Columbus McKinnon Corp (CMCO) 2005 Q2 法說會逐字稿

Good morning, and welcome to the Columbus McKinnon's financial 2004 -- I'm sorry, 2005 second quarter investor conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session.

To ask a question, please press star-one.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now, I will turn the call over to Mr. Timothy Tevens, president and CEO.

Mr. Tevens, please begin.

Thank you, Autumn.

Good morning, all, and welcome to our call this morning.

Earlier this morning we did issue a press release with our second quarter results, and hopefully you've had a chance to print it off and take a look at it.

And consistent with the first quarter of the fiscal year, you've noticed, that we've delayed our normal earnings announcements from the third Tuesday following the quarter, to the fourth Tuesday.

And that's basically to allow us to do our internal certifications, and necessary reviews to take place and it's, quite honestly, worked out fairly well for us.

I would expect that kind of timing to take place over the future.

And if we change that, we'll certainly let you know.

With me today is: Bob Friedl, our Vice President of Finance and Chief Financial Officer;

Karen Howard, our Vice President and Treasurer;

Bill Owen, our VP of Strategic Integration, and Ned Librock, our VP of Sales.

We do want to remind you that the press release and this confererence call may contain some forward-looking statements within the meaning -- the meaning of the Private Litigation Reform Act of 1995.

These statements contain known or unknown risks and other factors that could cause the results to vary.

You should, in fact, read the periodic reports that CMCO files with the SEC to be sure you understand these risks.

I'll give a brief overture and then turn it over to Bob for some financial overview.

Overall, our sales for the second quarter exceeded the same period last year by over 15%, and about 1% greater than the first quarter.

Our evaluation of our market share data shows we continue to lead the U.S. hoist and chain markets and have a very strong position in forgings and indoor industrial cranes.

Sales for the second quarter ended at 122.7 million and about 90% or so of that coming from our profitable products segment and the balance from our now-profitable solutions segment.

Sales in the products segment, if I can focus on that for just a moment, in the second quarter, were up over 15% compared to the same quarter of last year, and relatively flat, compared to the first quarter of this year.

With two fewer shipping days, I might add, which those of you that follow us know that shipping days are indeed important to this company.

The increase is primarily driven from increased demand from our various distribution channels, and Ned Librock will explain that to you in a moment here, who are in turn experiencing increased demand from the end user markets.

Some of the increase that we have seen this past quarter was a result of some increased bookings that were taken in September in advance of a price increase on certain products, primarily hoist products.

Now, the reason I'm saying this is that it's actually fairly good news for us.

We haven't seen this pre-price increase level of activity in the last several years, since the end user demand was so low and our distribution channel partners thought it was fruitless to buy something that was going to sit on the shelf for quite a long time.

These purchases certainly influenced a lot of the revenue this past quarter.

We did have some offsetting entries, first one being divestiture of Lister and Positech from last -- last year.

We actually did it in February.

We lost about 2% of sales in a comparative basis.

The revenue increase is driven by currency translations of around 2%.

We also had some price increases and steel surcharges, that was around 4%.

Our good news is our international sales is up, which is one of our strategies, to grow outside of the U.S., that's up by about 15%, led by Europe and Latin America, over the same quarter last year.

Relative to gross profit in the products segment, that was up about 17 1/2% over the same quarter last year, and the operating income before amoritization and restructuring chargings was up over 20%.

This is the operating leverage that we have been speaking about in this segment.

Our gross profit margin in the quarter was up to 25.5%, or 50 basis points over the same time period last year.

You should know we have experienced some operating cost increases in Q2 over Q1 of fiscal year '05, and that basically accounts for the difference in margin between the two quarters.

Some of the ones that I can identify you specifically are-- there is a product mix.

There has been a bit of a shift in the type of products sold from quarter-to-quarter, and unfortunately this quarter we sold some products that weren't as profitable as we did last year -- or last quarter, excuse me.

We also had some additional vacation time in the summer quarter of Q2 of ours, and, therefore, some lower absorption in some of our more fixed costs-oriented business.

We also had an additional product liability expense for the company, higher healthcare costs, as well.

And, at least in the general and administrative expense area, we have had some additional Sarbanes-Oxley compliance costs, which I'm sure Mr. Friedl will speak more about shortly here.

Bookings in this product segment were robust in the quarter, and were up in excess of 20% over the same quarter last year.

Backlog ended at about $47 million, up slightly from the backlog at the end of the second quarter of last year.

And please keep in mind that the cycle time on most of the items in the product segment is in days or weeks.

Therefore, this backlog number represents somewhere around a month, about four weeks or so, worth of -- worth of shipments.

Very quick turnaround and cycle time business with this product segment, this predominantly in.

Talk about the solutions segment for a moment.

Sales were up 14.3% over the same quarter last year, and up about 5% on a consecutive quarter basis.

The gross profits increased 51% from last year, and down slightly from the first quarter of fiscal '05.

And this is following a concerted effort toduce our cost base in a variety of the businesses that we participate in the solutions area.

Sales for the quarter ended at 13.7 million.

Backlog more than doubled last year to about 20.6 million, and up 13%, or 2.5 million from our first quarter of this fiscal year.

A little bit about that business, we are seeing an increased quoting and booking activity in this segment, primarily driven by our Univeyor, powered conveyor system, that sells predominantly into the European markets.

Funded debt, net of cash, was up slightly in the quarter and inventories ended the quarter at about seven -- 75 million, up about 5 1/2 million for March of '04.

Funded debt, net of cash, increased in the quarter as a result of the semi-annual bond debt paid, which Bob will speak about shortly here.

The inventory increase represents some additional inventory we put on the shelves in the form of raw material, particularly steel, and-- but our returns for a company still represent about 5%, excuse me, five times, which is a fairly good number for us, not where we want to be just yet, but at least in this point in our lean manufacturing process, not a bad number.

And at this point, I would just like to ask Bob to lead us through some of the financial results.

Thank you, Tim.

Good morning, everyone.

I'm pleased to take a few minutes to review some of the financial highlights of Columbus McKinnon's second quarter for this fiscal year 2005, which ended on October 3rd.

Consolidated sales, as Tim mentioned, increased by a little over 15% in the second quarter of this year, compared to the second quarter of last year.

Products segment sales, which accounted for 89% of total sales in the quarter, increased by 14.4 million, or 15%.

Dilution segment sales increased by 1.7 million, or 14% compared to the second quarter of last year.

Second quarter fiscal '04 sales included revenues from the Lister and Positech businesses, both of which were sold in the fourth quarter of last year.

Removing Lister sales from the product segment, the increase in sales quarter-over-quarter was 16%.

Likewise, removing Positech sales from the solutions segment, the increase nearly doubles to about 27.2% driven by a 36% increase in Univeyor revenues, and a 45% increase in American Litho sales.

Sales were also positively impacted in the quarterly comparison from currency translations relating to our foreign operations, mostly our European operations, as the U.S. dollar continued to weaken against the euro.

Adjusting for divestitures and currency, the product segment sales increased 14.4% and the solutions segment increased by 20%.

Typically, the company's sales are strongest in the fourth quarter, and weakest in the third quarter, with either the first or second quarter coming in second and third.

As the company continues to see increasing demands for products, this pattern has shifted.

Looking on the sequential basis, the second quarter of this year saw higher sales than both the fourth quarter of last year, and the first quarter of this year.

Revenues of 122.7 million in the quarter were the highest quarterly revenues recorded in any quarter since the first quarter of fiscal '02, when sales were 129.1 million.

As Tim pointed out, the number of shipping days in the recent quarter and the comparable quarter of last year, second quarter, was 63, and we've included in the press release a table showing the number of shipping days in each of the quarters of fiscal 2005, the current year, and last year fiscal 2004.

In both of the remaining quarters of this fiscal year, we will see fewer shipping days than the comparable quarters last year.

Two fewer days in the third quarter, and three fewer days in the fourth quarter.

On higher sales consolidated gross profit dollars were up 19.5% quarter-over-quarter, driven by a 17.7% increase in gross profit in the product segment and a 50% increase in the solutions segment.

The gross profit margin improvement in the solutions segment, from 11.8% to 15.6%, was generated from improved profitability in our Univeyor and American Lithos businesses.

SG&A expenses were 16.1% of sales, compared to 16.2% in the second quarter of last year.

SG&A expenses were also down, as a percentage of sales, from the first quarter of this year and the fourth quarter of last year when SG&A was 16.6% and 16.4% respectively.

As Tim mentioned, this year we're incurring, of course, implementation costs related to Sarbanes-Oxley.

In the second quarter of this year, our results include -- SG&A expenses include -- about $350,000 of those costs related to Sarbanes-Oxley implementation.

Interest and debt expense of 7.1 million in the second quarter of this year is up from 5.7 million in the second quarter of last year.

Last year's interest and debt expense was reduced by the $1.1 million accrual reduction of payment in kind and other fees upon the July 2003 refinancing of the term B debt, and a .3 million or $300,000 benefit in an interest rate swap.

Adjusting for these, interest in debt expense was about even second quarter compared to last year's second quarter.

Other income in the quarter includes interest income from the Automated Systems, Inc. note received on the sale of that business.

And last year's second quarter includes a gain on the repurchase of the sub debt retired upon refinancing.

The effective income tax rate for the second quarter was 29.2% versus 46.2% last year.

Beginning with the first quarter of this fiscal year, no federal income taxes are being recorded for our U.S. entities.

The company generated $147 million net operating loss carry forward with the filing of its March 31st, 2003 U.S. federal income tax return.

This was primarily from the loss on the sale of the Automated Systems, Inc. business in May of 2002.

In May of this year, the joint committee approved the refund request from the carry-back of a portion of this loss.

The overall worldwide effective tax rate of 29.2% in the second quarter is up from 17.8% in the first quarter of fiscal '05, due to the higher proportion of non-U.S. taxable income in the second quarter, 80% in the current quarter versus 55% in the first quarter of this year.

The effective tax rate on foreign taxable income is about 30% and the company records state taxes in the U.S. ranging from 4-6%.

It also incurs franchise taxes in states where a net loss is reported, driving up the effective U.S. rate.

Depreciation for the quarter was 2.251 compared to last year's first quarter and we continue to track on target t o our range o f $4 to $6 million for the fiscal year.

Capital expenditures for the second quarter were 1.1 million, up from 838,000 in the first quarter.

With regard to the cash flow statement, net cash used in operating activities was $3.9 million in the second quarter compared to $17.6 million of cash provided by operations in the second quarter of last year.

In the current quarter, inventories increased, requiring an additional $3.2 million in cash compared to an inventory reduction of two million in the second quarter of last year, even though we saw inventory turns increase from 25 times from 4.4 times last year.

This increase in inventory in the second quarter is due to three primary reasons.

First, of course the increased level of business the company is experiencing, and second, the company entered the second quarter of this year with $4 million less inventory than it entered the second quarter of last year, even though revenues are up significantly higher levels.

And third, we're carrying inventories higher than normal as a buffer to potential steel shortages.

The reduction in accrued an non-current liabilities in the second quarter was due to the timing of the $7.1 million payment of interest due on the 2008 notes.

Typically the interest payment is made just after the end of the quarter; however, payment fell inside the quarter, since the quarter ended on the 3rd of October.

Unbilled revenues in excess of billings consumed about $2.3 million of cash in the second quarter, as Univeyor's long-term contract business increases.

At quarter's end, net debt was 284.5 million and funded debt was 294.3 million.

The company has a senior credit agreement with its five bank group, providing a revolver and term debt.

Availability on the revolver at the end of the quarter, was 29 million, with $8.5 million outstanding.

Term debt was 63 million at quarter end and the company's in full compliance with all financial covenants related to this agreement.

During the quarter, we were able to repurchase $5.5 million of the 8 1/2% 2008 notes with excess cash.

Our ability to repurchase the 2008 is limited by the provisions contained in the 2010 indentures.

The carveout we used to access the 2008's requires that they be purchased at a discount or below par.

Among other requirements, future purchases under this carveout must be at a discount to par.

We will continue to focus on debt and interest expense reduction in the future.

Debt to total capitalization decreased from 83.5% a year ago, to 80.9% at the end of the second quarter.

Longer term, we're targeting a 50/50 debt to equity ratio and a debt rating of BB or better.

With that, I thank you, and turn it over to Ned.

Thanks, Bob and good morning to everyone.

Taking look at our sales trends by distribution channel, I am pleased to report that all major channels are up significantly compared to the same quarter last year.

This includes our general distribution group, which is up 24%.

And this consists of our industrial distribution folks, rigging shops and crane builders.

And this group represents approximately 34% of our revenues.

Our specialty distribution group is up 10% consisting of our catalog houses, entertainment, material handling specialists, and this represents approximately 9% of our revenues.

And overall, consolidated North American distribution channels are up 20%, representing approximately 64% of total quarterly revenues.

Outside the country, international sales on a consolidated basis were up 15%, representing approximately 36% of total revenues, for a good picture around the world.

We believe that there are three primary reasons that are driving this continued sales momentum.

These are one, a sustained economic recovery over the-- over the past nine months, which we're very pleased to see; second, increased distributor confidence, as Tim mentioned, with end user orders driving sales and subsequently having distributors put stock orders in, and third, a much stronger international business climate for foreign and export operations.

Last quarter we reported a very aggressive plan for price increases and surcharges for most of our sales divisions.

We continued to lead the industry in this area, effective October 4th 2004, we implemented an additional price increase for hoists of approximately 4%, and hoist parts for approximately 5%, which was identical to the price increase of May 2004, five months earlier.

Typically we realize about 50% of the price increase on hoists and 100% on hoist parts.

Surcharges continue to be reviewed monthly for all products, but with a keen focus on changing forgings.

We will adjust surcharges monthly if need be, and to date in addition to price increases, we have surcharges in place anywhere from eight to 23%, depending on the product group.

Our goal here is to remain margin neutral, while competitive in the marketplace.

Looking out for the remainder of the year, we continue to be cautiously optimistic.

Incoming orders we remain strong.

The most recent price increase on hoist was well accepted and while surcharges remain high and lead the industry, orders remain good.

Market shares in all major cat -- in all major categories remain strong and we expect this to continue.

On a final note, Columbus McKinnon was awarded the very prestigious Supplier of the Year award by North America's largest industrial marketing group, Affiliated Distributors.

This is the second award this year following WW Grangers' Distinguished CF Q1 award which we won earlier this year.

Tim, that's my summary and back to you.

Thanks, Ned.

Let me just give you a quick operations update and then we can open it to questions.

As you know, our focus is to continue to generate cash and repay debt as quickly as possible.

And just along these lines, let me see if I can comment on a couple of points you may find interesting.

The operating leverage that we have spoken about previously continues to show itself, and this past quarter for every incremental sales dollar over last year we generated about 30 cents in gross profit.

We do continue to market the real estate of the properties that we have closed.

As you may recall, over the last several years, we have indeed consolidated ten factories.

That's the real estate that I'm speaking about.

And we have a fair amount of activity, quite honestly, in certain properties, but at this point in time, we have nothing to report relative to a transaction, but hopefully something soon.

We continue to be analyzing our facilities for opportunities to rationalize production.

We do have some opportunities here.

They are more difficult ones, albeit, but we'll certainly keep you appraised of our-- ouf our progress in this area.

Although inventories rose slightly in the past quarter, we are pleased with the continued churn of inventory reduction overall.

Our lean process continues across our company.

We expect to see continuous improvement in this area, as well as in the general area of working capital reductions.

We also continue to market the less synergistic businesses in our family of companies.

You know most of those are in the solutions segment.

One small business, specifically American Lifts, we were unable to sell to a potential buyer, has now been restructured over the last couple three months, and is now profitable, I'm happy to report, very profitable in the last couple of months.

So, it's a wonderful turnaround for us.

This business is indeed part of the solutions business and has been a part of that improved performance that we've seen now for the last several quarters and of the entire segment.

We are diligent in these processes and certainly will report to you when there is something to report.

As we reported last quarter, we have instituted a plan to track steel surcharges and Ned commented on this earlier.

I think him and his team have done a wonderful job in understanding what's going on in the steel market and understanding the impact on Columbus McKinnon Corporation and for the most part, certainly passing them on into our distribution channel partners.

As a final point, I'll remind -- reminder to you all, our strategy is to leverage our superior material handling design and engineering know-how to continue our dominance in the U.S. markets as we expand our global presence.

Our market share growth will be built upon new product designs specifically for the various market needs -- market needs, incorporating our high quality standards and to service support.

And with that, Autumn, I would like to open it up to questions.

Thank you.

At this time we are ready to begin the question and answer session.

If you would like to ask your question, please press star-one on your phone.

You will be announced prior to asking your question.

And to withdraw your question, press star-two.

Again, star then one on your phone to ask your question.

One moment, please.

Our first question comes from Sarah Thompson with Lehman Brothers.

Hi.

Just a little bit more on the steel because I want to make sure I'm understanding this correctly.

I think you guys historically have instituted price increases once a year, is that correct?

Yeah, that's our normal, Sarah.

Okay, and this year you've raised them a couple times but you also have surcharges, so I guess I'm trying to understand, I think in your comments you said you weren't getting any additional margin benefit.

I'm just trying to understand what I'm missing, the difference between the surcharges and the, what the price increases are covering.

We don't, certainly don't mean to confuse anybody with this, and it is fairly complicated.

You really have to look at it on a product by-product basis.

For our chain and forging business, which as you know, they are predominantly made of steel, they would have price increases and surcharges together.

For hoist products, it's only been price increases.

Okay.

So then maybe I just misunderstood your earlier comment.

So they are real price increases, so we should, you know, obviously we all hope steel prices come down, but those should stick going forward?

Yes.

Okay.

I don't know what's happening in steel, but I would suspect if it does not move, lets say downward over the next year or two, that these surcharges could conceivablely turn into an increased price and then they would stick as well.

Okay, and you've-- I know-- you're, you're sounds like orders have been good.

Have you gotten pretty quick acceptance from customers?

I mean it seems that you guys have had more, made more progress on this than other people we've heard from.

So, I'm just wondering if you can give us some color, any ideas of why you're having better luck getting the price increases through?

Yeah.

Let me see if I can comment.

I'll ask Ned to add to what I, my view at least.

A couple things.

I think number one, we've been very focused on it, recognizing that certain products certainly steel has a major impact relative to the cost that is in there, and I think we've been out of the blocks first.

I would say that in our, at least in our industries, most of our competition is following.

This is a worldwide problem.

This is not a Columbus McKinnon problem and it's really affected us, as well as the entire industry.

I would say that we have been in advance mostly, but I think for the most part our competitors have followed either with a price increase or surcharge or combination like we have done in these products.

I think that it's sticking because the end user demand is present and people need our products at this point in the economic recovery, and there is really little other choice because the whole industry is is up.

Ned, any other color?

Yeah, hard to quantify, but, you know, what happens, we've been fortunate with the -- with the economic recovery and there is tremendous brand name equity in all of our products following CM hoist our chain forgings and subsequently when a customer is calling up for our products, they know what they want, what works and they are willing to pay a little bit more for them.

But we are definitely out in front of the industry.

We got a jump on our competitors and we're still ahead of them.

Okay.

Great.

That's helpful.

Can you just tell me how much of-- you said part of your inventory increase is because you prebought steel.

How much of it is related to that?

I don't know that specific number, but I can give you an estimate that I think in our forging business has been some of that.

I don't want to put a number on it;

I would be guessing.

Okay.

That's fine.

And then last question, I'm sorry, I don't have this in front of me, but in terms of the repurchase on the notes, my memory is that you had a basket in terms of how much you could repurchase.

Can you just tell us how much is left?

Sure.

Sarah, there are, in the 20/10 indentures, there are really primarily, I think, four avenues to get through to the repurchase of the 2008's.

The one that we used is a $35 million carveout, so we would have at the end of the quarter almost $30 million left.

Okay.

That's exactly what I couldn't remember.

Thank you very much.

That's all I had.

Thank you, Sarah.

David Chrisman with Needham & Company.

Yes, hi.

Couple of questions.

First of all, do you have any guidance on what the tax rate will be for the rest of the year, or is it-- is the better way to look at it as what percentage of revenues you think is going to come from international for the rest of the year?

David, it's going to-- yes, I think the answer is yes to the latter part.

Yeah.

It is going to depend on the proportion of non-U.S. taxable income to the total worldwide taxable income.

Okay.

Do you have any sort of guidance on what you think based on your bookings at this point, or how you see order trends, how you think the international will play out as a percentage?

Well, we have indicated that what the percentage, 55% of the total taxable income in the first quarter was non-U.S., indicated 80% in the second quarter, so it can vary a bit quarter to quarter.

The-- I can say that aside from getting into specific guidance, can say that with regard to the non-U.S. taxable income, it's fairly, fairly level throughout the year.

Got it.

But we do see some variation from quarter to quarter in the U.S. taxable income.

Of course all of our interest costs, the 27 million, are by far the majority of them, is of course deductible in the U.S..

Right.

Right.

In terms of the SG&A, you reported slightly differently in your K than in your results here.

Can you break out the selling expense from your G&A expense, please?

Well, we can certainly do that.

You talking about for the quarter now?

For the quarter.

Thank you.

Selling expenses for the second quarter of this fiscal year, 12.270 million.

270, okay.

I can figure out what the G&A is from there.

When you take a look at the kinds of products that are selling internationally at this point, has, has it changed any from what you expected, or is it pretty much the kind of products that, say, the Europeans with their lower spec, lower quality desire products tend to want, or is there something that surprised you?

Well, the mix from our European operations are consistent since they have been selling like products for a number of years.

The export side of our international business from the United States out has primarily been the hoist side of the business, which has been consistent with years past.

It's, it's more the value-added products where we can differentiate yourses as posed to some of the chain and forgings, which are a little more generic outside the country.

Got it.

And final question, then I'l hop back in the queue, is any new products on the drawingboard or recent introductions that you think might be significant contributors going forward?

Yes.

I think there are.

There's always a steady stream of new products in our development mix.

There is a couple that I can maybe point you toward that are of keen interest.

In the rope hoist, as well as the electric chain hoist world, we have, in the process of designing a new platform of those products and that platform is based upon the European standard, called the FEM standard.

And we would be expecting to launch that at least the wire rope portion of that in next fiscal year, fiscal year '06.

Got it.

And I have high hopes for that because it would allow us to compete more ably in the world.

And that's probably going to be a lower ASP product?

Yes.

Great, thank you.

David File with Stanfield, you may ask your question.

Great.

Thank you.

Could you try and break down the 15% sales growth and I guess the 20% you're seeing on bookings between pricing and volume and of the volume, how much of that is restocking through the channel versus end user demand?

Yeah, let me see if I can take a shot at this and then look to my colleagues to add to that.

The-- in the quarter relative the sales volume, revenues, first of all we had a, an offsetting entry or minus 2% in growth because we divested ourselves of two companies, Lister and Positech in February of '04.

To offset that, we had some foreign currency translation of about 2%.

This combination of price increase and surcharge at about 4%, and the balance, or about 11% or so is a combination of volume and/or mix of different kinds of products.

And I would suspect those bookings that you asked about would be, have a similar makeup.

I don't know that, but, in particular, not having studied that, quite honestly, but I don't see any reason why it would be much different than this.

And of the 11% volume in mix, any sense of how much of that channel restocking versus pull-through demand from the end user?

Yeah, I, I would say that we are seeing restocking and have in fact seen restocking for the last six months or so, as the end user, the variety of end user markets that we sell into actually are showing life, signs of life.

Our distribution partners are recognizing that demand and not afraid to stock, contrary to what they felt for the last three years prior to this time period.

So I think that my guess would be, and it's difficult for us to measure that quite honestly.

We receive orders and the orders are getting larger, but I would say the bulk of it is for end user and, you know, maybe in the two-thirds area, three-quarter area.

Right.

It's a tough measurement because the customer service expectation levels have not gone out.

In fact they have increased.

Our largest customers, if they expect our products in four days, they still expect it, it's just a larger order, so it's very difficult to measure, but we do know that more is being put on the shelves.

Right.

Great.

Then last question, your outlook was one of cautiously optimistic.

It seems like had you a good quarter and things are going well.

Not to mince words, but what are you cautious about or is that kind of a standard hedge?

Wow, that's a very good question.

I'm actually, I'm cautious.

Are you just a cautious guy, I guess?

I'm a cautious guy.

I'll tell you that I, you know, I know that, you know, our friend, Mr. Greenspan is trying to slow the economy to a degree and raising rates.

And I think that's going to have an impact on us.

I think ultimately if oil stays up at the $55 a barrel level, I think that's going to have an impact on us.

I think we got uncertainty around our next president.

I think that certainly could affect the economy going forward.

And I think we have some hidden costs around the world --- excuse me around the United States, like healthcare, which is a huge cost and it's a huge cost for our company here, and it is, in my opinion, out of control.

So, you know, I blend that all together and I, even though I see the same thing that you see when looking at this quarter and the same thing I saw at the last quarter, and I say, I think that this is going to continue, but I'm going to be cautious here because I don't know what effect these other things are going to have on us down the road.

Great.

Thank you very much.

Great quarter.

Thank you.

Mike Harris with Robert W. Baird.

Good morning, everyone.

Hello, Mike.

Tim, I just wanted to talk about the mix issues during the quarter.

You know, you talked about product and service contract mix in certain businesses.

Can we just get more detail here?

Yeah.

To refresh my memory, what in particular are you looking to get your arms around, Mike?

You're commenting about the gross margins, year over year comparing them and acknowledging that although they did improve, my sense was you were a little bit disappointed because of the negative mix issues during the quarter, both year-over-year and sequentially.

Yeah.

We would have liked to, for example, the thing that we saw was certain product lines which you know, Mike, aren't as profitable as others, and one of those is our crane business.

Okay.

It is, even though the volume was up and we had a very nice quarter from that group, we shipped more cranes, which is wonderful, but they were at a lower margin than our, let's say standard hoist line, which you know is the, kind of the backbone of our company.

Even within the crane business, if they have a mix shift between more cranes and less service business, they see that margin swing and it can swing quite dramatically.

Sure.

I think we saw those kinds of changes happen to us in the second quarter that we, for example, didn't see in the first quarter.

Okay.

And as-- I'm assuming that this is difficult to predict from quarter-to-quarter.

Yeah, I think it's probably damn near impossible to predict, quite honestly.

Fair enough.

Okay.

And just the-- you know, you talked about increased reserves for product liability.

Can you quantify the increase and just also describe the reasons why the reserve was increased?

Yeah.

There is a couple areas.

We did increase the liability reserve and this is-- we don't have an actuarial report to point to, but, you know, as we look at the increased volume and we know how the actuaries will look at our business at the end of the calendar year, sometime in the December and January time frame, you know, we anticipate with the increase in revenue and the increase in shipments that we're seeing throughout the year, that we're going to have to build that reserve at the end of the year.

So this is in anticipation of that increase reserved.

Okay.

We'll know more as we true up the year and as our actuaries give us some advice and counsel on this, but at this point, this is really an -- in anticipation of that.

Okay.

And Bob has a number for you for the quarter.

Great.

Yeah, Mike, for the quarter, we took an additional accrual of $500,000 for product liability.

Okay.

Great.

And so this is really nothing more than, you know, you're seeing your top line increase historically, you know what type of percentages you apply for the reserve and you're just trying be conservative, and make sure you're adequately reserved for by year's end.

We're anticipating they would say and what their recommendation would be and we're trying to get ahead of that ball.

Sure.

Okay.

And just-- I know that you talked about the impact of surcharges and price increases on the top line for the quarter.

You said 4%?

Yes.

I'm going to be greedy here.

Is it possible to break that down between surcharge and the price increase?

You are getting greedy, Michael.

Yes.

We certainly can.

Price increases, probably 3%.

Okay.

Surcharges are the balance, 1%.

Okay.

Helpful.

And then just, I want to talk the order environment, order trends.

You gave some, you know, pretty clear commentary here.

I just-- I want to go back to last year and just, can you remind us of the year-over-year growth rates in orders experienced back in August of '03, as well as September and then also comment on October?

I guess I'm just trying to get a sense of how much more difficult the year over year comparison is this year for October relative to August and September, if that makes any sense.

Yeah, I know what you're trying to get to.

Let me see if I can give you some areas of things that we measure and I-- you heard me talk about, you know, 20% plus --

Yeah --

numbers, and I would say that, that for August and September, that's about what we saw company-wide.

So we were 20% over last year August and September.

Now that's about the time we started to see the increases in, you know, the end market demands start to move up, was last, late summer, early fall time period.

So far in October, I would say we're in the 8, 9, 10% over last year.

Just to give you a sense of size.

But, you know, we measure this every week, as you know, Mike and we study these and we look at them plant-by-plant, product by-product, I've given you gross numbers company-wide here, but I don't have a good feel for October last year and how that really pictured out.

I would expect it to be similar to September last year.

Okay.

And it's just that, you know, when you throw out there that October and September were up 20% plus and then, you know, October you're talking high-single digits, I just want to get perspective of , you know, how strong last October was order wise, creating such a difficult comp.

But, you know, you also commented that with September saw some benefit from, of increased demand with customers trying to, you know, get ahead of the price increase as well.

I'm sure that played a factor.

We had a huge, huge booking week the week before the price increase took effect on October 4th, so that would have been in September business.

So this booking, this September booking number of 20 some odd percent that I mentioned to you does increed that -- include that prebuying that we see.

Okay.

And as I said earlier, that is a wonderful and welcome sign because we haven't seen that many, many years.

Sure.

Okay.

And just to talkabout steel issues, you know it appears that you continue to handle the inflation aspect of a situation relatively swell.

Looks like you've built in safety stock for raw materials.

Just wanted-- high level here, just wanted to discuss the availability issue a little bit more.

Has the availability of steel materials for your business gotten any worse relative to last quarter, or would you kind of comment that it's largely remained the same?

I would-- my general comment would be it's the same and I know that our purchasing folks and materials folks in the plant, they deal with this every day and they are wrestling with it constantly, as you may know.

It's not an easy thing, but I don't think it's gotten worse and I don't think it's gotten better, so, you know, I guess my general comment, is it's about the same.

Okay, and just-- you had some notable working capital usage during the quarter.

You know, you quantified, you actually qualified that comment on what caused the increase.

How do you see your working capital usage shaking out in the next quarter or two?

I think it's probably, you know, given the steel dilemma we're looking at, I think given the increase in business, I think given all of the improvement activities that we have embarked on, it's-- for the next quarter or two, it's probably not going to move all that much, but I would suspect over in, a given trend over multiple years, I would expect it to improve.

Okay.

The working capital as a percent of sales in my opinion should be on a trend line, albeit ever so slightly you know downward.

Okay, and just the last question here, the-- the 200,000 million received during the quarter, judging by the language in the press release this is something that we should expect to see reoccur going forward?

Yeah, that, that $200,000 note, principal payment on the note?

Yes.

Discontinued off line, it's a quarterly number.

Okay.

And unless something happens that we don't see today, I guess our expectations would be that we would see that quarterly.

Okay.

Great.

Thank you.

Thank you, Mike.

Julia Cruz with BNY Capital Markets.

Hi, there, how are you?

Good.

How are you?

Great.

Just a couple of questions.

I just want to get a little bit more detail on the margin change sequentially in the product segment, the gross profit margin that was down about 1.4%, $1 1/2 million if I do the analysis.

Out of the 1 1/2 million, you said about half a million was for the increase in the liability reserve.

And can I then safely assume that the other million dollar variance came from this change in mix?

Particularly from the crane business?

Yes.

It has, okay, would it be safe to say then that your successfully passing through all of your steel pricing increases?

I think that for the most part we are passing them on.

I think there may be some timing differences.

I think that there is some contracts in place that have to run out before we can get all of the surcharges in place, but I believe generally speaking overall, company-wide, that's a fair statement to make.

But individually contract by contract, customer by customer it, may not be.

Okay.

And for the for the liability reserve increases, would you expect to continue throughout the year, meaning will there be further reserve adjustments needed in the second half of the year?

Yeah, I-- in the second half, you mean our third quarter?

Yeah, in the third and fourth quarter.

Third and fourth quarter, I would expect us-- if we continue to have the same volume activity and see the same kinds of liability, product liability things coming at us, that I would expect us to have that charge as well.

That charge in the second-- in the third and the fourth quarter?

Of a similar magnitude?

Yes.

That would be my expectation.

I don't see any-- look around thet table to see if anybody else has a different feel tn that.

I think that would probably be a fair thing to say.

Okay.

Great, and I just want to get a little bit more detail on the marketing of some of these solutions businesses that had you spoken about in the past.

Can you just give us a sense of where that stands, whether any of the businesses are being activity marketed and what you see as the horizon for potential sale?

Sure. we had seven businesses for sale.

Let me see if we can recap this for you.

Alway good to revisit it.

Two have been sold.

So there's five remaining.

There are is one business that we are in the process of receiving a firm bid on.

Okay, and would that be in the solutions segment?

No, that's not.

Okay.

So that's four remaining.

Two have yet to actually start marketing.

We're waiting for their businesses to have a little bit more recovery at this point, so that's two remaining.

One has been pulled.

That was our shredder division.

We marketed it last year and quite honestly did not get a fair offer for that business, so we decided to pull it off the market.

That is one remaining then and that is the one that I mentioned, American Lists and we did have a buyer for that.

We had a firm offer and he decided to go a different route and actually did an acquisition apparently in Europe, in which he took his eye off of this American List ball, so to speak, and that's where we actually went in and restructured that business and are at this point in time operating it profitably and in a positive manner.

Don't have any buyer for that business today.

Is that something that you're thinking of keeping now?

I think that if we got a-- if we did have someone that was someone who was interested in purchasing it, we would certainly entertain that offer, but at this point in time, it's still-- it's not on the market per se because we thought we exhausted all of those potential avenues over the last year or so, but at this point in time I think it's fair to say we're going operate it going forward and if we do have an opportunity to sell it, we will.

Okay, and could you talk a little bit more about the business that you're in the process of getting a bid on.

Yes.

That's our Duff-Norton business.

Okay.

And that is in our product segment today.

And how much in revenues did that do in the last year, in the last 12 months?

30 million or so.

Okay.

And can you give us an EBITDA?

I don't-- we don't give out individual EBITDA numbers by division.

Okay, but so what do you think the time for closing that transaction is?

That's a good question on your part, and one that I can't answer because I haven't seen the final bid yet, let's alone comment on the closing.

Okay.

All right.

Okay.

All right.

Great.

Thank you so much.

Thank you.

Wes Snyder with Raymond James.

All of my questions have been answered.

Thank you.

Thank you, Wes.

Don Waldhausen with Aragon.

Yes, good morning.

Hello, John.

On the inventory situation, if we look at just with and finish goods, is that up as well, or is it just due to the increase in raw materials?

I think most of it is in raw materials.

I, our finished goods should be bear bones minimum number, quite honestly.

The chain business might be newspaper whip because of the way they process chain.

So I think that business might be up in whip and the hoist businesses would not be.

So it really depends on the business, John.

But I think if you say that three quarters of the increases in the raw materials side, that's probably bear and the balances in whip in certain businesses.

Right.

Could you clarify what you mean by the way they process the steel and the chain business?

Because obviously I'm trying to understand, you know, what progress we're making in terms of bringing our inventory turns to better levels?

Sure.

Right now we form and weld chain from rod and that process, you know, take-- s a pretty quick process and then we have to go through a heat treating operation and typically a plating operation and nose are bottlenecked.

So at this point in time we're running seven days a week, 24 hours a day.

We got a little bit of queue of inventory before that.

We have twos coming online, a heat treating operation and plating operation in our Mexican plant, which should free up that queue to get a better flow then as a result of that.

And I would expect that whip then to come down once we get those two additional pieces of equipment online.

And in the hoist business, I don't see a buildup in inventory, any of our locations.

There is one busy should talk about and that's our crane business and that's because some of the crane contracts are, we have received, and that's more project-oriented sales as opposed to a flow.

So you prebuy, get the steel and you bring the hoist in, make the end truck you assemble them and then you deliver them.

So that inventory can fluctuate dramatically month to month.

But today because of the level of business they have, and the difficulty with which to predict it, to get a good flow, that one is going to be a little more lumpy.

And our hoist business, as I said, I think that's flowing pretty well and that's where our -- where our really good turns are, is probably in the 8 or 9 category.

Good, good.

And the bolts necks in the chain business on the heat treating and the plating, is that because you closed down some operations in anticipation of the Mexican, or, you know, because I mean that's kind of one of your less exciting businesses, you know, surprised to see that you--

We actually are moving equipment fromof the close down plants into Mexico.

So you have basically a temporary hiatus?

Availability of equipment, yeah.

And not only that, that-- this would not be a problem.

Our intent was not to set up this equipment in mix company, but because of the increase in business,we find ourselves having to set it up now.

Does, does that mean that the pricing in chain is getting good enough so that this is worthwhile doing that?

It's getting better.

Oh, good, good.

Glad to hear that.

The other question I had, sort of an overall one.

Do we have a target for what debt paydown from cash flow operations you were hoping to do this year?

I think that our original estimate, John, at the beginning of the year was in that 10-15 range.

Okay and it still seems like a viable number?

I think it is.

Okay.

Good.

Thanks a lot.

Thank you, John.

Ryan Kiss with Kettle Hill Partners.

Yes, hi.

Good morning, gentlemen.

Good morning, Brian.

Question for you, as you-- the amount of preprice increase selling bonus, if you will that, got September versus October, how much is pulled forward?

I don't think there is any of that.

It was just booking activity then?

That was booking activity.

Okay.

Fair enough.

And then with regard to the solutions business, in light of your not being able to sell certain assets, should I expect EBITDA margins in that business to sort of muddle along in the low to single digits or can I expect a EBITDA margin increase sometime in the future.

What are your expects there?

Our expectation is we encounter, like this American Lifts one, is that we, once we encounter the fact that we're not going to be able to sell them, we agressively pursue restructuring and I would expect the margins to increase.

Do you have any goal for, on the timing for that?

I don't because it really depends on the businesses where they are in the sales cycle, quite honestly.

Okay.

Thanks very much.

That's all I have.

Thank you, Brian.

R. L. Jane with Egg Harbor Management.

Hi.

I just wanted to get an update on the outstanding revolver and the term loan and if you can just, you know, how much of the notes are outstanding.

Sure.

I can do the senior secured note.

That's 115 millions, bonds to do in 2010.

Bob will take the rest.

As we mentioned, revolver is $8.4 million outstanding at the end of the quarter.

Term A 6.3 million.

We have other senior debt, which includes mostly our foreign debt, 5.9 million.

Our 2008 indentures, 158.6 million and our 2010 debt, 115 million.

Okay .

Did have you another question?

No.

I'm done.

Thank you.

Okay.

Thank you.

Once again, to ask your question, please press star-one on your phone.

One moment, please.

At this time, there are no further questions.

Thank you, Autumn.

Just in summary this, is a very solid quarter for Columbus McKinnon.

We've seen double-digit growth in most of our distribution channels and this combined with the significant cost reductions we've accomplished in the last seven years has generated improved profit.

Also the restructuringn we have done in the solutions segment has generated value and a decent turn around in this segment.

Our operating leverage is significant, as we generate more profit on even the smallest of sales increases.

We maintain the strongest market position we have in our domestic markets and have penetrated new markets around the world, specifically some of the successes we've had in Europe and Latin America.

After slower bookings months in the summer, we've have seen bookings in Q2 come roaring back and experienced some of the best booking months we've seen in years.

We continue to have good indications from all of our markets, but there certianly remains some uncertainty with the threat of rising interest rates, continued with scraps deal increases, terrorism alerts, seemingly uncontrolled healthcare cost, and election ambiguity.

We believe we will continue to perform well, but as we did in previous quarters, warn these uncertainties could have an impact on the improvements we have seen.

We continue to drive our lean concepts across our businesses.

This Process has certainly proven we continuously improve our operations around the world.

We'll also continue to invest prudently in new markets and products to protect our market share in the U.S. and grow sales internationally to keep Columbus McKinnon positioned as the leader in the material handling industry.

Certainly we want to thank all of our associates around the world for their efforts to make CM that leader.

As always, we certainly appreciate your time today.

Have a good day.

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