Columbus McKinnon Corp (CMCO) 2010 Q3 法說會逐字稿

Good morning, and thank you all for standing by. All participants will be able to listen only until the question-and answer-session of today's conference call. Today's call is being recorded. If anyone has any objections, you may disconnect at this time.

And now I will turn the call over to your speaker for today, Mr. Tim Tevens. Sir, you may begin.

Thank you, Angie. Welcome to the Columbus McKinnon conference call to review the results of our fiscal 2010 third quarter. With me today is Karen Howard, our Vice President of Finance and Chief Financial Officer.

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

Our revenue for the quarter was down by about $46 million, or almost 28%, from the same quarter last year, but up $3 million sequentially from the second quarter of fiscal '10. We also have achieved international revenues of 46% of our total revenue for the quarter.

We continue to see increasing global economic activity. The United States industrial capacity utilization in December was at about 68.9%. Now, this is up six months in a row now, or about 350 basis points from its low point in June. The Eurozone industrial production continued their upward trend. China does remain robust, albeit from a very low volume for us.

Our bookings in the quarter were down in the 15% to 20% area compared to last year, but certainly better than the prior quarter. Our larger channel partners are reporting improving bookings and a slowing of the decline in the revenues in their most recent quarters. It does appear that we are off the bottom of the economic cycle, but it seems like it is a fairly slow recovery at this point in time.

The inventory that is in the channel seems to be very low, and we believe we are seeing economic needs from the end-user community come straight through our channel partners to us.

We've continued the implementation of our planned facility rationalizations in North America that will reduce our operating square footage by about 500,000 square feet and fixed operating costs in the area of $9 million to $11 million in annualized savings. These savings will ramp up throughout fiscal '10, and their full potential we will begin to see in the first quarter of fiscal '11.

We expect the costs to implement these closures to be in the $8 million to $10 million area, most of which we will incur in fiscal '10. Two of the three facility closures are now complete. We're just wrapping up some things at those locations right now. These savings are in addition to the $7 million to $8 million in annualized savings from our normal cost reduction activities.

One attribute of Columbus McKinnon is our ability to generate cash even in the midst of a severe economic downturn, and for the first nine months, we generated $17 million in cash from operations. We have also continued to make strategic investments in new products and new markets to help us position the Company to be a more integrated global company servicing the global market.

From an earnings perspective, there are a number of different items that occurred in the quarter which impacted our results. On a non-GAAP pro forma basis for the quarter, we did achieve a $0.06 earnings per share versus about $0.44 last year. Most of the shortfall was attributed to the shortfall in revenue, but we also had some exceptional expenses for restructuring charges and things of that nature, which Karen will review with you in a moment.

The backlog of our business remains relatively flat at about $71.6 million. And with that as a brief overview, I will ask Karen to lead us through some of the detail.

Thank you, Tim, and good morning, everyone. I am pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2010 third quarter and year-to-date period that ended on December 31, 2009. As a reminder, the prior year year-to-date numbers were impacted by the October 1, 2008 acquisition of our German-based Pfaff business, which was at the beginning of the prior year's third fiscal quarter, and therefore impacts comparability, as noted within this discussion.

Consolidated sales decreased by 27.9% to $119 million in the third quarter of this year compared with last year's third quarter. We realized growth in certain geographic pockets, including parts of South America, Europe and Africa. But all of our other geographic markets continued to be negatively impacted by the global recession, albeit to a lesser degree than prior quarters.

Compared with the same quarter of the prior year, US and international volume declined by 28.4% and 32.6%, respectively. Foreign currency translation positively impacted revenue by 3.1%, and pricing added 0.3%. Additionally, the divestiture of the Company's American Lifts business effective October 31, 2009, as previously announced, resulted in a 1% negative impact as compared with the prior year's quarter. A table summarizing these fluctuations is included within the earnings release.

On a year-to-date basis, consolidated sales decreased $117.7 million, or 25%, over last year, despite this year's addition of $52.5 million attributable to the Pfaff business, compared with $26.8 million in last year's partial year under CMCO ownership. On a same-store basis, that is, excluding the Pfaff business, sales are down 32.2% year-to-date compared with last year.

The Company's quarterly sales pattern, assuming a period of consistent economic conditions, which of course we have not seen over the past year, typically shows sales strongest in our fiscal fourth quarter and weakest in our third. The recent quarter had 60 shipping days, which is 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 and fiscal 2009 for your reference, as well as the upcoming year, fiscal 2011.

Overall, third-quarter consolidated gross profit decreased $18 million, or 40.1%, with gross margin contracting 460 basis points to 22.5%. 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 facility consolidation activities begun during the second quarter, improving gross margin by approximately 20 basis points this quarter. However, those activities required approximately $3.2 million of costs relating to relocating and reorganizing inventory between facilities, ramping up production at the receiving facilities, training, travel and project management, all of those negatively impacting gross margin by 270 basis points.

As a reminder, we previously announced that we are consolidating our North American hoist and rigging operations. This resulted in a significant downsizing of one facility and the closure of another, both completed during this fiscal 2010 third quarter, for which we will expect to realize approximately $1 million to $1.5 million of savings in Q4.

A third facility will close by June of 2010. These three projects together take out approximately 500,000 square feet, or 25% of our global manufacturing space. We estimate an additional $1 million to $2 million of restructuring charges during our fiscal fourth quarter, of which approximately $0.5 million is estimated to be non-cash.

Additionally, we estimate approximately $2 million to $3 million of non-GAAP restructuring costs that will unfavorably impact gross margin during our fiscal fourth quarter relating to such activities as inventory reorganization and movement, training, project management and oversight travel. We expect that the annualized benefits of all three projects, estimated at $9 million to $11 million, will continue to ramp up and reach their full run rate at the end of the first quarter of fiscal 2011.

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

Besides the impact of the restructuring activities, we realized sequential erosion in gross margin due to the timing and amount of product liability charges that fluctuate from quarter to quarter, and are more noticeable at these low sales levels.

On a year-to-date basis, consolidated gross profit declined $54.6 million, or 39.3%, representing a 560 basis point erosion to 23.9% margin. Compared with the prior year, this year-to-date period was impacted by the factors previously described.

Consolidating selling expense as a percent of sales was 13.3% in this year's third quarter, up from 12.0% last year, on significantly lower revenue this year. The actual dollars, which include the benefit of restructurings incurred in the first quarter of this year, as well as general cost management action, are down $4.1 million, or 20.5%, versus the prior year, despite continued investments in emerging markets, somewhat offsetting reductions in base business spending.

On a year-to-date basis, consolidated selling expenses were 13.6% of fiscal 2010 year-to-date sales compared with 11.7% for fiscal 2009 year to date. Consolidated G&A expense was 8% of sales in the fiscal 2010 third quarter compared with fiscal '09's 5.2%, again on significantly lower revenue this year.

This quarter's G&A dollars are up 9.7%, with an unfavorable foreign currency impact contributing 4.6% of the increase, and the remainder primarily due to additions in the Asian executive team, as well as higher variable compensation. Year-to-date G&A expenses were 7.5% of fiscal 2010 year-to-date sales compared with 5.9% for fiscal 2009 year to date.

Restructuring charges amounted to $3.6 million during the third quarter of fiscal 2010, primarily including severance costs and pension charges associated with the North American facility consolidation initiative. We anticipate full-year restructuring charges in a $13 million to $14 million area, including approximately $1.5 million to $2 million of non-cash write-off. Our FTE level is down approximately 20% compared with the year ago and 25% compared with June 2008.

Driven by the gross margin contraction and restructuring charges described above, operating income decreased by $17.4 million, or 117.1%, to a loss of $2.5 million for the fiscal 2010 third quarter as compared with the prior year. Excluding the $3.6 million of restructuring charges, as well as the $3.2 million of non-GAAP restructuring related expenses, non-GAAP income from operations is $4.3 million, or 3.6% of revenue.

Similarly, on a year-to-date basis, also considering the year-to-date $12.1 million of restructuring charges and $3.6 million of year-to-date non-GAAP restructuring charges, as well as a $2.9 million reserve provided for a specific tire shredder product liability claim in the second quarter, non-GAAP income from operations is $15 million, or 4.2% of revenue.

Interest and debt expense was $300,000 lower than the prior year's quarter and flat on a year-to-date basis. During this year's third quarter, the Company recognized $1.9 million of gains in its divestiture of American Lifts and a minority interest in a European business, reflected as Other Income.

Regarding income taxes, the effective tax rates for the fiscal 2010 third quarter and year to date are not really meaningful, since they are impacted by the unusual items previously described. Accordingly, excluding the restructuring charges, non-GAAP restructuring related costs and gains on the business divestitures, a normalized effective tax rate would be approximately 36% to 37%, relatively consistent with the fiscal 2009 year-to-date 35.7% effective tax rate.

Loss per diluted share for the third quarter of fiscal 2010 was $0.12 versus $0.20 of income in the third quarter of fiscal 2009. Upon isolating the unusual items as previously described, non-GAAP earnings per diluted share for the third quarter of fiscal 2010 were $0.06 versus $0.44 in the third quarter of fiscal 2009.

On a year-to-date basis, the GAAP loss per diluted share was $0.39 compared with last year's income per diluted share of $1.26. On a non-GAAP basis, this year realized $0.21 of income per diluted share as compared with last year's $1.65 on a year-to-date basis.

We have included tables in the earnings release listing and quantifying the tax-affected amounts and per-share effect of the items impacting comparison between the two years for both the third quarters as well as year-to-date periods.

Depreciation and amortization was $3.1 million and $3.0 million for the fiscal 2010 and 2009 third quarters, respectively. Capital expenditures were $1.9 million and $3.5 million for the fiscal 2010 and 2009 third 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 $10 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, despite a large pension contribution that was due this past quarter.

Net cash used by operating activities from continuing operations was $6.8 million in this year's quarter, or $0.36 per diluted share, comparable to $12.3 million provided by operating activities in last year's quarter, or $0.65 per diluted share.

In this year's quarter earnings used $2.8 million, driven by the $6.8 million of restructuring charges and related costs. Operating assets and liabilities used $4 million, including the $12 million scheduled pension contribution, and receivables and inventories provided $7.6 million of cash this quarter.

In last year's quarter, earnings contributed $11.7 million, while operating assets and liabilities provided $600,000. We continue to focus attention on our working capital utilization, especially opportunities to improve inventory turns in alignment with our long-term goals.

At December 31, 2009, debt, net of cash, was $82.5 million and total gross debt was $133.6 million. Net-debt-to-total capitalization was 30.8% at the end of the quarter, down from 35.2% at March 31, 2009. 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 November 2013.

In addition to having $51 million of cash on our balance sheet, we have an additional $77.7 million available under our new $85 million Senior credit facility that was just completed effective December 31, 2009. And that is net of $7.3 million of outstanding letters of credit. That, and with nothing drawn against the revolver, we continue to demonstrate significant liquidity.

We were in full compliance with all financial covenants related to this agreement. Consistent with our long-term goals, 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. Okay, Angie, we would like to open it up for questions.

(Operator Instructions) Jason Ursaner, CJS Securities.

In the cost of goods line, you separated out a general product liability charge, and you separated out the margin impact, but didn't adjust for it as a one-time. So should we assume that this would expect to continue to accrue higher product liabilities?

Jason, not necessarily. There are normal fluctuations throughout the year for our general product liability reserves. Come the end of the year, the end of the calendar year, that is, we receive actuarial reports that dictate the amount of reserves that we are required to have on hand.

So these are just normal, general reserves and fluctuations, which are difficult to predict. But it is not indicative of a trend.

Okay. And in the prepared remarks, Tim mentioned exceptionally strong sales in Europe and encouraging progress in China. But domestically though, the US industrial manufacturing utilization has increased pretty steadily since July, including a jump in November.

So have month-to-month order trends in the US not reflected this, or is this just more of a normal one to two quarter lag?

As you know, we lag by a quarter or two, so you are right there -- normally. The capital -- capacity utilization as it increases in the US, we do indeed feel those increases. They are still at a very low level, at 69% or so right now, so that it is not robust growth in the United States. But we are indeed feeling the bookings now increase just slowly.

And were any price increases put in place in November in North America or in January in Europe?

No.

And what is the rate on the new credit facility?

The rate varies on the new credit facility, Jason, based on a grid. And it ranges from -- hang on a second, let me just flip to it -- it ranges from 200 to 325 basis points above LIBOR.

Okay, and then just last question. Tim, I know you have spoken a lot previously about the actions you have taken to reduce the impact of cyclicality. And just very globally, if I look back at the hypothetical slide that you used to put in the presentation, in fiscal year '08, operating margins were mid 13% on close to $600 million revenue. And you had given this hypothetical impact of a 23% revenue decline, which was equivalent to the last trough.

Looking back, this obviously has been much deeper, and excluding Pfaff, core sales are going to end up somewhere around $50 million lower than the hypothetical. So call it a 32% decline versus the 23%. And excluding all the noise, you're now running about 3.5% operating margin versus 7% in the trough.

So given your fixed cost structure, as utilization begins to show signs of stabilization domestically and you position yourself for growth in emerging markets, how do you begin to think about the magnitude of volume recovery and profitability from the bottom?

It has obviously changed from that hypothetical presentation, because it is, you are absolutely right, significantly deeper. It is 50% deeper than we thought it could be. That is number one. And that is a global impact. That is not just the United States.

The first thing that comes to my mind is our revenues are much more globally dispersed today than they were back in '01 to '05 when we did this measure originally. So I think that will give us less of a cyclicality, quite honestly -- hopefully, Jason. Don't really know.

I will tell you that the investments we are making in the emerging markets such as China should give us some higher level growth. Today, it is a fairly low volume that we are doing today. It is increasing and increasing very high rate -- percentage rate, but it is not a big number just yet. But I'm sure it will be as we look to the future.

And then you add into that the comment that I made about removing another 500,000 square feet of fixed cost out of our system with the plant rationalizations we are doing right now, which would give us a double-digit kind of fixed cost reduction, and I think that we will see margin expansion improvement as the recovery takes place. So we will get some very positive operating leverage in that regard, offset by maybe some of these investments we are making in these emerging markets, as well.

And where do you think incremental operating profitability is?

The last cycle we came through, it was -- we were in the 30% area. I think we targeted 30%. And I would expect us to be in a similar range.

Okay. Thanks a lot.

Ted Kundtz, Needham & Company.

Question for you could be, one, let's start off with your thoughts about normalized -- normal margins here. It looks like you reported a 22.5, you had mentioned 270 basis points from the restructuring, roughly. So that's 25.2. I don't think we can add back in the product liability reserve because that sounds like an ongoing event. So is that kind of your margin run rate here at this level -- your gross margin run rate at this level?

Now, I know we've got some savings coming in, that that could start to move that number back up. But maybe you could just address where you think normalized margins are currently and where you think they could go.

I think with the adjustments that Karen read to you and walked you through, this area seems to be about right. My expectation is going forward, as we conclude the restructuring activities, and -- we should start to see some leverage at the gross margin as the revenue increases, especially in the United States, where the closures are taking place. So it should go further north.

But Ted, it really depends on the volume, and how quick that volume will hit us. Obviously, if it comes a little quicker, we should get some increases in that regard. But if you assume no volume -- let's be pessimists here, which I'm not -- I think -- I'll look to Karen to comment, but I think 25% area seems reasonable.

Is the number? Okay.

And I'll say, there isn't anything highly unusual about this quarter. I think it is -- mix fluctuates from quarter to quarter, so there are always some natural fluctuations. But there wasn't anything really unusual about this quarter.

This was just the first time you broke out the product liability reserve as a separate item -- at least that I remember.

Yes, well, because it stuck out. It's a big fluctuation. And as you think about it sequentially, I anticipated that would be a natural question.

In past years, there have been times when it has stuck out. But it is not a normal quarterly thing.

I don't quite get why it fluctuates so much. You are saying -- what could it be like in the fourth quarter? Is it a big fluctuation number or --?

Generally not. It is difficult to predict, but generally not. And we get our actuarial report as of December 31. So it is kind of our true-up time.

Okay, at which point you could -- you don't restate it, but you could just lower for the particular quarter that you are truing it up to?

That's correct.

Right. It's like a percent of completion thing or something.

Okay, but generally what does it run per year? Is there a way to annualize this on a normalized rate?

I don't know that would be helpful for you, because it is just -- I mean, it is just a normal cost of goods sold item.

Okay. Now, it looks like you are going to take some additional charges in the fourth quarter. It looks like you are talking in the terms of GAAP and non-GAAP restructuring charges of $3 million to $5 million.

That's right.

Is that -- will that kind of end the restructuring expenses or do you expect anything to move over into fiscal '11?

We do expect that there will be some in the first quarter of fiscal '11 associated with this third project that is still in progress. And that project is expected to be completed by the end of that first quarter of fiscal '11.

Okay. Any idea of the size that could be in Q1 '11?

We are still tightening up our non-GAAP numbers at this point, so I think it would be preliminary to say.

Okay. Time, are you seeing anything on the pricing side? You mentioned there was a little bit of benefit from pricing, very modest. But are you seeing anything currently that -- in either here or in Europe -- that would affect results?

No, I think we remain in this -- if you look at our history, we are always somewhere around a half a point to a point to a point and a half, somewhere in this area. And pricing is holding up reasonably well. It is not horrible, but it is -- hey, we want the volume, right?

Right. Okay. But you're not seeing any great price pressures --.

Correct.

-- to compete. Okay, great. And then just lastly, any thoughts on acquisition activity at this point? Are you guys still actively looking, or you just want to get this restructuring behind you and then work from there? Kind of your thoughts on that.

Two different groups of resources of people that we have working on it. The restructuring is pretty much dedicated folks that are in the midst of moving this equipment around and inventory and setting up production lines, et cetera.

There is a different group. I have a Corporate Director of Development, and his name is Kurt Wozniak. And he is indeed working on some of these acquisition activities. So that continues, Ted, and quite honestly, we would love to have one or two done in the upcoming fiscal year.

Okay. And then maybe just compare Europe with the United States. You mentioned some of the strengths you had saw in the quarter was from Europe, not so much yet in the US. Is that trend still continuing?

Yes. Europe seems to be -- and I know this seems odd to many people -- Europe seems to be in advance of the US, at least in our markets. We haven't really got our arms around why. It may be market share gain in Europe. But the US seems to be lagging economically, and we are not losing market share in the US.

Okay. Well, some of the companies are talking about increasing production, so hopefully that will start benefiting you guys, as well.

That would be great.

Yes, if you can hurry (multiple speakers) along, that would be super.

Let's hope it continues. Okay, thanks a lot.

Gary Farber, C.L. King.

Can you just talk about your end markets a little bit -- or some -- construction, or whatever ones you want to touch on. Are some drastically weaker than others and sort of what you are seeing.

It is a little hard, Gary, because of the sale that we make through distribution. So end markets get a little fuzzy. But in having discussions with channel partners and attending some shows, like we just did the Grainger end-user market show last week, construction is challenged. I think it is going to remain challenged for a while.

Manufacturing seems to be coming back a little bit, as well as oil and gas seems to be a little bit more -- a little stronger. Keep in mind we are coming off incredibly low lows here, so any kind of uptick is a positive thing.

Right.

So those are the major things that I heard and had conversations around, was I think construction is going to be challenged for a while, but manufacturing seems to be leaking -- heading in a more positive direction.

And then also on -- any issues with raw materials or prices going up? Are they staying about the same?

It's pretty much about the same, yes. I mean that is obviously a concern of ours and it is something we watch very closely with our commodity management team. But at this point in time, there has really not been any spikes or anything that is odd.

Right. Okay, thanks.

James Bank, Sidoti & Company.

Thank you. Really just one question. Karen, if we could look at the G&A line, for me, that was really the biggest surprise here in the quarter and probably one of the bigger parts of the shortfall, I think, from consensus estimates.

If we kind of take out the variable compensation and maybe even the Asian piece, is this sort of a G&A run rate in the mid-$8 million range we can expect for the remainder of this year and then maybe heading into next year?

You know, we don't give guidance, but we do talk about if there is anything unusual in there. And in this quarter, G&A compared to last year was impacted by a few things that we had identified. One was currency. Just given the fluctuation in currencies, it is about $0.5 million higher than a year ago.

But then the other operating type things, we had some variable compensation catch-up; that was about $500,000 to $600,000. And a couple hundred thousand for some investments that we are making, which will be ongoing, relating to our Asian management team.

So I would say the variable compensation one was a catch-up and not necessarily ongoing. But -- and the currency is difficult to predict.

Right, and I guess excluding the currency cost as we go forward and want to anticipate higher volume, these are maybe even items, if they were ongoing, could be absorbed.

As volumes is higher, these types of things don't stick out as much.

Right. Okay, great. That's all I had. Thank you.

Jason Ursaner, CJS Securities.

Just following up, understanding that a lot of the sales are through distributors, do you have any insight into inventory levels at your distributor customers or the end-users?

We do, many of it anecdotal and/or some of our guys actually check the inventory. It is probably at the lowest state we've seen. So that is why we feel that any end-user demand comes through directly to us pretty quickly.

Not to harp on it, but with production gradually coming back and not a lot of inventory at customers, you are highly levered to a volume recovery. If you take 25% incremental operating profit and a 36% normalized tax rate, you are talking about $0.20 in earnings for every 5% sales increase from this year's trough run rate.

So can you try and give some -- a little bit more color into what type of magnitude of volume recovery you think you could see over the next couple of years as utilization begins to improve?

I would love to be able to do that. However, I'm not an economist, nor can I predict the future.

But I will tell you that historically speaking, as we saw the last recession -- actually the one before it, as well, for every dollar of additional revenue that we saw in gain, we did recognize about $0.30 of the operating income line, which is that 30% operating leverage that I mentioned to you.

And I would suspect that you should get in that same area. Arguably, it might be higher because we are taking more fixed cost out right now, but it should be in this general area.

Now when does it come? We lag the general economic activity by a quarter or two, depending on individual sectors. This recovery, although it is up 270 basis points or so off the bottom in the last six months -- we actually felt that. Our bookings are up from the prior -- sequentially from that time period. And we feel good about that.

When is it going to get back to the high 70%s, low 80%? Jason, I don't know. But I will tell you that the operating leverage, it will be in our Company and we will see it come through when the revenue comes back.

Okay, great. Thanks a lot.

(Operator Instructions) It looks as though there are no further questions.

Thank you. Let me summarize by saying we as a Company remain well-capitalized, with $59 million in cash and a new, untapped revolver of $85 million. Our remaining $124 million of subordinated notes mature in November of '13. And even with the significant downturn in business we have seen, we have generated and will continue to generate free cash.

And I think we are well-positioned to weather the storm and continue to make prudent investments in our business, and, as well, attack waste in all forms through our lean process. We are positioned very well to take advantage as we emerge from this current economic malaise and generate higher levels of operating profits.

I would like to thank all of our people around the world for their dedication to our Company and making us a stronger organization. As always, we appreciate your time today, and we look forward to talking to you. Thank you.

This will conclude today's conference call. You may now disconnect.