Columbus McKinnon Corp (CMCO) 2006 Q2 法說會逐字稿

Good morning and welcome to Columbus McKinnon's Fiscal 2006 Second Quarter Investor Conference Call. [OPERATOR INSTRUCTIONS].

Now I will turn the meeting over to Mr. Timothy Tevens, President and CEO.

Thank you, Frances.

Welcome to the Columbus McKinnon Conference Call.

Earlier this morning, we issued a press release with the second quarter fiscal '06 results.

Hopefully, you have received it by now and -- as well as the corresponding financial statements.

With me here today is Karen Howard, our Vice President, Treasurer, and our Interim Chief Financial Officer, Derwin Gilbreath, our Chief Operating Officer, and out of town, but on the phone line with us here today, is Joe Owen, Vice President of our Hoist Group, and Ned Librock, our Vice President of Sales.

We want to remind you that the press release and this 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 with the SEC to be sure you understand these risks.

I'll give a brief overview here, and then turn it over to Karen.

But overall, our revenue for the second quarter exceeded the same quarter last year by about 10%.

Net income was up nicely $700,000 or 26% greater than last year in the same quarter.

Now, one note on net income -- it was negatively impacted this quarter by $3.5 million of costs associated with the subordinated debt refinancing we completed this month.

If you add back that amount, we would have produced a wonderful 160% increase over last year or somewhere around $0.44 in earnings per share.

Sales for the Products segment in the second quarter were up almost 11% compared to the same quarter last year, down about 2.5% or so compared to the first quarter of '06.

The increase compared to last year in the second quarter was primarily driven from increased demand from the end-user markets to our various distribution channels, as well as price increases.

The international sales, which is one of our strategic initiatives, were up nicely by 16.7% in this segment, predominately led by Europe and Latin America, and our Product segment gross profit was up 17% over the same quarter last year.

Operating income was up over 35%, and as you can see, our operating leverage is showing through very nicely here as the lower cost environment with higher volume is producing some wonderful results for the company.

Bookings in our Products segment continue to be good in the quarter and overall were up mid-single-digit over the same quarter last year.

You may recall that we have -- began to see increased volume last year, so the comps are becoming a little more difficult for us, but we still see some growth, albeit some moderate growth.

Backlog ended at $40 million, down slightly compared to the backlog at the end of the first quarter.

Keep in mind that the cycle time for these items in the Products segment is days or weeks and therefore, the backlog number represents about 4 or 5 weeks worth of shipments or so.

Relative to our Solutions segment, sales were up about 2% over the same quarter last year and down about 17% on a consecutive quarter basis, primarily driven by the timing of some projects at our Univeyor business, which is a Danish power roller conveyor business servicing Western Europe.

Gross profits increased nicely, 17% over last year in the same quarter and are up about 7% from the first quarter of '06, primarily driven by product mix.

And the backlog is at about $17.5 million down from last year, but slightly over the first quarter of fiscal '06.

A couple of notes before I turn it over to Karen.

Continuing our positive trend of debt reduction, you'll notice that our funded debt, net of cash, is down to $238.2 million at the end of this quarter, which is down $46.3 million from last year's same quarter and down almost $15 million in the second quarter, which is obviously very positive for us.

Earnings and working capital improvements drove this improvement in reduction in debt.

As you may have read, we're in the process of selling about 3 million shares of equity to reduce our debt and to invest in our businesses to increase sales in both North America and our global markets.

You should also note that we just completed the sale of our new subordinated notes and closed on them in the middle of October.

And, at this time, I'd like to turn it over to Karen who will lead us through some more details in the financials.

Thanks, Tim, and good morning everyone.

I'm pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's second quarter of fiscal 2006 which ended on October 2.

Consolidated sales increased by 9.8% in the second quarter of this year, compared with last year's second quarter.

Volume increases accounted for 5 percentage points of the increase, with pricing accounting for 4 percentage points and foreign currency translation only 1.

Product segment sales, which accounted for about 90% of total sales in the quarter, increased by $11.7 million or 10.7% with strong double-digit sales increases from our Hoist group.

Solutions segment sales increased only $300,000 or 2.2% compared to the second quarter of fiscal '05, driven by project timing changes in our European Conveyor Business, which accounted for 67% of that segment's revenues in this year's quarter.

The Company's quarterly sales pattern, assuming a period of consistent economic conditions, typically shows sales strongest in the fourth quarter and weakest in the third quarter, with either the first or second quarter placing second and third, generally depending on the number of shipping days in them.

As the U.S. industrial economy has recovered since the middle of 2003, the Company has now reported year-over-year sales growth in each of the last 8 quarters since the third quarter of fiscal 2004.

The recent quarter had 63 shipping days, the same as the second quarter of last year.

This is a decrease of 2 days or 3.1% compared with the first quarter, taken sequentially.

Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal 2006 and fiscal 2005.

For the current year, fiscal '06 we will see the same number of shipping days in each of the first 3 quarters as in fiscal '05, with 2 additional shipping days in the fourth quarter.

Turning to gross profits, consolidated earnings leverage added $0.43 to gross profit for every dollar of incremental sales this quarter compared with the prior year.

The sales growth realized by both of our segments was complemented by margin expansion.

The Product segment gross profit margin increase of 160 basis points quarter-over-quarter, as well as the Solutions segment gross profit margin increase of 220 basis points drove overall consolidated gross profit dollars up 17.4%.

Product segment gross profit, as a percent of sales, was higher than last year's second quarter due to better product mix with higher hoist sales, pricing, and the earnings leverage from higher sales levels.

The gross profit margin increase in the Solutions segment to 17.8% this year from 15.6% last year was primarily due to favorable sales mix at our Denmark based conveyor business with more product type sales as opposed to systems.

Consolidated selling expense, as a percent of sales, was down to 9.7% in the second quarter versus 10.0% last year, even though increased investment in international markets drove expenses up $300,000 this year.

Consolidated G&A expense was 6.3% of sales in the second quarter compared with last year's 6.1%.

This year's expenses included about $0.5 million of higher compensation expense.

Our operating margin improved to 9.8% for this year's quarter compared with 8.1% last year.

The operating leverage contributed $0.28 to income from operations for each incremental sales dollar compared to the prior year.

As previously disclosed, we continue to drive revenues toward the annualized $600 million level.

We are targeting operating margins in the 11 to 12% range.

Interest and debt expense is down $500,000 due to lower debt levels, but included $200,000 of extra interest during the period in which we had two layers of subordinated debt outstanding during our refinancing.

Other income and expense of $1.9 million expense this quarter includes several items.

It includes $3.3 million of charges relating to our debt refinancing.

That is partially offset by approximately $500,000 gain on the sale of excess real estate that was previously announced and $700,000 investment returns on our captive insurance company assets.

Regarding income taxes, beginning with the first quarter of fiscal '05, no U.S.

Federal income taxes have been recorded for our U.S. operating entities due to the use of fully reserved net operating loss, or NOL, carry forward.

The Company began the year with $98 million of fully reserved U.S. federal NOL carry-forward and utilized approximately $5 million thus far year-to-date leaving $93 million available for future use.

While the cash tax payment savings will continue to be available until fully utilized, we will be working closely with our auditors to determine when it will be appropriate to reverse the reserves against those assets for financial statement reporting purposes.

The overall worldwide effective tax rate for the second quarter of this year was somewhat high at 36.1% compared with 29.2% in the second quarter of last year.

This year's second quarter was unfavorably impacted by the $3.5 million of debt refinancing charges and interest offsetting U.S. taxable income, and therefore, reducing the impact of the NOLs.

Going forward, we expect to see an overall tax rate for fiscal '06 approximating 22 to 23% depending on the mix of U.S. taxable income to foreign taxable income.

Depreciation for the quarter was $2.3 million, consistent with last year's depreciation.

Capital expenditures for the second quarter were $2.1 million and included investments in our new product development activities, our growing low-cost international facilities, productivity improvement equipment, as well as normal maintenance CAPEX.

We continue to expect capital expenditures to be in the $6 to $7 million range for fiscal '06.

Net cash provided by operating activities was $13.5 million in the quarter, with $8 million generated from earnings and $5.5 million from working capital.

Within working capital, accounts receivable, net of unbilled revenues, contributed $3.5 million, and inventories contributed $2.3 million during the quarter.

We have continued to focus attention on our working capital management, noting that our utilization of working capital at the end of the quarter, relative to the latest 12-month revenues, improved to 18.1% compared with 23.1% a year ago.

Sticking with the balance sheet, at quarter's end, net debt was $238.2 million and total debt was $280.7 million.

As previously announced, we closed on our subordinate to debt refinancing on September 2.

However, $25.6 million of our refinanced 2008 note remained outstanding at the end of the quarter and were subsequently redeemed for cash on October 14.

This timing impacted the gross debt and cash balances at quarter's end.

During the quarter, net debt was decreased by $14.8 million.

We expect further debt reduction, driven by application of some of the proceeds from the offering of additional Columbus McKinnon stock, which we announced on October 20.

At quarter end, availability on our $65 million revolver provided for under the senior credit agreement, was $55 million with outstanding letters of credit only and nothing actually drawn against the revolver.

We were comfortably in full compliance with all financial covenants related to this agreement.

Our strategy includes continued focus on debt and interest expense reduction.

Debt to total capitalization of 75% is still high at quarter's end, down from 76.8% at the beginning of the year.

Considering the October 14 redemption of the $25.6 million remaining 2008 notes, debt to total cap would have been 73.3% at the end of the second quarter, reflecting a 350 basis point improvement from the beginning of the year.

Longer term, we're targeting a 50-50 debt to equity ratio and a senior subordinated debt rating of double-B or better.

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

Thanks, Karen, and good morning to everyone on the call.

We are happy to report that revenues for the second quarter of the fiscal year remains solid on all fronts.

We see a similar pattern continuing from the first quarter whereby all major brands have equaled or exceeded revenues of last year despite some very tough comps.

For example, last year September, we experienced a large buy-in from distributors in advance of a Hoist price increase on October 1, 2004.

General distribution product sales in the United States, which is 35% of our total revenue, increased 14%.

Our specialty distribution product sales, or 9% of total sales, increased 9% and consolidated international sales, or 37% of total revenue, increased approximately 16%.

Effective July 5, all surcharges were eliminated and new list pricing went into effect for chain and attachments, which included various surcharges and a price increase.

There were no new price increases for hoists or other products at this quarter.

Columbus McKinnon companies have been proactively responding to the horrific devastation along the Gulf Coast in many ways.

We have seen an increase in our quotation levels for short and longer-term projects and have received orders in certain product categories specific to power restoration, and facility cleanup, and construction.

We believe that the overall cleanup and restoration of the area will provide modest increases in business activity over the next year or so.

These products are, for the most part, classified as maintenance and contractor related goods.

We hope to see some larger capital projects evolve as insurance claims for cranes and larger Hoist products are resolved.

In addition, and of course, we're practical, the CM fleet of trucks is assisting with transportation and distribution of food and products to these devastated areas.

The industry outlook remains confident despite the uncertainty of rising fuel and energy costs.

We are pleased with our performance to date and look with confidence to the immediate future.

Thanks, and now I'll turn the program over to Derwin.

Thank you, Ned.

Good morning, everyone.

Our operating leverage continues to be strong.

Every incremental dollar in sales has generated an incremental $0.28 of operating profit over the last year.

We are using lean as a foundation for change throughout the business.

For example, at one business unit we have planned, and we are in the process of executing a major rationalization plan.

It involves outsourcing half the machine parts, relaying out the factory floor using a lean approach, reducing floor space by 1/2 to 2/3 and improving the operating income on all product offerings at this plant to the mid to high teens.

The benefits will occur over the next 24 months.

This is just one example of multiple events going on across the Company.

Our focus on inventory reduction throughout the organization is both short and long-term.

For the long term, we will create a master plan for key plants to reduce lead-time by relaying out the process flow and, at the same time, invest in improving machine processes that will lower costs.

In addition to the improved financials, of course, customer service will improve.

In the short term, we will continue to review our operation to lower inventory without lowering customer service.

On another front, final plans have been made to move $13 million of sales from our product line to one of our foreign plants over the next few years.

This will lower our labor and overhead costs by about half.

More investigation will take place on other products to move to our China and Mexico plants.

In addition to our factory investments, we are investing in our sales organization in Asia, and Latin America.

This investment will grow over time as our plans firm up.

In summary, there are many areas of opportunity in operations and we are very aggressively pursuing them.

Thank you and we turn it over to Tim.

Thank you, Derwin.

Frances, we're ready for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

The first question comes from Sarah Thompson from Lehman Brothers.

You may ask your question.

Hi, good morning.

Good morning, Sarah.

One of the numbers you threw out, Karen, I think, was the $600 million of revenues and the 11 to 12% EBIT margins.

What's your timing on expectations to get there?

Sarah, I'll take that one.

We constantly get the question, will we be able to return to the fiscal year 2000 levels of 600 or $609 million, I think it actually was, in 2000, and I think our EBIT margins were in the 12% area.

And, if you look at our trend line over the last, now 1.5, maybe pushing 2 years, we clearly see that we've hit the bottom.

We're recovering very nicely and we can see in the not too distant future, the next -- maybe not this fiscal year, but the next fiscal year or shortly thereafter, would put us in that vicinity of the $600 million to this 11 to 12% EBIT kind of margins.

So it's the foreseeable future, but certainly, at this point in time, it's difficult to say exactly when it would be.

Okay.

Now that's great; that gives me a concept of it.

And on your -- obviously, you guys have done a fantastic job in terms of deleveraging.

Just curious; you had mentioned that you wanted to get to a 50-50 debt-to-equity ratio and, obviously, you've announced this.

This equity deal, you're going to call back a portion of the bonds, but I guess you could -- what are your plans beyond that?

Is it to further reduce debt and just either tender for the bonds or buy them on the open market, or are you going after acquisitions?

What do you kind of foresee as the use of cash?

I think, simply put, yes, all of the above, Sarah.

As we look down the road, obviously, this step with the equity that we've recently announced would clearly help us continue the deleveraging and would add a nice chunk of change, if you will, to the equity side and pull away from some of the debt.

The use of proceeds from that offering clearly are all oriented, or not all, but most are oriented toward that.

But the balance would be oriented toward growth, reinvestment back in our business to continue to grow our international markets, as well as our domestic markets.

So new products, as well as entering new markets, you'd see us use that cash.

Further down the road, the 2010 notes that we would claw with this equity offering, we would like to, at some point in a reasonable timeframe, take them out with bank debt and hopefully, that would be a lower interest rate debt and it would give us some pre-payable debt as well.

And our first call on those is August of '07, so it's a couple of years away now.

And that would allow us to use our strong cash flow, which you know us as a very strong cash flow Company, to continue to delever our balance sheet, as well as invest in our business.

We can't forget growth and we can't forget new markets that will -- that have gotten us to this point, so we need to continue to balance our cash flow between those two, and I think if you look even further down the road, we can see ourselves getting closer to even a 40% debt, 60% equity kind of timeframe, relationship several years out.

I'm not exactly sure when that would occur, but if things continue on the trend line that they're on now, you can clearly see that that could take place.

Okay.

No, that's terrific; that's really helpful, and then just two other quick questions.

I know that you guys don't calculate accounts payable the same way we do, but if you just look at it as a percentage of cost of goods sold, you're up about 5 days in the first quarter, and the second quarter you have about 9 days versus the prior year.

Is there a change in thought process around the accounts payable?

We've had a consistent policy of payables to pay in X number of days across the Company.

I think it's fair to say that Karen is heading up a working capital team and has been for the last 6 months or so, which has put a bit of a light, if you will, has shone a light on payables as an opportunity for us to actually meet that policy that has been in place for a long time.

And I think it's probably fair to say, and I'll ask Karen to comment as well, that with that project team that we have people maybe paying a little bit more attention to it.

I would agree with that, Tim, and Sarah, yes, we -- I think as we have dug into some of our details throughout the corporation, have reminded people and reinvigorated the awareness of our desire to better match our payables with our collection strength, so I think we've been successful thus far in those regards.

Okay.

Terrific and then just the last question, you had mentioned that the gross profit margin in your Solutions business was up, basically due to mix of product.

If you look at your backlog, or I guess mix of product purchases, if you look at your backlog for the balance of the year, are we talking about this kind of a level of margin?

Is it significantly better than it's been for a while?

Actually, Sarah, I don't want to say definitively because you know that business is somewhat volatile and it fluctuates from quarter to quarter depending on the nature and the types of the contract that they have undertaken.

This quarter included, as I mentioned, more product related revenues as opposed to systems related revenues and we expect that to continue into the next quarter.

After that, while we're continuing to focus on products with that business, we do think that the systems percentage will probably come back to some degree.

However, all that having been said, we have focused on taking costs out of that business to improve its profitability, so we're hopeful that we will, as we look forward, see less volatility in the profits that we've seen in the past.

Terrific.

That's all I have.

Thank you very much.

Thank you, Sarah.

Our next question comes from Tom Klamka with Credit Suisse.

You may ask your question.

Good morning.

Good morning, Tom.

I guess when you separated out the components of growth volumes were about 5%, I think that was just on the product side.

What are you seeing currently, as far as your pure volume growth?

I would expect some sort of slowdown, but you're starting at about 5%.

The pricing over time should kind of flatten out.

Are you still looking sort of at 3 to 5% growth, say going out over the next 12 months?

Yeou know, it's difficult to say that long, Tom, but I think, clearly, the next quarter or two, we're looking in that area, the 3 to 5% area of volume and, obviously, price would be the balance of that.

I think, overall, we said mid to high single-digit kind of growth in total so that would, I think, for the next couple of quarters look to be about the same.

Right.

And pricing, you've been raising prices pretty firmly, I guess, to follow your costs.

It sounds like everything got rolled into price from surcharges, which is great, but what do you see happening on the price side, and I guess sort of a precursor to that, what's happening on your cost side, say, over the last 3 to 4 months, especially in steel?

I'll ask Derwin.

Let me give you an overview here, and then I'll ask Derwin to comment.

I think, generally speaking, you're absolutely right.

We have been aggressive on the price side to, as you know, recapture steel surcharges that have occurred over the last 18 plus months now.

I guess we first started seeing that in January of '04 and that's been our policy and I think we've been very successful in that.

Obviously, last year, our costs rose relative to Sarbanes-Oxley costs that we didn't foresee going as high as they did in fiscal '05.

We also saw healthcare costs going up quite a bit, as well as product liability and I think, if you look at this current year, you'll find that our Sarbanes-Oxley costs, we're planning on being about half of what they were in fiscal '05, so we've controlled that fairly well.

I'm happy to say that healthcare has moderated to the point where it's about the same level or so as last year.

It really hasn't grown as dramatically as we've seen in the last several years so we're pleased with that, but we do we have -- and product liability seems to be maybe not growing as rapidly, those costs, as we have seen in the past.

But there are some new costs coming at us, fuel surcharges coming from our freight carriers.

Steel has moderated a bit.

We've seen steel ever so slightly come down.

I would not say a huge amount, but ever so slightly and now with the forecast of going back up because of the price of energy.

So we're in a bit of an uncertain time, I'd say, here right now.

Joe, I don't know if you have anything to add to that.

I agree.

The steel, we've actually had a fairly good advantage for a period of time with the surcharge, but now we're getting gas surcharges from the steel companies beginning to roll in.

On the other hand, we have a lot of projects going on to save money, reduce costs, and we're trying to overcome that and I'm sure we will.

On the freight front, we're analyzing that and, of course, we had a freight increase in our industrial area, but in our other areas, we've been raising freight charges to customers and we're continuing to do that and being much more aggressive about that and those increases are sticking.

So that's the positive side, but we have so many different things in place, projects.

The one that I mentioned as an example across the Company that I'm very confident we will overcome the natural gas increase and the freight surcharges that continue to roll in.

And how much -- you mentioned, I think, moving some production, $13 million, over to Asia.

How much of the Company's production now is done in the lower-cost countries and then what's the target?

Yes, that's an excellent question.

We get that question; we all look at each other like, what's that number again?

I think that -- let me just give you a trend line here, if I can.

I don't have the number in front of me.

I'll have Karen pull it in a second here.

About 15% of our volume or so comes from -- let's call them low-cost economies, whether that be Mexico, or China, or other parts of the world.

But, the trend line is, it's increasing.

We, as you know, have four plants in China.

We have a plant in Mexico.

Over the last several years, we have been adding more and more products into those existing facilities we have, and expanding them, quite honestly.

And the project that Derwin mentioned that we are in the midst of working on right now is actually just a continuation, I would say, of that trend.

So over time, I would expect that 15% to continue to grow at the pace that we've seen it.

We're very cautious and we're very careful.

We don't want to lose quality.

We don't want to lose technology and know-how when we do that transfer, so we do it in – well, let me use the word, a "measured pace," so that we're successful in transferring that know-how and product into those markets.

Okay.

And this last question.

Have you guys made plans or have you been planning to see S&P on the ratings since you announced the equity offering?

We have not made plans to re-rate our debt, if you will, but that's an interesting point and we'll take a look at that, Tom.

Great.

Thank you.

Thank you.

Our next question comes from Peter Lisnic of Robert W. Baird.

You may ask your question.

Good morning, everyone, nice quarter.

Thank you.

Tim, if I could just go back to your comments on growth initiatives and what you plan on doing with cash flow going forward, can you maybe talk about growth from an organic sense versus what you might be willing to acquire or where the acquisition opportunities are?

Sure.

Let me speak in generalities because we don't have anything specific to speak about in acquisitions, but I'll take the first part of your question, which is organic growth.

There is a steady stream of investment in new product opportunities that we see, specifically, product that would broaden our offering to assist in our sales in international markets, as well as the North American marketplace.

We need to make sure that we keep a fresh view of our products, innovative products, into the marketplace so that we can continue to maintain our market lead there, which we're doing and I think doing quite well.

The equity proceeds, in my mind, would accelerate that pace and we would be able to maybe push forth some more products in a quicker way.

And I should also mention that on the international front, we certainly have a very nice footprint in Western Europe and just began a couple years ago in Eastern Europe and now is beginning in full force in the Far East.

To be effective in those lower cost economies, we need to have different products, so we are investing in products that are made to international standards, different design products, different cost point product that we will make in those low-cost economies, to distribute in those low-cost economies.

We're in the midst of a brand-new wire rope hoist line, for example, that is rated to the [SEM] standard, which is an international standard and that will be made in our -- a lot of the components will be made in our Chinese plant for distribution and final assembly back here in the States, but also will be final assembled and distributed into the Far East.

And I would expect that you'd see another line of hoists come out from that, as a result of this equity offering.

Okay.

And is it a fair assessment to say most of the new product initiatives that you'd be looking at really are just, in essence, extensions of what the current product portfolio is?

And the other alternative way of asking the question is, would these new growth initiatives, they really wouldn't be Greenfield opportunities, I guess, for the lack of a better phrase?

I think extension is a good word.

Okay.

Extension of the current product offering, very similar, but a different design or a different price point kind of product.

Well, it's not like you're going to have to put up a brand new plant somewhere and start something totally different or ancillary to what you're doing right now.

I would expect not, although our plans, for example, in China aren't 100% complete yet.

We might need to expand the footprint that we currently have there.

Okay.

But that would be an extension of what's already present.

Okay.

Okay, fair enough on that front.

If I could ask a question on pricing.

It sounds like, basically, all the surcharge mechanisms that have been implemented are basically -- those are gone now at this point.

If you look at the first half of the year, you've got sales growth of 13%.

Can you distinguish what or tell us what percentage of that growth comes from surcharges alone versus normal price increases?

No, we combine price increases and surcharges together, but I can tell you that the surcharges were only in place for steel product, steel welded chains, and steel forgings.

The Hoist products didn't have any surcharges on them so I think for the first half -- I'll ask Karen, 13% growth, how much was price increase and surcharge together?

Do we know that?

Together, price and surcharge for the first half of the year was about 4%.

Okay.

And then can you maybe take a step back and just give us a sense as to what historically you've been able to do on the pricing front?

I think traditionally, you've been able to pass through pricing.

It's been relatively sticky, I guess from what I understand.

Yes.

I would say it really depends on the product, Pete.

For Hoist products, it's been 2 to 4% annually; for maybe steel forgings, it's been in that same area and for chain, it's been less than that, maybe 1 or 2% and that would be an area where it wouldn't be as sticky, to use your term.

Okay.

But certainly forgings and hoists typically have that.

Okay.

So a blended basis, you've basically -- annual price increase is somewhere around 3%?

Yes, I would say -- if you said 2 to 4 and an average of 3, it would be reasonable.

Okay.

And then coupled with the single or the same kind of numbers maybe for volume growth, get to the mid-single-digits is kind of how you're looking at the near-term outlook, I guess, at least?

That's exactly what our thinking is.

Okay.

Karen, if I could have you just rewind to your commentary.

I'm sorry I missed this, but the net debt numbers post quarter end.

Could you just rehash those for me real quick?

Sure.

The net debt balance at the end of the quarter was $238.2 million.

Was that the number you were looking for, Pete?

Yes, that's the number.

Okay.

Okay.

And then one question on profitability, if I can.

Gross margin seems to be trending nicely and if you look at it historically, I guess the historical peak has been 28, 29% kind of number.

I think I'm right.

In the 11 to 12% operating margin forecast, I assume that a big driver of that increase in current levels is the fact that gross margin improves to those historical levels.

Is that right?

That would be fair to say with the volume going through the same fixed footprint of manufacturing facilities, we should get a little bit of margin expansion, but I also think we've worked hard on the SG&A side, so that's why operating income is expanding at a more rapid pace as well, so it's a bit of a mixture.

Okay.

Okay, fair enough.

Thank you.

Thanks, Pete.

Our next question comes from Ken [Schimmel] of Wolf Point Capital.

You may ask your question.

Hi, two questions.

One, I think you had talked about how last year people kind of beat the price increases they saw by buying a lot of inventory ahead of the price increases, and with all the price increases that have been going on the last year, do you have a sense from your distribution channels, do they have a lot of inventory or could they pull forward some of their buying in light of all the price increases they've seen?

First question and then secondly, which areas of your business have you seen, I guess, the best growth and is there any areas where you're seeing a slowdown or any kind of weakness?

Okay.

Ken, let me see if I can take that and then I'll ask Ned Librock who's on the phone as well to comment.

Relative to your price increase question, in normal economies, a normal cycle, not a down point, or even a high point, we typically see some buying on the part of our distribution channel partners in advance of a price increase.

We typically give a 30-day notice to those channel partners and they might stock up.

Now, they're not stocking up 6 months or 12 months; they're stocking up maybe 2 or 3 months.

They might be buying pre-advance of a quarter.

You heard Ned Librock mention that last year on October 1, we had a price increase for hoists and the last week of September was a huge booking month for us.

It was really, I'll say more robust than I have seen in a long time, and Ned, when he has a chance here, will comment as well.

That was last year though, right?

That was last year, which makes the comps more difficult for us for this year.

Now again, a normal buy, a normal advanced buy, would be like 1, 2, 3 months kind of buy in advance of the price increase.

And I would say that this year has been more normalized.

It hasn't been that large or that extreme.

I think inventory in the channel, which is really where you're getting to, and what does the trend look like, I think, normally -- generally speaking, most of our channel partners don't like to have inventory and given our shorter cycle times coming up from our facilities, we generally are fairly responsive.

They don't need to hold that much inventory.

We don't see, at least I don't hear about it, and Ned can comment on it, a significant amount of stocking up.

We see good end-user markets.

We see good flow, but we don't see much in terms of stocking up in the channels.

And then relative to your growth comment, I think pretty much all of our channel partners are hitting on all eight cylinders right now.

I think things seem to be very broad, very positive, good momentum across all channels.

I don't see anything faltering at this point in time and it's been that way now for the last 5, 6 quarters or so.

Best growth might be our entertainment business which services a market that's oriented towards concerts, and tours, and live theater.

They seem to be going maybe more exceptionally well and of course, our international businesses are just performing very, very well as well.

Ned, could you comment on those two points?

Sure.

I'd be glad to, Tim.

I would say that it's safe to say that the end-user demand for our product continues and that most of our distribution channels are not flush with inventory at this particular time.

We're working within relatively normal lead times and the products are flowing through us through the channel to the end-user.

Specifically, regarding last year, the October 1 price increase was the second of three that we had, and I believe that our distribution channels were opportunistic and saw that end-user demand was high and took advantage of the price increase, given that the economic trending in United States and Canada was still going very, very robustly.

So I would say, it's normal today.

I would expect the order flow to continue as it is and there's not one of our channels that's flush with inventory today.

Thank you.

Thank you, Ken.

Our next question comes from Michael Connelly with T. Rowe Price.

You may ask your question.

My questions have already been answered.

Thank you.

Thank you, Michael.

The next question comes from Will Dalrymple of Hoist Magazine.

You may ask your question.

Hi.

I have some questions about the movement of products into China.

Can you give a better idea of what lines you are moving over and what stage of this process are you in?

Well, you made an assumption we're moving into China and some of the products have already been moved there, but there is some products going into Mexico as well, and some of our chain product and that is a continuing trend that we've gone through for the last 3 or 4 years, quite honestly.

It's been ongoing for quite a while and that's just a continuation of that, different grades of chain being made in Mexico.

Relative to China, I would say it's mostly new product, new design product and a product that's new to the U.S. market as well as the global markets that will be made in China.

So it's not really a movement; it's more of the extension of the product offering being made in that market.

Will Dalrymple Thanks.

So what you're saying is the $13 million is all chain?

Predominantly, yes.

Can you give me an idea about when this wire rope hoist based on [SEM] standards for international sale is due out?

It's scheduled for the beginning of next year, next calendar year.

Wide ranges or are you going to focus on small capacities, midrange?

Well, the initial -- there's multiple phases of roll out.

The initial phases would be in the moderate lifting capacities, the 5 and 10-ton for example and then the multiple phases thereafter would roll out larger capacities and then smaller capacities as well.

And this Hoist is mainly intended for -- you said low cost economies, so Eastern Europe, Asia, Mexico?

Well, there, as well as, we would offer it into North America.

Excellent.

Thank you.

Our next question comes from Mark Grzymski from Needham and Co. You may ask your questions.

Hello Mark Grzymski.

Yes.

It's a tough one.

Just getting back to, I think, two callers ago, you were talking about the last 5 to 6 quarters, we've seen growth in the industrial cycle in companies like Columbus McKinnon.

Where -- are there any differences as far as the end markets or are you just -- are you seeing broad-based growth now like you did 5 quarters ago, 4 quarters ago, whatever?

I think it's fair to say that it's still broad like we had in the past.

There's some -- maybe a couple hotter spots than normal.

The entertainment I mentioned; international markets are very robust for us generally speaking as well, and there's one that came to mind that actually Ned and his guys have been working on and that is the oil patch.

Obviously, with the price of oil and the catastrophes of the hurricane down in Louisiana, we're seeing a fair amount of quotation activity as well as building, I might add.

So that's probably more expansion/repair than anything right now.

So those would be some hot ones for us.

Right.

And so now what kind of products -- what specific products would you see going down into the affected areas and kind of take it a step further?

Well, relative to repair -- Ned, I know you've studied this a lot.

Do you want to comment on that one?

Sure, Tim, I would be glad to.

What we're seeing -- let me specifically address a couple of industry sectors.

One would be power and utilities.

We are selling quite a few of our hand hoist and lever tools for the re-rigging of power lines, both temporary and permanent, in that greater area, more of what we would call hand-powered products.

We're actually seeing a fair amount of business in some sectors like the mobile home construction and temporary facility construction with powered hoists for the FEMA relief project, as well as just a general increase in all of our rigging products in the supporting states that are supporting the restoration and reconstruction in that area.

We're also seeing -- one of the unofficial barometers that I use about industry segments is we look at our industrial distribution segment or channel and our catalogue channel which sell a wide variety of NAICS customers and their business continues to be robust over last year, which indicates that most of the NAICS industry segments are still demanding our products.

Okay.

Great, thanks for the color.

And just quickly, Karen, did you say the tax rate 22 to 23?

Did I hear you right?

Yes, we looked through for the full year, Mark, and given the impact of the refinancing charges that were all U.S. and resulting in a high effective tax rate for this quarter.

Okay.

We're anticipating in the 22 to 23% range at this point.

Great.

Thank you very much.

Thank you, Mark.

At this time, you have no further questions.

Thank you, Frances.

Let me just wrap up here with saying that reiterating our strategy is to leverage our superior material and 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 the various market needs, incorporating our high quality standards and service support.

I want to thank all of our CM associates around the world for their hard work and ultimate success in making this quarter and actually, the first half of fiscal '06, a huge success for our Company.

We continue to experience growth in bookings and revenue, as most of our distribution channels have experienced growth.

Combine this revenue increase with significant cost reductions, we have accomplished in the Company in the last several years, and you see the results -- a wonderful operating leverage.

We maintain our strong market position in domestic markets and have penetrated new markets around the world.

Specifically now we continue to have success in Europe and Latin America and are beginning to have success in the Far East.

We believe we'll continue to perform well, but we all need to recognize there are some issues in the world markets that certainly could have an impact on improvements we have seen to date.

We talked about some of those, certainly energy costs.

We are seeing increasing interest rate environment, still some ongoing concern on health care, product liability costs, and regulatory costs have had an impact on CM and certainly might in the future.

We continue to drive lean concepts across our business, as this process has 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 market share in the U.S. and gross sales internationally to keep Columbus McKinnon 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.

Thanks, and have a great day.

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