Columbus McKinnon Corp (CMCO) 2011 Q1 法說會逐字稿

Welcome and thank you for standing by. ( Operator Instructions ) I will turn the meeting over to Tim Tevens . Thank you and you may begin.

Thank you, Rose. Welcome to the Columbus McKinnon conference call to review the results of our fiscal 2011 first quarter. With me today is Karen Howard our vice president of finances, Chief Financial Office. We do want to remind you the press release in the conference call may contain some forward-looking statements within the meeting of the Private Litigation Reform Act of 1995. The statements contained 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 be sure you understand these risks.

Relative to the quarter, the good news is we had very strong bookings from all around the world in the quarter. Unfortunately, we have been able to keep pace with that growing demand. Our bookings were up about 24% in the quarter but the revenue was flat last quarter, up about 2%. Excluding investiture and the negative effects of currency translation. As a result, our backlog grew about $17 million. This is a temporary situation as our supply chain and our production capabilities ramp up over the next quarter or two. Rest assured that our management team and our people around the world are focused on getting this backlog shift to our customers. And we expect the attorneys' bookings in the revenue sometime in the next couple quarters, as I said.

International revenues for our company were at 45% of total revenue in the quarter, which is a pretty good standing for some of our targets. We continue to see interest increasing global economic activity, the US industrial capacity utilization held steady at about 71.6%. The euro zone industrialization is also improving. As many of you know, our bookings and normally our revenues track industrial utilization figures and as the utilization rates increase, so, of course, does our revenue. Based on discussions with many of our channel partners and end-users, we believe the recovery that we are feeling continues to be in full swing and will continue for the foreseeable future.

We have completed the implementation of our planned facility rationalization in North America. This will reduce our operating square footage by about 500,000 square feet. And our fixed operating costs in the area of $13 million to $15 million annually. We have begun to see some benefits this quarter but certainly the bulk of them will ramp up through fiscal '11. We had some free cash flow, this -- it was negatively impact this past quarter. Mostly by our interest payments on our sub notes as well as an annual incentive payment and Karen will delineate those in a moment.

On a non-GAAP performance basis for the quarter, we achieved $0.05 EPS versus $0.05 last year. Now I will ask Karen to lead us through some of those details.

Thanks, Tim and good morning, everyone. I'm pleased to have their opportunity to review with you some of the financial highlights of Columbus McKinnon's fiscal 2011 first quarter that ended on June 30. As you have probably seen, consolidates sales were relatively flat with last year's first quarter at $119.1 million. However, incoming orders were up 24% over last year's first quarter, reflecting growth in all geographic regions.

Accordingly, backlog grew by $17 million, or 23% in the quarter, compared with March 31 balance. This significant and rapid increase in demand for our products during the quarter caused bottlenecks in our supply-chain for component parts, as well as our production facilities. We are working diligently towards resolution of those issues and anticipate backlog getting back to a more normal level by the end of the current quarter.

Focusing on the actual revenue for the quarter, compared with the same quarter of the prior year, US volume declined by 5% and international volume increased by 12%. Resulting in a consolidated volume increase of 2% over the prior year. Foreign currency translation negatively impacted revenue by 1% and pricing was favorable by less than 1%. Additionally, the divestiture of the company of [American business] on October 31, 2009 resulted in 1% negative impact in revenue as compared to prior year's quarter. A table summarizing those fluctuation is included within the earnings release.

The company's quarterly sales pattern assuming a pattern of consistent economic conditions, typically shows sales strongest in our fiscal fourth quarter and weakest in our third. The recent quarter had 63 shipping days consistent with a year ago quarter. Included in the press release is a table showing numbers of shipping days in each of the quarters fiscal '11 and '10 for your reference.

Overall, first quarter consolidated gross profit decreased by $1.4 million or 4.8% with gross margin eroding 120 basis points to 23.5%. The erosion was primarily due to two factors. First, was $1.8 million or 150 gross margin basis points of higher component costs, of which $700,000 related to temporary freight costs and the remainder to materials, primarily steel. We expect release in future quarters as we have implement price increases beginning in June and July to offset material cost increases. The higher temporary freight costs resulted primarily from expediting components from suppliers, due to the rapid and significant increase in demand, which is now predominantly ramped up.

The second factor negatively impacting costs of goods sold this quarter is $1.6 million or 130 gross margin basis points of restructuring related costs associated with our nearly complete facility consolidation. Including training, travel, overtime, and operational inefficiencies and the facilities that are ramping up production. On a non-GAAP basis, excluding those costs associated with the facility consolidation, gross margin was 24.8%. Favorably offsetting those factors and consistent with trailing quarter, we realized savings of approximately $2 million in the first quarter on those facility consolidations, which were completed during fiscal 2010.

As a reminder, the three projects within that initiative together take out approximately 500,000 square feet. or 25% of our global manufacturing space. Looking forward, we estimate that approximately $1 million to $1.5 million of restructuring related costs will unfavorably impact gross profit during our fiscal 2011 second quarter. Additionally, we estimate $0.5 million to $1 million of separately reported restructuring charges during that quarter as well. Consisting primarily of severance costs and facility related charges, such as maintenance, utilities, taxes, security and the like. We expect the annualized benefits of all three projects estimated at $13 million to $15 million will continue to ramp up and reach their full run rate during the second quarter of fiscal 2011. Rest assured that we have sufficient capacity to support anticipated volume upon market conditions returning to normalcy.

Consolidated selling expense decreased $1.3 million compared to the prior year to 12.8% of revenue, whereas last year's quarter 13.8% of revenue. Currency translation had a very modest $100,000 favorable impact but the actual decrease was also primarily for re-organizational changes implemented in fiscal 2010. Partially offset by investments in our Asian sales organizations in accordance with our strategic growth plan for the region. Consolidated GNA expense increased $1.3 million compared with the prior year to 8.2% of revenue, whereas last year's quarter was 7.1% of revenue. $200,000 of favorable currency translation impact was offset by increases in our international management teams to drive growth in those region and variable compensation.

Restructuring charges of $1.5 million during the first quarter of fiscal 2011, include primarily severance and facility costs associated with the North American facility consolidation initiatives previously noted. Last year's restructuring charges of $5.8 million, primarily related to severance and pension charges resulting from global personnel reorganization. Excluding the $3.1 million of restructuring related costs, as I previously described, non-GAAP income from operations was $4.2 million or 3.5% of revenue in the fiscal 2011 first quarter, as compared to $4.1 million or 3.4% in the year ago quarter.

Regarding income taxes, the effective tax rate benefits for fiscal 2011 and '10, first quarter, are 54% and 42% respectively. The usually high rates were impacted by jurisdictional mix and the fiscal 2011 first quarter tax rate was also favorably impacted by a non-recurring favorable adjustment at an international location. Accordingly, a normalized effective tax rate for fiscal 2011 would be approximately 38% to 39%. Income per diluted share on a non-GAAP basis for the fiscal -- or the first quarter of fiscal 2011 was $0.05, consistent with the year ago quarter on the same basis, as summarized on the table within the earnings release.

Depreciation and amortization were $2.9 million and $3.1 million for fiscal the 2011 and 2010 first quarters respectively. Capital expenditures were $2.2 million and $1.3 million for the fiscal 2011 and 2010 first quarters respectively. Filing a very modest capital spending year in fiscal '10 reflecting economic climate we expect capital expenditures for fiscal '11 to be in the $10 million to $12 million range. Reflecting working capital needed for increases in production activity as well $5.5 million of semi-annual interest and $4 million of incentive compensation payments due to this quarter, net cash used in operating activities was $7.1 million in this year's quarter. Comparable to $4.9 million, with cash provided, by operating activities in last year's quarter.

In this year's quarter, operations provided $1.4 million of cash, while operating assets and liabilities used $8.5 million including the interest and incentive compensation payments previously noted, as well as restructuring payments. Last year's quarter, earnings used were $400,000, while operating assets and liabilities provided $5.3 million of cash. As sales were declining and freeing up working capital.

We continue to focus attention on our working capital utilization, especially opportunities to improve inventory returns in alignment with our long-term goals. June 30, 2010 debt, net of cash, was $78.8 million dollars and total gross debt was $131.9 million. Net debt to total capitalization was 30.2% at the end of the quarter, down from 33.8% at the end of last year's quarter. The current level approximates our 30% debt to total capitalization ratio goal. The majority of our outstanding debt relates to our senior subordinated notes, which don't expire till November 2013.

In addition to having $53 million of cash on the balance sheet we have additional $77 million available under an $85 million senior credit facility, net of $8 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 grow strategy, which includes strategic [full-time] acquisitions regardless of the point in the economic cycle. And with that, I thank you and turn it back to Tim.

Thanks, Karen. Rose, we'll open it up to questions now.

(Operator Instructions) Our first question is from Ted [Kountz], your line is open.

Yes, good morning Tim and Karen. A couple questions for you. One, Tim, could you go over the bottle-kneck issue again, and was this on your end or was this on your suppliers end; and what would revenues, might have looked at if that had not been eight issue?

That is a good point. The answer is both. We had a supply base that is having difficulty keeping up with the orders that we have been giving them. Because of the orders that we have been receiving from our channel partners, globally. It goes all the way back to component parts, and in fact, we are in some of our [raw forged-bar] we're actually having difficulty getting some steel. From some of our suppliers. Predominantly, on the hoist side, it's mostly components. It's castings and things of that nature.

In addition to that, if we had the parts-flow from our supply base going as we would like it to, we would have been able to ship more but, we're still also ran the comp some of our production capabilities. Ted, especially in the receiving plants, after the rationalization, where we are actually adding headcount as well as some machining and work centers. That is taking a little bit longer than we would like it to. You might have heard me report that in our in Chattanooga we've had difficulty hiring people in that part of the world. The reality is, actually getting them to do things like past drug test. That continues to be a bit of a problem for us. That's lesser of a problem, I would say, then the supply base, though. If you just put those problems aside, Ted, you see the backlog grew about $17 million in the quarter. I would say that we probably would not have been able to get all of that out the door. But, arguably somewhere, half or greater-than-half would have been able to shipped in the quarter.

Okay.

It's our plan, though, to get that growth in backlog down to what our more reasonable levels are and get it out the door, this quarter we are in right now, plus I think it's going to flop into our third quarter as well. Somewhat

Okay, so you've got some catch-up going on. In the meantime, are the orders trends still continuing fairly strong, how were they were through the month of -- well, current month and --

There still in the -- I think we reported 24% growth year-over-year. They're still in this area. Right now as we sit here today, Ted. So, as I look at it though, and maybe you've seen some of the reports from the large channel partners, like Granger, [Facinol], MSC Motion Industries, which is apart of Genuine [Allspite]. These guys are, right now, recognizing revenue in the mid-teens to 22% kind of growth. We're feeling that. And that is what, to a large degree, was driving this.

In addition to that, our normal industrial distributors, which you heard me refer to you as relatively-small mom and pop,they are up double digits more like 13% or 14%. I think the catalog houses, though, are actually beginning to stock-up a little bit more beyond demand. Which is, I think, why we're feeling a little bit more from them, than we would be from the small industrial distributors.

Okay terrific. Are you seeing the same trend in Europe as you are here?

Yes. Yes, it is a global demand we're feeling.

Okay, similar growth in both geographic regions. Okay just during the gross margins, real quickly, you indicated you will be penalized again in the second quarter by about $1.5 million, is that correct? And then some other restructuring charges so, you're looking at almost a $2 million impact, was that right? Karen, I think, that was you who commented on that? I'm not sure which one.

Yes, that was me, Ted. In the second quarter, I had indicated that we expect somewhere in the $1 million range or so. For restructuring related costs within cost of goods sold. And then, an additional $0.5 million to $1 million on the restructuring charges line.

Okay, so margins will be inching up but, normalized margins obviously should be around more the 26% level I would guess.

I was going to say, we expect we'll start to realize savings from the closure of the third facility we just completed. The third of three facility rationalizations, that facility closed in June so, we'll start to see savings during that this quarter.

Okay, that would help us as well. So, you've got excess-charges margins would be around 26%, then you add on top of that the additional savings you're going to get, which will takes take your margins hopefully, to the higher 20% range closer to 30%? Is that the target? Have you given any target gross margins?

No we have not.

Okay.

But, you're hot logic holds true without counting numbers.

Okay, I hope that we can see the moving to the high 20%. That would be my goal.

Our biggest challenge, Ted, to be perfectly honest with you, I think, if we can get the revenue by shipping the backlog we have, that would produce some decent margins alone.

Yes, give you incremental revenue. Incremental margins that would be great. Can you talk, my last question, can you talk a little bit about the progress in Asia expanding out that network?

Sure. Eric, who is our managing director there, has been at work building out a sales force. We've got six or eight people on the ground, right now. Obviously, there is a ramp-up in terms of training them and getting them up to speed with our products. We're -- we just added our sixth person, I think it was. And, we are going to open up our fourth sales office in China. So, that's proceeding as we planned. It's a slow go, it's organic. It's training, wrapping-up, and getting in the marketplace. We have been winning some orders that they've been seeing so, that is helpful. I think it is a learning game, and it is going to take some time we've talked.

Okay, what percent of revenue is that currently, the Asian?

90%.

A couple percent?

2% or 3%.

Good. Thank you.

We have a few more questions. The next is from Arnie Ursaner, your line is open.

Good morning, Arnie.

Good morning. Just looking again at the backlog number, you mentioned some longer-term projects that $23 million per shipment beyond the September. Can you give those for fiscal Q4 and what was Q1 last year, just to try and figure out what the order rate is doing to the backlog number?

You know what, Jason, that is kind of a normal thing that is always out there. We haven't historically put those numbers out. I don't have them in front of me, unfortunately. They relate to things like, cranes, actuator projects that go out several months. Tire-shredders, that have a due date going out several months. That's the type of thing which is a normal ongoing part of our business.

So, the $16 million growth in backlog, that's just almost purely the orders that really couldn't be filled? In the fourth?

Yes, that is most of it.

There is some still of that. In some of that, actually this was announced this morning, is some of these larger projects which has a due date beyond the on next quarter or two. But most of them --

But, if I'm looking at just the growth, and you said about half could have been shipped in revenue in the quarter, if I'm thing about that right, if you have 30% or 40% incremental operating margins on volume, is it kind of fair to say there is an $0.08 to $0.10 earnings catch-up at some point over the next couple of quarters?

There is definitely a catch-up. That's right

Okay. And obviously, you didn't have the sequential volume increase for this quarter but, do you feel think those numbers for the incremental margins are ringing true with the story?

Yes, that is right. We would expect to get that as well.

Okay thanks I will jump back in the queue.

Thanks Jason.

Thank you, the next is from Gary [Farber], your line is open.

Good morning. Just a couple questions. On this incremental amount of business you would've captured everything that comes together. You say is sort of $8 million or so you would've gotten that you didn't in the quarter?

I think that is a reasonable assumption.

Okay. The volumes, you were saying, were down in the US in the quarter, were they down in the fourth quarter also?

Are they down in the fourth quarter? Let's see so, the March quarter? You know what, yes, they were.

They were.

As I think back on that, Gary.

Okay, do you think they were down more or less in this quarter?

They were down more in the fourth quarter. I think back, March was the first month that consolidated basis, our orders exceeded the prior year. So, in January and February orders were still less than a year ago.

Great, okay. And free cash flow? Can you give us a way to think about it for the balance of the year, even though it's still sort if early in the fiscal year?

Well, generally, over time the working capital filed revenue. It just it may fluctuate from quarter to quarter, as it did this quarter with large payments due. So, depending on revenue assumption, I would apply a working capital ratio for that. Generally, we have been running in the 17-ish% average area.

But, you would still expect to be cash flow positive for the year?

Yes, absolutely.

Okay. Can you also talk about acquisitions, what's going on there as far as anything coming up or is it just sort of slow, as far as targets?

Nothing to report specifically, as of yet. There is a fair amount of activity that, I would say, that arena. Where we continue to study and look closely at targets. But, we have nothing that is imminent.

Right. Okay, and then lastly, from -- given that things are sort of moving-up demand wise, what are you seeing from your competitors, either in the US or internationally?

I think, from their standpoint, they're feeling the same kind of lift. From an economic standpoint. I don't see them doing anything different than they have, historically.

Right. Okay, thanks.

Thanks.

(Operator Instructions) The next is from Holden Lewis your line is open.

Good morning. I'm sorry to keep bringing us up, but I think I messed up some numbers. You did $119 million in revenue Q1. If you had not have these issues, do you think that number would have been about $8 million or $9 million higher, or $17 million higher, I thought I heard to numbers, I may have [jumbled] up what they were.

The backlog grew $17 million in the quarter. I don't think, put these problems aside, I think we would have been able to ship around half of that. So, I would've -- from your perspective added about $8 million or $9 million to the $119 million. The balance of the $17 million, I would expect, to get in this quarter that we are in right now, the second quarter.

Okay, now -- okay, so in terms of trying to figure out seasonality. I mean this is probably about $127 million $128 million quarter. The rest of that $17 million in backlog, you said that these issues, some of them may drag into Q3 to some extent? Why would that not actually build? Because, if those issue are still in Q2 there's probably still bottlenecks that you don't break. You might not be able to move it all through in Q3, Q4 is where you get the bigger bulge?

We would expect bigger the bigger bulge in the second quarter. This quarter we're in now. We would expect that the third quarter would get the balance of it. If we can't break these bottlenecks by the fourth quarter, we're not worth our salt. We'll get over these. These will be behind us. The wildcard Holden, really is, will the bookings continue at the rate which we are seeing that now. That is the question.

Right. And if you have been able to ship this product, I think you said backlog was up something like 23%. What would that backlog increased had looked like, had you been able to ship that help?

Well, it went up $17 million. In the quarter. If everything was perfect, we would have shipped $17 million but, because it's such a rapid escalation. That's impractical to think that way. So, I'm assuming that about half of it would have went in this second quarter and the other half in the third quarter. Ball-park.

Can you give a sense of how much pricing is going to go through? What are your price increases? What do you expect to realize in terms of total revenue contribution?

It should be around one or two points in the upcoming quarter. We put a price increase in June and July. For the channel-partners. Holden, as you know, it's a SKU discussion with them. It's anywhere from 0% to 4% . So, on average we probably, for the total company, would get about one or two.

Okay. Then lastly if you could touch on sort of what went on in the international-ops. Obviously, that's been growing factor, are you still seeing -- do you have any greater color as to why Europe seem to be going so well? The economy has now kind of kicked in but, you were obviously doing well before that [inaudible] market share gains. Have you been able to sort of tease any greater color out as to exactly you have been doing over there as to what exactly you have been doing over there that has been driving the relative performance in Europe, and has that continued?

I think it has continued. The answer is still the same. I think we have been able to gain a bit of a market share because we have been more responsive to the demands as they've come at us earlier in the year.

Okay. Lastly, and I'll jump back in -- you still expect incremental restructuring contribution savings to be $10 million in this year, or did Q1 kind of push some of that out in terms of what you expect to realize.

Should be the same as what we've planned.

Okay, cool. Thank you.

(Operator Instructions) The next is from Ted Kundtz.

Yes, I was just going to ask a pricing question as well. It sounds like -- are you looking for further price increases? Tim? Are these going to stick any pushback pricing?

None more than normal. I think they are going to stick to what they do pretty much every year, Ted.

Do you expect another one?

No, I think that right now we are planning for this one that we put in place. This was a fairly [gullible] one, by the way. In Europe as well as the Americas. Hey, look, if steel continues to move and the components continues to move we will probably do another one, if our costs continue to escalate at this point I think we're okay.

Okay. Terrific, thank you.

We have one more question from Arnie Ursaner, your line is open.

I am just trying to look at the -- you give the bookings and how it converts for a year-to-year basis but, do you have a sequential foreign-currency intact?

Sequential foreign-currency? Yes. Obviously, given the strengthening of the dollar the first quarter compared -- in our June quarter -- compared to the March quarter. There was about a $3 million negative impact. In the June quarter compared to March quarter. On revenue.

On revenue.

On revenue.

So, obviously it effects the backlog, as well, if you're comparing it year-over-year.

Sure. And in terms of the shipping. It sounded as if the impact for you, particularly, was more than the receiving plants so, it's really not the making of the equipment it's just a timing issue of how it gets out.

Yes, that is a good way to look at it. It is the flow of components. Parts. From our supply base, who pack the ramp up as well. If they're used to delivering us 100 pieces on month, and now we ask for 150 pieces the month.

That impact, they probably can't do that quick enough. Then, when the parts flow into our manufacturing facilities to assemble hoists, for example, then we need to staff up within our own four walls to be able to produce units, and that has been a difficult thing in some cases. And then, now, as opposed to the backlog going away, it will be shipped, it is just a matter of which week, or which day, it will be shipped; and I am saying that most of the will be shipped this quarter and asked quarter.

Okay. In terms of hiring the third facility. This wasn't a new facility, though? Was there any possibilities of transfer of some of the workers from the facilities that close or --?

Yes, we offered transfers to many, many workers. In the unfortunate situation, is many did not want to leave their homes. Where they are from originally. So, as a result we have to hire new to exceed to receive new production lines and more to build-up capacity in receiving plants.

Okay. Thanks a lot for taking the follow-ups.

Thank you, I'm showing no questions at this time.

Okay, thanks Rose. Let me summarize, by saying our focus, and hopefully you are getting the gist from me and Karen. Is to produce and ship our backlog. We are going to apply all our resources to make this happen, in the short term.

As you can see, our balance sheet remains solid and we remained committed to growing our revenue through prudent investments and emerging geographies, as well as introducing new services. We are continuing to search for acquisitions that add value to our company and help us grow globally. I want to help think all our Columbus McKinnon associates around the world for their dedication to excellence in making our company a stronger, well-positioned organization. As always, we appreciate your time today thanks, and have a good day.

Thank you for your participation.