Columbus McKinnon Corp (CMCO) 2010 Q2 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

(Operator Instructions) Today's conference is being recorded.

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

I would now like to turn the meeting over to your host for today's conference, Mr.

Tim Tevens.

You may begin.

Thank you, Teresa.

Welcome, everyone, to the Columbus McKinnon conference call to review our results of the fiscal 2010 second quarter.

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

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

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

You should in fact read our periodic reports that we file with the SEC to make sure you understand these risks.

A little bit about the quarter.

Our revenue was down about $39 million or 25.5% over the same quarter last year, which was offset partially by our Pfaff acquisition, which actually occurred about a year ago now, October 1, 2008.

The Pfaff revenue was $17.9 million in the quarter.

This overall decrease in revenue is a direct result of lower industrial and commercial market activity around the globe and to a lesser extent some currency translation, which you actually see in our press release, of about $1.4 million.

We've also achieved international revenues about 41% of our total revenue in the quarter.

As you all know, there's been an increase in global economic activity.

In particular, in the United States the industrial capacity utilization in September rose to 67.8%.

This is now up three months in a row and up about 260 basis points from the low point of June.

Of course as you all well know, we are still well below last year's 72.5% or so.

In the euro zone, industrial production rose about 0.9% in August; and that also continued an increase in industrial activity in that part of the world.

In the Asia-Pacific region, in particular China, we continue to see robust economies.

From a market perspective, the order rate from our channel partners are down about 35% to 40%, depending on what distribution channel you look at over last year, and many of our partners continue to report significant revenue decline -- although that seems to be slowing.

For example Grainger, the broad-based MRO distributor, reported their sales in their third quarter to be down 14%.

MFC reported their revenues down 21% in their fourth quarter ending August.

And Fastenal, another channel partner of ours, reported revenues down 22% for their September quarter.

These declines, although seemingly pretty large at this point in time, now have flattened; and each one of them now have reported quarterly revenue declines that have remained intact and about the same level.

The good news is that over the last seven weeks we have begun to see sequential increase in bookings in the low double-digit area.

Since the inventory in our channel partners is very low at this point in time, we believe we are seeing direct needs of the economy from the end-user community come right through our channel partners and to us.

Our general and investor distribution channels were down in the 40% area.

One bright spot was the business through the OEM and our government channels, as the Department of Defense spending remained very positive through the quarter.

As I mentioned earlier, we have now owned Pfaff-silberblau about one year.

It was an excellent acquisition for our Company, and the integration is well underway and has been very successful.

We have more work to do in this, and actually are in the midst of our Phase 2 development and integration.

But so far so good.

We're very pleased with the integration results.

We continue with the implementation of our planned facility rationalizations in North America that will reduce our fixed operating costs in the area of $9 million to $11 million; and those are annualized savings.

These savings will ramp up throughout this fiscal year and achieve their full potential sometime in the first quarter of fiscal '11.

We expect the cost to implement these closures to be in the area of $8 million to $10 million or so, most of which will be incurred in fiscal year '10.

We also have some savings that are addition of about $7 million or $8 million in annualized savings.

That's from normal cost-reduction activities that we do as the economic malaise hit Columbus McKinnon.

One attribute of our Company is our ability to generate cash.

Even in the midst of the severe economic downturn we generated almost $24 million of cash from operations for the first six months of this fiscal year.

We've also continued to make strategic investments in new products and markets.

We've not slowed that, and that will help position our Company to be a more integrated global company and leverage the additional revenue that we would expect to see as the global economy recovers.

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

Karen will cover many of these with you.

But just at a high level, on a non-GAAP pro forma basis for the quarter we achieved $0.12 earnings per share versus $0.50 for last year.

Most of the shortfall, as you might imagine, was attributed to the shortfall in revenue.

We've also had some additional expenses including things like the restructuring charges, large product liability claim, and the tax effect on those items.

We also are completing two of the three restructurings actually this quarter -- this quarter we're in right now, which is our third quarter.

And the third one will be complete in the first quarter of fiscal '11.

So we have some additional benefits that will be coming at us here shortly.

Gross profit in the quarter was down about 38% or $17.5 million.

And as I said earlier, the bulk of which is directly related to lower volumes.

Our bookings for this quarter are down 38% excluding Pfaff, and about 28% or so which includes Pfaff revenue.

The trend through the quarter was very positive, actually.

Once we moved through the summertime we saw a definite increase in our quotation and booking activity.

At this point in time it's really hard to tell if we just had an exceptionally slow summer or where actually really beginning to recognize some improvements in general economic activity which is driving our bookings rate.

So we're a little cautious here.

We continue to work on cost control.

However, we have balanced those activities with a measured level of strategic investments to position us for the future.

As you all know, we've managed through difficult economic times before and are doing so again.

Our backlog for the business was about $69.7 million, flat with last quarter.

The backlog number is four to five weeks worth of shipments or so, so it's not a meaningful market number at this point in time.

Let me turn it over to Karen now, who will lead us through more details on the results of the quarter.

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 second-quarter and year-to-date period that ended on September 30.

As a reminder, all of 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 25.5% to $115.2 million in the second quarter of this year compared with last year's second quarter.

The Pfaff business added $17.9 million, and we have realized growth in certain geographic pockets including parts of South America, Eastern Europe, and Africa.

But all of our other geographic markets were negatively impacted by the global recession.

Excluding Pfaff, overall sales decreased 37% from last year, with US and international volume declining by 37.5% and 40.6%, respectively; but an additional shipping day added 1.6%.

Further, foreign currency translation negatively impacted revenue by 0.9% compared with the prior year's quarter.

However, pricing favorably impacted the revenue by 0.8%.

A table summarizing these fluctuations is included within the earnings release.

On a year-to-date basis, consolidated sales decreased $71.6 million or 23.4% over last year despite this year's addition of $35.5 million attributable to the Pfaff business.

On same-store basis -- that is, excluding the Pfaff business -- sales are down 35% year-to-date compared with last year.

The Company's quarterly sales pattern, assuming a period of consistent economic conditions -- which we obviously haven't seen over the past year -- typically shows sales strongest in our fiscal fourth quarter and weakest in our third quarter.

The recent quarter had 64 shipping days, one more 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 2010 and fiscal 2009, for your reference.

Overall, second-quarter consolidated gross profit decreased $17.5 million or 38.4%, with gross margin contracting 520 basis points to 24.3%.

The contraction was primarily due to the continued reduction in demand for our products driven by the global recession, but was also impacted by a few other items.

We are favorably realizing the benefits of the restructuring activities undertaken during the first quarter, improving gross margin by approximately 60 basis points this quarter.

However, our facility consolidation activities required approximately $0.5 million of costs to relocate and reorganize inventory and equipment, negatively impacting gross margin by 50 basis points.

And we also reserved $2.9 million for potential charges associated with an unusually large and atypical product liability case, negatively impacting gross margin by 250 basis points this quarter.

As a reminder, we previously announced that we are consolidating our North American we stand hoist and rigging operations, which will result in the closure of two manufacturing facilities and significant downsizing in the third, taking out approximately 500,000 square feet or 25% of our global manufacturing space.

Those projects are well underway, and we estimate an additional $4.5 million to $5 million of restructuring charges during our fiscal third and fourth quarters in total, of which approximately $0.5 million to $1 million is estimated to be non-cash.

Additionally, we estimate approximately $1.5 million to $2 million of non-GAAP restructuring costs that will unfavorably impact gross margins during our fiscal third and fourth quarters in total, relating to such activities as inventory reorganization and movement, training, project management, and oversight travel.

However, we expect the annualized benefit, estimated at $9 million to $11 million, will be ramped up starting in our fiscal third quarter and reach their full run rate at the end of the first quarter of fiscal 2011, which is June.

Rest assured that throughout and upon completion of this consolidation, we will have sufficient capacity to support anticipated volume upon market conditions returning to normalcy.

On a year-to-date basis, gross profit declined $36.6 million or 38.9%, representing a 630 basis point erosion to 24.5% margin.

Compared with the prior year, this half-year period was impacted by the factors previously described.

Consolidated selling expense as a percent of sales was 13.5% in this year's second quarter, up from 11.1% last year on significantly lower revenue.

The actual dollars, which include the benefit of restructurings incurred in the first quarter as well as general cost-management actions, are down $1.6 million or 9.1% versus the prior year, despite the addition of the Pfaff business and continued investments in emerging markets somewhat offsetting reductions in the base business spending.

On a year-to-date basis, consolidated selling expenses were 13.7% of fiscal 2010 year-to-date sales compared with 11.6% for fiscal 2009 year-to-date.

Consolidated G&A expense was 7.6% of sales in the fiscal 2010 second quarter compared with fiscal 2009's 6.1%, again, on significantly lower revenue this year.

This year's G&A dollars are down 7.6% despite the addition of the Pfaff business's G&A and with continued investing in our new product development activities.

Year-to-date G&A expenses were 7.3% of fiscal 2010 year-to-date sales compared with 6.3% for fiscal 2009 year-to-date.

Restructuring charges amounted to $2.7 million during the second quarter of fiscal 2010, primarily including severance costs, pension charges, and $1 million of non-cash machinery write-offs associated with the North American facility consolidation initiative.

We anticipate full-year restructuring charges in the $13 million to $14 million area, including approximately $1.5 million to $2 million of non-cash write-offs.

Our FTE level is down approximately 20% compared with a year ago on a pro forma basis; and we estimate an additional 5% reduction from the facility consolidation activities previously noted.

Driven by the gross margin contraction and restructuring charges described above, as well as the currently lower operating margin profile of the Pfaff business, operating income decreased by $18.2 million or 97.1% to $0.5 million this quarter.

Excluding the $2.7 million of restructuring charges as well as the $0.5 million of non-GAAP restructuring-related charges and $2.9 million associated with the unusually large product liability reserve, non-GAAP income from operations is $6.7 million or 5.8% of revenue.

Similarly, on a year-to-date basis, also considering the $5.8 million restructuring charges incurred in our fiscal 2010 first quarter, non-GAAP income from operations is $10.7 million or 4.6% of revenue.

Our long-term goal has been for each peak and each trough to outperform the 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 fiscal 2000 peak.

Given the 35% revenue decline we are realizing year-to-date, we recognize that this recession is unprecedented, and it is unlikely that we will outperform the fiscal 2003 operating margin result.

However, given the current strength of our balance sheet, we are pleased to have approximately $18.5 million or 58% lower interest expense at the current time than we did in fiscal 2003.

Interest and debt expense was up $300,000 over the prior year's quarter and $400,000 on a year-to-date basis.

The increase is primarily due to the assumption of some previously existing Pfaff debt for capital leases.

Regarding income taxes, the effective tax rates for the fiscal 2010 second quarter and year-to-date are not really meaningful since they are impacted by the unusual items previously described.

Accordingly, excluding the restructuring charges, the non-GAAP restructuring-related costs, and the large product liability reserve, a normalized effective tax rate would be approximately 36% to 37%, relatively consistent with the fiscal 2009 year-to-date 35.8% effective tax rate.

Loss per diluted share for the second quarter of fiscal 2010 was $0.14 versus $0.55 of income in the second quarter of fiscal 2009.

Upon isolating the unusual items as previously described, non-GAAP earnings per diluted share for the second quarter of fiscal 2010 were $0.12 versus $0.50 in the second quarter of fiscal 2009.

On a year-to-date basis, the loss per diluted share was $0.27, compared with last year's income per diluted share of $1.06.

On a non-GAAP basis, this year's first half realized $0.16 of income per diluted share as compared with last year's $1.12.

We've included tables in the earnings release listing and quantifying the tax and per-share effect of the items impacting comparison between the two years, as I've previously described, for both the second quarters as well as the year-to-date periods.

Depreciation and amortization was $3.1 million and $2.3 million for the fiscal 2010 and 2009 second quarters, respectively.

Capital expenditures were $2.8 million and $2.9 million on the same basis, the fiscal 2010 and 2009 second quarters, respectively.

This year's capital spending is primarily dedicated to that necessary for the facility consolidation initiative, as well as new products.

We expect capital expenditures for fiscal 2010 to be in the $8 million to $9 million range, compared with $12.2 million in fiscal 2009.

We continue to generate strong cash flow from operations even in this tough economic time.

Net cash provided by operating activities from continuing operations was $19.1 million in this year's quarter or $1.01 per diluted share, comparable to $19.2 million in last year's quarter or $1.00 per share.

In this year's quarter, earnings provided $1.6 million; and operating assets and liabilities provided $17.5 million.

In last year's quarter, earnings contributed $19.8 million while operating assets and liabilities used $600,000.

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

At quarter's end, debt net of cash was down to $80.3 million, and total gross debt was $134.7 million.

Net debt to total capitalization was 29.9% at the end of the quarter, down from 35.2% at the end of March.

This level remains 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 2013.

In addition to having $54.3 million of cash on our balance sheet, we have an additional $68.2 million available under our $75 million senior credit facility, net of $6.8 million of outstanding letters of credit.

That, and with nothing drawn against the revolver, we continue to demonstrate significant liquidity, and we are in full compliance with all financial covenants related to the agreement.

We are in the process of renegotiating a new credit facility this quarter to provide added flexibility throughout this period.

We're 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.

Teresa, we'd open it up to questions at this point.

(Operator Instructions) Jason Ursaner.

Good morning.

Congratulations on the good quarter.

First, just for Karen, to make sure I'm understanding it correctly.

The product liability charge and the non-GAAP restructuring, those are embedded in cost of goods sold; so adjusted gross margin would be around 27.3%?

That's correct.

Okay.

Then for Tim, in your prepared remarks you spoke a little bit about the sequential improvement in order trends in the quarter and through October.

And you said it was a bit unclear if it was normal seasonality coming out of the summer or if it was more of a clear upward tug from utilization, with the shorter lag associated with the de-stocking.

So can you try and add a little bit to this?

Yes.

You understand the point.

At this point in time, if you look at the quarter which started in July and ramped through August, we felt July being the bottom from a booking and a quotation activity.

Then August ticked up slightly.

September was better than August.

And so far through the first three weeks of October we're seeing better than September.

So that ramp has clearly demonstrated a trend from the low point of July.

Now in normal times, Jason, we would see bookings improve in this time period as well.

The question remains is -- how much of this double-digit kind of growth that we are feeling over this time period relates to just normal business activities coming out of the slower summer months, and how much relates really to an economic pull that's created from the capacity utilization or industrial production numbers that have been sequentially improving during the same time period.

Historically as I look back on the Company -- and I'm getting to be the guy that has most of the history, which is scary to think about.

But as I look back, coming out of prior recessions we felt similar things.

Normally, we felt summertime being low even in normal economic times; and then September usually would ramp up.

And we would see the fall looking a little bit more positive than the summertime.

It's difficult for me to place judgment and to really give you a sense of how much of that growth we are seeing is coming from good, solid economic trends that are going to continue and be sustained, versus those that are just normal ebbs and flows of the business and the seasonality associated with it.

Now I know that doesn't necessarily answer your question direct, but that is the level of knowledge that I have at this point.

Well, in terms of the prior recession, can you speak at all about the capacity buildup going into it?

And maybe if that is playing at all a role in terms of the speed of recovery.

Good point.

In prior recessions, the one that I'm thinking about that started in '01, there was a fair amount of capacity build through the back half of the '90s.

And we had capacity utilization pretty high, but there was also a lot of add-on in capacity at that time period, which gave a pretty deep recession but also more importantly a longer time frame to come out of the recession.

So through '01 through '04, '05, it took three or four years to recover.

In this recession that we went into just beginning about a year ago now or so, there was not that buildup.

Capacity utilization reached about 80%, stayed in that area coming out of the prior recession.

There wasn't extensive building of capacity or overcapacity or overbuild, and it stayed in the 80% area for a very short period of time, like maybe a couple of years.

And then we went into another recession.

So maybe we might be seeing the beginnings of a quicker recovery.

Hard to tell at this point.

The go-to-market strategy that you launched in July, is that at all helping in terms of visibility?

I know last quarter you had put a big question mark on it.

Maybe you can update in terms of if you have seen an impact from orders based on that.

Or are we still kind of in the training program?

And just, is it giving you that better reach into the verticals?

And are any of your end markets really showing meaningful strength or weakness relative to the others?

I think that first of all we did launch it in July; so it was actually the beginning of this quarter that we're reporting on now.

I'd say that it has gone very well.

It's been accepted very well by our channel partners and end-user customers alike.

Our people like it a lot better.

We are going to market with the breadth of our product portfolio and brand names to the channels.

We also have vertical market specialists calling in on individual key industries that are key users of material-handling equipment.

That's beginning to take some hold.

That is going to take a while, though, to really show some benefit.

I think at the end of the day, what we see here is a good direction, a good step forward, a good launch.

Hard to tell if some of the activity -- the additional booking activity we are seeing now -- is driven by that directly, or not.

I suspect based upon what I feel -- and it's more of a feel than a quantitative measure -- that some of it definitely is a direct result of some of that activity.

Okay, great.

I'll jump back in the queue, let some other people ask questions.

Ted Kundtz.

Great.

Good morning, Tim and Karen.

A couple questions for you.

Tim, are you seeing any difference between Europe and the US in the recovery outlook?

Yes.

You know, Europe came up a little bit quicker.

They went in later, but they are coming out quicker.

We are seeing some strength out of Germany in particular.

And I would say that -- I mean, Ted, it's not great yet, okay?

Right.

It's just beginning to recover, so I don't want to give anybody the feel that we are back to normal levels here at all, because we're not.

But I think that Europe is maybe in front of the United States a bit, and ever so slightly -- like a month or two.

Okay, okay.

Are you seeing any -- could you comment a little bit on pricing and any competitive pressure you may be seeing?

I think you mentioned you got some price increases that helped.

Yes, we saw some price in the quarter.

We always average somewhere between 1%, 1.5% of price.

I think this quarter it was 0.8%, 0.9% was from price.

I think competitors are acting rational.

People recognize that it's an economic downturn.

I think competitors are certainly as aggressive as they always have been, and we don't really see anybody acting oddly.

Okay.

Are you getting any benefit from lower commodity prices on the steel side or anything like that?

Is that helping you at all?

Flat.

A lot?

No, it's flat.

Oh, flat?

Flat.

I'm sorry.

Yes.

The steel prices have been flat through the quarter.

You know, it depends on which grade you look at or type of steel.

They move a little bit; but overall it's relatively flat.

Okay.

And your outlook there?

I think it's going to remain flat for the next quarter or two.

But I think we might see some commodity price increases beyond that.

Okay.

Just a final question maybe for you.

Given the restructuring you've done, margin is now at 27%, a little over 27%.

When you come out of the restructuring efforts, which you will complete in the next couple quarters, where do you think your target margins are going to go back to?

Are you looking at something in the high 20s, back to the 29% range, longer term?

Or do you think you can do even better than that with all the restructuring you've done?

Yes, good question.

Let me -- I think that we would get -- when the economy recovers and we get to normal levels of revenue that we would see some level of improvement in that area.

But I like to focus on operating income.

And the thing that we've talked about in the past with you all is the comment that we do see good operating leverage coming out of any kind of increase in revenue.

With about 500,000 square foot of manufacturing footprint removed that we are doing right now, we should see some pretty positive leverage.

We've experienced somewhere in the 25% to 30% area of incremental margin going forward at the operating income level.

I would expect to see that same kind of level.

We are pointed toward the 12% to 14% operating income.

I think in the past we hit 13% and change at our peak.

And I think that we would definitely get back into that 12% to 14% area.

I'd like to see it higher, and I think the activities we've got going on right now should help that.

Okay.

Terrific.

Thank you.

Dan Whang.

Morning.

I just wanted to ask about the sequential margin improvement.

Obviously, you are showing pretty meaningful improvement sequentially.

How did that fare versus your plan going in?

Was that better or about where you had expected?

Yes, I'll comment on that, Dan.

I think we were pretty pleased with the performance this quarter.

It's obviously been a difficult economic climate over the past year.

Everybody has been very focused on, I'll say normal cost management, but as well very, very busy with the facility consolidation activities.

I think that focus on cost and productivity has helped to drive the performance this quarter.

Great.

Obviously, you are able to achieve that with actually volumes coming down.

But it seems like with some of the recent weeks' order trends, that perhaps the September quarter is really the trough revenue quarter.

And if you layer in the additional capacity closing that you should continue to see perhaps some sequential revenue and margin improvement.

I was just going to say -- recall that in the first quarter we had done some restructuring.

We had taken -- made some headcount reductions throughout the organization.

So we did anticipate improvement in the cost model as a result of those activities.

We talked at the time about these facility consolidation activities that we believe will bring additional margin expansion as we reduce our fixed-cost base.

So we're excited about it.

All right.

Great.

I know you've mentioned you continue to work towards taking out some of the 500,000 square footage and footprint.

But I guess with the additional facility efficiency that you should have sufficient capacity to at least produce products at the previous peak sales level and possibly beyond that.

I mean could you just -- any additional thoughts about that?

Sure, yes.

We have planned this restructuring that we are going on and this consolidation to be able to produce at least the peak.

So we would not be capacity constrained with the newer footprint that we would end up with even at the peak levels.

Recognize, Dan, that these activities that we are undertaking now were not a result of a downturn in the economic cycle.

These were part of our manufacturing plan as we evaluated our footprint and our necessary footprint for the future.

The economic downturn gave us the opportunity.

Now would be a good time to do that, while demand is low.

Right.

Okay.

Finally, you had good cash flow, free cash flow performance in the quarter.

How should we think about the run rate in the second half and plans on how to use that?

Is it further debt paydown?

Perhaps maybe looking at acquisitions a little bit more actively?

Yes, I'll touch on the use of the cash.

I think that you are seeing it build on our balance sheet in this quarter.

You are seeing -- we have some debt maturing in '13, out there a bit.

But I think that as we see the general economy move in a relatively positive -- it doesn't have to be super positive, but a relatively positive way, we feel some comfort about that things aren't going to double-dip on us.

I think that we could be positioned to do some small bolt-on acquisitions, as we talked about in the past, that would enhance our market position in markets that are of interest to us like Asia, for example, China, in particular.

Where we could add to the product portfolio; where we can broaden our lifting capability, whether it be lifting tools and/or hoists that could give us some added depth and breadth of capable products.

And these would be, let's call it, Dan, modest in size, $50 million and under in terms of revenue and obviously a purchase price would be something south of that as well.

Right.

I think in terms of the cash generation, we would expect to continue to be free cash flow positive and generate cash from operations, even as we invest in new markets and new products and also make investments and continued investment in the restructuring of our business.

That takes some cash, and we're expecting to spend some of our cash in the upcoming quarter to do those restructurings as well.

Great.

Thank you very much and congrats on the quarter.

Gary Farber.

Yes, can you talk a little bit about your end markets?

I know they are pretty diverse.

But can you give any color as far as maybe some end markets are doing better than others?

And also back on acquisitions, can you talk about -- if you are talking to sellers or looking at acquisitions, what are sellers looking for, for price?

Do you think they are being rational or are they still having high expectations as far as what they want?

Sure.

Okay, let me start with the first question you had relative to end markets and some color there.

First of all, you're right.

We sell to a distributor who in turn sells to the end markets.

We don't have 100%clarity.

But our new go-to-market strategy puts us in front of some end-user markets that we typically haven't seen.

Some of the more positive ones -- the government, the Department of Defense in particular.

Which is not stimulus money, by the way.

This is new troop carriers that use our hooks and shackles and hoists on them, which are very robust.

I think that that business is going very well.

And I think the movement of troops into and around the Middle East drives a lot of this activity as well as some new designs to protect our troops.

So we are seeing -- we're participating in that growth, and that is been very good for our business.

I think for a large part, oil and gas is certainly depressed and down a bit.

But we are seeing it stabilize and actually do more recently a little bit better.

So I think that the global use of that commodity is going to continue to rise.

I think people are getting prepared for that, quite honestly; and our kinds of tools are used in that as well.

So that's been not positive, but better than the other markets.

I think traditional industrial accounts in manufacturing is down.

There is no question.

So I think that would be down the farthest.

I'll tell you that historically when I look at our Company and have lived through recessions, we typically have seen that the spare parts business in our business goes up a little bit, and the unit hoist business goes down.

And this recovery is mirroring a normal recession.

The last one did not.

So our unit hoisting volumes are going down, and we're seeing people do more repairs of the units.

So we're selling more spare parts, which is a normal recession.

And that is doing quite well.

You also might know that we sell a small amount of revenue -- in total maybe only 5% or 6% of our total revenue -- but we sell this entertainment line of hoisting and lifting equipment for concerts and live theater and shows and things of that nature.

That business was gone for the first nine months of the year.

It disappeared.

And just -- it seems to be reemerging.

And we're seeing more demand come from that market at this point in time as well.

Great.

Acquisitions, the second question you had, we're not at the level to really speak about multiples or size or that kind of thing just yet.

But what I would say, that so far on the preliminary conversations, it seems like it's in a reasonable area.

It's not abnormally high -- or low, unfortunately.

Right.

Okay.

All right.

Thank you.

James Bank.

Good morning.

Just really one question.

It looks like everything is going according to plan on a non-GAAP basis.

I think you guys are executing very well.

Tim, if you could just elaborate a little bit on this comment in the press release -- continue to remind investors that our December-ending third quarter has typically been our weakest.

And then you kind of go on to say that the fourth quarter ultimately could be skewed as well.

To me it would make sense to see sequential improvement on the bottom line in each and every quarter as your restructuring efforts continue to hit the bottom line.

So is there something that I'm missing?

Or did I just read too much into that comment?

Yes, let me see if I can explain it.

Historically, the third quarter's revenue is typically the worst.

And the reason it is, is because the holiday season impacts us and our sales activity.

We find plant shutdowns, we find a lot of people shutting down for that extra week or two at the end of the year.

So our revenue will indeed be the weakest of the year.

Now, that might be offset with some increases; hard to say.

But typically when the revenue is down as well we still have costs that are going on, so as a result of that our earnings are usually down as well.

That would indeed be offset by some of the restructuring that we are actually finalizing in the quarter begins to take effect in the quarter as well.

Okay.

So there's a bit of an offset there with the restructuring activity compared to the normal lower revenue and therefore lower earnings.

Okay.

You would specify year-over-year, right?

Correct.

Okay.

Fair enough.

Thank you.

That's all I had.

Thanks, James.

Holden Lewis.

Good morning.

Thank you.

You had made mention about, I guess, you are done -- sort of two phases of restructuring and you're on the third.

And the third is this sort of $9 million to $11 million in annual savings.

Can you just sort of clarify?

Did I hear that correctly, and this is sort of the third?

Can you give a sense to sort of where we've been and what statements you've got embedded, and that sort of thing?

Sure.

Let's make sure we all understand the same things, so let me start from the beginning.

There's three facilities that are being either closed or significantly downsized, and two of them are being completed this quarter.

The largest one will not be completed until the first quarter of fiscal year 2011, which is the June quarter next year.

So about nine months from now.

Got it.

Okay.

You said facilities, not restructuring.

Okay.

Got it.

Yes, and the $9 million to $11 million is the total of all three; and that is an annualized number.

Got it.

Okay.

So we are ramping to the $9 million to $11 million, but we won't see that level on an annualized until the first quarter of next fiscal year.

Right.

And first quarter is when you will have finished up with the third facility.

You got it.

And the two facilities are done in Q3 or Q2 this year?

Q3.

Q3?

Okay.

And can you give a sense of that $9 million to 11 million?

How much of that do you expect to actually realize in 2010?

So we can get a sense of what the incremental contribution is in '11.

Yes, I don't --

It was about $2.5 million or so in fiscal '10, so it starts out slowly, Holden.

And then in the first quarter of fiscal '11 it will continue to ramp until we get to the end of that quarter, where we would be at a full-year run rate, and then continue thereafter.

Okay, but you do believe that in 2010 you are going to realize about $2.5 million a savings from these two that you are finishing up in Q3?

I'm just looking at our (multiple speakers) --

Let's just check that, okay?

-- reconfirm that.

Yes, that's that area.

Okay.

Then you had commented that in the quarter you got benefits of restructuring of about 60 basis points.

Is that related to this?

Or is that related to the $7 million or $8 million that you have squeezed out of the OpEx?

Yes, that was from the activities undertaken in the first quarter.

Okay, so that's relatively stable going forward?

Correct.

And in the second half, these restructuring, this $2.5 million is all kind of new in the second half?

That's correct, and it will ramp up between third and fourth quarter.

Okay.

Excellent.

Thank you.

That's helpful.

Can you also talk -- Pfaff, I appreciate your talking about the integration being successful and all that.

Was it accretive for the quarter?

And in its first 12 months what has been the accretion?

How should we look at that?

It has been accretive, Holden.

It was accretive this quarter.

It has been for the first 12 months.

We don't like to isolate it, because we don't like to talk about the full profitability of any one business.

But we talked about the revenue, so you can get a sense for that comparability.

But it has been accretive.

As accretive as you expected?

Or the downturn kind of took a little bit of that off?

Well, certainly the downturn took some away from what we would expect in a normal economy.

But even with a 35% down kind of revenue, it still was accretive.

Right.

Yes.

Okay.

Then on the balance sheet, haven't made -- considering how far things are down, you've taken a little bit of inventory down, and you did in the quarter as well.

But I mean not really at a blistering pace by any means.

Do you have a sense, now things are stabilizing?

Are you going to continue to work off inventories and keep production depressed?

Or are we at the point where you like the inventory levels and you are going to step production up in line with demand?

Yes, let me see if I can take that one.

The inventory levels in the September quarter are overstated to a degree because we had to ramp up production to produce products to put on the shelf ready to be shipped as we shut down plants in anticipation of moving product lines.

So actually it's a bit inflated in the September quarter.

If we weren't doing the restructuring you would see that number a lot lower.

Okay.

So it's going to -- my expectations are, now that we are doing the actual physical movement of production lines, is that inventory number will come down a bit.

And then as the normal economic activities -- let's be hopeful and say it continues, and we continue to grow, then it would grow at a normal pace.

Do you need a redundant product in the channel just to make sure there are no service slipups?

You got it.

Yes.

We did not want to disrupt the customers.

Yes.

We were moving equipment from one facility to another in many instances here.

And while the equipment is out of production we need to have sufficient inventory to carry us through.

Okay.

Then so the corollary to that is -- what's going on with production?

I mean presumably you also ramped that in the September quarter.

How much did that production ramp benefit the gross margin versus where you might have been in Q1?

And then do we expect that the Q3 production will step down from the Q2 level and have an adverse impact on gross margin?

No, no.

I think that our production activity in September -- in the second quarter we just reported, wasn't meaningfully different.

I think September might have been slightly up, but July and August was way down.

Yes, we just started having to ramp up production towards the end of the quarter and held on to inventory.

So it really is negligible, actually.

Okay.

So the expectation for production going forward is just kind of it stays at this level?

Or do you think you need to step it up as you are seeing some sequential improvement in the order rates?

If the order rates continue, we will step it up, which is a good thing from a margin standpoint.

Right, absolutely.

But you don't think that the gross margin this quarter were beneficiaried in any way from your ramping -- from your trying to put more product in the channel?

Negligible.

Okay.

Okay, and then just one piece of housekeeping.

What did you say the domestic and the international volume percentage change was in the quarter?

Let's see.

I said US volume declined 37.5% and international declined 40.6%.

And that excludes Pfaff, right?

That excludes Pfaff; that's correct.

Now is that 40.6%, does that compare to minus 22% in Q1?

Yes.

Okay.

That seems like a pretty dire difference considering I don't think the year-over-year volume change in international -- I mean, the comps don't seem any easier or harder at this point; and that seems pretty negative.

But you're saying I guess that was all front-end loaded and it's looking better towards the back end?

Yes, I guess to Tim's point about Europe, for example, being slower to come into this cycle and faster to come out, we definitely didn't see the declines in our international revenues fall as much as our US revenues, relative to your point about the first quarter.

Just to put it in context, our first quarter US volume was down 36.4%; and the international, Holden, as you said was down 22%.

Now this quarter the US is down 37.5%, so kind of flat.

The international, though, was down 40.6% -- much more significantly.

And those numbers do exclude the day or include the day?

Exclude the day.

That excludes the day, okay.

Okay.

Great.

Thank you.

Thanks, Holden.

Shaun Nicholson.

Just a quick question on China.

Obviously, first, great quarter.

Good to see some of these things on the restructuring side are starting to work.

But in China can you touch a little bit more on, obviously, the progress you guys have made there?

Seemingly an important market and I know you guys have put some resources into there.

Can you talk a little bit about where we are at there?

Sure.

The effort there is -- of course as you know we manufacture there.

I'll start out with that.

We have actually a show, the material handling show.

It's called the CeMAT show.

It's in Shanghai starting this coming weekend.

I will be there actually Sunday to kick it off.

We will have several booths there at the shows, so we're going to launch a full line of products.

We are going to use the Yale brand name.

We're going to market under the Yale name there.

So good news.

Most of the products are coming from our Chinese plant.

We have a booth we will be launching -- we will have set up some distributors to also hold inventory and sell the product into the market.

So, Shaun, think of this as kind of at the front-end of setting up, establishing distribution, and showing our wares at the premium, the premiere show in China.

And it's just beginning.

In addition to that, we've added some resources.

We are in the process of adding some production capability into our Chinese facility there in Hangzhou.

We are going to be making some [lever] hoist and electric chain hoist there as well as the manual product we make there today.

I'm transferring some executives there to help set that up and transfer knowledge to make that happen.

It's going to take probably the better part of six months to ramp up fully to put that capability in place, maybe even longer.

I don't have a detailed plan in front of me, but I think it's a multi-month capability.

The other thing is we are in the process of -- I might have mentioned to you that we have a managing director there.

He is a British fellow that I have asked to move there, and he did about nine months ago or so.

He has been helping establish and set these details up in terms of the product offering, and the show, and the production capability.

And we've been searching for an Asian to replace him, and I will be reporting shortly that we have engaged someone and will be hiring him shortly.

So that is news to come just yet.

So I feel pretty good about where we're at.

Obviously we need to ramp and take advantage of that large and expanding industrial market there.

So we have a lot of work in front of us yet.

Great.

Thanks, guys

Jason Ursaner.

Just a follow-up on the last question regarding China.

Can you talk a little bit about the local installed base there and what exactly makes it so difficult to grow organically?

Yes, the Chinese hoisting industry is really started from a common state-owned design of hoists.

Mostly wire rope product, wire rope hoist product.

It's a common design.

There is 60, 70 manufacturers scattered around the country, each having their own little regional area that they produce and service to.

There is a level of understanding to the indigenous manufacturer as to how a hoist should perform.

Our hoists perform at a much higher and different level than that, and there is a premium associated with buying our product.

So it's a safer product and it's a more productive product.

There is an education that has to go on.

That education has to go on at the grassroots, if you will, of the people who use the product -- why you would want to buy a Yale or CM product versus why you would want to buy the indigenous local manufacturer.

And that education process doesn't happen overnight.

It just takes some time and some energy.

So our sales force has to be trained, and then they have to go out and touch that market.

In addition to that, let me add to that, Jason, is that there is really not an efficient method of distribution of our kind of product into the marketplace.

The Chinese market is made up of a lot of direct sales and, as I mentioned, little hoist companies that sell into the market directly, city by city if you will.

There is no large industrial distributors that we've taken advantage of in America as well as in Europe, that have been established hundreds of years ago in some cases, that is an efficient method to market.

So we have to make that method.

We have to produce it or get to the buyers directly.

And that takes time as well, as opposed to hooking up with a big industrial distributor.

Okay.

Those would be the two major reasons why it's time-consuming and difficult.

Okay, and in the mature markets, is there any regulatory changes that you see being discussed that could have the potential to impact volume?

Or are you getting any benefit from companies that have tried to improve efficiency during the downcycle?

Or is it just the cyclical rebound replacement demand story right now?

Yes, it's the latter of the two.

I haven't seen any standards changes or anything that is driving our industry at all.

So it's really just normal business activity that would drive our demand.

Okay.

Thanks a lot for taking my questions.

Thanks, Jason.

Ted Kundtz.

Yes, Tim, just a quick follow-up question for you, sort of a hypothetical question, given your long years of experience in this business and seeing recessions come and go.

Coming out of a recession, when you get some more normalized GDP growth -- call it a 3% number next year, in that range, and keep that going forward, where do you think you could grow?

What kind of ratio of that number do you think you could go coming out of a recession?

Do you have any thoughts on that?

What kind of multiple of the GDP growth rate you guys could grow?

Yes, okay.

There's not an easy answer, as you might imagine.

Right.

If we had a normal 2% or 3% every year and that was going on, we would typically grow a little bit better than GDP normally.

However, because of the depressed state of the current industry and activity of using our kind of equipment in the marketplace today, and if we got 3% growth next year but capacity utilization went from 68% to 72%, that growth would be huge.

We'd see a bigger uptick in revenue just driven because the activity in the marketplace, the utilization of our equipment, would drive a quicker recovery than the normal GDP plus a police, GDP plus a half a point kind of activity.

That is what I would expect to see.

Okay, so even if it just got to 72% you would see a dramatic --?

Yes.

The movement from 68% -- and I used to use 72% as an example because that is what it was a year ago.

That 400 basis point movement is meaningful to our Company and it would grow at a faster rate than the typical GDP kind of growth.

Okay.

That's good to hear, because you don't have to get back to this 80% number of utilization to really see the --?

Got it.

Yes, we don't have to hit 80% to be --

Great, to be really be really dramatically growing.

Yes.

And dramatic being what, 2 or 3 times the GDP number?

Would that be a fair number?

Okay, you're challenging me now.

It's all theoretical.

I'm just saying your thoughts.

Theoretically speaking, it would be -- I don't know if it's 2 or 3 or 5, it's hard to say.

But I would expect it to be magnitudes.

Multiples of.

My expectation.

Great.

Thanks very much.

There are no further questions at this time.

Well, thanks, everyone.

We appreciate your time this morning.

Just let me summarize by saying as you know we remain very well capitalized with $54 million of cash, this untapped revolver of about $75 million that matures in '11, but we are going to be renegotiating that right now, putting a new one in place coming up here.

We have the remaining $124 million of sub notes that don't mature till 2013.

So we have plenty of liquidity.

We're in good shape in that regard.

And even with the significant downturn in business, we've generated and will continue to generate free cash flow.

And that's one of the attributes of our Company.

We're very well positioned to weather the downturn, and we're going to continue to make prudent investments in our business so that we continue to grow in products as well as new markets.

So rest assured that is not stopping.

And we continue to attack waste in all forms through our lean activities.

We're going to position the Company to be very stronger as we emerge from this malaise that we're in right now, and we are going to generate higher levels of operating profits.

I'd like to thank all of our people around the world for their dedication to making our Company excellent, and certainly thank you all for your faith in us to run the Company.

As always, we appreciate your time today.

Everybody have a good day.

Thank you.