter contained about $3.2 million. The sale of some California property we inherited when we bought Yale, that now finishes that contract, so that's behind us. But it adds to income or first quarter of this year. And last year, there were some investment income that came from the self-insurance portfolio of $3.5 million. Typically, other income and expense would be a smaller number. Cash flow-wise, we had positive cash flow from operations of about $7 million this year first quarter. And that's made up of several numbers. One is that we got a tax refund of almost $11 million. In that quarter, we had some inventory reduction of almost $5 million but we also paid some bond interest of about $8.5 million.

Last year, the cash flow was negative to the extent of $6.1 million. Most of that, in fact, all of that and then some was caused by the bond interest of $8.5 million that was paid in that quarter a year ago. Balance sheet-wise, day sales outstanding are at 65.8, which is a fairly normal level, I would say. The fourth quarter of the year we just finished had some heavy shipments in March, which reduced that to 61.3 days, but that was artificially or I'll say temporarily reduced. Inventories have come down nicely as you can see. We are at $75.2 million. Turns are $4.3 million, which for a company in this industry is fairly good. We think we can do better in that, and there is a continuing effort to manage inventory better and to bring that number even further down.

In summary, I would say the manufacturing recession in the United States does continue. It feels as though it is flattening out, but there's certainly no sign, at least in our segment of the business, of an uptick. And as Tim mentioned, the private placement of senior secured notes should close today. There will be a press release on that, and then in due course, there will be a further press release when those notes have been registered and we can describe their impact on us. With that, I'll turn it over to Ned.

Thanks, Bob, and good morning, everybody. What I'll do is add a little detail to what Tim and Bob indicated earlier. Our sales for the last six months have been flat. They've leveled out. But that resulted in our product segment comparatively being down 6%.

A little detail on that. Our general distributors were down 12% this past quarter. This one's primarily driven by the capital intensive crane building market. Our crane builders were off 22% this quarter, so that segment still remains very, very soft. Our specialty distributors were only off 2% and these are our catalog houses, the Graingers, the McMastercards of the world and our own M Entertainment business was up a little over 30% a much smaller business. Again, that's six months in a row where that specialty segment is coming back nicely or has been doing very nicely for us.

Bright spots include our own crane builders that were up a little over 8% which is bucking the trend of the crane builders nationwide or in North America. Our parts business was flat compared to last year but above our first quarter so that's actually a good, long-term sign that product is being repaired and hopefully repaired product will lead to new unit purchases. And again our international sales were up 7%, so again, six months of continuous growth internationally, which is very positive for the corporation. Strong markets include the entertainment business, the construction and contractor trades industries segment, government sales have been good, our international sales are strong and utility markets continue to hold up very well. These markets tend to buy the less capital-intensive equipment-forgings, hand hoists, lever tools which are doing very well for us.

Weaker markets include the crane builders, which I've mentioned, the mining segments, various mining segments, aerospace and overall general manufacturing which tend to buy the more capital-intensive products which are our wire rope hoists and electric chain hoists. The trends for this quarter were not much different than I reported last quarter. Inventory management at the distributor level is key. It's crucial to distributors making money, and I do maintain that inventories are probably at an all-time low at the distributer level and probably will remain that way, which puts good pressure on us to make sure we have good deliveries on our prime products. There's continued price pressure, although the price pressure from Europe is decreasing with the weakening dollar. With China and some of the Asian imports, we have to make sure our pricing is keen and that we're doing a good job. Particularly with the U.S. dollar and the Chinese currency pegged the way they are today.

The Parts and Repair business as I stated earlier is on the rebound. That's a good, profitable segment of the business for us and hopefully is an indicator of future business. Market shares remain stable and we're doing, as I stated earlier, the noncapital related products in our business are doing fairly well. As opposed to our more capital intensive products. We did have a price increase in May, middle of May, which was a select price increase primarily on parts and some of the less capital-intensive products. And the important point there is that we met with very little opposition to the price increase.

And concurrently, or I guess sequentially, some of our other competitors were raising prices, also. So in conclusion, we continue to have aggressive sales and marketing at both the distributor and the end user levels. And we're maintaining what I think is very appropriate selling expense control in these tight markets. So Tim, with that, I'll turn the program over to you.

Thanks, Ned. We'll wrap up here with some operating comments and then we can turn it over to questions. We did accelerate our pace of improvement clearly with the focus to continue to generate cash and repay debt as quickly as possible. We completed the facility rationalizations that started last quarter including CM limited projects as I mentioned earlier, actually last quarter. We expect the annual pretax savings to be about $2.6 million dollars and implementation costs to be about $1.6 million. We also just closed on the sale of our German property for about almost $300,000, $290,000, in fact.

At the end of June, we closed the manufacturing portion of our crane business in Chicago and moved its production to other crane building facilities in Illinois and Texas. As previously mentioned as well, we estimate the pretax savings to be about $700,000 with an implementation cost of $1.1 million. Over and above that we have a signed contract for the sale of this property, which we're -- we expect to close sometime I would expect this quarter. Inventory continues to be reduced as Bob mentioned. Especially in those facilities that are implementing the lean manufacturing technique. Corporatewide our inventories are down about $3.5 million. Our turns are about $4.3 million.

We think there's more to come there and are planning on that for the rest of the fiscal year as well. Lean manufacturing process, our basic improvement process continues to be the driving force for improvement at CM. We've completed well over 50 lean rapid improvement events this quarter in 15 different facilities. Also as Bob mentioned, we are considering all options to continue to reduce debt including divestiture of certain non or less synergistic businesses.

The Solution segment is part of that as well as some less synergistic product segment businesses. We are proceeding through that strategic alternative process, and in fact, I would hope sometime this quarter we'd be announcing some of those results of that work. Nothing to report just yet. As a reminder, our strategy is to leverage our superior handling design and know-how to continue to dominate the U.S. markets as we expand our global presence. Our market share growth will be built upon new products designed specifically for various market needs incorporating our high quality standards and service of course.

Thank you. If would you like to ask a question, please press star one on your telephone touch pad. If you are using speaker equipment, you may need to lift the hand set prior to pressing star one. To cancel or withdraw your question, press star two. Our first question comes from Graham Cohen.

Yeah, hi. This is Graham Cohen from Royal Bank of Canada. Two questions. Just wanted to know what your revolver availability is and after the 10% deal, what sort of cash you have on the balance sheet?

Graham, the revolver availability that's changing as you may know given the activity -- excuse me we have going on with our debt structure. As of the end of the quarter, our availability was about $13 million. But with the closing of our bonds today, it will increase by about $20 million. You asked about the cash on the balance sheet. I'm not sure what the question was.

Yes, the cash post the closing and, you know, repaying some of the other debt. What cash would be left on the balance sheet?

That would have no impact on cash.

Okay. Thanks.

You're welcome.

Thank you. Our next question comes from Keith Hogan of Egan Vance.

Hi, good morning, how are you?

Good, Keith.

A couple questions. First question. You talked about crane- both crane manufacturing and internal crane. Can you kind of explain to me why there's such a big dichotomy between the sales to the crane manufacturing and the -- your crane -- internal crane being up?

I'll give it a shot, Keith and ask Ned to comment as well. Just to be clear on what we're speaking about here because it does get a little confusing is that we make hoists and those hoists are sold through a channel that we call crane builders. They happen to buy our hoists and install them on inside building pipe, overhead bridge cranes and jib cranes into end users. That's one channel that Ned referred to. They happen to be depressed today across the country.

Mm-hmm.

We own some wholly owned crane builders. Actually four of them. Most of which is in the middle part of the country. If you draw a line down from Chicago through Illinois into Oklahoma down through Texas into Houston, that's kind of the territory that we cover with those wholly-owned fellows. They seem to be seeing an increase in quotations in that area of the country and actually their hit rate is up a bit as well, which has given them the spike in business.

A couple of those wholly owned distributors do some international business- they were awarded some international contracts outside the United States. So I would say it's more of a geographical phenomena. I hope I can report next quarter that they're up again that they're all up.

That everybody's up. Yeah. I'm just trying to get -- I guess it sounds like it's basically driven by sort of a geographic issue because if you are selling the stuff to the crane building builders and they are down, if they are not buying as much from you, they are not building as many cranes but you seem to be building more cranes. So do you think you're taking share from these guys or are these guys buying their winches that they put their cranes from somebody else or are they starting to build their own winches for their cranes, are they vertically integrating?

We make hoists not winches.

I mean hoists rather.

There is a differentiation between them. I think our market share in the world of hoists which typically are sold to crane builders has not gone down in the United States. That tells us that the entire market is down number one. Ned mentioned some international business. We did get some nice orders internationally, but we also were awarded major contracts around this region this geography that I think might indicate, at least for this quarter, that maybe some market share is shifting.

The other thing that I think Ned mentioned was the price increase. Can you give me a sense of the size of the price increase and then how does that compare to the price increases you pushed through on an annual basis historically?

What we did is we've given the market sensitivity right now. We were very select on what products we did raise prices on. We did raise on average our parts pricing 5% to 6% but we do believe that's a captive market. We can push that through. That was met with very little resistance. We raised our forging prices which are hooks and attachments approximately 4%. Seems like the industry responded in that same area. Then we did not raise our wire rope hoists which are sold to the crane builders given the sensitivity of the capital market. We did raise our hand hoists and lever tools anywhere from 2% to 5% depending on the category. It's hard to say. I guess the real question I'm going to answer myself is how much is that going to stick? I will say most of it will stick. It's always a good question. The parts business will stick 100%. And on the other pricing, very little of that will be given back to the marketplace.

Okay. From a total corporate perspectiive, you did raise some things. You didn't raise others. What would sort of being be the weighted average price increase across your whole, you know, revenue base, I guess? If some things were zero and some were 5% or 6%, are you --

that's probably in the --

2% range.

For the whole business, it would really be more like half a percent. Because the Solutions business prices have not gone up. That business is very price competitive today.

Okay. And again going back to the second part of my other question, how does that compare to on a historical basis your annual price increases.

On the parts side of the business, it's pretty average I would say on the handle. I guess overall it would be pretty average.

Okay.

Not extraordinary either way. Everybody in the industry seems to be going about the same percentages.

Okay. Great. That's all I had. Thank you.

Thank you.

Thank you. Our next question comes from John Waltonhousen of Paradigm Capital Management.

Hello, John.

Good morning. A quick question on the refinancing. Could you tell us what expense will hit the income statement this quarter for that?

In Q2?

Yes.

Hold on a minute, John. John, we're just discussing how much -- we always run it by the attorneys of the world.

Okay.

This is governed by 135-c and we're very limited as to what we can put out because this was a private placement. As an ordinary course as you well know, it will be retch strd at some point down the road and then we can flush it out for everybody, and we will.

Okay. Okay.

Fair enough?

The other more general question on the refinancing is it appears to me that it is a good move in reducing the cash flow pressure that you guys have been operating under. But I guess the question then is, does it change your attitude on the strategic alternatives discussions on the laundry list of businesses that you listed in the K?

Absolutely not, John. Our focus continues and will be on debt reduction and it won't change our alternative -- our strategic alternative process.

Okay, good. Good. And then a question on the seasonality. You know, we've been in such a long-term decline for the past few years, typically, the second quarter products is significantly dropped from the first quarter. Now is business looking a little bit better, maybe stabilized, would we still expect that second quarter below the first quarter?

I would think it would be relatively flat.

Okay.

It might be down, a technical term, a smidge.

A smidge, yeah.

But I would expect it to be reasonably flat. You know, and it is a tough -- it is a tough environment to forecast anything in today.

Right. As you might imagine.

We are not seeing seasonal build like in the past. You know, we get orders as the products being used.

It feels as if we are feeling the end user demand right to us.

Right.

As opposed on the inventories that should be at the distributor level that's not there today.

Okay.

So it's a bit more difficult.

Good. Good. Did I hear correctly that the improved gross margin was really reflective of the cost initiatives you've taken and not any serendipity on the mix or anything of that nature?

No, no. It's pretty much cost reduction, yeah.

Good. Thank you very much.

Okay, John.

Thank you. Our next question comes from Jason Harris of peninsula.

You mentioned your market share is stable year-over-year. Could you give us a rough estimate of what that is? And then have I one follow-up question.

Sure. I can give you some ballparks. It's in the -- for hoists overall, and we can give you a number for all of the hoists. It's in the 50 to 60 category percentage. Market share in the United States.

Okay.

Actually it's over 60. As I was just corrected. And I think for our chain business, our chain business is in the let's say 35 to 40 bracket.

Okay. And then, you know, your long-term debt is down to I guess just under $300 million. Do you have kind a goal to get that down to by the end of this year? Or are there any kind of targets that you've set?

Yeah, I think in the press release, we talked about another $10 million to $20 million on top of what we did so far in this quarter.

$10 million to $20 million for the rest of the year?

Correct.

Okay, thanks.

And that's a good point, Karen. That would not include divestitures.

Okay.

Thank you. Our next question comes from Sarah Thompson of Lehman brothers.

Hi, good morning.

Good morning, Sarah

I just had a follow-up on the market share questions. I'm not sure it's something you can answer but I'm concerned as you start to look at production in the United States, a lot of companies resolve to moving plants overseas. Do you have a sense of what your market share looks like worldwide? Are you guys maintaining market share in the U.S. and following or not follow following your customers or do you have any ability to segregate it that way?

Yeah, we try to. It's a little more difficult outside the United States. Here in the states, we have trade associations we report into and then we get some feedback from those trade associations on where we stand. But outside, we don't have that so it's a little more of an estimate. If I could talk along those lines, relative to the secular trend I think you're referring to?

Yeah that's fine.

Manufacturing in my opinion has been going overseas to Mexico and China and other low-cost environments for 10 or 15 years. This is not something that started with the economic downturn in the United States a mere two years ago. And in fact, we've been in China for about ten years and been in Mexico for 25 years. So just from that perspective, we know how that operates. But clearly, as the U.S. end users begin to build plants overseas, the one thing we're finding is we're asked more and more to go with them and to support them. The good example I have is a very fine customer of ours, Caterpillar asked us to provide specified Yale hoists in their plants in Mexico, which we in fact provided and installed cranes and hoists with a couple of service technicians on the ground in Mexico in their facility doing that. So that kind of trend, and that anecdote that I just gave you is something that we see and feel and we would be following those manufacturers as they migrate around the globe. It's tough to know and get your arms around exactly what those market shares are, but from our standpoint, our opportunities to grow are much greater in economies outside the United States. Especially those that are larger like Europe and also those that are growing more fancy like the far east. So we certainly have opportunities. In fact, that's one of our strategic components, to grow our market share in our types of products in those economies.

Okay, great. That's helpful. Then just two other questions, and I'm sorry if I missed this. The Solutions business, do you guys -- are you guys still running negative numbers on that or has that flattened out? You had some projects, I think that were losing money.

Oh, yes, I think you're referring to the univeyor where we had negative products.

Correct.

Actually, they weren't negative. They just had for the given quarter had reported that the earnings were down lower than expected lower than budget but overall, the project was still a positive project. Univeyor is in the project of cleaning that up.

So when you made the comment that the Solutions business remained sleek that's just a top line issue?

Right.

Okay. And just a last question. On your $10 to $20 million on expected debt reduction, you said that doesn't include any divestitures. Was the $10 to $20 million an additional $10 to $20 from where we are today?

That's correct, Sarah.

Okay. And that doesn't include -- I thought you still had another $3 million of so of real estate divestitures. Do I have that number wrong?

It doesn't include that, either.

It does not include that, either?

No.

Okay.

We're waiting for those to close, in fact. And you're right, it is several million.

Okay. Terrific. That's all I have. Thank you.

Thank you.

Thank you. Our next question comes from Graham Cohen of RBC.

I just had another quick question on the long-term debt. Post the financing, what is the breakdown of the long-term debt?

Yeah, Graham, we're still running afoul with the legal system and we're unable to discuss that very much. At the proper time and when we can, we'll certainly lay it all out for everybody.

Okay.

Sorry.

Thank you. Our next question comes from Alexei Corals.

Thank you. Just a quick question follow-up on the debt. What is your total commitment under the revolver post the closing of the offering if you could at least give us that number, please.

There's no change. It's $57 million.

Thank you very much.

I show no further questions at this time. We'll turn the meeting back over to Mr. Tevens.

Thank you. In summary, we'll continue to execute those plans that we've talked about for a long time-focus our efforts on debt reductions, cost control managing our working capital. Our product and plant rationalization and lean initiatives along with normal operation will continue to generate peak cash flow at Columbus McKinnon along with our normally generally low Cap Ex we'll have another year of debt repayment as you can tell. We're also continuing to invest prudently in new markets and products to protect our market share in the U.S. and gross sales internationally, and keep Columbus McKinnon positioned as the leader in material handling industry. I want to thank all of our CM associates for their efforts. As always, we appreciate your time today. Have a good day. Thank you.

Thank you for attending today's teleconference and have a great day.