Columbus McKinnon Corp (CMCO) 2010 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions).

Now we'd like to turn the call over to your host for today, Mr. Tim Tevens, President and Chief Financial Officer. Sir, you may begin.

Thank you, Amy. I'm actually the Chief Executive Officer, but that's okay. Karen is here with me today, and she is the Chief Financial Officer. Good morning, everyone, and welcome to our call this morning. We are going to review fiscal 2010, and our fourth quarter results with you. And as I mentioned, Karen is here with me today. We do want to remind you that this press release and conference call may contain some forward-looking statements within the meaning of the Private Securities 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 SEC, to be sure you understand those risks.

Okay, our revenue for the quarter was down about $12.8 million or 9.4% for the same quarter last year, but up $4 million sequentially from the third quarter of fiscal 2010. We've also achieved about 45% of our revenues, are outside the United States in the quarter. This happens to be the second consecutive quarter where we've seen some modest revenue growth. And we will talk a little more about that in a moment. We continue to see some interesting -- some increasing global economic activity. The United States industrial capacity utilization in April was 71.2%. This is up 10 months in a row, and up about 600 basis points from the low point of June of last year. In the euro zone, the industrialization is also up about 600 basis points from it's low last summer.

As many of you know, our revenues track the industrialization figures, and as the utilization rates increase, so does our revenue. I believe we are definitely off the bottom of this cycle, and in the midst of slow, but sustained recovery. So far it's been modest, we do expect this trend to continue. A little bit about our bookings, which as many of you know is the driver of our business. They've rebounded nicely in the latter portion of our fourth quarter, and quite honestly, into the first quarter of fiscal 2011. We are now seeing double digit growth rates in our bookings, which we believe is predominantly end user demand, being pulled through our distribution channel partners. There is a fair amount of optimism in the channel, and certainly -- in certain end users. But I think there is a level of caution that is still around, and now we are seeing things that are happening in the euro zone, like the Greece situation, which I think gives people some pause. And in the states here too, I think that people are trying to better understand the new laws that are coming at us here, from the current administration, and how that might impact our business. So there is some caution there.

We are almost complete with the implementation of our planned facility rationalizations in North America. It's going to reduce operating square footage by about 500,000 square feet. A lot of fixed cost associated with that is going to come down as well, in $13 million to $15 million in annual savings area. We begin the see the benefits in the quarter, and Karen will review that with you in a moment, but the bulk of the benefits will ramp up through fiscal 2011. Our final facility which we are in the midst of moving from now, that restructuring is expected to be complete in the first quarter of fiscal 2011, actually at the end of June.

As many of you know, this is a free cash flow provider. Once again this is true, as we generated about $13 million in cash from operations in the quarter. Almost $30 million in the entire year, which I think we can attribute to our organization, as we've seen a pretty big downturn in our revenues, we have still been able to generate that cash. We've also continued to make strategic investments in new products and markets to help position us to grow around the world, especially as the general economies of the world, in my opinion get back to work now. On a non-GAAP pro forma basis for the quarter, we had $0.10 earnings per share versus $0.17 last year. And as you can see in the release, and Karen will cover in detail in a moment here, most of short fall was volume related. So at this time, I'll just ask Karen to continue.

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 fourth quarter and fiscal year that ended on March 31st. As a reminder, the prior year, year-to-date numbers are 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 9.4%, to $123 million in the fourth quarter of this year, compared with last year's fourth quarter. However we are pleased to realize growth in certain geographic pockets, including Europe, Middle East, Africa and certain parts of Latin America and Asia. But our other geographic markets including the US, continued to be negatively impacted by the global recession, although orders did turn favorable to last year during March, and into fiscal 2011.

Compared with the same quarter of the prior year, in addition to having two fewer shipping days causing a 3% decrease, US and international volumes declined by 12% and 3%, respectively. Foreign currency translation positively impacted revenue by 3%, and pricing was neutral. Additionally, the divestiture of the Company's American Lifts business on October 31, 2009 as previously announced, resulted in a 1% negative impact on revenue, as compared with the prior year's quarter. A table summarizing these fluctuations is included within the earnings release. On a full-year basis, consolidated sales decreased $130.5 million, or 22% over last year, despite this year's addition of $71.5 million attributal to the Pfaff business, compared with $43.5 million in last year's partial year under Columbus McKinnon ownership.

On a same-store basis, that is including the Pfaff business for entire two year period, sales are down 28% compared with last year. The Company's quarterly sales pattern, assuming a period of consistent economic condition, which we obviously have not seen over the past year, typically shows sales strongest in our fiscal fourth quarter, and weakest in our third quarter. The recent quarter had 63 shipping days, two fewer than the year ago quarter. Included in the press release in the 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 year recently started, fiscal 2011. Overall, fourth quarter consolidated gross profit decreased $3.2 million, or 9.1%, with gross margin improving 10 basis points to 25.7%.

The improvement was primarily due to the realized facility consolidation savings of approximately $2 million, despite lower revenue. Further, those ongoing facility consolidation activities required approximately $800,000 of cost, for ramping up production at the receiving facilities, training, and project management, negatively impacting gross margin by 65 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 our fiscal 2010 third quarter. A third facility will close by next month, June of 2010.

These three projects together, take out approximately 500,000 square feet, or 25% of our global manufacturing space. We estimate that approximately $1 million to $2 million of restructuring related costs will unfavorably impact gross profit during fiscal 2010 first quarter, relating to such activities as ramping up production, project management, and oversight travel. Additionally, we estimate $3 million to $4 million, of separately reported restructuring charges during that quarter as well, consisting of primarily severance costs and facility related charges, such as maintenance, utility, taxes and such. We expect that the annualized benefits of all three projects now estimated at $13 million to $15 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 consolidation, we will have sufficient capacity to support anticipated volume, upon market conditions returning to normalcy.

Besides the favorable comparison to the prior year, we are pleased to report a sequential improve in revenue and gross profit. Fiscal 2010 fourth quarter revenue was up 3%, over the third quarter, with non-GAAP gross margin including the -- excuse me -- excluding the restructuring cost, expanding 120 basis points, representing 60% leverage at the gross profit line. On a full-year basis, consolidated gross profits declined $57.8 million, or 33%, representing a 430 basis point erosion to 24.3% margin. Compared with the prior year, this year-to-date period was impacted by the factors previously described. Excluding the restructuring costs, and a large product liability claim reported in the second quarter, non-GAAP gross margin for fiscal 2010 was 25.9%.

Consolidated selling expense, as a percent of sales was 13.5% in this year's fourth quarter, up from 12.8% last year on lower revenue. The actual dollars are down $800,000, or 4.6% versus prior year, with continued investments in emerging markets and unfavorable foreign currency translation, somewhat offsetting reductions in base business spending. On a full-year basis, consolidated selling expenses were 13.5% of fiscal 2010 sales, compared with 12% for fiscal 2009. Consolidated G&A expense was 8.3% of sales in the fiscal 2010 fourth quarter, compared with fiscal 2009's 7.2%, again on lower revenue. This quarter's G&A dollars are up 5%, with an unfavorable foreign currency impact contributing 3% of the increase, and the remainder primarily due to additions to the European and Asian executive teams, and higher variable compensation.

Full-year G&A expenses were 7.7% of fiscal 2010 sales, compared with 6.2% for fiscal 2009. Restructuring charges amounted to $4.4 million during the fourth quarter of fiscal 2010, including severance costs, pension charges, and asset writedowns associated with the North American facility consolidation initiative. Full-year restructuring charges amounted to $16.5 million, including approximately $2 million of non-cash writeoffs. Our FTE level is down, approximately 26% compared with June of 2008. Excluding the $5.2 million of restructuring related cost, and a $600,000 non-cash writeoff and selling expense, non-GAAP income from operations was $5.8 million or 4.7% of revenue in the fiscal 2010 fourth quarter, as compared with $7.2 million or 5.3%, in the year ago quarter. Similarly on a full-year basis, also considering the special charges or gains as itemized in the tables in the earnings release, non-GAAP income from operations was $20.7 million or 4.3% of fiscal 2010 revenue, compared with $62.4 million or 10.3% of fiscal 2009 revenue.

Interest and debt expense was essentially flat, on both the quarter as well as full-year comparison basis. During last year's fourth quarter, the Company recognized a non-recurring $3.3 million litigation gain. Regarding income taxes, the effective tax rates for the fiscal 2010 and 2009 fourth quarters are not meaningful, since they are impacted by the unusual items previously described, as well as favorable rates in some international jurisdictions. Accordingly, a normalized effective tax rate would be approximately 36% to 37%. Income per diluted share on a non-GAAP basis for the fourth quarter of fiscal 2010 was $0.10, versus $0.17 in the fourth quarter of fiscal 2009. On a full-year non-GAAP basis, this year realized $0.32 of income per diluted share, as compared with last year's $1.90. We've included tables in the earnings release, listing and quantifying the tax effected amounts, and per share effect of the items impacting comparisons between the two years, for both the fourth quarter, as well as the full-year period.

Depreciation and amortization was $3.3 million and $3.1 million for the fiscal 2010 and 2009 fourth quarters, respectively, excluding a $107 million goodwill impairment charge recognized in fiscal 2009 fourth quarter last year. Capital expenditures were $1.3 million and $3.7 million, for the fiscal 2010 and 2009 fourth quarters, respectively. On full-year basis, CapEx was $7.2 million for fiscal 2010, and $12.2 million for fiscal 2009. This year's capital spending has been primarily dedicated to projects that are necessary for the facility consolidation initiative, as well as new products. We expect capital expenditures for fiscal 2011 to be in the $10 million to $12 million range.

We continue to generate strong cash flow from operations. Net cash provided by operating activities was $12.7 million in this year's quarter, or $0.66 per diluted share, comparable to $18.9 million provided by operating activities in last year's quarter or $1 per diluted share. In this year's quarter, earnings provided $4.1 million. Operating assets and liabilities provided $8.6 million. And last year's quarter, earnings used $3.4 million, while operating assets and liabilities provided $22.3 million. We continue to focus attention on our working capital utilization, especially opportunities to improve inventory turns, and align it with our long-term goals. At March 31, 2010, debt net of cash, was $68.8 million, and total gross debt was $132.8 million. Net debt to total capitalization was down to 26.9% at the end of the year, down from 35.2% at the end of last year.

The current level is modestly below our 30% debt to total capitalization ratio goal. The majority of our outstanding debt relates to senior subordinated notes, which don't expire until November of 2013. In addition to having $64 million of cash on our balance sheet, we have an additional $77.1 million available under our $85 million senior credit facility that was completed effective December 31, 2009. And that's net of $7.9 million of outstanding letters of credit. That, and with nothing drawn against the revolver, we continue to demonstrate significant liquidity. Further, we are in 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. Also, we ended the year with working capital as a percentage of sales at 16.2%, favorably compared with eight -- excuse me -- 18.8% at the end of last year. With that, I thank you, and turn it back to Tim.

Thanks, Karen. Amy, we are open for questions now, please.

Thank you.

(Operator Instructions).

Our first question comes from Jason Ursaner with CJS Securities. You may ask your question.

Good morning.

Good morning.

Good morning, Jason.

Tim, looking ahead at increase in utilization that's in front of you, as primarily replacement demand, even if there was no further gains, we should still see meaningful improvement in sales, as this flows through. And you mentioned monthly bookings, and kind of momentum in there. So from a profitability perspective, with all the costs you taken out, holding gross margin on 8% lower volume, have your views on sensitivity to incremental sales changed at all?

Yes, the incremental, the levers, the incremental volume, our margin that we would expect to see. If you look back to 2001 recession, we were in the 30% area, now Jason, this bounced all over the map, quarter-to-quarter. I think the low was in the 20s, and the high was like in the 40s or 50s, quite honestly percentage, we probably expect to see something similar to that. And it really depends on how quick the revenue comes at us. I think from a modeling standpoint, if you think about our business though, you can look at us, with most of fiscal 2011, most of fiscal 2011, with $15 million less fixed costs. That's gone, it's not going to come back. So the leverage has the potential to be on top of that. But again, it's really dependent on how quick the revenues come at us. If they come at us very, very quick, the leverage might come down, just because of the way the math works, with the revenues being the denominator.

Okay, and --.

Does that make any sense to you?

Yes, and just staying with that, what costs need to come back as you grow revenue, given your current capacity level and the footprint that you changed, how much revenue could you add before you need fixed capital investment?

Well, we sized this business to the footprint to actually produce the same peak, a little bit more than the same peak that we went through back in 2008, 2009, 2008 really, $610 million, or so. So we've got a long way to go to get back to that level. So our fixed environment is set, our capacity is set for that. The only cost that would come in, of course, would be the variable side, in terms of direct labor application, engineers, material, et cetera.

Sure. In Europe, sales were up 1%, you mentioned market share gains rather than market recovery. Have you not seen indication that the weaker euro would be advancing the recovery, as prices become more competitive?

Not yet. I think we have not seen that. Because it just really moved in the, what last couple of months, very quick. It's happened very, very fast, in terms of it getting weaker against the dollar. But I don't think that's what is driving our business today. That may happen in the future. I don't know.

Okay. And just on the domestic crane business down, pretty substantial in the quarter, can you help us understand maybe what happened there a little bit better?

It's a capital good, our cranes are tens of thousands, if not hundreds of thousand of dollars. Capital budgets were shrunk by most of our end users, Caterpillar and Deere to name a few, some of the oil patch extensively. So those people just shut that valve off, and it went to zero. Our bookings and revenue, as a result of those bookings are much more service oriented and resale, repair kind of business as opposed to the large cranes that might be sold into that market. So it's impacted more dramatically than the other parts of our business, the other 90% of Columbus McKinnon which is much more maintenance expense items. And that will recover -- that usually goes in later, and comes out later as well, in terms of recovery.

Right. Okay, thanks a lot for taking my questions. I'll jump back in queue.

Our next question comes from Ted Kundtz with Needham & Company. Your line is open.

Yes, good morning, Tim and Karen.

Morning, Ted.

A couple of questions for you. Could you talk a little bit more, Tim, about what you are seeing this the US? You talked about some up tick in late in the quarter, and continuing in to this quarter. Is that anything unusual, any specific industry that you are seeing that from?

Well, as Jason just reminded us all, it's not the crane business.

Well, we know that one.

Well, there is a couple of ones that are of interest. The first one that comes to my mind, which is our biggest market and channel partners, would be the general industrial supply houses that supply America from an MRO stand point. Seems to be doing better. That's been up ticking a bit. The entertainment business that the hoisting line goes into concerts and live theater, et cetera, that went away last year is back and alive. And people are spending money in that market, and we are seeing results of that in, quite honestly a big way, even though it's a small portion of our business, it's dramatic in terms of percentage of our business. I would say it's -- the feel we have is general industrial supply houses that service those markets, probably not construction, but more manufacturing, more oil related, more energy related kind of industries.

Okay. You mentioned something about new laws impacting the business, and I guess you are referring some of the environmental legislation that's working its way through? I'm not sure what you were referring to, how that would impact your business.

Some of the dialogue we have with channel partners and end users alike, are the uncertainty with which the health care program that came out from Washington, and how that's really is going to impact us. And it seems to give people cause for a pause, and concern over, where do I invest my money, and am I going to put it here in the United States, or am I going put it in my Brazilian operation or where ever. And that's what I'm referring to.

Okay. You are making a political statement here.

No, I'm not. I am making a statement of what I'm hearing from our market. Thanks, Ted.

It seems to be impacting business decisions.

Right, okay. It's got us all nervous, you are right. Could you talk a little bit about business outside of Europe and the US, what's the rest of the international business looking like for you?

Brazil remains strong. Latin America strong. Mexico is not just yet, they are much more tied to the US cycle I think. Asia Pacific continues to be robust. As you know, it's a small portion of your business today, but we are investing in it from a sales and marketing stand point. And we see plenty of opportunity coming out of that part of the world, in particular China. So there -- we -- just looking at a very nice order this morning, and potential contract with the major manufacturer out in China that would be very beneficial for us. So there is just plenty of opportunity there, a lot more than what we are seeing in, let's say, western Europe, and or America.

What portion does that represent of your business, non-Europe, non-US?

Small. 10%.

10 percentage. Okay. But that's an area that's the most rapidly growing.

Yes, that would be true.

And is there anything new in the China strategy, in terms of getting a better presence over there? I know you have been obviously looking for JV's and partners, and growing internally as well. So any new thoughts on that?

Continue on the parallel path. We are building the organic sales force, and we continue to search for acquisitions or partners. On the partner side, we've had dialogue now with about a half a dozen different organizations and companies. It's too early to tell just yet, I have nothing to announce just yet. But we are working diligently in that area. So we are going to continue to the dual path approach.

Okay. Can you comment on thoughts about gross margin trends here? Do you see them at least stabilizing here, and perhaps moving up? Obviously, when you take some of the cost out, that could help in the Q, or maybe more Q2, Q3?

Yes, Karen tried to talk -- gross margins are a little muddy now, because of the restructuring activities we have going on. But if you strip that out, this 25% area, this is volume 25, 26 is what we feels about right. Of course, that as you know, as the revenue grows, that margin will step up, and we will get up. And we'll get to a decent level of revenue in to the low 30s like we normally would be.

Okay.

So, yes, I think with the cost coming out, and the revenue going up, we should see that continue to head north.

Okay, and your longer term goal is to get it back in to the 30s?

Yes, sure. Absolutely.

Anything going on with pricing? Last question.

Yes, the prices we pay are going up.

Are you seeing inflationary --

It's kind of all over the map, but we are seeing some pricing increases from key suppliers. It's our policy, and we have been pretty good at passing that on to our channel partners. So we are increasing our prices as well. We did not put one in the fourth quarter, but we will be putting one in this quarter, to So offset some of that price increase that we seen from our suppliers.

Okay.

And we normally get between a point or two each quarter. This past quarter we didn't, because we didn't raise prices as we normally would of have in the fourth quarter.

Okay. Basically, that would be margin neutral. You're shooting kind of for.

That's exactly right.

Keeping it margin neutral for you.

You got it.

Thanks very much.

Thank you, Ted.

(Operator Instructions).

Our next question comes from James Bank with Sidoti & Company. Your line is open.

Hi, good morning.

Hi, James.

Karen, just on the selling expense in the quarter, I didn't see an explanation in the press release. And I don't think you elaborated on it in the conference call. I was just wondering if you could explain why it ramped up in the quarter?

The selling expense in the fourth quarter?

Yes.

Specifically, the biggest driver for the increase compared to a year ago is currency. There's about $700,000 unfavorable currency impact. And then also, with sales increasing, on a sequential basis, we had increased commissions and such associated with the sales.

Okay. And with the employees in Asia, --

Actually, there was one other item, I'm sorry, selling expenses, there was a -- we took a non-cash writeoff of about $600,000 associated with a royalty that we cleaned up. That also hit this quarter, kind of unusual.

Okay. Was that included non-GAAP reconciliation?

Yes.

It was?

Yes, we adjusted for that in non-GAAP reconciliation.

With the employees in Asia, two quarters in a row now, spending some money, and some new product development, I'm just trying to conceptualize how I should think about G&A going forward over the next twelve months. Is there still training going on in Asia? And also, what I type of spending are you looking for with the new products?

Yes, it's going to continue to go up from a dollar standpoint, but of course, we are looking for a return on that, from the revenue side. We are planning to -- are well on our way to hiring 25 additional sales folks in China. And adding some admin folks to manage the group. It's probably around a $2 million dollar investment in China over fiscal 2011.

I'm sorry, what was that number, Tim?

A couple of million dollars. It's not necessarily huge, but it's certainly is a baseline we are targeting to grow revenue. The revenue should come up to correlate with that.

Okay.

We have the train these people, of course, in product training, and then they have to obviously work in their respective markets. And I think that at the end of the day, they won't generate a lot of margin in fiscal 2011, but we should get revenue and market position that ultimately we can leverage in the future. New product development, I don't have that number off the top of my head. Karen, maybe you - it's about $4 million or $5 million --?

Yes. It's roughly about $4 million.

And that's been growing maybe about a $1 million a year or so, for the last several years. That's probably a good level for fiscal 2011 as well.

Okay. And that's all I have, thank you.

Thanks James.

At this time, there are no further questions.

Well, thank you, Amy. And thank you, everyone. Just let me summarize by saying, that the debt net of cash continued to decline, and now, as Karen said, stands at about $69 million. One thing I wanted to point out to you all, is that cash on our balance sheet stands at about $64 million. If you combine that with our untapped $85 million revolver, we're well positioned to execute our strategic growth plans, invest in these new markets, invest in new products, as well as execute our strategic global acquisition plan. I also want to thank all of our Columbus McKinnon associates around the world for their hard work, their dedication to excellence in making our Company a much stronger organization, and well positioned for that growth. And as always, we appreciate your time today. Thanks, and have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.