Columbus McKinnon Corp (CMCO) 2010 Q1 法說會逐字稿

Good morning and welcome to the Columbus McKinnon first-quarter 2010 conference call.

At this time, all participants are in a listen-only mode until the question-and-answer portion of the conference.

(Operator Instructions).

This conference is being recorded.

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

I would now like to turn the call over to Mr.

Tim Tevens, President and Chief Executive Officer of Columbus McKinnon.

Sir, you may begin.

Thank you, Stacy, and good morning, everyone.

Welcome to our conference call this morning to review the results of our fiscal '10 first quarter.

With me today here is Karen Howard, our Vice President of Finance and Chief Financial Officer.

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

Those 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 Columbus McKinnon files with the SEC to be sure you understand these risks.

Our revenue for the quarter was down over last year a $32 million or 21%.

This was partially offset by the Pfaff in the quarter.

Pfaff is the business that we acquired based in Germany and European business.

They had revenue of $17.6 million in the first quarter.

The overall decrease in revenue is a direct result of lower industrial and commercial market activity around the world and to a lesser extent, currency translation of about $4 million.

Although the general economic activity around the world is significantly reduced, it does feel as though we are bouncing along the bottom of a severe downturn.

We have achieved international revenues of 44% of our total revenue in the quarter.

This continues the trend of increasing our revenue in international markets.

As many of you know, in the United States, we track the Federal Reserve Board's US industrial capacity utilization figure, which in June hit 64.7%, which is down from 66% in March, the last time we talked.

The rate of this decline has -- the rate of decline has significantly eased but keep in mind, it remains at the lowest level in recorded history.

From a market perspective, the order rate from our channel partners in industrial distribution are down 30% to 45% area.

Many of our partners are reporting significant revenue decline.

For example, W.W.

Grainger, the broad-based MRO distributor, reporting that their sales in the second quarter to be down 13%.

MSC reported revenues down 23% in their third quarter ending in May.

Fastenal reported revenues down 21% in their June quarter and Motion Industries down at 22% in their second quarter.

The good news is that there seems to be a slowing of revenue declines among these distributors.

Our entertainment channel remains depressed.

It is actually off significantly as concert tours and a few major events have been reduced -- have reduced the volume in this channel.

Our material handling partners are down about 50% and our European revenues were also lower than last year, down about 35%.

The integration of the Pfaff-silberblau, that European-based company that we acquired last year is proceeding well.

Of course, they are also impacted by the poor economic state of the world.

Our Asian business is also lower in the 35% to 40% area as a direct result of lower exports back into other Columbus McKinnon divisions.

As we have discussed in the past, we are implementing additional facility rationalizations in North America that will reduce our fixed operating costs in the area of $9 million to $11 million in annualized savings.

We have increased this figure slightly from the last announced savings.

These savings will ramp up throughout fiscal '10 to a full potential in our first quarter of fiscal '11, which is about a year from now.

We do expect costs to implement these closures to be in the area of $8 million to $10 million.

Most of this cost will be incurred in fiscal '10.

These savings are in addition to the $7 million to $8 million of additional annualized savings from normal cost-reduction activities that are well underway within our Company.

One attribute of Columbus McKinnon is our ability to generate cash.

Even with the severe downturn in revenues for the quarter, we generated almost $5 million in cash from continuing operations.

We also continued to make strategic investments in new products and markets that help position our Company to be more -- an integrated global Company and positioned for growth.

From an earnings perspective, there are a number of different items that occurred in the quarter which had impacted our results.

On a pro forma basis for the quarter, we achieved a $0.06 earnings per share.

This should improve as the cost reductions we have implemented will bear fruit in future quarters.

Our gross profit was down 39% or $19 million and the bulk of which was directly related to these lower volumes we just spoke of.

Bookings for the quarter are down the 40% area, excluding Pfaff, and 30% area including Pfaff.

As you can see, cost control is the name of the game right now, but it is balanced by a measured level of strategic investments to position our Company for the future.

We have managed through difficult economic times before and we will do so again.

As you all know, this is an excellent time to structurally change our operating costs in a dramatic way, and that is exactly what we are doing in these consolidation efforts we have underway.

Our backlog for the business was at $68.6 million, basically flat with the last quarter.

This represents about four to five weeks worth of shipments for our Company.

At this time, I will turn it over to Karen Howard, who will lead us through more details.

Karen?

Thanks, Tim, and good morning, everyone.

I'm pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2010 first quarter that ended on June 30, 2009.

As a reminder, all the prior year numbers were before the October 1, 2008 acquisition of our German-based Pfaff business, which impacts comparability as noted within this discussion.

Consolidated sales decreased by 21.3% to $119 million in the first quarter this year compared with last year's first quarter.

The Pfaff business added $17.6 million but nearly all of our geographic markets were negatively impacted by the global recession.

Excluding Pfaff, overall sales decreased 32.9% from last year with US and international volumes declining by 36.4% and 22.0% respectively.

Further, foreign currency translation negatively impacted revenue by 2.7% compared with the prior year's quarter.

However, pricing favorably impacted the revenue by 1.5%.

The Company's quarterly sales pattern assuming a period of consistent economic conditions which we have not seen over the past nine months typically shows sales strongest in the fourth quarter and weakest in the third quarter.

The recent quarter had 63 shipping days consistent with 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 2010 as well as 2009.

Overall, first-quarter consolidated gross profit decreased $19.1 million or 39.4%, with gross margin contracting 740 basis points to 24.7%.

The contraction was primarily due to the continued reduction in demand for our products driven by the private recession and the lagging impact of cost-reduction activities which continued during the first quarter following those undertaken during the third and fourth quarters of fiscal 2009.

Rest assured that many activities have been undertaken to effectively manage costs during this economic downturn.

This is a never-ending process.

The normal ongoing cost management activities will be complemented by the more significant restructuring activities associated with strategic facility consolidations.

As previously announced, we are consolidating our North American hoist and rigging operations, which will result in the closure of two manufacturing facilities and significant downsizing of a third, taking out approximately 500,000 square feet of manufacturing space.

Those projects are well underway and the restructuring costs associated with them of approximately $7 million to $8 million will begin in our fiscal second quarter with the annualized benefits estimated at $9 million to $11 million to be ramped up as the year progresses and into the first quarter of fiscal 2011.

Throughout and upon completion of this consolidation, we will have sufficient capacity to support anticipated volumes upon market conditions returning to normalcy.

Consolidated selling expense as a percent of sales was 13.8% in this year's first quarter, up from 12.0% last year on significantly lower revenue.

The actual dollars are down 9.5% despite the addition of the Pfaff business and continued investments in emerging markets, somewhat offset -- somewhat offsetting reductions in base business spending.

Consolidated G&A expense was 7.1% of sales in the fiscal 2010 quarter compared with fiscal 2009 6.5%, again on significantly lower revenue.

This year's G&A dollars are down 14.5% also despite the addition of the Pfaff business's G&A.

The restructuring charges recognized in the first quarter are expected to result in $7 million to $8 million of annualized cost savings beginning in the second quarter primarily a further cost savings in the SG&A area.

These restructuring charges amounted to $5.8 million during the first quarter of fiscal 2010, primarily for severance costs and enhanced pension benefits.

We anticipate full-year restructuring charges in the $12.5 million to $13.5 million area.

Our FTE level is down approximately 20% compared with a year ago on a pro forma basis and we estimate an additional 10% reduction from the facility consolidation activities previously noted.

Driven by the gross margin contraction and restructuring charges described above as well as a currently lower operating margin profile of the Pfaff business, operating income decreased by $22.2 million or 108.8% to a loss from operations of $1.9 million.

Excluding the $5.8 million of restructuring charges, non-GAAP income from operations is $4.1 million, or 3.4% of revenue.

Our long-term goal is for each peak and each trough to outperform our results of the prior cycle.

In the prior cycle, our operating margin troughed at 6.8% on a full-year basis in fiscal 2003 with $394 million of revenue following a 23% decline from the fiscal 2000 peak revenue.

Interest in debt expense was up $100,000 or 4.5% over the prior year's quarter.

The increase in the quarter is due to the assumption of some previously existing Pfaff debt.

Regarding income taxes, the effective tax rates for the fiscal 2010 and fiscal 2009 first quarter were 41.9% and 35.6% respectively.

Fiscal 2010 is affected by the variation of rates by tax jurisdictions, especially the impact of state taxes in the US where the majority of the restructuring charges are being incurred.

For fiscal 2010, our expectations are for an effective tax rate in the 41% to 42% range, driven by the impact of these restructuring charges.

Loss per diluted share for the first quarter of fiscal 2010 was $0.13 versus $0.50 of income in the first quarter of fiscal 2009.

Upon isolating unusual items as previously decided and as specified in the earnings release including restructuring charges and discontinued operations, non-GAAP earnings per diluted share for the first quarter of fiscal 2010 were $0.06 versus $0.61 in the first quarter of fiscal '09.

We have included a table in the earnings release listing and quantifying the tax and per share effect of the items impacting comparison between the two years, as I have previously described.

Depreciation was $2.6 billion and $2.1 million for the fiscal 2010 and 2009 first quarters respectively.

Capital expenditures were $1.3 million and $2.1 million for the fiscal 2010 and 2009 first quarters respectively as well.

The spending included investments in our new product development activities, productivity improvement equipment, as well as normal maintenance CapEx.

Including some investment requirements associated with our facility consolidation project, we expect capital expenditures for fiscal 2010 to be in the 11 -- excuse me -- the $10 million to $12 million range compared with $12.2 million in fiscal 2009.

Net cash provided by operating activities from continuing operations was $4.9 million in this year's quarter or $0.26 per diluted share compared with $12 million in last year's quarter or $0.63 per diluted share.

In this year's quarter, earnings used $400,000 and operating assets and liabilities provided $5.3 million.

In last year's quarter, earnings contributed $15.6 million while operating assets and liabilities used $3.6 million.

We continue to focus attention on our working capital utilization, especially opportunities to improve inventory turns with sales at currently low levels.

At quarter's end, debt net of cash was $95.2 million and total gross debt was $139.5 million.

In addition to the $44.2 million of cash on our balance sheet at the end of the quarter, availability on the $75 million revolver provided for under our senior credit agreement was $66.1 million, representing $8.9 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 and expect to be throughout the remainder of the facility period, which doesn't expire until February 2011.

Net debt to total capitalization was 33.8% at the end of the quarter, down from 35.2% at March 31, 2009.

This level remains reasonably in line with our 30% debt to total capitalization ratio goal.

The majority of our outstanding debt relates to our senior subordinated notes which don't expire until November 2013.

Due to total global economic instability, we are currently holding cash and growing our liquidity as opposed to considering near-term acquisitions.

We are ultimately targeting an investment grade rating to give us flexibility to support our growth strategy, which will include strategic bolt-on acquisitions regardless of the point in the economic cycle.

And with that, I thank you and turn it back to Tim.

Thanks, Karen.

Stacy, we are ready for questions.

(Operator Instructions) [Arnie Ursaner].

Good morning.

It's actually Jason.

Tim, in your prepared remarks, you spoke about the average time to convert backlog in the quarter being anywhere from a day to a few weeks, whereas normally it represents four to five weeks.

Understanding that you have limited point-of-sale data, can you speak to the distributor customers' inventory levels, the de-stocking issue, and your product sell-in versus your view of sell through?

Sure.

As you know, the bulk of our business is sold through channel partners, distributors, and I would say that as it has for the last several months now felt as though that many of the channel partners have already destocked extensively and what we are feeling from many of them right now is direct end-user kind of pull.

So we think that the destocking is behind us.

Just to be clear here, the number I referenced was the level of backlog, Jason, in our current business, which represents about four or five weeks worth of service.

Historically though, a lot of our business as you may know in the hoist and rigging products, we ship literally very quickly, within days.

So as a result of that, our visibility into the end-user market is very limited.

We don't have a significant amount of backlog from which to work.

Okay, and you've spoken anecdotally about industrial capacity utilization as a leading indicator of demand.

But when I look at the gap between production and capacity, it has continued to widen.

Production has declined dramatically since October while capacity hasn't really budged.

So while the rate of decline has clearly slowed, I think Q2 declined at about half the rate of decrease recorded in Q1, but it doesn't appear obvious to us that production has found a bottom.

So as investors think about utilization, what factors are going to drive this back up?

Do you see aggressive capacity cuts or is it just the eventual timing of a recovery in production?

Normally it's the eventual timing of production being ramped up and utilization following it.

I don't follow the industrial production number maybe as closely as I do the utilization number because.

That's as close a driver for our business.

Although some of our products are akin to it, but the bulk of our business would be more utilization driven.

And I'm wondering if that number may be more directly affected by plant furloughs where capacity may not be affected by a temporary shutdown of a month or two or three, that kind of thing.

But that's speculation on my part.

Okay and just briefly on the cost reductions, to make sure I understand it, the first-quarter restructuring activity is -- it's about $2 million a quarter beginning in fiscal Q2 and another $2.5 million a quarter from the North American consolidation beginning sometime into Q3 to Q4?

Jason, it sounds like you're breaking down the two pieces.

The $7 million to $8 million associated with the restructuring activities that we recorded in this first quarter and that's right.

That will start immediately in the second quarter.

And with respect to the facility consolidations, they ramp up so you can't -- it easily break it into four quarterly buckets.

They are more backend loaded.

Okay.

And have you quantified the total expected cost savings for the $19 million estimated restructuring in total for fiscal year '10?

We estimate the total restructuring charges for fiscal '10 in the $12.5 million to $13.5 million range and on an annualized basis, the expected annual savings associated with those activities is $16 million to $19 million.

Okay.

Thank you very much.

I look forward to seeing you at our conference in August.

Dan Whang.

Yes, good morning.

Just first question was just trying to just analyze the comments that you had made.

I think you said kind of core business excluding Pfaff, order rates stand about 40% rate and just comparing that to decreased volumes about 32% in the first quarter, you know, just trying to take those comments and see what that may say about the revenues in the second quarter.

I mean, are we -- do you anticipate maybe the second-quarter revenues to be kind of the trough and see sequential declines but cost benefits coming in so that you see improvements from that $0.06 level that we saw in the first?

I think it's fair to say that's correct.

We would expect more cost-reduction benefits to hit us in the second quarter than did in the first and that's because of the restructurings that occurred throughout the fourth quarter and the first quarter that are providing the benefit beginning in the second.

In addition to that, you were right.

Bookings for -- during the first quarter, which by the way affected revenues in the first quarter because of the short cycle time were down about 40%.

Revenue was down same-store basis about 32%, 33%.

So there's a bit of an offset there which certainly may impact our second quarter.

But really what is equally important is the orders we receive in the second quarter that will be shipped in the second quarter, which is the bulk of our business.

And of course, that is yet to be seen at this point.

Okay, I guess just looking at the monthly order trends in the first quarter and so far in the second quarter, you essentially are seeing a sort of a decline in the rate of compression?

We are -- so far in the second quarter it's slower than in the first quarter, that's correct.

Okay and in terms of the pricing aspect, you continue to see pricing, how are your discussions going on with your customers and what do you expect from the pricing trends going forward next few quarters?

Well, so far this year or at least this quarter we got about 1.5 points in price, about 1.5% in price and historically through the ups and downs of the various economies that we've lived in, it's always in this 1% to 2%, 3% area.

It doesn't vary a lot.

Anecdotally speaking to channel partners, it typically isn't about price, although every time you get into these dialogs, price does come up.

But we are seeing more normal discussions around price, nothing exaggerated because of the downturn.

Okay.

Lastly could you talk about -- I know in the release you talk about this new go-to-market strategy in North American hoist and rigging and I think also you also mention about perhaps reaching out more directly into the markets.

Could you provide some additional details around that?

Sure, sure, I'd love to.

We actually just launched it in the first week of July internally here in the Company.

Basically I can summarize it in two major ways.

One is we've given our field salesforce the full portfolio of all of the brand names and product offerings that we have as a Company to sell into the marketplace.

Prior to this launch, we would sell by individual product group and/or brand name.

So we are loading up if you will the field salesforce with a bigger suitcase and more items to sell, which we think is advantageous for our channel partners and ultimately to the end user market.

That's the first major change.

The second major change would be we have added a vertical market focus where we have vertical market specialists who would be specialists in things like oil and gas, mining, manufacturing, entertainment.

There's about half a dozen of these vertical markets, construction being another one, where we would be very knowledgeable in the industry in particular or we would have people that are knowledgeable in that industry in particular especially how to use our product or our material handling products in that industry.

So they would be called upon to help the field salesforce sell directly into those vertical markets and help our channel partners position our products the best light if you will to service the end-user needs with their increased productivity or safety.

That's the second biggest change of that as well.

The other one is we are also supporting -- it's not as big as the first two but we're also supporting our field salesforce with product specialists who are much more knowledgeable technically in the product applications and how the products are designed and what is the right application for that and we would support them across North America as well in that regard.

And from all this being put together and changed, we are experiencing some very positive feedback from the channel partners.

We are also experiencing some very positive feedback from the vertical markets, who are looking for and searching for this kind of assistance as they make changes in their own organizations.

Okay.

And you're saying the first two aspects of vertical markets and field salesforce given the full portfolio product, that those changes really were instituted the first week of July?

That's right.

We just rolled it out to our salesforce the first week in July and it's going to channel partners, well, right after that and as we speak right now.

So as those initiatives with the positive feedback, maybe the conversion to actual orders and sales -- I mean, typically how long -- is that maybe six weeks, eight weeks, or I'm not sure what the --

I would put a big question mark on it right now and the reason I would -- I'd feel different about if we had a more normal level of economic activity.

But there's so much concern and focus by others, channel partners, end-users in just going through their own survival process that this may not have as quick an impact as we'd like it to have.

But I would say normally over the next fiscal year or so, we would be seeing some positive results coming from it.

I would hope sooner rather than later, but as I said, I have a question mark around it only because of the poor economic activity that we are faced with.

Okay, very well.

Thank you very much.

(Operator Instructions) James Bank.

Good morning.

Just one question on the quarter reported, even though it's in the rearview mirror.

Just slightly confused on the sales beat, but then the miss on operating income even when adding back the restructuring charge, the 3.4% non-GAAP operating margin was a bit lighter than I would've assumed given I guess the target of mid-operating margins and then obviously your goal of being in the high single-digits by the end of the year.

So I was wondering if there is something extra that went on in that quarter that I'm just not aware of.

Well, I think I will comment and then ask Karen to add to that if I could, James.

To me the reason for the 3.4% -- first of all, that's one quarter out of a whole year.

And secondly, the thing that I noticed the most is that the cost reduction initiatives that we put in place in the quarter really didn't give us benefit in the same quarter.

It won't be until future quarters that we see the benefit.

Okay, fair enough.

I would say the same thing, James.

I wouldn't have anything to add.

It's been such a dynamic environment out there and we are reacting quickly but then there is the effect of [and it takes] -- doesn't get realized until after the actions are done obviously.

Right, I think the important question was the prior caller's question in regards to sequential improvement.

I just wanted to see -- dot my i's and cross my t's so to speak.

Karen, one last question on the investment grade.

What actually do you need to do to get to that point?

Is there a timeframe with that?

You know, it's a long-term goal, James, because one of the key things needed for that is really size.

We need to be a bigger company, so as we lay out our long-term goal being a $1 billion revenue company, we see that within reason at that level.

Okay, that's all I have.

Thank you very much.

Holden Lewis.

Good morning, thank you.

Building on I guess that last question, it seems like going back to even fiscal Q3 of last year is when you began to cut heads.

You know, and then sort of address wages and that sort of thing.

So I guess in part, the $7 million to $8 million that you talked about and just general cost cuts that you expect to sort of be at that run rate in Q2, I guess I'm kind of surprised as well that we are not talking about seeing more of that embedded in fiscal Q1 at this point.

Because again, it seems like the last couple of quarters you have been talking about head cuts and some of these basic cost cuts.

So when you talk about not getting the real benefits yet that it is on the come, why has there been kind of the delay while we've been doing this?

I will comment, Holden, and then Tim can as well.

It's really, like I said, it is such a dynamic environment out there and comparing -- if you think about sequentially our Q4 fiscal '09 revenues, our March quarter, compared to our June quarter, our revenue is down about 12.5%.

So while we were absolutely making the cost reductions in the third and fourth quarters that -- and those did benefit this quarter but as revenue continued to decline, we continued to do more activities and so really it's just been a moving target here.

To give you a sense -- I will just add to that, Karen.

The planned restructuring that we had in the first quarter, the restructuring charges were actually significantly less than what we've reported, that $5.8 million number.

And the reason it was because we recognized the revenue decline and ramped up the cost reduction activities at a much faster pace.

And again, those won't come in until -- the benefits of those won't come in until the second quarter.

Okay, so you've got benefits in Q1 from cost reductions and wage cuts, it is just that you think there's an additional $7 million to $8 million annually on top of what you've already done that you are putting into place.

Absolutely.

You need to appreciate again it's a little bit -- it may be missed in the detail, but without Pfaff, our year-over-year revenue is down about 33%.

Okay, I understand.

It seemed like we had lost some savings there that I just wanted to make sure I understood what we were talking about.

Can you also talk a little bit about your working capital trends in two respects?

First, on the balance sheet, do you expect to continue to work off receivables and inventories, that they will be lower than Q1 I guess for Q2 and then by the end of the year?

And then I guess the second issue is given that you have been cutting the inventories and receivables, are you producing -- is your production down significantly more than this 33% at this point?

That your volume is down?

Yes, we -- it depends on the individual plant, but generally speaking, yes, we would be producing less than the 33% and we are pulling out of inventory of course to support the difference.

And in regard to your comment, you know continued reduction, I do see it.

The AR has a more immediate -- accounts receivable has a more immediate impact of course on the revenue.

So if revenue declined further, I would expect the receivables to decline further.

Inventory takes a little bit more time to manage it down but we are very focused on that within the Company to manage the inventory down to these lower levels and hence the lower production currently.

Right.

And sort of a baseline of expectation, I think in the first fiscal half of last year, you were sitting around $89 million or $90 million.

I mean, is it your goal given that volumes are so much lower than it was even first-half last year, is it your goal to be below $89 million by the end of the year kind of thing?

That would be our expectation.

That's right.

Okay, so then you would expect that production is going to remain -- even though your channel partners seem to be out of inventory, you would expect that your production will remain below your volumes and orders for largely the balance of the year?

You know, I don't know the timing exactly, but I can tell you that as we sit here today, many of our facilities are producing at about half the rate that they were a year ago.

Right, so --

When you look at the type of orders we are receiving from channel partners, instead of someone ordering 20 electric chain hoists, we're been getting orders for two and three.

Maybe more orders, but each order is significantly lower in size.

So then our plants obviously don't have to ramp up from a quantity standpoint or a lot size standpoint.

They just need to produce the two or three that are actually ordered.

Right, but you are -- you are at 50 -- and you kind of expect to stay at that level.

Are we expected to pull production down further still or increase it or we are just going to assume that until we get inventories where we need them?

Well, we are so hand to mouth relative to orders to production today.

I mean we literally take an order today, it prints on our shop floors today and they build it today.

So if you can tell me what the orders will be, I will tell you what our production will be.

That's how close things are.

Okay, and then the last thing I will jump back in.

You gave some good color about these marketing efforts, getting the product to the salesforce and all that other stuff.

Are there incremental costs that are hitting the model related to that so that we talked about these initiatives to cut costs and rationalize and all that stuff and we can sort of build those dollars in that you talk about?

But is there an increase in dollars related to this that functions as something of an offset, or is the spending despite this really not moving that much?

At the end of the day, the North American sales go-to-market strategy that we just implanted will net reduce cost even though we are moving some cost buckets from one category to another.

For example, these vertical marketing folks that I mentioned, the investments we are making there.

That's really just moving costs from one area to another.

But if you add up all the pluses and minuses, it is a net reduction.

And that's incorporated in the net benefit we talked about, Holden.

Okay, so that's built into those cost savings, (multiple speakers)

Correct.

Yes, of the total numbers we spoke of, right.

Okay, but there's no offsetting incremental increase that we should be working down your cost savings from?

Correct.

All right, great.

Thank you.

Jason Ursaner.

Just a follow-up.

The tone of this call has been more focused on the near-term challenges, but as you look out 12 to 24 months with the aggressive actions you've taken to right size the cost structure of the business, what do you think margins could look like in a positive 3% to 5% GDP environment?

Wow, I think they could look great, Jason.

With the amount of -- the fixed cost reduction, if you go back in time with Columbus McKinnon, back about 2001 to 2003, we removed about one million square feet, about 10 -- $15 million of fixed costs.

And our margins went up very nicely once the recovery took effect and we actually got decent volumes going through that smaller footprint.

I would expect to see the same kind of leverage going forward and I think historically, Karen, we are in the 30% to 40% operating leverage area.

Our goal was 20% to 30% operating leverage and we were consistently outperforming that.

Okay.

Then currently given your low fixed cost absorption, do you have any idea of what incremental margins are?

I don't think it can be -- there's so many moving targets right now in the near-term, Jason, I don't know that it can be summarized that easily.

But to your question about looking out kind of once we get through this, this downturn, get back to normal times, I think that we can realize margin leverage in the area that we had historically coming out of a cycle.

Okay, that's it for me.

Thanks a lot.

Holden Lewis.

Back again.

Can you just detail for us quickly sort of what the covenants are?

Because there's an easy one for us to track, such as debt to EBITDA kind of things.

But it does look like with the EBITDA where it is that that is sort of rising and could be a challenge if things remain tough.

Can you just give us a quick reminder on where the covenants sit?

Sure, we have two financial covenants on our bank credit facility, Holden.

One is a senior leverage ratio, so it only includes senior debt which we don't have much of.

The majority of our debt is subordinated.

So the covenant there is that it can't exceed 3 times and we are currently at 0.4.

Our second covenant is a fixed charge coverage ratio and that can't go below 1.25 under the covenant and we are currently at about 2.6.

Okay, so you have plenty of room there.

And then just I guess a question about the utilization, tracking utilization.

Would you expect that your business would pick up when utilization troughs begins to recover or would you expect that once utilization recovers you need to achieve some level of activity and utilization in the field to get people to spend on new lines or additions or what have you to really sort of get your activity?

So, I mean, are you going to react in line with utilization trend wise or do you need to achieve some level of utilization in the customer base to really start to hit your sweet spot?

The former.

We would see any kind of increase in utilization.

For example, if it goes from 65% to 66%, we would feel that eventually, not immediately.

Normally we would lag by one to two quarters.

Right now, it feels to me like it's closer to one than it is two, but any kind of incremental movement upward we typically would feel that revenue tug in an upward fashion as well.

Okay, thank you.

At this time, I show no further questions from the phone.

Well, thank you very much, Stacy.

In summary, we remain well capitalized with $44 million of cash, a $75 million untapped revolver that matures in February of '11.

The remaining $124 million of subordinated notes mature at the end of 2013.

Even with this significant downturn, we have generated and will continue to generate free cash.

We are well positioned to whether this economic storm and we will continue to make prudent investments in our business as well as restructure it as we've been talking about here and attack waste in all forms through our lean processes.

And this is going to position our Company to be much stronger as we emerge from the current economic malaise.

I would like to thank all of the Columbus McKinnon associates around the world for their dedication and excellence in making our Company stronger and well positioned.

As always, we appreciated your time today and we look forward to talking to you in the future.

Thank you.

Thank you.

This concludes today's conference.

You may disconnect at this time.

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