Columbus McKinnon Corp (CMCO) 0 Q0 法說會逐字稿

Good morning, and welcome to the Columbus McKinnon Fiscal 2005 Third Quarter Investor Conference Call. (Caller Instructions.) Now, I'll turn the meeting over to Mr. Timothy Tevens, President and CEO.

Sir, you may begin.

Thank you, Elaine.

And good morning to all.

Welcome to the Columbus McKinnon Conference Call.

Earlier this morning, we did issue a press release and our third quarter results.

Hopefully, you have it with you and can refer to it.

With me today here in Amherst, New York is Bob Friedl, our Chief Financial Officer, Karen Howard, our Vice President and Controller, Ned Librock, our Vice President of Sales, and Joe Owen, our VP of Strategic Integration.

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

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

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

Overall, our sales for the third quarter exceeded the same quarter last year by over 14 percent and about 2.5 percent greater than the second quarter of this fiscal year.

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

The sales for our products segment in the third quarter were up over 13 percent compared to the same quarter last year, and relatively flat compared with the second quarter of this year.

The increase, as compared to last year, is primarily driven from increased demand from end users.

They affect--the bulk of it is from that sector.

And these revenues were offset somewhat by some divestitures we did last year.

Specifically, Lister and Positech.

And also, we had fewer shipping days in this quarter than last year.

The revenue increase was also driven by some currency translation, steel surcharges, and price increases that we put in place in the third quarter.

International sales were up 26 percent, led by Europe and Latin America and that continues to do well for us given the fact that it is our strategic focus as well as the weakening of the U.S. dollar.

The products segment gross profit was up about 21 percent over the same quarter last year, and our operating income before amortization and restructuring charges was up over 15 percent.

The operating leverage continues to show as our volume increases, which is certainly wonderful news for all of us.

Gross profit margin was up to 25.2 percent, or 160 basis points over the same time period last year.

You should know that we have experienced some additional operating costs as we go through this fiscal year.

Specifically, Q3 over Q2 of this fiscal year, we have seen some additional product liability costs, health care.

I did mention that we had fewer shipping days compared to last year, but in fact, we had five fewer shipping days in Q3 than in Q2 and they were offset by some other costs.

But--but basically, we are seeing some increases in these areas.

Bookings for the products segment continued to be robust in the quarter and we're up over 10 percent over the same quarter last year.

Backlog ended at about $46 million, down slightly from the end of the second quarter, but up significantly from last year.

And please keep in mind that the cycle time on most of the products in--in this products segment is literally days or weeks.

Therefore, this backlog number is about four to five weeks worth of shipments or so.

Solutions segment sales were up 21 percent over the same quarter last year and up about 21 percent from the consecutive quarter as well.

Gross profits increased 40 percent from last year and up about 15 percent from the second quarter of '05.

The sales for the quarter ended at about $16.6 million and backlog is at $19.6 million, down slightly from last quarter, but certainly up significantly from a very depressed last year.

And with that very brief interview, I'd like to turn it over to Bob Friedl, who will lead us through the entire financials.

Thank you, Tim.

Good morning, everyone.

I am pleased to take a few minutes to review some of the financial highlights for Columbus McKinnon's third quarter, which, of course, ended on January 2 of this year 2005.

Our current fiscal year, fiscal 2005, ends on March 31 of this year.

Consolidated sales, as Tim mentioned, were up by 14 percent.

And if we take a look at the impact of removing the sales from the divested businesses, we see that removing Positech--removing the Lister sales from the products segment increased the sales quarter-over-quarter by 14--to 14.4 percent.

And likewise, removing Positech sales from the solutions segment, the increase jumps to 34.5 percent, and that's driven by a 47 percent increase in Univeyor revenues and a 15 percent in American Lifts sales.

Typically, as Tim pointed out, the Company's sales are strongest in the fourth quarter and weakest in the third quarter.

And we see either the first or second quarter coming in second and third.

As demand continued to increase for the Company's products over the past few quarters this pattern has changed.

On a sequential basis, the Company has recorded increasing sales in each quarter since the first quarter of last year, fiscal 2004.

Revenues of $125.9 million in this quarter were the highest quarterly revenues recorded in any quarter since the first quarter of fiscal '02 when sales were $129.1 million.

And as Tim pointed out, there are fewer--there were two fewer shipping days in this recent quarter and the remainder of the fiscal year, this fourth quarter, we'll see three fewer shipping days than in the comparable fourth quarter last year.

We will see 63 shipping days this fourth quarter versus 66 last year.

On higher sales, consolidated gross profit dollars were up 22 percent quarter-over-quarter, driven by a 21 percent increase in gross profit in the products segment and a 40 percent increase in the solutions segment.

The gross profit margin improvement in the solutions segment from 13 to 15 percent was, like last quarter, generated from improved profitability in our Univeyor and American Lifts businesses.

SG&A expenses were 16.1 percent of sales compared to 16.8 percent in the third quarter of last year.

SG&A expenses as a percentage of sales were flat from the second quarter on a sequential basis, but down from the first quarter of this year and the fourth quarter of last year when SG&A was 16.6 percent and 16.4 percent, respectively.

Included in SG&A are outside costs incurred in the implementation of Sarbanes-Oxley.

These costs have surmounted to about $400,000 in the third quarter and we're looking at a little over $800,000 year-to-date.

Interest and debt expense was $6.8 million this quarter, compared to $7.1 million last quarter and $6.5 million in the third quarter of last year.

Last year's interest and debt expense was reduced by the favorable impact of an interest rate swap.

Other income was $1.5 million in the third quarter of this year, compared to the third quarter of last year due to the favorable impact of an interest rate hedge and higher gains on the Columbus McKinnon Insurance Company portfolio last year.

Beginning with the first quarter of this year, no U.S. 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 31, 2003 U.S. federal income tax return with about $108 million NOL carry forward remaining for future use.

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

The overall worldwide effective tax rate of 35 percent in this quarter is up from 29.2 percent in the second quarter and 17.8 percent in the first quarter of this fiscal year due to increasingly higher proportions of non-U.S. taxable income.

They were 90 percent this--this quarter, the second quarter 80 percent, and 55 percent in the first quarter.

The effective tax rate on foreign taxable income is 28 percent and the Company records state taxes in the U.S. ranging from 4 to 6 percent.

It also incurs franchise and other taxes in states where a net loss is recorded driving up the effective U.S. rate--or the overall rate.

Depreciation for the quarter was $2.5 million or $2.471 million compared to last year's depreciation of $2.524 million.

And Capex for the third quarter of over $1.2 million, up from $1.1 million in the second quarter, and $838,000 in the first quarter.

We continue to track to afford a $6 million range for this fiscal year.

Net cash provided by operating activities was $11.2 million in the quarter.

Half of this cash was from earnings and the other half from working capital reductions, principally from accounts receivable and accounts payable.

In the current quarter, inventories increased by $4.7 million if we exclude the impact of currency translation changes.

The increase in inventory in the third quarter is due primarily to increased order activity and--and additional increases from currency translations as the U.S. dollar continued to weaken against the Euro.

The increase in accrued and non-current liabilities in the quarter was primarily due to the buildup of accrued interest since the second quarter balance sheet included no accrual of interest on the 2008 notes.

Typically, the interest payment is made after the end of the quarter.

However, the payment fell inside the--inside the second quarter last quarter since the quarter ended on the third of October.

At quarter's end, net debt was $275 million and funded debt was $283 million.

During the quarter, funded debt decreased by $10.8 million.

The Company reduced bank debt by $5.5 million, repurchased $4 million of the 2008 notes at a discount with excess cash, and decreased debt held by its foreign subsidiaries by $1.3 million.

The Company has a senior credit agreement with a five-bank group providing a $50 million revolver commitment.

Availability on the revolver at the end of the quarter was about $35 million with $3.4 million outstanding.

The Company is comfortably in full compliance with all financial covenants related to this agreement and will continue to focus on debt and interest--debt reduction and interest expense reduction in the future.

And debt to total capitalization at the quarter end was 78.6 percent, down from 82.5 percent at the beginning of the year.

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

And with that, I'll turn it over--I thank you and turn it over to Ned.

Thanks--thanks, Bob and good morning to everybody.

I'd like to give a quick sales and marketing update.

The third quarter was healthy for all Columbus McKinnon brand names and distribution channels in North America.

The same was also true for sales outside the continent.

General distribution sales in North America were up 11 percent, representing 34 percent of total revenues.

Our specialty distribution sales in North America were up 20 percent, representing 9 percent of total revenues.

International sales were up 26 percent, representing 41 percent of our total revenues.

Consolidated parts sales supporting our extensive service station network were up 8 percent.

On October 1, 2004, price increases were implemented for hoists and hoist part sales in the United States and Canada.

On average, all hoist products increased 4 percent and 5 percent for hoist parts.

Business remained brisk prior to and after the price increase.

Surcharges remained in effect for most chain and forged products.

Overall, we lowered some surcharges and increased others based on the cost of steel.

Columbus McKinnon continues to lead the industry in this arena compared to our competition and orders remain robust.

Market shares for the major categories of chain, hoists, and forgings in North America remain, on average, very stable.

The outlook is positive as we enter the new year.

No one market product or geography is dominating revenue growth.

Distribution in North America continues to be optimistic for sales growth in 2005.

Our initiative for growth outside of North America remains on target as we continue to implement our multi-branding strategy in key international markets such as Europe, Brazil, and Asia.

Overall, we are encouraged by the results of the third quarter and look forward to a solid fourth quarter and fiscal year-end.

Thank you, and I'll turn it back to you, Tim.

Thank you, Ned.

Just a couple operational comments I'd like to make.

Our focus, as you well know, is to continue to generate free cash flow and to repay debt as quickly as possible.

And along these lines, just a couple of things worth noting.

Operating leverage continues to be evident.

For every incremental dollar in sales so far this year, we've generated about 34 cents in gross profit.

Additionally, on January 14, we announced to the market the sale of our Chicago property, Abell-Howe, which is a property we vacated a couple of years ago or so, generating about $3.7 million in proceeds.

This will have a favorable impact on the net income in the fourth quarter of about $2.7 million.

We continue to market real estate of the properties that we have closed and will report the significant transactions as they occur.

As you also know, we continually analyze our facilities for opportunities to rationalize our production.

We do have some additional opportunities that we're studying right now and we'll keep you apprised of our progress.

About one and a half years ago or so, we engaged an advisor to assist us in developing strategic alternatives for seven less synergistic businesses.

About one year ago, you'll--you also noted when Mr. Friedl was presently, that we were successful in selling two business, Positech and Lister.

We did, in fact, remove one business from the sale because of woefully inadequate bids that we were receiving.

We were also unable to sell another division and have actually--actively restructured it.

We have not yet begun to market two businesses just yet, waiting for them to go through a recovery, and would expect to do that sometime I would think in fiscal '06.

One remaining business--predominantly because of the economics of a potential sale that do not favor our shareholders, we decided not to sell that business.

And that is the Duff-Norton facility that many of you have heard us talk about in the past.

And our plans for Duff-Norton will be to relocate them from their currently underutilized facility, significantly reducing their operating costs and also putting on the market--in fact, this property is, in fact, on the market to sell it in the Greater Charlotte area.

This is a very profitable business and we intend to improve it going forward.

As we reported last quarter, we have instituted a plan to track steel surcharges.

And for the most part, as Ned mentioned, we are passing them on to the channel and asking the channel partners to pass them on to the end users.

A quick reminder.

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 products designed specifically for various market needs, incorporating our high quality standards and service support.

And at this point, Elaine, I think we're all ready for questions.

Thank you. (Caller Instructions.) One moment, please, for the first question.

Our first question comes from Tom Quinta from Credit Suisse First Boston.

You may ask your question.

Good morning.

Good morning, Tom.

When you look at the numbers for the--for the nine months so far, you know, you've been tracking each quarter ahead of last year.

But in the segment info, it looks like, you know, solutions has been increasing sequentially and products operating income has been declining, you know, each quarter so far this year.

Can you just talk about what's going on in there?

I'm not sure if there's other charges in there, too.

But it looks like you started out close to 11 and went to 9.7 and then this last quarter posted 9.1 on--on flat revenues.

Yes, there's a number of things going on in there.

I think that it's somewhat difficult, first of all, to compare sequentially the quarters just because, as you know, the number of shipping days available to us quarter-by-quarter has--it does vary and, quite honestly, has a significant impact on the products segment in particular.

But that would be the first thing I'd--I'd like to point out to you.

The other--the other thing is we are seeing increased costs, especially as it relates to insurance and Sarbanes-Oxley costs.

I think in our press release we actually talk about we're going to be spending somewhere around $1 million or over to successfully implement the 404 disclosure section of Sarbanes-Oxley, which is, obviously, a negative and is directly hitting that--that area.

And also, I would say that the insurance costs, the product liability reserves that we are booking as well, have increased a bit in the products segment, also impacting it.

What's--what's driving the higher insurance costs?

Bob, you want to take that?

Yes.

If we're--we're looking at insurance, we're private--we are self-insured predominantly on the product liability.

And we've seen, as we indicated in our press release, we've seen an increase in our product liability costs, particularly in the asbestos area, mostly caused by a change in actuarial parameters.

We, for asbestos purposes - and our actuarial report really utilizes two--two different methods - utilized the survivor ratio method and the frequency and severity method.

And at this point, take really kind of an averaging of the result of the two methods.

The survivor ratio method multiple that's utilized there increased significantly from last year to this year.

The--that is not specific to Columbus McKinnon.

That is an increase that actuaries are seeing in that multiple given today's current environment.

So while we did have some increase in costs, by in large, the greatest driver in pushing up our product liability costs with regard to the asbestos--asbestos cases is that increase in the--in the ratio.

What about the--what about the current costs, settlement costs and all that?

What--what's that running?

What did that run in the third quarter and year-to-date?

Well, we really reflect--we really reflect the--an accrual.

The actual costs certainly go through our insurance company, but the premium that our insurance company charges us or--is really the--based on our actuarial numbers.

The actual cost is--is unchanged from last year to this year, from '03 to '04.

It's about $200,000 per year.

As to--that's your premium or that's your actual cost?

Actual--actual cost.

You asked cost, right?

Actual cash?

Right.

Yes.

That is--that is the actual cash cost.

It's this multiplier that Bob spoke about that's--.

Okay.

And the--and the $200,000, that's your cost to the Company or the--or the cost--the actual cost that the insurance company is paying?

Is that your--your net cost?

That's the cost the insurance would pay.

Okay.

Legal fees as well as for settlement.

Okay.

So it's still very minor.

Okay.

And one other thing I'd like to add just to round it out is because of the increased volume, Tom, that we're seeing, we're paying higher commissions on those sales, and that--that's obviously having an impact as well.

Okay.

And if you--it's hard to deal with the numbers that you--you've put out here.

But if you look at the products division and you, you know, take out the costs for--for these accruals.

You take out the SOX cost and some of these other ones--does--do those--those margin numbers look flatter than the decline that we see just with the segment analysis?

Yes, they actually pick up a bit, as a matter of fact, if you do those adjustments.

Okay.

And then, on the--on the pricing it sounds like, in Ned's commentary, you continue to raise prices to reflect steel.

Are your competitors following you on those price increases?

We're way out in front of the industry.

Some have followed, oh, I would say, roughly to maybe the 60 percent level that we have.

Those are at the 25 or 30 percent level.

It's--it's one of these confusing issues on why--why our competitors aren't doing that, but needless to say, our bookings remain strong and we continue to lead the industry.

Our objective is to remain at least margin neutral due to these varying cost increases.

Right.

Which we think is a very prudent thing to do.

Sure, okay.

And on the--on the cash side, you make reference to a potential sales leaseback of your corporate headquarters.

What's the timing on that and what's the impact to cash and the impact to operating expenses going forward?

We haven't closed just yet, Tom.

We would expect to put something out in the next, let's say, month or so.

And, you know, we'll give you those numbers going forward.

But it would be a positive, obviously, to cash and our operating expenses actually would go down.

So it's a bit of a win-win for Columbus McKinnon.

Your operating expenses would go down?

Yes.

Yes, because we're actually leasing back only a portion of the building.

Oh.

We own the whole building, two floors, and we'd only be leasing back the first floor.

But we're going to be leasing approximately 42 percent of the current space.

So--and frankly, we've had--for the last say 18 months we've had no tenant upstairs.

So, you know, we're going to see a reduction in our administrative type costs related to the building.

So it's a win-win here.

Yes, both cash and operating expense.

Okay.

And then, in your fourth quarter, as far as coupons.

So there were no coupon payments in Q3.

You'll have the payment on the 10s.

Do you pick up the April 1 coupon payment in Q4 or does that slip into Q1 next year?

That would be '06.

That would be '06.

So, you just have the one payment?

On the senior notes.

Right, okay.

Okay, thank you.

Thank you, Tom.

Your next question comes from Sarah Thompson from Lehman Brothers.

You may ask your question.

Hi.

A couple of questions, I guess.

On the first one, I know you said your competitors aren't pushing through the ceil--price increases as much as you are, but you also said that you were pushing them through to the channel partners.

Do you have a good feel as to whether the end customer is actually paying the full price increase?

It's my--all indications are from our distribution channels that this is being successfully passed on to our--to the ultimate users of our products, Sarah.

Okay.

Okay, terrific.

If it wasn't, we'd--we'd hear a lot about it.

Well, that's what I was wondering.

I just--I was trying to understand again just more why your competitors weren't as aggressive as you were.

Let me know if you figure it out.

Okay.

Second question is, and maybe I misunderstood the number.

I thought you had said that the variable contribution margin from the higher sales was like 34 percent on the products business.

Did I hear that right?

Yes.

For every additional sales dollar, so far year-to-date, we have seen at the gross margin line about 34 cents.

Right.

I guess I'm just trying to figure out--the numbers I'm coming up with are a lot higher than that if I back out the steel.

Are you guys actually making some money on the--on the steel issue or is it just a straight pass-through?

No.

It would be, for the most part, it's a pass-through.

We do have some timing differences, Sarah, on individual contracts either coming due before or after.

But, you know, generally speaking, that's not the case.

Okay.

Maybe I'll catch up with you offline, then, because I just--I'm coming up with a higher number.

I did it for a consolidated.

I don't--I don't know--.

--Oh, that's--that's probably the difference.

Maybe in the products business it might look a lot different.

Okay.

Okay.

Yes.

And then, on your Capex.

Obviously, you guys have--have been running at pretty low levels.

If we continue to see, you know, top line growth like we've been seeing, I guess, at what point do you need to spend more money?

Well, I think that for the foreseeable future, you know, it's going to be a reasonable number.

I think that we can maintain it for another year or so underneath depreciation expense, Sarah.

We will be using most of that money to invest in new products and in new markets.

Specifically, as we enter the Far East in a bigger way we'll probably be doing much more there.

And, as you know, we have a new product development program that uses up some of that capital.

But, quite honestly, at this point in time our facilities do not need a significant amount of capital investments to continue to operate at these levels.

So to answer your question, the long--longwinded way to say probably another year or so.

Okay, great.

And then, just a last question.

On the--on the bonds, obviously, you've been rebuy--repurchasing some of them in the open market.

Do you have any kind of bigger plans to refinance those?

I would say not at this time.

It's something that's always on our radar screen is the entire capital structure and trying to determine ways to better leverage that and, obviously, reduce our interest expense going forward.

But at this time, we really have nothing to report.

Okay, great.

That's all I have.

Thank you.

Thank you, Sarah.

Mr. Harris, your line is open.

Good morning, everyone.

Good morning, Mike.

Good morning.

Tim, you commented that--well, actually it kind of was made in the press release that you see the pace of sales growth moderating going forward from fiscal Q3 levels.

I mean, here in the commentary on the call it seems like demand is pretty strong out there.

It sounds like it's sustainable.

Is this largely a function of going up against more difficult prior year comparisons going forward?

Yes, it's a more difficult comp, clearly.

You know, we start--we started to see the rebound, as you well know, late last year.

And every quarter now, rolling forward, is going to be a more difficult comparable.

That's correct.

Okay.

And I believe you said orders in the quarter were up 10 percent over the prior year.

I just was wondering, thus far in January, how are orders tracking over the prior year?

They're about the same level.

Okay.

They're in that same area, you know, low double-digit.

So, you know, probably if you used 10 percent that would be reasonable.

So, in other words, they're maintaining.

Okay.

Okay, fair enough.

Just going on the tax side--and I always cringe to bring up tax related questions on a conference call.

But I'm going to--I'm going to go for it anyway.

Your comment that predominantly all interest expense is U.S.-based.

And obviously, that's not a change from previous quarters.

I guess my question is did profitability for your U.S. operations decline notably in fiscal Q3 relative to say the last two quarters?

I think that it--it probably has just because of the number of shipping days available to us in Q3.

Okay.

If you'd probably do it on a per day basis that would not be true.

Okay.

That's an--I'm doing that off the top of my head, Mike, without a number in front of me.

But I think that generally speaking that our--actually, our margins did quite well in the third quarter, which is our--indeed, our weakest quarter because of the holidays, which is generally impacted.

In addition to that, we took some--the Sarbanes-Oxley charges.

This certainly hurt our EBIT margins.

And certainly, the product liability numbers that we've quoted in here have affected that third quarter as well.

If you remove those two, I think margins look wonderful.

Okay.

So when--when you look at your core U.S. operations and the profitability of the margins of those operations and kind of ignoring the incremental SOX 404 and the product liability accruals, you're--you're happy with the profitability level at this stage of the cycle?

We're very pleased, yes.

Yes.

Okay.

Just going down to the segment level, and I know that Bob kind of gave some detail regarding this.

But, Bob, can you quantify both Lister and Positech the actual prior year's sales contribution for me for each one of those?

Sure.

In the quarter, the Lister sales in the products segment was $945,000.

Okay.

That's Q3 last year, of course.

And also, in the same quarter, Q3 fiscal '04, Positech sales in the solutions segment was $1.381 million.

Okay.

And then, you gave foreign currency benefit to the top line on a consolidated basis.

Can I just get that on a segment basis, if possible?

On a segment basis in Q3, products segment, $2.027 million.

And in the solutions segment, $1.046 million.

Perfect.

Thank you.

And then, just looking on a consolidated basis, it appears that of your 14 percent sales growth, it looks like 6--approximately 6 percent was due to price increases and surcharges to deal with the higher steel prices.

Can you give the breakdown between the two?

So, of that 6 percent, how much was surcharge and how much was price increase?

Yes.

Most of it, three-quarters or so of it, was the price increase.

The balance, of course, steel.

Okay.

Okay, let's see what I--just a couple more questions here.

I just want to get, you know, an update on the two steel issues, that being the inflation of steel prices and the availability of steel material.

Tim, can you just give us an update on, I guess, how each of these issues have--has changed or evolved for Columbus McKinnon over the past three months?

Specifically, is availability of steel getting better?

Are you seeing inflation of steel prices settling down a little bit here?

I'm going to have Joe Owen answer that one.

Okay, Mike?

Mike, on the availability, I would say that generally the--the industry has been increasing capacity and we're--we're seeing less shortages than we did see, say, three to six months ago.

However, it's--it's not, you know, where--where we would like it yet.

So there's probably still a little bit of the industry capacity catching up.

As that has happened, steel scrap prices, which is--which is a big indicator of the overall market, have lessened somewhat.

The scrap prices--which is a key component going into steel.

So right now what's going to happen--I mean, what we expect to see in the future, I would say that we generally expect availability to improve.

While it has not been a huge problem for us here in the last say quarter or so, we're generally able to get what we need and we don't think that that's going to become any more difficult than it is now.

It should ease a little bit.

On the pricing side, things have slowed.

As we reported in the press release, we really saw a much bigger jump earlier in the year and things sequentially have slowed down--the increase has.

Now, what's going to happen in the next quarter, we might see a similar, you know, either a slight increase or a flattening.

And we don't really quite know what's that's going to be yet.

So we're monitoring it closely as we put together our budgets for next year.

Let me just add to that Joe.

In fact, Mike, what we did last quarter is we actually reduced some of our steel surcharges to our channel partners a grade.

So we have seen some improvement albeit not earthshaking.

Sure.

No, that's perfect.

That was exactly what I was looking for.

That's all I have right now.

Thank you.

Thank you, Mike.

Our next question comes from David Kurzman from Needham and Company.

You may ask your question.

Good morning.

It's Mark Chimsky with David Kurzman.

Oh.

Good morning, Mark and David.

Guys, just a quick question on health care costs, $1.3 million year-to-date.

I'm just wondering--that's a big number over last year.

I'm wondering where you're seeing--are you going to see additional increases there?

And, you know, what are you budgeting for really?

Well, I'm going to turn that around.

What do you think?

I don't see any--I don't see any end in sight.

You know, we're seeing 10 percent growth this year, quite honestly.

And I don't see any changes in that industry to mitigate that.

Now, things that we're doing here in the Company, which is much more specific, of course, than the entire healthcare industry, is we have--we have changed our plans.

We've moved to more of a consumer-driven plan, and have attempted to put in place wellness programs to have our folks participate and, obviously, take care of themselves so that we don't have healthcare costs, which is probably the best way to get around it.

We're making those kinds of investments.

We're encouraging our people to shop when they can, and we're asking them to look around for costs.

And they'll participate in that and they're doing that.

So we're trying to mitigate it on our end probably like most industries that you speak to.

But--but I've got to be honest with you.

I'm a little afraid of this entire industry.

I don't know where the thing is headed and it--it looks like it's double-digit growth for the last three or four years and it looks to be the next three or four years.

Well, if it's any consolation, I think ours are going up, too.

The European hoists that you were talking about--the new product, wondering when--when that launch is--when you see that launch?

The European one you are talking about is the FEM-rated wire rope hoists that we're in the process of prototyping and testing right now.

And I'll have Ned answer that one.

Yes, hi.

What we're targeting right now is a September/October launch through January, depending on the platform or the capacity of the hoists that we're going to be introducing.

So we're targeting right now the end of September.

Okay, great.

And one housekeeping question on the income statement, the SG&A.

Can you break out selling expense for me?

It's usually two-thirds, one-third.

I'll look to our financial folks to--to do that.

Hi.

This is David.

I actually have one quick question here.

Bob, you mentioned before that you still have a fair amount of capacity on your revolver.

And I noticed that you have about $84 million--just under $84 million of receivables and another $81 million of inventory.

Yet it doesn't seem like the revolver is being used as much to fund that part of your working capital.

Is there some covenant that I can't seem to remember from what I read - the 8.5 and the 10 percent bonds - that prevents you from using the incoming cash to go out in the open market, buy the bonds, and then use the revolver to fund the incoming receivables and inventory needs?

We do utilize, David, the--we do utilize our revolver to fund our daily task needs.

And--and, of course, that would include our working capital needs.

To the extent that we have excess cash, we can accumulate that cash and go to the market to repurchase let's say some of our 2008s, which we have done the last two quarters now.

Now, there are certain requirements in the 2010 indentures regarding how that needs to be done, including the need for a discount in purchasing those 2008s that we utilize as the largest carve-out in that indenture to get through to the 2008s.

Okay.

And where are you at this point in that carve-out?

Are you less than 50 percent there?

More than 50 percent there?

Well, the carve-out is $35 million and we've--at this point, we're just under $10 million in repurchases.

Okay.

So we've got about $25 million less--left through that carve-out.

Okay.

So it's going to be based on whether you can get it at a discount.

All right.

Yes.

All right.

Thank you, gentlemen.

Mark, to answer your question, it's about one-third is G&A expense and two-thirds is selling.

Thank you.

Our next question comes from John Waldthausen from Paradigm Capital Management.

You may ask your question.

Yes, good morning.

Hi, John.

I had to miss a segment.

Did you talk about why the inventory increased from second quarter to third quarter so dramatically?

Yes, we did.

We--we--there are two reasons, really.

The largest is really an increase in order activity.

And we also saw a fairly significant change in the currency translation impact during the quarter.

Okay.

Okay, that's--.

--About half of the order activity, John, or so, that Bob has referenced is a stocking up of pallet trucks because of some European legislation that's currently going through.

It's an anti-dumping legislation on these kinds of products going into Europe.

We, in our Chinese plant, make these products and export them into Europe.

That legislation affects us.

So we had to stock up in anticipation of that legislation so that we could be prepared to continue to service our customers.

That's probably 50 percent of the increase in volume is just in that one product line alone.

Okay.

And what's--longer-term what do you do to service those customers or has that just become a non-viable product line?

No.

It--I'm sorry.

It will--eventually what we'll be allowed to do is--and what we will do is assemble these in a different country.

Okay.

Thailand, to get around the anti-dumping laws, is what most people will be doing probably.

Okay.

Okay, that's helpful.

And then, in terms of on the product side, what sort of capacity utilization do you think you're operating at now?

You know, John, this is a--it's a great question and we get it all the time and it's a very difficult one to answer.

In some of our product lines, like chain and forgings, we're probably pushing toward the 80-85 percent area.

You know, we're running 24 hours a day, five days a week in our chain businesses and in our forging business it's probably more like 20 hours a day, five days a week.

So we'd have room to grow there.

In our hoist business, I would say that we're pushing a solid two shifts.

So we're probably more in the 66 or 70 percent category right now.

Okay.

Most of those lines.

Plenty of--plenty of room to grow.

Right.

So someone asked a question earlier, and I think your response to it was that you were happy with the margins and products.

So you just kind of surprised me because, you know, I guess maybe we'll do 9 percent this year versus, you know, a peak of over 15 percent.

Is--is the issue really that we have to continue to build volume in order to return to historical margins?

Yes, if you make the adjustments we talked about in terms of stripping out some of those additional expenses and keep the line going upward, if you will, on a trend line basis, I think, you know, quarter-to-quarter it's certainly going to move around a bit, especially when we see some of these things like product liability come and hit us in one quarter.

But I think on a trend line basis it will be following a positive direction.

Yes.

Well, of course, I mean, some of the expenses we talked about, you know--maybe Sarbanes-Oxley, you know, moderates going forward.

Right.

But, you know, healthcare certainly doesn't.

You know, maybe product liability.

It's--I mean, I don't know.

In analyzing year-to-year, obviously, it's important to understand these things.

But in terms of the achieving part of it, are you assuming that they'd moderate?

I think that we are assuming that Sarbanes-Oxley will moderate to the tune of one-third to 50 percent of where it's currently at today.

And I think that's a short-term goal.

I think long-term we have to get that down even further.

Okay.

And I--and I would also say that, you know, healthcare--we're going to continue to work on that as a company and try to figure out ways to--to reduce those expenses.

And we have many initiatives underway to try to combat that, of course.

Product liability, I think that we're going to need some help from our government in terms of new legislation and some level of tort reform and/or things like the Fairness Act - which is I know in process right now in the Senate - to mitigate the asbestos claims that we're seeing.

So, you know, I'm actually hopeful that some of those things go through.

I know that some of those things are beyond our control as well.

Okay.

Okay, great.

Okay, that's helpful.

Thanks.

Okay, John.

The next question comes from John Parker from Jeffries.

You may ask your question.

Hi, guys.

Can you [indiscernible]--could you please summarize the businesses you're attempting to sell in terms of revenues and EBITDA or projected EBITDA once they recover?

Yes, there's--right now there's two remaining of the original seven.

And the revenues for those two are somewhere in the $40 million area or so.

And I would say EBITDA is oh, maybe $2 million, $3 million, somewhere in that vicinity.

Okay, thanks a lot.

Our next question comes from Michael Gregg, Private Investor.

You may ask your question.

Good morning, everyone.

Sorry to belabor the steel surcharge issue, but two questions.

The first, is the mechanism by which it is applied sensitive to steel cost declines on an immediate basis?

And secondly, could you give us some idea of the dollar magnitude hence the margin--measured margin impact that it's application might have had over the last couple of quarters?

Yes, sure.

We can do that.

The--the third quarter, the steel surcharge represented $1.3 million.

Okay.

It was less than that in the second quarter, maybe under $1.1 million.

And the first quarter was about $400,000.

So obviously, it's--it's ramped up as it--as we continue to push them forward.

The process, Mike--and by the way, how are you?

Just fine, thank you.

And assume the same is for you?

Yes, thank you.

Good to hear from you again.

The process that--by which we go by is that Ned Librock and Joe Owen and many of our operating people and sales folks meet once a week and review the steel situation around the globe in terms of deliveries, prices that we're seeing.

They project out into the future where we think prices are headed, any availability problems.

And then, there's a discussion of the marketplace in terms of what competition is doing and what we see ourselves doing and where we stand and any impact that we have seen from the marketplace.

So it's pretty well vetted by the people in the know and the people that will be making the decisions.

They collectively gain consensus on what we need to do to meet the objective, which is to remain margin neutral going forward, and once a month go to the marketplace with a change.

And that is an addition--that is actually a steel surcharge, which is a separate line item on our invoices, separate from price.

And they--they moderate those prices no more than once per month to the marketplace.

Okay, thank you.

You're welcome.

Our next question comes from Peter Udal from Presidio Investment Management.

You may ask your question.

Hey, guys.

I had a question--it was actually a follow-up to a question earlier regarding the incremental margin.

I, too, was a little surprised by your statement saying that you're pleased with the incremental margins.

Because I know from past calls and discussions the targeted incremental margin is much higher than what you are experiencing now.

And I do realize there are some extra costs going on currently.

But as the caller pointed out, a lot of that is the cost of doing business.

For example, commissions, that doesn't go away.

As hopefully your sales do increase, that cost item should increase.

I'm wondering, are you targeting any--anything?

You mentioned a little bit on the healthcare side, but are there any plans to cut costs in specific areas?

I don't know if there's headcount areas that you could look at.

But is there any--are there any specific areas you're looking at to try to improve the incremental margin?

Because I think that from my point of view it's a little disappointing.

It sounds like it's a little disappointing from other--from, you know, others.

So I just wanted to hear you talk a little bit about your goals for the incremental margin going forward and what you're specifically doing to get there.

Thank you, Peter.

Thanks for those questions.

First of all, we have not put out any--any projections or forecasts and won't do that on this call either.

The other thing is I really want to reiterate that the third quarter of our year has historically been a very low margin quarter just because of the holidays and the fewer shipping--shipping days available specifically to our products business.

Beyond the cost kind of changes that we're--we're putting in place for the healthcare, that is a continued focus of our Management Team is to try to determine how to best purchase and source and manufacture products around the world.

And there's a variety of initiatives underway, including manufacturing products in our--our lower cost Chinese operations and actually to service that market in a bigger way to grow sales.

But there's literally--a headcount review is going on continually and that's something that we have always done over the last three or four years and will continue to do to continue to push that margin in a positive direction and to actually offset some of these additional costs that we're seeing coming in at us that are larger than expected.

Things like the healthcare and the product liability and Sarbanes-Oxley, etcetera.

Sarbanes-Oxley, for example, you know, I know that Bob Friedl is beginning an initiative to look at our next fiscal year to determine how we can reduce those costs.

And they were pretty big coming at us this year, well over $1 million, I think at the start of the year.

And I think many other companies are seeing those kinds of increases.

But--but one of the things we want to do is become much more efficient at our audit process, at our testing, and that review will be going on after we close our year to really push forward with the determination as to how we're going to make it more efficient to get that number down significantly.

So, I mean, there's--there's many things like that--that going on and it's a broad-based approach.

And we're--that's one of our focuses is to continue to look at--work on the margins.

But again, I caution you to look at the third quarter with a bit of a slanted eye because of its--it's difficult to just generate significant margin when you have fewer days available to ship.

And generally speaking we have--we have seen that in the third quarter and the fourth quarter, you know, should be in a better position.

Okay.

Well, that's great, guys.

Thank you very much.

I appreciate--I appreciate those answers.

Very good.

Thank you.

Thank you, Peter.

Our next question comes from Greg Hyde from Wachovia.

You may ask your question.

Good morning.

Most of my questions have been answered, but I have just these quick two remaining.

One is a quick one regarding Sarbanes-Oxley.

Going forward, I sort of gather that your--your costs thus far have been what you might term setup costs and at some point - it sounds like pretty soon - you'll have more of, if you will, just a run-rate cost.

And I think you commented on it, but I wanted to get a better sense for what you think quarterly once you guys get fully sort of setup, if you will?

Well, let me--let me see if I can take a shot at that and I'll ask Bob to add.

You know, if we look at our--our total costs today, you know, in excess of $1 million, as you know, it's--at this point in time I think it's difficult to say how much of that is setup and [indiscernible] run rate.

But I--we do have a target that we'd like to cut it in half next year, just to give you a sense of magnitude.

And I think that's probably a reasonable target, quite honestly, and we probably need to get aggressive with a variety of our outside people who help us in this regard.

Our auditors and our people that help us with testing.

But I think that's--that's something that we need to--we need to do.

I don't know if we actually have our arms around just yet how much is really setup and how much is really going to be run rate going forward.

Great, thanks.

My second question has to do with international sales.

And I guess as a lead-in to that, I don't have a very good sense of what degree international sales that are made by you guys where your costs are sourced in dollar--dollar-pegged currencies.

I'm not sure if your international sales are being applied in the context of international costs or if they are being supplied in U.S. dollar costs.

Can you--can you give me a sense on that?

Not specifically, but I'll give you some areas or some ballparks.

Okay.

That would be great.

Thanks.

You know, we do--we probably have two-thirds or so of our volume is--would be in Euro by my estimate.

Manufacturing costs?

Yes, that would be manufacturing costs.

Some of those Euros though are manufactured in China, so you're--now we're tied to the [indiscernible] which is more pegged to dollar.

Right?

Right.

And I don't--I don't really have the percentage in my--in my head just yet, but it would be a fair amount of those two-thirds.

Okay.

Well what I was trying to get at was as the dollar weakens, if it were to continue to weaken, you know.

Would you guys continue to get sort of a lift by--lift from that?

And it sounds like if most of your costs are pegged to Euros and most of the sales are pegged to Euros, then the lift is going to be modest at best.

Is that right?

Well, I think it's going to be pretty big on a low base, pretty big as a percent.

We do do a fair amount of export and that--we're seeing that business grow dramatically, especially as we produce in U.S. dollars here in the states and export to Europe, in particular, and to Latin America.

We're seeing that grow quite a bit, the export business.

But again, it's on a low dollar base.

So--.

There's two ways to handle that, right?

There's you can raise prices and pick up margin or you can keep prices the same and pick up volume.

Pick up--yes.

Or you can do sort of a blend, if you will.

How do you all sort of view that?

Well, that's something we watch on a very regular basis.

And right now, I would say that you--we're going to your third choice of a blend.

You--you have to factor in the third dimension, which is what our current market price is in these various countries and whether or not you're--you're--whether you were competitive prior to or after the devaluation.

So we're looking at we--some price increases in various markets along with trying to capture market share where we have no market share given the--given the price positioning, so it's a blend.

Okay.

And just one last thing on this and I'll--I'll let you go.

The--can you give some color or a sense as to relative profitability between international sales and U.S. sales, let's just say in the products segment?

Just say, the gross margin level.

Yes, we don't--haven't broken that down for the market--for the marketplace at this point in time.

Okay.

Thanks very much.

Okay.

Thank you.

(Caller Instructions.) I have no further questions at this time.

Thank you.

In summary, thanks to over 3,200 CM associates around the world.

I think we've achieved another solid quarter for Columbus McKinnon.

We do continue to experience significant growth in bookings and revenue as most of our distribution channels have experienced double-digit growth as well.

Combine this revenue increase with significant cost reductions in the products segment and we have accomplished--that we have accomplished in the last several years and you'll see the result is greatly improved profitability.

Also, the restructuring we have done in the solutions segment along with our recent improvements in bookings and revenue have recognized a respectable turnaround.

The operating leverage remains significant as we generate more profit on even the smallest increase of sales.

We have maintained our strong market position in the domestic markets and are beginning to penetrate new markets around the world, specifically, as we continue to have success in Europe, Latin America, and the Far East.

We remain encouraged with the end users markets and recognized some very decent bookings this past quarter.

We continue to have good indications from the overall market, but there certainly remains some uncertainty, specifically, as relates to rising interest rates here domestically, continued scrap steel increases, terrorism alerts, seemingly uncontrolled healthcare, and other regulated costs.

We believe we will continue to perform well, but we have to recognize that these uncertainties could have an impact on the improvements we have seen to date.

We continue to drive Lean Concepts across our businesses.

This process has indeed proven that we can continuously improve our operations around the world.

We will also continue to invest prudently in new markets and products to protect our share in the U.S. and gross sales internationally to keep CM positioned as the leader in the material handling industry.

Again, I want to thank all of our associates around the world for their efforts to make CM that leader.

And, as always, we appreciated your time today.

Have a great day.

This concludes today's conference.

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