Columbus McKinnon Corp (CMCO) 2006 Q4 法說會逐字稿

Welcome to Columbus McKinnons' fiscal 2006 fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Timothy Tevens, President and CEO. Sir, you may begin.

Thank you. Welcome all to the Columbus McKinnon conference call. Earlier this morning we did issue a press release with our fourth quarter and fiscal '06 results. With me today here is Karen Howard, our VP of Finance and Chief Financial Officer; Derwin Gillbreath, our Chief Operating Officer; Joe Owen, our VP of our Hoist Group; and Ned Librock who is normally with us is not. He decided to slow his life down a bit and left Columbus McKinnon for a much smaller company located here in western New York. We do 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.

Overall, our revenue for the fourth quarter exceeded the same quarter last year by about 2% driven by our product segment which was up 4.1% and offset by our solutions segment which was down about 14%. The revenue in the quarter was lower than expected because of exceptional increase in orders or bookings in the quarter that remained in backlog, a focus on profitable revenue in certain businesses, and some currency translation. Revenue for the year was 556 million or up 8% year-over-year. Excluding the reversal of the valuation allowance reserve for an NOL and other small items, our net income was up about $4.3 million or 76% higher than the adjusted last year net income figure in the same quarter. Sales for the product segment in the fourth quarter were up 4.1% as I mentioned compared to the same quarter last year and up 11.5% compared to the weaker third quarter of our fiscal '06. The increase from last year is primarily driven from increased demand from end-users through our various distribution channels as well as price increases.

International sales were up about 2.6 million or 7%. The product segment gross profit was up 20% over the same quarter last year and the gross margin was very strong at 29.7%. The operating income was up 64%, and the operating margin was also strong at 12.7%. The operating leverage continues to be very positive for our company. Revenue for the fiscal year in the product segment was up 9% with gross profit up almost 18% and our operating income in this segment up a great 41.3% with margin at 11.3% for the year.

Bookings for the product segment were very positive in the quarter and overall were up mid-double digit area over the same quarter last year. Our backlog was up 11.3 million compared with last year, and up 15.3% to $53.6 million compared to the backlog at the end of the third quarter of fiscal '06. The cycle time on most of these items in the product segment is in days or weeks. Therefore the backlog number represents about five to six weeks worth of shipments. The solution segment sales were down 14.3% from the same quarter last year and flat with the third quarter. Recall that this segment can be and is volatile in terms of quarterly revenue. Gross profits were essentially flat with last year and are down 30% from the third quarter of '06. Operating income is up $150,000 over last year. The backlog is at $13 million up 3.4 million from last year and essentially flat with the third quarter of '06. Again, this segment is experiencing the normal ebbs and flows of booking and production of large projects.

Revenue for the fiscal year was at 62.1 million, and essentially flat with last year, but gross profit was up 8.4% and operating income was up almost 59% to over $2 million. One critical focus for our company has been the reduction of debt. I am pleased to report that the funded debt net of cash is down $164.2 million at the end of our fourth quarter which is down over $97 million from the beginning of the year. We have achieved our short-term goal of 50% debt to total capitalization. At this time I would like to turn it over to Karen Howard who will lead us through some more details for the quarter and for the year. Karen.

Thank you, Tim, and good morning, everyone. I am pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2006 fourth quarter and year that ended on March 31. Consolidated sales increased by 1.8% to $147.1 million in the fourth quarter of this year compared with last year's fourth quarter. Product segment sales which accounted for approximately 89% of the total sales in the quarter increased by $5.2 million or 4.1% with strong double digit sales increases in several major core product groups including hoist and forged attachments. Those increases were partially offset by volume reductions resulting from a repositioning of pricing practices in some of our more competitive product groups and by delays in shipments due to very strong orders during the quarter.

Accordingly net volume increases for the product segment accounted for 3 percentage points of increase with pricing accounting for 2 percentage points and foreign currency translation negatively impacting the change by 1 percentage point. Solution segment sales decreased $2.6 million or 14.3% compared to the fourth quarter of fiscal '05 of which $1 million of the decrease was due to a negative impact of foreign currency translation. The remainder of the decrease was driven by project timing changes in our European conveyor business which accounted for approximately 71% 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 or 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 ten10 quarters, that is, since the third quarter of fiscal 2004. The recent quarter had 65 shipping days, two more than the fourth quarter of last year or 3.2%. This quarter also reflects an increase of seven days or 12.1% compared to the third quarter thinking sequentially. We did fully realize the corresponding increase in sales this quarter due to the transitional impact of strategic activities undertaken in less profitable product groups and also delays in shipments due to very strong orders during the quarter. 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 as well as fiscal 2007, the new year we just started.

Turning to gross profit, considering earnings -- excuse me, consolidated earnings leverage added $2.47 to gross profit for every dollar of incremental sales this quarter compared with the prior year. Both of our segments realized margin expansion. The product segment quarterly gross profit margin increased to 400 basis points year-over-year, and a the solutions segment gross profit margin increased of 150 basis points drove overall consolidated gross profit dollars up $6.5 million or 18.8%.

Product segment gross profit as a percent of sales was higher than last year's fourth quarter due to better product mix, pricing, strategic decisions relative to bidding on projects, and last year was unfavorably impacted by a one-time German pension adjustment. The gross profit margin increased in the solution segment to 12.5% this year from 11% last year was primarily due to improvements in the cost structure of certain businesses in this segment. Consolidated selling expense as a percent of sales was 9.7% in the fourth quarter consistent with last year, e. Even though increased investment in international markets drove expenses up $200,000. Consolidated general and administrative expense was 5.8% of sales in the fourth quarter compared with last year's 6.8%. This year's expenses included $1 million of higher compensation expense partially offset by $0.5 million of lower Sarbanes-Oxley compliance costs. Additionally, last year was unfavorably impacted by $1 million for the one-time German pension adjustment previously disclosed.

With operating income increasing by $6.7 million or 66.1% our operating margin improved to 11.5% for this year's quarter compared with 7% last year. The operating leverage contributed $2.55 to income from operations for each incremental sales dollar. We see further sustainable opportunity for operating leverage in the 20 to 30% range. As previously disclosed we continue to drive revenues toward the annualized $600 million level. We are targeting annual operating margins in the 11 to 12% range. Interest and debt expense was down $1.5 million due to lower debt levels in the quarter. Noting that we continue to focus on debt reduction, we further reduced our 2010 notes by $32.1 million subsequent to year end which will save us an additional $3.2 million of annual interest expense or $800,000 quarterly going forward. Other income and expense of $200,000 of expense this quarter includes several items. It includes $900,000 of charges of which 200,000 was non-cash relating to our open market refinancing activities. That is partially offset by $700,000 of investment returns on our captive insurance company assets and excess cash. The fiscal 2005 quarter included $3.9 million of gains on real property sales.

Regarding income taxes, in the fiscal 2006 fourth quarter, we reversed a $38.6 million valuation allowance against deferred tax assets, primarily U.S. Federal net operating losses or NOL carry forwards that existed since March of 2004. The effect of this reversal is an increase in deferred tax assets in the balance sheet and a corresponding income tax benefit in the income statement of $38.6 million. Excluding this valuation allowance reversal, the effective tax rate would have been 24.2% for the quarter which was unfavorably impacted by the $900,000 of open market refinancing costs offsetting U.S. taxable income and therefore reducing the impact of the NOL.

Beginning with the first quarter of fiscal 2005, no U.S. Federal income taxes had been recorded for our U.S. operating entities due to the use of fully reserved NOL carry forwards. We began fiscal 2006 with $98 million of fully reserved U.S. Federal NOL carry forwards and utilized approximately $15 million this quarter leaving 83 million available for future use. Despite the reversal of the valuation allowance and the anticipated normal effective tax rate going forward, the cash tax payment savings will continue to be available until the NOL's are fully utilized. Going forward, we expect to see an overall tax rate approximating 38 to 39% which will include a non-cash portion relating to the NOL utilization.

Depreciation for the quarter was $2 million while last year's was 1.9 million. Capital expenditures for the fourth quarter were $3.7 million, a higher level than previously anticipated due to the strength of the overall economy. They included investments in our new product development activities, our growing low cost international facilities, productivity improvement equipment, as well as normal maintenance CapEx. We expect capital expenditures to be in the 8 to $10 million range for fiscal 2007. Net cash provided by operating activities was $10 million in the quarter, all generated from earnings since working capital was mutual this quarter despite the increase in revenues over the third quarter of fiscal 2006 thinking sequentially. We have continued to focus attention on our working capital management noting that our utilization of working capital at the end of the year relative to annual revenues improved to 17.4% compared with 20.2% a year ago.

Sticking with the balance sheet, at quarter's end net debt was $164.2 million, and total debt was $209.8 million. During the quarter net debt decreased by $8.4 million. At quarter end availability on a $75 million revolver provided for under the Senior Credit Agreement was $64.8 million with outstanding letters of credit only and nothing actually drawn against the revolver. We are comfortably in full compliance with all financial covenants related to this agreement which was amended and expanded in March 2006 as previously announced. The new $75 million facility allows for further expansion up to $125 million, and improves our capital structure, reduces our cost of capital and provides financial flexibility to execute our strategic growth plans. While our strategy emphasizes profitable sales growth with international expansion, it continues to include focus on debt and interest expense reduction to further improve our profitability. Debt to total capitalization improved to 50.6% at the end of fiscal 2006 achieving our near term goal of 50% down from 76.8% at the beginning of the year. With attainment of this goal we're next targeting a corporate debt rating of BB or better. Ultimately we're targeting a 30 to 40% debt to capitalization ratio with an investment grade rating to give us flexibility to support our growth strategy. With that, I thank you, and turn it over to Derwin.

Thank you, Karen. Good morning to everyone. The fourth quarter proved to be another strong quarter for Columbus McKinnon's product brand names and distribution channels in North America compared to last year. General distribution sales in North America were up 15% representing 39% of the total revenues. Specialty distribution sales in North America were up 16%, or 9% of total revenues. With lower profitability product groups, sales volumes were negatively impacted by repositioning of pricing practices,. iIn some instances these strategic activities resulted in reduced revenues, but improved margins. International revenues were down 7.6% compared to a very strong quarter last year primarily driven by Univeyor sales in Denmark. In addition, currency fluctuations impacted growth by a negative 2.5%. As a reminder Univeyor is driven by a limited number of large projects and if projects are delayed or one is lost, the impact is very much noticed.

Exclusive of Univeyor sales plus one very large Korean shipment international sales were flat. Overall international sales represents 36% of total revenues. No new price increases were implemented in this quarter. All product surcharges were rolled into new pricing earlier in the year and remain in place. A price increase for all of hoist, chain, and forged products was effective May 15, of this month in the range of 3 to 5% on average. The outlook remains positive entering the new fiscal year. No one market, product or geography is dominating revenue growth. Distribution in North America continues to be optimistic for sales growth in 2006 which is reflected in strong bookings so far this quarter. On the high-end of the scale, crane manufacturing remains robust while general MROP products sold through a variety of distribution channels continue to grow nicely.

We continue to maintain a strong presence with the reconstruction operations and aftermath of the hurricanes along the Gulf Coast. High oil prices also generated incremental sales for a variety of production and maintenance applications with cranes, hoist, chain, and forgings, Our initiative for growth outside of North America remains a key focus as we implement our multi-branding strategy in key international markets such as Europe, South America, and Asia. Relative to operations, our operating leverage continues to be strong. This fiscal year every incremental dollar in sales is has generated ian incremental $0.42 of operating profit over last fiscal year.

Operational excellence and people excellence are two initiatives supporting our never ending pursuit of superior customer service. Our focus on lean continues to be a foundation of improving our business. However, listening to our customers via many face-to-face meetings and survey data are key factors in determining our focus on operational excellence. A recent review of all data continue to keep Columbus McKinnon focused on the right operational excellence initiatives. This focus is partially reflected in our results and will continue in the future.

We are also focusing on developing our people and our development plans are well underway and show positive results. Investing in new and improved products is also a key initiative for customer excellence. This quarter Columbus McKinnon had a big win with a major launch of a new wire rope hoist product offering. It was launched in a meeting with most major customers attending, and the orders at the meeting were more than twice our expectations. In addition to being a superior product to the one being replaced, the margins were substantially improved over the prior model. This was partially the result of an exceptional design, but it's also a result of part of the product being made at one of our lower cost plants in China. All of this combined with many new value-added customer desired features created a big success. We continue to have multiple initiatives that will improve the results of the Company in spite of inflation in energy and steel. Having said this, we will continue to have annual price increases as previously mentioned. Thank you and now let me turn it over to Tim.

Thank you, Derwin. We're open for questions now.

[OPERATOR INSTRUCTIONS] Our first question is from Peter Lisnic with Robert Baird. Sir, you may ask your question.

Good morning, everyone.

Hi, Pete.

Tim, can you help us understand a couple things with the sales growth in the quarter. First, it looks like you lost some sales due to what I will call pricing, I guess. Is there any way of quantifying that?

We can give you a range, I think, at this point. Basically what we have done is in some of our businesses where we have been either neutral in terms of margin or negative, it is fair to say, we have decided to walk away from that business and not pursue that any longer for probably obvious reasons. That equated to somewhere around I will say several million dollars worth of revenue, in that area.

Okay.

The other one, and the larger impact quite honestly is the amount of bookings that we're seeing from the marketplace in that quarter, in the fourth quarter, was huge and . Qquite honestly, unexpected to the degree that we saw. You heard Derwin talk about the launch of one new product which was our FEM wire rope hoist. It was very well accepted by the marketplace, and more than doubled our expectations in terms of what we were going to see by actually probably approaching more like triple our expectations. That one we added to backlog, and I think we talked a little about backlog rising,. iIn our product segment backlog generally speaking, Pete, as you know, is relatively flat. iIt probably bounces a couple million dollars quarter to quarter. But this past quarter it grew to a large degree because of these bookings, and a lot of the orders came in in March and we just couldn't get them shipped in the fourth quarter, and that had an impact on revenue not being recognized, but adding to backlog.

Okay. It was essentially because it was booked at the end of the quarter, not necessarily because you didn't have capacity or there were production issues or whatever the case may be from that standpoint?

I think it is actually a combination of two things. One is, yes, most of it was booked in the March month which is the last month of the quarter, but also in addition to that we didn't expect to see this kind of activity from the marketplace, so we need to ramp up our capacities as well to be able to deal with this increased volume we're seeing right now.

All right. Fair enough.

We're hiring people now which will help rectify the situation.

If I could just continue I guess, along that line of questioning, you have taken out some of these lower margin product or discontinued, I guess, and then the FEM product is presumably higher margin product as you alluded to earlier,. aAnd then you're still targeting 11 to 12% operating margin over the course of a year, and you just did 11.5% in this quarter. Is there any reason to believe that you can't do above 12% as you get more leverage into the model and as your mix becomes richer?

I think that possibility exists, but we're on record for saying that 11 to 12% is our target.

I am trying to get you on record to say 12% or higher.

What I would like to do, Pete, is actually get a couple quarters in the new fiscal year under our belt to make sure that -- there is additional cost as you know are whacking us as well as others in terms of energy, higher compliance costs, product liability costs, and what I want to do -- and healthcare. What I want to do is live through a couple quarters before I change our stance.

That's a very good point. Then on the FEM product, I presume that you have actually shipped some product, it's performing as expected, and can you give us a sense as to what the margin differential there is between the FEM and the non-FEM product or the product that it is replacing?

We don't comment on gross margins as you know but it is -- let me give you a point that it is substantially different than the one it has replaced, and that is a combination of a great design as Derwin mentioned earlier added to the fact that we have a lower cost component coming to from our factories overseas and in China adds to that as well.

Okay.

By the way, you're right. It is absolutely launched, shipped, I don't know exactly how many we shipped.

We shipped within a week of the launch we actually built up some inventory in anticipation of that, and we shipped a little over 100 units right off the bat people were very pleased with it: it is going well. We're continuing to go ship heavily in the last six weeks.

Okay. And then in terms of I guess the order book that you saw, was there any sign of cannibalization from the -- for the ANSI product for some of those FEM product that you booked?

I think not.

Okay.

Well, it did replace one ANSI product line. From that standpoint, yes. By the same token that business continues to see pretty astounding booking levels generally speaking across the entire product range.

Okay.

It is still a very solid business today.

Okay.

Except for the one product that was displaced by this FEM rated hoist.

That explains it. Thank you very much.

Okay, Pete.

Our next question comes from John McGinty with Credit Suisse. You may ask your question.

Good morning.

Hello, John.

Let me start just to -- this is I guess a clarification more of words than anything else. When you talked about the issues that affected your sales on the product side, it is clear that as you said several million where you simply have decided to either exit a that business or raise prices enough that you weren't going to be neutral or negative. But the fact that orders were booming didn't really -- didn't hurt your sales. All it did was -- that actually didn't hurt your sales. It is just what you're really saying is that your sales would have been stronger if those orders had come earlier or if you had been geared up for them.

Correct.

Okay. And then the question is given the fact that the orders were so much stronger than you thought, your backlog is up, and you're now actually going to the point of ramping up capacity and hiring people. I guess really the underlying question is why were orders so much stronger and obviously you're fairly confident that this order rate is going to be sustainable or you wouldn't be hiring people. What is it that's out there that's causing orders to be stronger in this regard?

John, as you know, most of our products business gets sold through distributors.

Right.

There's Nnine different channels of distributors. We meet with them regularly. As a matter of fact, we were with our industrial distribution channel which is kind of the mainstay and probably 25 or 30% of our volume this past, not this past weekend, the weekend before, and the end-user activity out there in the marketplace is just astounding. It is very, very positive. Our channel partners are all very positive, we just had a price increase this past May, and normally we get a little bit of increase in orders then, in anticipation and advance of the price increase. It was huge, so I think generally speaking the end-user markets are hot. Our channel partners servicing those end-user markets see that and understand it and are willing to stock up in advance of that, in advance of our price increase and put it on the shelf because they know they are going to move it in short order. That's the only thing I can say. The new product, certainly the new product that we launched, the FEM-rated wire rope hoist in March was well accepted by the marketplace, and there is obviously a lot of pent up demand nor for products of that nature as well.

You're not implying at all -- that's only a small part I assume of the overall increase in the backlog and in the order?

Correct.

Okay. And the price increase, the 3 to 5% was on May 15. In the two weeks or so since then has there been a marked slow down in orders? Has there been any evidence that -- I mean, March just seems a long time for them to have anticipated the May price increase. I assume April continued at the same rate that March was in terms of the orders and things like that?

April and May were equally as strong as what we saw in the fourth quarter.

Okay. And in terms of just a couple of questions over on -- given the pay down of debt, given where you have done what you have done since the end of March, Karen, can you give us what we should expect a run rate for the interest in debt expense to be on a quarterly or annual basis in looking at fiscal '07?

John, well, we don't give specific guidance. I guess I can comment to you on the changes. In the -- let's see. You recall when we step back to the third quarter for a minute, in the third quarter using proceeds from our equity offering, we took down about 40 million of our 10% paper, so that would be a reduction of $4 million annually. Let's see. In this quarter we took down -- let me think. How much did we take down this quarter? 8 million which would amount to about $800,000 annually and then subsequent to year end between March and recently we took down an additional $32 million of that 10% paper which would save an additional $3.2 million of annual interest expense.

So what is the total debt now?

The total is about 8 million.

I am sorry?

In total that would be about 8 million.

In less interest expense.

Of lower interest expense.

What is -- just remind us, is it 1.77 a funded debt that you said? Where are you right now?

Where are we right now? As a result of the recent reductions subsequent to year end, we are at -- I think it was 1.77, let me just confirm that.

It is 136 million of the 8- and 7/8ths notes and about 35 million or so -- 36 million or so of remaining 2010 notes.

At 10%?

At 10%.

Yes, I am sorry.

Then there is some outside the country.

Just maybe, it runs in 3 to $5 million or so. Total is currently about 177 million. You're right.

At about a blended rate of what 9, 9.5?

Say 9. The majority, 136 million is 8- ad 7/8ths, and then about 35 million of it is at 10.

Okay. And then did you -- again, I apologize. I just want to make sure I got this correctly. The tax rate we should use now, the book tax rate would be 38, 39% going forward?

That's correct.

The cash tax rate will be substantially lower?

That's correct. The cash tax rate, depending on how you build your models will be similar to what we have seen in the past quarters, and that basically we'll only be paying taxes on our foreign earnings and a little bit of state taxes.

And then just -- if you could just -- Derwin, if you could go back over how you got the foreign from being down 7 to being flat? I missed that.

There were two key things. Our Univeyor business is made up of a few big orders.

Lumpy.

If you miss one or it is more likely they're delayed, which is the mode they're in right now primarily, those are delayed. If you just compare year-over-year the orders just weren't as strong in the fourth quarter. In addition, we had a very large Korean order not out at Univeyor, but actually out of the United States that was shipped there, and that was very large, and so that essentially made the international sales flat if you take those two things out.

In other words, that was an order -- that was a shipment in '05 that was not present this year?

That's correct.

That's what threw me off. I will get back in queue. Thank you.

Thank you, John.

Our next question comes from Mark Grzymski with Needham & Company. Sir, you may ask your question.

Good morning, everyone, and congratulations on a good quarter.

Thanks, Mark.

Getting to the revenues in fiscal '07, you mentioned $600 million of revenue and an operating margin between 11 and 12%. I know the 600 million isn't guidance, but are you kind of implying that you're pretty confident or are you implying that 600 is very attainable? What's your feeling on that?

Well,--.

I know you don't give guidance, but. T the number is in the release, so I am just curious.

Yes, yes. We still stand behind the fact that this company will be back to that $600 millionish revenue range, and as Karen mentioned, 11 to 12% operating income clearly. We're not saying when that's going to happen. I just want to be clear on that. I will tell you that we've also said that our bookings have been to mid-to high single digit kind of historical rate other than this fourth quarter which has been higher than that. I don't know if that's going to level off or not. I think if you put pen to paper and you say 4, 5, 6, 8% growth on the $556 million we just put up for the fiscal year, you can come pretty darn close to $600 million just by doing that math.

Right. Correct. What would you imply is -- how are you guys looking -- you have price increases 3 to 5%. What portion of say that 4 to 8% are you hoping to get through in the way of price increases?

Historically speaking you get somewhere between half and three quarters of the price increase.

Okay.

It is kind of a timing gain game. We have distributor partners that have printed catalogs out there that we have to wait on, and we have outstanding contracts with the government. We can't get price increases on. It varies all over the map. But generally speaking we get somewhere around half or so of that price increase. The other part of that of course would be a true volume.

So a $600 million number isn't really all that much in volume growth which is conservative I would guess. Anyhow, Tim, moving onto China, I know there is a lot of talk here and maybe you can shed some light on what's going on there as far as your distribution partners. I know Grainger is growing rapidly there, and you're on the pages with them. Could you go into more detail, and I also want to look longer term. I guess I envision that your revenue stream from China and the Asian markets is going to continue to grow. What's your longer term feel there?

I think you're right on. First of all, just a couple comments. As you know, the economy in China is hot and has been hot, and we foresee it to continue to be very hot, especially in building of manufacturing plants and there is a lot of foreign owned money going into that economy today as well as local, indigenous manufacturers. The way we're going about this is multiple prongs. The first one is to partner up with our channel partners that we work with around the world. Grainger is one that most people know. They are our largest channel partner at 4, 5% of our revenue is to them. They are just printing a Chinese catalog, 740 some odd pages which will be launched this had summer. Actually it is already launched -- the formal launch is sometime I think at the end of the summer, and we have our fair share of pages in that book that will be going out to the Chinese market.

We also have a partner by the name of IDG which is a smaller catalog house -- not a catalog house but industrial distributor, publicly traded that's been in Shanghai now since I think 1999 or 2000 or so, and we've been selling through them for quite a while. We have also ramped up to train their people this past spring in a bigger way to sell our product which is a little more difficult in selling cutting tools, et cetera,. aAnd then in addition to that we have a German customer distributor partner [Melchiers] that we've been selling into the Chinese market for a number of years. They're growing dramatically, more a consumer oriented, retail oriented kind of partner which gives us a good presence there as well.

How fast do you think they're growing?

I don't know. I got to believe it is at least as fast as the economy which is 12 or 13%.

Okay.

And then I would say the other thing we're doing is hiring a salesforce. We have a sales manager on the ground in Beijing. We have got a new fellow in Shanghai and someone going down in the Canton region to really focus on going after the indigenous manufacturers in China. To sell them more directly we have to have a strong presence in the major markets and in essence a store front if you will in the industrial markets to be able to capture that market a little better. We're growing that way as well. You're right. Today it's a relatively modest number that we sell into the Chinese market, stronger in the western portions like Korea or January Japan. But China is the one we're focused on and investing in, especially given the fact that we have four manufacturing locations with a nice presence there in Hangzhou which is just outside of Shanghai, so we feel pretty confident that we can get our fair share of that growing economy and hopefully as we look to the future it is going to be growing much more rapidly. Again, albeit from a smaller base.

Also staying in China, are you -- you mentioned, and this isn't new to the press release but your ability now to make an acquisition as greater -- is there -- are you really looking in that area as far as getting inside the indigenous area there?

The best opportunity that we have to grow more quickly is to find someone who already has a wonderful presence there better than we do that is already ingrained in an indigenous world, manufacturing world there that we can buy or partner with that would give us a strong presence out of the blocks.

Yes.

We have nothing to announce other than to say that is our focus.

As far as -- since you haven't made an acquisition in awhile, of any significance, is there -- can you give us a kind of range as far as what you're comfortable paying for someone?

Yes. It is hard to say what we would be willing to pay for someone. It is really what the people bring to the party and what the synergies look like and what we can make of the Company of course, but I think at this point in time given the fact that we're pointed in a very positive direction with our level of debt as you well know, especially with buying back more of those bonds in the open market which Karen has been able to do this past couple months or so, we feel pretty good about our financial position and would be very cognizant about where we stand from a capital structure standpoint, but we're looking at companies that are somewhere in the area of 5 to $50 million in size and sales revenue. I can't imagine paying more than one-time sales for anybody.

Right.

It really depends on what they bring to the party.

Okay. Finally, in China, what kind of impact does the current environment over there, interest rates rising? How is that going to affect you guys now that you are manufacturing over there and from a cost of goods standpoint?

Well, I think the biggest impact might be slowing the economy if they can in fact slow the economy. It would be more from a revenue standpoint. I think our cost of sales, they've been impacted dramatically on rising costs, energy is going up, and they still have brownouts in that country that is certainly foreign to us here, so we send people home. Very unproductive. We still see steel, they pay as much for steel as we do here. It is steel prices is a worldwide market. They've been seeing and feeling those increases. I think it is fair to say they have not felt any increases as a result of rising interest rates. They don't have a -- they don't borrow money today. They generate enough cash to support themselves and the growth that we've been seeing. That's not an issue.

Okay. Great. And then coming back over here, since most of my questions have been answered can you just touch on general economy within certain sectors? Is there -- are you still seeing strength across the broad markets? You've mentioned that in the past. Is there anything negative that you can say?

I am happy to report, no. I think it is fair to say that we still continue to see a broad based growth around all of the markets that we sell into. Of course the oil patch and oil service and oil related kind of activities is very hot. I would say that the Katrina and related hurricane problems down there, we expected to see something faster than we are today. We certainly are seeing some additional demand for the rebuilding effort, and we're poised to help in that record regard. We're just not -- it's just not coming through as fast or as robust as we thought it would. I think it is taking them a little while to get organized. We expect that to come, it is just not happening as quick. I would say and I will look to Derwin to comment as well, it really seems to be very broad, very positive, the same kind of mood and attitude that we've been talking about now for quite a while.

That is exactly right. All the distributor partners that I am talking to, they're just bubbling over with enthusiasm about it's not been this good ever.

All right.

Whether that is factual or not, certainly it is good. There is no doubt about it. Whether it is ever or not is another question. That's what they say.

Right. Okay. And then Karen, just lastly, I think I missed it. Did you say in the products area that there was a 3% increase in volume and a 2% increase in pricing?

Yes, that was right and those were offset by a 1 percentage point decrease due to foreign currency translation.

Okay. Great. You will be happy to know your stock went up once you started the call. Congrats.

Thanks, Mark.

Our next question is from Ken Schlemel with Wolfpoint Capital. You may ask your question.

A couple of questions. When you talk about expansion, what ways do you plan on financing? I'm sure you have got some very aggressive production targets.

Well, the first one that comes to mind is we do have an outstanding revolver, 75 million revolver can expand up to 125, and certainly that's available to us. The pricing on it is LIBOR plus 100. Is that right? It is relatively modest at least compared to our senior bonds that we have outstanding as well as our subordinated notes, so that's certainly one area that we can tap. Our capital clearly has -- our stock I should say is in the area that certainly could be used as capital if need be. I would prefer not to do that, and I also say that our normal cash flow that comes from our operations, especially with this reduced interest expense that we're going to be looking at for the upcoming fiscal year, we should generate a fair amount of free cash this year, and the kind of growth that we're talking about here is what I would term to be relatively modest. Acquisition sizes in the area of 5 to $50 million, the kind of sales growth and positioning of partners in the Chinese market and hiring of the salesforce is small, it is not a huge capital intensive kind of operation we're looking at there. Our investment in fixed plant has already taken place. We have well over 120,000 square feet of operating space there. We're in pretty good shape. I think we're not looking toward a whole bunch of capital to be used going ftoward quite honestly.

Sounds like you're looking at one or several specific targets in China and it's probably a this year event or this fiscal year event.

That would be nice. We're also looking at the Eastern Bloc of Europe which continues to be growing, maybe not as rapid as China but certainly growing, and we are studying India to better understand that market and how we can penetrate that. We have no plans at this point, but that ones--.

Okay.

Other than entertainment I think we're real close on it.

In terms of the debt you bought back, what was the price paid?

We paid a premium, and I don't know exactly what the average would be. I, but it is in the 109 to 110 area.

Right.

Right in that area?

Yes.

I think they're trading in that area, so.

It's market pricing which is economical for us.

Okay. Do you have any more plans to buy back more of that or are you done for the year?

We said we will continue to monitor the market based on their availability and based on what makes sense for us economically.

Okay. And then costs, you keep talking about cost increases. I am wondering a year-over-year basis is it second, third quarters, is that going to be neutral at some point or do you still see a bigger price or cost increases?

Well, our projections are certainly costs will rise. We know that energy is going to continue go up. We know that our freight is going up today especially with energy surcharges from our carriers. We're seeing that. Healthcare has moderated. It is not growing as fast as it has historically, at least the last several years. That's something we're very cognizant of and still think that we have a healthcare industry that is absolutely out of control. We're cautious about that. Product liability is something that's on our radar screen only because we are in this wonderful country that's litigious in nature and we seem to be sued on a regular, ongoing basis regardless of fault. We're certainly optimistic that we can hold the costs or at least offset them with price increases.

What do you see in the materials?

Steel is bouncing up a bit, d. Depending on the product grade that we buy clearly and down in some grades. So Iit is kind of up and down I guess depending on which one you speak about, which grade of steel we buy today. We have contracts for electric motors that extend for several years. I don't know when that motor contract is up. It has got to be a couple years out. I basically have locked in prices there.

We just signed it.

We just signed it.

The only variable there is copper.

Copper is the variable. We will be paying some material increases as copper moves around?

Right.

Is copper a pretty small part of your material costs.?

It is only in motors. I think that's fair to say.

The rest is pretty much steel.

The rest of it is steel, and steel represents 10% of our cost of sales. Even steel is somewhat modest when compared to the overall cost of sales of the Company.

Okay. And then just trying to get -- you talked about this several times. I am just trying to get a feel or seeing -- is international business not as robust as it is in North America or is it just more competitive and that's why you're not seeing as big a pick up as you're seeing in North America?

I think that's probably true. North America is doing quite well. As I take a step back, and you take a step back from the details of the quarter and look at places like Germany, they have had a great year, a very nice run. I would say that most of our international sales has been negatively impacted by Univeyor which is our powered roller deveyor conveyor company.

Yes, excluding that which is obviously binding.

If you exclude that we did quite well. I would say that generally speaking that it has been fine. Most of our growth is coming from export markets out of Germany into the Eastern Bloc. That's going to be probably our next foray into Europe is -- we sell into Hungary today and then we export from there as well as in Germany the rest of Eastern Bloc. We probably need to add a location like maybe Poland because that's doing quite well for us to service that market as well.

How about competitively?

Well, we certainly have competition everywhere around the world. There is no question. In Europe we have a lot of very strong competitors. [DEMOG]Demag comes to mind ais a German an -based company that does a great job in Europe. Similar to how we're positioned here in the states, we see KCI Konecranes around the world and here in the states as well. Clearly we have competitors. Certainly in Europe there is a fair number of them.

But Yyou're not seeing any other competitive pressures increasing or decreasing?

None more so than normal. Let's put if it that way.

Thank you.

Our next question comes from John McGinty with Credit Suisse. You may ask your question.

Just as a follow-up we talked about the very strong orders and everything in the products business. In the solutions business, specifically the lumpiness on Univeyor orders and so on, can we talk about what the outlook there is, in other words, that continues to be disappointing certainly in terms of margins, certainly in terms of growth. There is not much top line growth there at all in '06. Do we see anything that is going to be any kind of an improvement there based on either orders they have or proposals they have outstanding or bookings or anything at all?

They are working on a number of very large and substantial orders that could come through at any moment. I can't give you an outlook, John, on that just yet. I would much rather wait until we book it and then tell you all about it. They are continually a very innovative group. They also continually develop a whole line of new products one of which is very interesting and intriguing to us which they will be launching this coming summer. We would expect to see some future benefit, maybe not this fiscal year but certainly in future fiscal years as a result of that. So we would hope that the revenue would follow that as well as margins quite honestly.

What kind of a gross margin should we ever expect out of the solutions business?

Well, again, we don't giver guidance on that.

I understand. What kind of gross margin, you give a Columbus McKinnon 11 to 12% operating margin which is a corporate, corporate, corporate number, but that obviously has to be made up of a gross margin and an operating margin of both products and solutions. What I am just trying to understand is this a 13%, 14% gross margin business at best or is it fundamentally that much lower business than everything else or is it just that they're screwing up right now?

I would say that generally speaking this business will be somewhere in the mid-to-high single digit operating income target or area that we should be able to attain with time.

Okay. Very good. Thank you.

At this time there are no further questions.

Well, thank you, everyone. Let me just summarize by saying our strategy is to continue to leverage our superior handling design and engineering know how to continue our leadership 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 the CM associates around the world for their hard work and ultimate success in making this quarter and fiscal year a success.

We continue to experience growth in bookings and revenue from our distribution channel partners who have experienced growth from the broad end-user markets they serve. Combine this revenue increase with significant cost reductions we have accomplished in the Company in the last several years, and it results in very impressive operating leverage. We maintained our strong market position in the domestic markets, and have penetrated new markets around the world. We believe it will continue to perform well but need to all recognize there are some issues in the world markets that could have an impact on the improvements we've seen to date. Energy costs, interest rate increases, healthcare, product liability, and regulatory costs, have all had an impact on Columbus McKinnon and certainly might in the future.

We continue to drive the lean concepts across our businesses as this is the process that has proven that we can continuously improve our operations around the world. We also continue to invest prudently in new markets and products to protect our market share in the U.S. and grow sales internationally to keep Columbus McKinnon positioned as the leader in the material handling industry. Again we want to thank all of our CM associates for their efforts to make us that leader. As always, we appreciate your time today and have a great day.

To listen to a replay of today's conference please dial 866-363-4002. Once again, to listen to a replay of today's conference please dial 866-363-4002. Thank you for attending today's conference and have a great day. You may disconnect at this time.