Columbus McKinnon Corp (CMCO) 2007 Q3 法說會逐字稿

Good morning and welcome to the Columbus McKinnon's fiscal 2007 third-quarter earnings conference call. At this time, all participants will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you do have any objections, you may disconnect at this time. I would now like to introduce your host for today's call, Mr. Tim Tevens. Sir, you may begin.

Thank you, Gerri. Good morning and welcome to the Columbus McKinnon conference call to review our results for the third quarter of fiscal '07. Earlier this morning we issued a press release with the results. With me today here is Karen Howard, our Chief Financial Officer, Derwin Gilbreath, our Chief Operating Officer, and Joe Owen, Vice President of our Hoist Group.

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 we publish with the SEC to be sure you understand these risks.

Overall, our revenue for the third quarter exceeded the same quarter last year by 6.5%, the bulk of this being volume-related; continued to be driven by a strong global industrial economy. Our bookings in the third quarter, for the Products group in particular, is the mid-single digit area. Our gross margin was up almost 10.6%. Operating income increased 13.6%, leading to an operating leverage of 20%. Our net income was up $7.7 million, or over five times the third quarter in fiscal '06.

Relative to our Products segment, which is the largest piece of our business at almost 90% of our sales, revenue in the third quarter was up 7.6% compared to the same quarter last year and down slightly compared to the second quarter of fiscal '07, primarily because of fewer shipping days. The increase compared to last year is primarily driven from increased demand from our end-users through the various distribution channels that we sell as well as our price increases.

International sales were up 17% over last year, a very strong percentage, which you'll hear more about from Derwin in a moment. Our Products segment gross profit was up 17% over the same quarter last year, and gross margin was very strong at 29.7% in this short quarter.

The operating income was up 31.6% and the operating margin was very positive at 12.7%. The leverage in this Products segment continues to be very positive, as it has been for a while now, and it was at 43% for this quarter. Bookings for the Products segment continued to be positive in the quarter and, overall, were up about 5% over the same quarter last year. Backlog was flat compared to the second quarter. And just as a reminder to you all, the cycle time on most of these items in the Products segment is days or weeks; therefore, the backlog number represents about five weeks worth of shipments to us.

The Solutions segment sales were down slightly from the same quarter last year and flat compared to the second quarter of this fiscal year. Recall that this segment can be and is volatile in terms of quarterly revenue because of the nature of the bookings and processing large contracts. Gross profits were down considerably, 65% compared to last year, and down 12% from the second quarter '07. Our operating income is down substantially in both comparisons as well. Backlog is up about $5 million.

In summary, we're not happy with the performance of the major business in this Solutions segment, Univeyor, which is our European powered-roller conveyor business that represents the bulk of the segment. We expected a decent turnaround this quarter and we did not see it. Therefore, we are actively restructuring this business and would expect to recognize some additional restructuring charges in the fourth quarter in the area of $300,000 to $400,000.

We are aggressively pursuing changing the operating model and migrating from a material-handling systems provider to more of a standard proprietary product and maintenance contract; and only those projects, those systems projects, where we can demonstrate and be paid for are unique value-added abilities. We are also considering all strategic alternatives as it relates to this business.

One critical focus, as you all know, for our company has been the reduction of debt. We continue to see progress in this area, as funded debt net of cash is down to $141 million at the end of the third quarter. We have now achieved a 37.7% net debt to total capitalization.

With that summary, let me pass it on to Karen now, who will lead us through more details.

Thank you, Tim. Good morning, everyone. I'm pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2007 third quarter and year-to-date that ended on December 31, 2006.

Consolidated sales increased by 6.5% to $142 million in the third quarter of this year compared with last year's third quarter. Products segment sales, which accounted for approximately 89% of total sales in the quarter, increased by $9 million or 7.6%, with strong double-digit sales increases in several major core product groups, including hoists and cranes, and particularly to our Columbus McKinnon Europe business, and to a smaller extent our Latin American business.

Orders were solid in most categories and continued to be especially strong for more capital-type equipment, such as engineered hoists and cranes. Accordingly, volume, including one additional shipping day, contributed a 4.8% increase for this segment over last year. Further, pricing and foreign currency translation favorably impacted the change by 1.7% and 1.1% respectively.

Solutions segment sales decreased $0.3 million or 1.9%, compared with the third quarter of fiscal '06, with decreases in our Material Handling Solutions business offsetting increases realized by some of the other businesses in this segment. On a year-to-date basis, consolidated sales increased $24.1 million or 5.9% over last year.

Products segment sales were up 6% and Solutions segment sales were up 5.2%. 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 fiscal quarter. The recent quarter had 59 shipping days, four fewer than each of the first two quarters of this fiscal year and one greater than the same quarter of fiscal '06. Looking forward to the upcoming fourth quarter, it will have five more shipping days in the quarter just ended and one fewer than the year-ago quarter. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal '07 and fiscal '06 for your reference, as well as for our next fiscal year, 2008.

Now, reviewing gross profit. Overall, consolidated gross profit increased $3.7 million, or 10.6%, with the Products segment contributing $5.5 million and realizing gross profit margin expansion of 240 basis points year-over-year to 29.7%. Products segment gross profit as a percent of sales was higher than last year's third quarter due to better product mix and productivity improvements. The gross profit margin of the Solutions segment of 6.4% in the fiscal '07 quarter, compared with 18% in the fiscal '06 quarter, reflects continued weakness in Univeyor, our powered roller conveyor business, primarily due to project execution issues.

We have accelerated our initiatives to make this more of a standardized Solutions business and less of a customized Solutions business to reduce revenue volatility and improve overall profitability and return on capital. Additionally, we have begun strategic alternatives process for this Denmark-based business.

On a year-to-date basis, consolidated gross profit is up $13.3 million, with gross margin expansion of 160 basis points to 27.7%. Despite the issues realized in our Solutions segment, consolidated earnings leverage added $0.42 and $0.55 to gross profit for every dollar of incremental sales this quarter and year-to-date respectively, as compared with the prior-year period.

Consolidated selling expense as a percent of sales was 10.6% in the third quarter, up from 9.7% last year due to increased investments in both our domestic and international markets in accordance with our strategic growth initiatives. On a year-to-date basis, consolidated selling expenses follow a similar pattern at 10.4% of fiscal '07 year-to-date sales, compared with 9.8% for fiscal 2006 year-to-date.

Consolidated G&A expense was 6% of sales in the third quarter, compared with last year's 6.3%. This year's G&A reflects additional costs for our international expansion activities, new product development and personnel training, offset by lower variable compensation and other expenses. Year-to-date G&A expenses were relatively consistent year-over-year at 6.1% of sales.

Restructuring charges for the third quarter of fiscal '07 include $0.1 million associated with our Denmark-based Material Handling Solutions business. We expect to incur an additional $300,000 to $400,000 in the fourth quarter as the restructuring of that business continues.

With operating income increasing by $1.8 million, or 13.6%, our operating margin improved to 10.5% for this year's quarter, compared with 9.8% last year. On a year-to-date basis, operating margin expanded 130 basis points to 11.3%. The consolidated operating leverage contributed $0.20 and $0.32 to income from operations for each incremental sales dollar in the quarter and year-to-date, respectively. With steady revenue growth, we see further sustainable opportunity for operating leverage in the 20% to 30% range.

Interest and debt expense was down $2.2 million or 35.6% over the prior-year quarter and $6.9 million year-to-date, due to lower debt levels, including $3.7 million of open-market purchases of our 10% notes during this past quarter. We incurred bond redemption costs of $0.4 million in this year's quarter and $5 million in last year's quarter associated with debt reduction activities that are generating those ongoing interest savings. On a year-to-date basis, we incurred $4.9 million in fiscal '07 and $8.3 million in fiscal '06 for such bond redemption activities.

We realized $3.8 million of investment income on our captive insurance company assets this quarter, as compared with $0.4 million in last year's quarter. This year's activities included a significant portfolio reallocation to be more heavily weighted on fixed income securities as opposed to equities. On a year-to-date basis, fiscal '07 has realized investment income of $4.6 million compared with $1.6 million in fiscal '06.

Regarding income taxes, the effective tax rates for the fiscal 2007 third quarter and year-to-date were 38.2% and 39.5% respectively. The year-to-date rate was unfavorably impacted by the first quarter non-deductibility of incentive stock options expense associated with the adoption of FAS 123(R).

On a go-forward basis, our expectations are for an effective tax rate in the 38% to 39% range, which will include a non-cash portion relating to the utilization of U.S. federal net operating losses, or NOLs. The NOL carry-forward currently amounts to approximately $48.4 million, representing approximately $16.9 million of cash tax savings.

The effective tax rate for the fiscal 2006 third quarter and year-to-date were 55.1% and 29.6% respectively. The fiscal 2006 third quarter was unfavorably impacted by the bond redemption costs incurred in that period, which offset the availability of the NOL.

The year-to-date fiscal '06 results were favorably impacted by the reduction in reserve for the utilization of our NOL carry-forward, which was fully reserved at that time. At the end of fiscal '06, we reversed the valuation allowance against deferred tax assets, including the NOL. Accordingly, while the NOL still remains, it no longer impacts the resulting effective tax rate. Furthermore, the cash tax payment savings for U.S. federal tax will continue to be available until the NOL is fully utilized.

Earnings per diluted share for the third quarter of $0.48 compares favorably to last year's $0.08, reflecting fivefold improvement. Removing the extraordinary investment income financing costs and adjusting for a comparable effective tax rate, resulting pro forma non-GAAP EPS of $0.38 for the fiscal '07 third quarter also compares favorably to the fiscal '06 pro forma non-GAAP EPS of $0.28, or a 35.7% improvement.

Year-to-date, actual EPS of $1.22 reflects an increase from last year's $0.75. Upon adjusting for the same items as well as the FAS 123(R) adoption expenses from the first quarter of fiscal '07, the fiscal '07 year-to-date pro forma non-GAAP EPS of $1.31 compares favorably to the fiscal '06 year-to-date pro forma non-GAAP EPS of $0.98, or 33.7% improvement.

Depreciation for both quarters was $2.1 million. On a year-to-date basis, it was $6.2 million, compared with $6.6 million last year. Capital expenditures for the third quarter were $2.5 million, compared with $1 million in the fiscal '06 quarter. Year-to-date CapEx was $6.8 million, with last year being $4.7 million. The spending 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 $10 million area for fiscal '07.

Net cash provided by operating activities was $12.3 million in the quarter, with earnings contributing $12 million and operating assets and liabilities contributing an additional $0.3 million. We continue to focus attention on our working capital utilization. Our long-term target remains 15% working capital as a percent of revenues.

At quarter's end, debt net of cash was $141 million and total gross debt was $173.2 million. At quarter end, availability on our $75 million revolver provided for under the senior credit agreement was $64.3 million, representing $10.7 million of outstanding letters of credit and nothing drawn against the revolver. We were comfortably in full compliance with all financial covenants related to this agreement.

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 and provide capital structure stability. During the quarter, net debt decreased by $10.8 million, reflecting continued improvement in our net debt to total capitalization percentage to 37.7%.

Gross debt to total capitalization improved to 42.7% at the end of the fiscal 2007 third quarter, down from 58.6% a year ago. We are next targeting a corporate debt rating of BB or better. Ultimately, we are targeting a sustained 30% to 40% debt to total 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 third quarter continued a solid year for Columbus McKinnon, with sales for the quarter up 6.5% compared to last year. Domestically, sales of cranes through our CES division, which is our crane builders group, and hoist and components to the crane building industry remained strong, with a combined 25% growth over the third quarter of last year. This represents over one-third of our domestic sales.

The continued expansion of new construction and maintenance activities in the energy and power generation industry is a key part of this growth and is expected to remain strong throughout the remainder of the year. Internationally, growth continues in Central South America, with sales up for the quarter more than 20% compared to last year, driven by the overall strength in the industry there. With an established infrastructure in place, sales growth is expected to continue at a strong pace in Latin America.

A strong European economy produced a very good quarter for Columbus McKinnon Europe; up 26%, factoring out the exchange rates. The success of Columbus McKinnon Europe was largely offset by the weakness in our European operations at Univeyor.

Both domestically and internationally, energy and public works infrastructure construction is expected to remain strong, with both global energy consumption and prices at high levels. This is expected to continue to trend upward in the long run, despite considerable volatility in the short-term. With a focus on these high-growth market sectors, continued development of innovative new products, such as our recently-launched FEM wire-rated rope hoist, a new proprietary Load Lock universal rating system, expansion of our Quick Ship delivery programs, and further reductions in backlogs, the sales outlook for calendar year '07 remains very positive for Columbus McKinnon. With the continued emphasis on brand identity positioning, targeted end-user programs, market-driven value-based pricing, and further manufacturing cost reductions, we believe opportunities exist to continue profit margin expansion.

Relative to operations, our operating leverage in the Products side continues to be very strong, at $0.43 for the quarter and $0.50 year-to-date in the Products segment. Our Products segment backlog continues at a very high level, driven by large-capacity hoists and cranes. Our efforts to increase shipments in these areas have been very successful, but the orders continue at a very strong pace. On other products with lower backlogs, we have a number of Quick Ship programs in process where we will ship product in 24 to 48 hours. So this will continue to reduce that backlog as well.

Our goal of superior customer excellence is supported with detailed initiatives in operational excellence, people development, new products and services, as well as sales growth. As announced last quarter, our new Columbus McKinnon Europe organization has developed plans for the emerging markets, as well as our multi-branding strategy in Europe. They are well along the way to begin the execution of their plan.

Turning to inventory growth, it has been mainly in raw material, with some finished goods inventory. The largest single reason for growth in inventory is new products. The second reason is tied to the continuing surge in demand in our high-capacity hoist products, followed by the need to maintain steel raw material with longer lead times from that industry.

Our forecast is to reduce inventory this quarter as we launch some of the new products and continue to balance order flow, which will get our inventory back to a more normal level as we continue to work on further inventory turns improvement.

Now, let me turn it over to Tim.

Thank you, Derwin. Thank you, Karen. Gerri, we're ready for questions at this point.

(OPERATOR INSTRUCTIONS) Joe Giamichael, Rodman & Renshaw.

Congratulations on the progress you're making on the Products segment. I want to touch upon what seems like a paradigm shift regarding the future of the Solutions segment. Given the disparate nature and quarterly struggles, I don't think anyone is surprised by hearing the talk of seeking strategic alternatives. But is this process currently underway and, if so, is this something that has been a very recent process?

First of all, let me back up a little bit, I think, to the last quarter. We talked about Univeyor and some of the problems they were encountering with some suppliers. They had some repeats of that this quarter, and we studied this business for the last several months with multiple visits over there and also multiple conversations with their management team. There is a couple of things that still are good about this business, first of all.

They are very innovative in terms of developing products, specifically a device that we just launched at the ProMat show, which is our North American material handling show last -- beginning of January. EmptiCon is the name of the piece of equipment. It is a container unloading device which is -- you would view it, Joe, as more like a product, like pre-engineered hoist would be for Columbus McKinnon.

This is a pre-engineered device that helps people unload oceangoing containers from China, for example, which there's billions of them out there in the marketplace, with a lot of interest and a lot of insight, and that is an interesting product.

We are buoyed by the interest in it at the show. However, as we continue to review it, we need to fix this business and point it more toward products, innovative products like that -- they have several others as well -- and move, migrate away from systems, one-off designed and engineered systems, and point it more toward these products where they can get a steady stream of them out into the marketplace and producing very good margins, I might add, over the long haul for this business.

We are working on that migration right now, and that is part of the restructuring that we mentioned as well coming up in the fourth quarter, as well as some of the restructuring that you have seen us do in the third quarter. Along with that and in a parallel path to that, let me call it making this business a better one. We will be having, and have had, a couple of conversations with third parties to help us review and better understand what some of the other alternatives would be for Univeyor.

There, in fact, lies -- there may be a better owner for this business than Columbus McKinnon. Those conversations have taken place. We have not engaged anyone just yet, but we will continue to have dialogue and probably select someone here shortly.

Got it. I think what it sounds like is potentially you'll split the Products and Systems segments and likely part with the Systems side of the business.

That is one possibility and -- or may part with the entire business. I think what we really want to do is review all of those options and see which is best for Columbus McKinnon.

Okay, great. You've done an excellent job delevering and are approaching what you had previously targeted as your debt to total capital levels. If you sell any of these businesses, or I guess just more generally, if you want to talk about potential uses of your free cash, are you looking at strategic acquisitions now or do you continue to repay debt, do you repurchase shares? What are your thoughts there?

Great question, and thanks for that. We have in fact been, as you know, putting most of our free cash flow to debt reduction and we will continue to do so. We would love to be in the 30% area, and obviously we can see ourselves in the next quarter or two getting into that vicinity, which leads us to additional growth thoughts.

We here internally have spent a fair amount of time thinking about where to grow, how to grow, and the investments that we have been making. Some of the European growth that you heard Derwin talk about earlier has come from investments in some new markets for us, and they've proven to be very good and very positive.

In addition to that, we have been thinking our way through acquisition opportunities, and there are a number of them scattered around the world, some of which we have been talking with some of these folks for literally many months, maybe even a year or so, to continue to understand how the combination of our two businesses might create value for our shareholders at Columbus McKinnon and how we might make 2 plus 2 equal 5 kind of scenario. There is a number of those dialogues underway.

We have nothing -- nothing is imminent in terms of reporting to you an acquisition or anything of that nature, but you should be aware that one element of growth that we take seriously and are working on is acquisition growth. This comes in the way of relatively small, under $50 million typically-sized companies that would give us some additional international growth and/or product expansion to push through our networks, our distribution networks that we have that are very strong here in North America and in Europe. So hopefully, that makes some sense to you and that is a leg of growth that we're looking at going forward, as well.

Sure, that's great. Just one last question and I'll get myself out of the queue. You mentioned some of the new product introductions, the automation product for the freight consolidation and deconsolidation. Could you briefly walk through some of what the other examples are in terms of the new products that you are developing?

Yes, we have been talking now for the last year a FEM-rated -- FEM is an international standard -- hoist, wire rope hoist. That has -- we launched 5 and 10 ton last March. We have expanded that to --.

15 through 22.5 U.S. ton.

15 through almost 25 ton units. One through three ton comes out shortly here in the spring -- the summer timeframe, so we will have a full cadre of those products, that wire rope hoist line, from 1 to 25 tons, in essence. There is an electric chain hoist that is rated similarly against this FEM standard which is just finished up testing. And we expect to launch that sometime in the late spring, early summer timeframe around the world as well.

You heard Derwin talk about a rigging product. These are forgings, steel forgings called Load Lock and this is a proprietary device that is a hook, a hooking system that actually locks into place so that it can't come undone. And there is a wide range of capacities and also different end items so that you can attach a chain to it, you can attach textiles to it, you can attach wire rope to it, depending on the sling mechanism that an end-user would like to utilize as well.

Probably those are the biggest ones that come to my mind right now. In addition to this EmptiCon machine that I mentioned to you and a device that also Univeyor has had a lot of success in selling is called a Layer Picker. This literally breaks bulk from pallets, takes a layer off a pallet at a time, and re-palletizes it in different products on one pallet, mostly used in the food industry for redistribution into the retail outlets.

Got it. Thanks, Tim. That definitely helps us think about that. I will jump back in the queue.

John Haushalter, Robert W. Baird.

A couple questions for you. On the 20 to 30% range for kind of incremental margins, is there any price or raw material assumptions in that that we should be aware of or is that just kind of a going-forward kind of corporate goal?

Yes, it is a total. It is ongoing. That is kind what we are pointed toward, which would include all elements.

Okay, then just to kind of Univeyor, when you're talking about strategic alternatives there. Was this one of the businesses that had been put up for sale previously, like in the time period when you sold Lister and some other stuff?

No, we contemplated that and we actually started the process with Univeyor, but our advisor at the time quickly -- we quickly uncovered that there was really no logical buyers out there at the time. This was back in the 2001 to '02 timeframe and the capital goods market was extremely poor. His quick -- his research indicated that we would have a very difficult time moving it at that time, so we basically held it and it improved quite a bit in that time period, until this recent difficulty the last couple quarters. But now I think the market is different today than it was back then. I think there is a lot more opportunity in terms of who might be interested in Univeyor.

Yes, and I mean generally the people who would acquire it, their balance sheets are probably in better shape now than they were in 2001/2002.

Yes, good point.

Okay, then just if you could remind us, in terms of what else is in the Solutions segment, I think there is a tire shredder business in there, but what else is there? Is all the rest of that still kind of considered kind of core Columbus assets or stuff you would like to hold onto?

There's three other businesses, relatively small. The largest of the three is the tire shredder business. This is a business that Columbus McKinnon has owned since the early '80s and actually it is a device that shreds whole tires. And we've actually added to the product line. We've tried to sell this business a couple, three times with little success.

It is a very profitable business, growing very nicely I might add, as well. As the world becomes cognizant of the fact that tire piles are an environmental hazard -- European Union just enacted laws to take care of those piles, which is where they're getting a lot of their sales from today. Every time we try to sell this business, it does not have a lot of assets so it is tough to lever up. So we usually get extremely poor offering prices, which is not interesting at all to us or to anybody for that matter.

So we typically, and we have passed on those and we just allow that business to operate. It's got a great management team, it just runs. And they just produce a fair amount of free cash for us. We are going to continue to keep that business.

There are two other businesses, a lift table business and a small business that makes light rail systems up to only a couple of tons in lifting capacity. Both of those businesses are a part -- could be viewed as part of the Lifting Hoist business and/or part of the General Products business. Both are doing well and are profitable, as well. So they would remain. It is the Univeyor piece in Solutions that is the one that we're talking about here in terms of strategic alternatives and restructuring activities that we have talked about.

Okay, then just for Univeyor, I guess my final one, is there any kind of CapEx or how much -- there's the restructuring costs but is there kind of cost going on the balance sheet for improving the operations there?

No.

Okay, thank you.

Mark Grzymski, Needham & Company.

Tim, just wondering if we could talk more on Univeyor. Revenues weren't all that -- were down slightly and obviously gross margins came down and you mentioned a few specific projects and a challenging pricing environment, but it does not seem like the top line is struggling. I'm just curious what internally in Univeyor is really hampering the business.

I think that it really comes down to compressed prices. To bid and get these projects, Mark, they are finding incredible competition, as crazy as this sounds. The whole industry is a bit challenged, I think, in this regard and they are extremely competitive. So as a result, they bid lower, which does not necessarily remove cost, as you might know. You still have to finish the project.

I think it opens up risks for tighter margins and/or little or no margins. So one small error, Mark, and we have these losses, which is the piece of the business that we are not interested in at all. That is the one we're leaving -- that is the restructuring charges; we need to get out of those. So many of those projects, by the way, are being wrapped up now and will be behind us. But I think it is just the general environment that is causing this pressure.

Okay. I mean, it does have a big impact on overall gross margins. Will we see -- if some of those projects or some of those contracts are behind you, should we see some improvement in gross margin?

We would expect that. You heard me say this last quarter, and it makes me mad that I have to repeat it because I was wrong last quarter, but we would expect to see the next quarter, the next couple quarters our gross margin improve in Solutions and then, generally of course, it would uplift the whole company because the Products business is performing quite well.

Because it could be like anywhere from 50 to 150 basis points in a swing on your gross margin line just by that -- by Univeyor.

By Univeyor, right. We have a guy there this week, by the way, just going through all of their backlog of projects to understand all of the potential problems or issues. And at this point in time, it looks reasonably positive. But I would like to report to you in a couple months on how we're doing.

Yes, since there is more competition in that business, do you think that it would be easier to sell the business because it would be attractive to a competitor?

I think so.

And now just kind of jumping to pricing in the overall business, especially in the Products area, how is that environment looking as we kind of enter the new calendar year?

I think it's consistent with past. Derwin is nodding his head affirmative. I think, Mark, we have been able to get 1 to 2 percentage points of price, just generally speaking. It varies by product, of course, but overall it is in that area. I would think that that would be a consistent view for the future going forward.

How about raw materials for you right now? You're buying probably more stable?

I think it is fairly stable. Steel has done okay. It depends on the grade and the time and it bounces a little bit, but generally speaking, pretty good. We do have long-term contracts for things like electric motors and all the castings that we buy as well, so I think we're in pretty good shape on the raw materials side.

Okay, great. And then finally, Tim, just on the overall environment here, obviously certain parts of the economy still weak and weakening. Curious what you are seeing in the channel as far as the specific key end-markets for you, domestically speaking.

I think that the markets that we have talked about being hot continue to be hot. I think the oil patch and all the related services to it continue to be pretty good. Utilities seem to be pretty positive. I think the construction market, let's say nonresidential, which is where we participate, seems to be pretty positive as well.

We just had a show, the ProMat show, last week. Things were very positive there. A lot of end-users came through. It's probably one of the better shows that we've seen. And all anecdotal kind of comments from our different sales partners seem to be fairly positive. At this point in time -- of course the comps get a little tougher because we had a very strong fourth quarter last year. But having said all of that, we still see it positive, maybe not as high-growth, but still positive.

What about the large equipment manufacturers out there like Cat and etc.? Is business still a little softer, but still relatively okay?

I think it is even hotter than it was. The Cats and the Deeres, they seem to be going pretty good from an operating standpoint, which is the end we see it at, in terms of replacing hoists and/or cranes in our expansion. It seems to be very positive.

Great, thanks for taking my questions.

John Emrich, Ironworks Capital.

Did you say the operating margin in Products segment was 12.5% in the quarter?

Yes, I think that was right --

12.7.

Just in general -- I usually ask this question about the Company in its entirety as it currently stands, but I will just ask about the Products segment -- what you think the long-term model looks like, what the potential for Products is, in terms of operating and profit margin.

Well, I think if you take a step back and you look at the trend line that we have been on, John, you are seeing a fair amount of leverage come through, even with investments that we have made in international markets and some new products that we have developed. I would expect that trend to continue. We do not see it changing at all and we've talked about a 20 to 30% kind of leverage on incremental sales going forward.

That view has not changed at all. I would say that the model might change as international growth becomes a higher rate than maybe domestic growth over a long period of time, so that our percentage of sales outside the U.S. would grow -- would be a higher percentage of total sales in the Products segment and on a long-term trend, especially given the investments we're making in those markets as well.

Okay, thank you.

Sarah Thompson, Lehman Brothers.

It is actually Lawrence on behalf of Sarah. Just on your EBIT margin guidance, you reiterated today in the press release 11 to 12% EBIT margins. I believe in the last call you guys were hinting on kind of hitting the high-end of that range. Are you still comfortable with the high-end or, given the continued weaker margins in the conveyor business, are you guys kind of just keeping it open and more middle of the range?

We would like to keep it open at this point. Once we get Univeyor settled down and get this restructuring behind us, we will have a little bit clearer picture. But I think 11 to 12 is reasonable and I don't want to point you at one end or the other. You've seen what we've been able to do for the last three quarters, so having said that, we're going to be in that range for the year.

And then as you guys look into fiscal '08, given your comments around variable contribution margins, 20 to 30% EBIT line, I would assume that you guys are shooting for going north of 12% in fiscal '08.

As you know, we don't give guidance, so it is tough for us to comment on '08. But I think if you sit down and do the math and estimate some level of growth and you stick to the 20 to 30% operating leverage, you can kind of see where we end up in fiscal '08.

Okay, then just a housekeeping question. Can you give us the specific components of debt? I was confused. I thought there was $3 million of revolver borrowings, but I believe Karen said there were no revolver borrowings.

Sure, the total of gross debt outstanding is $173.2 million and that is made up of three pieces. The largest piece is $136 million of our senior subordinated notes. The second-largest piece is $25.1 million of our senior secured notes. The balance is $12.1 million. We categorize it as other senior debt and that is debt incurred at our foreign locations.

Okay, that's great. Thank you very much.

Shannon Mikus, Credit Suisse.

My first question is on your guidance. You reiterated your operating margin guidance for the full fiscal year in the release, but you were a little less specific that you had been on the top line. I'm just wondering if what you did say implies that you might be a little under your earlier target of $600 million.

Our $600 million, just to clarify that, was a general guidance. It was not specific to '08 ever -- I'm sorry, '07 ever. We have said that we feel like we can get back to that level in the future. We never plugged it to a timeframe, and I do know that some folks said, well, that is fiscal '07 guidance. We do not give guidance, so that is not true.

So having said that, we do not have a number to give you for fiscal '07, but I can tell you that it is probably going to be in that high 500, 590 to 600 area generally speaking, and then we'll take it from there for next fiscal '08. We haven't said anything about '08.

Okay, that's great. Also on the $300,000 to $400,000 restructuring charge, if I understood you correctly, that is for next quarter. But can you talk a little bit about what you might anticipate after that or for how long we might have restructuring charges before you might go with a strategic alternative?

Sure. The $300,000 to $400,000 that we've talked about for our fourth quarter is the restructuring that we see as of today, as of right now. There are further plans to downsize the manufacturing operations, but we don't think there will be a charge associated with that just yet. We can be clear with you when we put out the fourth quarter or as things become clear to us. But at this point in time, having said that, the 300 to 400 is it until we see something different.

Okay, and one last little question. The gross margin in the Solutions segment going forward, should we expect it to be around what it was this quarter last quarter?

No, it should be higher. I don't have gross margin in my mind, but I have operating income. Historically speaking, that segment has been in the 4% to 5% area. There is no reason to believe long-term we shouldn't get back there, assuming that Univeyor is even with us. If Univeyor is gone in a year from now or six months from now or whatever the timeframe would be, it would be higher.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) James Bank, Sidoti & Co.

I was just wondering if you could walk me through the pro forma EPS and essentially what you're adding back. If I add back the $3.7 million of extraordinary gain from the self-insurance entity and use an after-tax of 39%, I seem to come up with $0.36 as opposed to $0.38. So I was just wondering if you could give me the after-tax numbers of what you're adding back on that.

Sure, James. Actually, we did include a table attached to the earnings release, so that it would be available for easy reference. We added back $359,000, which were financing costs associated with our open-market repurchases of our 2010 notes, that refinancing activity.

We adjusted our captive insurance gains by $3.4 million, and the reason we did that is because we had $400,000 of income last year. So we said in order to put them on an apples-to-apples basis, we adjusted for the difference. Then the tax effect on those two items was $1.068 million, and that gets us to $7.143 million of non-GAAP pro forma net income.

Okay. Reading last -- the third quarter from 2006. I guess I'm also slightly confused because here you said net income would've been $6.4 million, or $0.37 per diluted share. But I guess in this press release, are you using some sort of -- just using different extraordinary items to get to the $0.28 pro forma?

Oh, you must be comparing to last year's release.

Yes, I am.

I understand. The difference really is the tax effect. Last year, we had a very low effective tax rate, so when we computed pro forma last year to compare to the prior year, we were in a situation where we had the tax benefit on the income statement for the NOL. We (multiple speakers) that change that we made at the end of fiscal '06, where we reversed that reserve for the tax, the deferred tax assets.

We now have a normal effective tax rate, so this year we reflected a normal effective tax rate. So it is the same pretax item. The financing costs, it was $4.95 million of financing costs associated with the 2010 notes, but we tax-effected them this time.

Okay, I understand.

By $1.5 million.

Thank you, Karen. In the first half of this year, there is a lot of talk about hiring labor. I think it was something along the lines of a 4 to 6% increase or 4 to 7% increase. Have you done that, and did any of that hiring help you work through some of the backlog from the first half of the year?

Yes, I think we did. Why don't I have Joe just comment on that.

In one of our businesses, our Yale Lift-Tech division, which makes a lot of wire rope hoists that Derwin pointed to was where we're seeing a significant amount of growth, we have hired about 40 people there. I think we have kind of slowed that down now, but we have gone to third shift in certain areas with some of those new hirees.

Obviously, you've got some learning curve, but the throughput is definitely up and it is helping out. On the flip side, the order rate is continuing to be strong, so we are still working through the backlog, but it is a good problem right now.

Okay. International sales as a percentage of growth -- I heard you mention that it grew 17%, but what percentage of international sales does Columbus now have? I think it used to be somewhere in the 26% range. I was trying to figure out what it actually attributed to the growth this quarter.

36% now.

It is not significantly different from what it was a quarter ago. It was 35 and it is now 36.

Okay, so it almost seems international is really the driver for this quarter in terms of topline growth.

Yes, and I would also add the hoist that Joe was just talking about, the high-capacity hoist in our crane business has been pretty hot as well. The rest of it is doing reasonably well.

Right, and that was the 15 to 20 ton, Tim?

It is actually all of the capacities in the wire rope hoist line, but predominately 5 to 25 ton range.

Some of our specialty hoist business, which is smaller, and also some are packaged goods hoist business are growing at near double digits.

And our cranes are also very strong.

Okay, terrific. You answered my question earlier on the economic cycle, so that's all I have. Thank you. I appreciate it.

Bob Franklin, Prudential Financial.

Regarding the acquisitions you're looking at, are you right now generating enough cash to pay for those with cash or could you see borrowing some money to do it?

Well, we are such at a strategic level and looking at our balance sheet, the stronger balance sheet we have today. I think that our view would be that we could use either or. Obviously, we have a lot of free cash flow coming out -- coming off of our business today, so that could certainly be used for acquisitions. Plus the $32 million we have on the balance sheet today. We do have a view, though just so you understand that, we have said this before, the 2010 notes are callable in August of this year and we would intend to call those with our cash.

Okay, with the cash.

So, it would be a combination I would guess, looking to the future of cash plus some revolver. It really depends on when and the timing of each acquisition. Karen makes a good point, location as well because we are looking at international companies.

Okay, with respect to the subordinated debt, I think that comes, becomes callable next year. Is that right?

2009.

'09, I'm sorry. What are the covenants on that, restrictive covenants, with respect to the amount debt you could put on?

I do not know of any. It has been awhile since I have looked at that.

To be honest with you, Bob, I don't have the specific covenants right at my fingertips here. When we negotiated that we had growth in mind, so we really worked into that a fair amount of flexibility so that it would not inhibit our ability to grow and to consider acquisitions.

Okay. Would you consider anything bigger than the ones that you talked about it being less than $50 million in size in revenues?

If they make strategic sense, yes, we would.

All right, and I have to ask this. Is it your intention to stay independent?

You mean Columbus McKinnon being an independent company, a publicly-traded independent company?

Yes.

Yes, we have not decided anything else different than that.

Okay, thank you.

Frank Bisk, Pilot Advisors.

On the call, I guess you talked about Cat and Deere and I was kind of wondering what segments or what are we selling to them? Are these chains and attachments for these vehicles, or is this in their -- are these hoists for their manufacturing facilities? I wasn't sure of the link there.

We do sell them some OEM equipment, some forgings that would go on some of their equipment, but predominately that is not it. What we're talking about here is their cranes and hoists and lifting tools in their business themselves.

In their manufacturing facilities?

That is correct.

Okay, great. So you sell them directly as opposed to a distributor so that you know how they're doing, or how does that work?

We sell both. Our crane business, our CES business, sells to them direct. Many of our other businesses sell through distribution as well, to Deere and Cat.

Okay, thank you.

That is our last question.

Great, thank you.

To listen to today's replay --

Can I summarize first, Jerry? Let me just summarize by saying that -- to remind you all that our strategy is to leverage our superior material handling, design and engineering know-how to continue our leadership in the U.S. markets as we continue to expand our global presence through organic and potential acquisitions. That's a new one -- or joint ventures.

Our 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 Columbus McKinnon associates around the world for their hard work and ultimate success in making this quarter a very good one.

We continue to experience strong growth in bookings and revenue from our distribution channel partners, who have experienced growth from the broad end user markets that they, in turn, serve. With this increase in revenue, we continue to see strong operating leverage driven by a cost restructuring we have done in the last four or five years now.

We maintain our strong market position in domestic markets and have penetrated new markets around the world. We do believe that we will continue to perform well, but we all need to recognize there are some issues in the world markets that could have an impact on these improvements. Geopolitical instability, energy costs, interest rate increases, healthcare, product liability, and regulatory costs certainly have had an impact on Columbus McKinnon and might in the future.

We continue to drive lean concepts across our businesses, 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 and grow our market share in the U.S. and grow our sales internationally to keep Columbus McKinnon positioned as the leader in the material handling industry.

Again, we want to thank all our associates around the world for their efforts. And as always, we certainly appreciate your time today. Have a good day. Thank you.

Once again, to listen to the replay of today's conference, please dial 866-433-1147. Thank you for attending today's conference and have a great day. You may disconnect at this time.