Columbus McKinnon Corp (CMCO) 2011 Q2 法說會逐字稿

Welcome and thank you for standing by. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd like to introduce your host for today's conference, Tim Tevens. Sir, you may begin.

Thank you. Welcome, all, to the Columbus McKinnon conference call to review our results of fiscal 2011's second 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 we file with the SEC to make sure you understand these risks.

Our revenue has rebounded nicely in the quarter, and we were able to ship some of that backlog that grew in the last quarter. Net of currency and a small divestiture we made last year, our revenue grew almost 19%.

Our bookings have also been strong as we continued to experience double-digit bookings growth in the second quarter. Our backlog has been reduced by about $9 million. Now, this is an adjusted number, taking out some of the project-oriented work that we have booked in this past quarter as well. Really, just looking at the shorter lead-time business. So we're pretty much on plan as we reported to you, or as planned on doing over the last quarter.

Our supply-chain issues that we reported on have improved, dramatically improved, in fact. Just aren't perfect yet, so we're still working hard to make them perfect.

We continue to see increased global economic activity. The United States industrial capacity utilization increased to 72.4% and the Euro-Zone industrialization also improved to 77.4%. As many of you know, our bookings, and normally our revenues, track this industrial utilization figure, so as these rates increase, so does our revenue, typically lagging by about a quarter or two.

And based upon discussions with our channel partners and a variety of end users, we believe that the economic recovery continues to be in full swing.

We have completed the implementation of our planned facility rationalizations in North America that will reduce our operating square footage by about 0.5 million square feet. Our fixed operating costs will be -- come down by about $13 million to $15 million annually. We have seen some benefits in this quarter, but the bulk of these benefits are going to ramp up through fiscal 2011, as we have been reporting to you.

Our free cash flow this quarter was negatively impacted with rising inventories and Accounts Receivable. I would expect this to improve as we work through the remaining supply-chain issues and get the flow out of our own facilities up to a more normalized pace.

On a non-GAAP pro forma basis for the quarter, we achieved $0.24 earnings per share versus $0.12 last year.

And now, I'll ask Karen to comment on some of these details.

Thanks, Tim, and good morning, everyone. I am pleased to have the opportunity to review with you some of the financial highlights of Columbus McKinnon's fiscal 2011 second quarter and year to date that ended on September 30, 2010.

Consolidated sales of $132.3 million were up nearly 15% compared with last year's second quarter. U.S. volume was up 14% for the quarter and non-U.S. volume was up 24%, resulting in a consolidated volume increase of 18% over the prior year.

Foreign currency translation negatively impacted revenue by 3%, but pricing was favorable by almost 1%. Additionally, the divestiture of the Company's American Lifts business on October 31, 2009, resulted in a 1% unfavorable impact on revenue 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 increased $17.2 million, or 17% over last year, with volume contributing 10% and pricing contributing less than 1% of the growth, offset by a currency translation of 2% and the American Lifts divestiture of 1%.

The Company's quarterly sales pattern, assuming a period of consistent economic conditions, typically shows sales strongest in our fiscal fourth quarter and weakest in our third quarter. The recent quarter had 64 shipping days, consistent with the year-ago quarter, but the next quarter only has 59 shipping days. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal 2011 and fiscal 2010 for your reference.

Overall, the second-quarter consolidated gross profit increased $3.2 million, or 11%, but with gross margin eroding 70 basis points to 23.6%. The gross margin benefited from approximately $1.5 million, or 110 basis points, from our facility consolidation initiative that was unfavorably impacted by $2.9 million, or 220 basis points, of unusually large product liability claims and $1.3 million, or 100 basis points, of restructuring-related costs in cost of goods sold.

We define unusually large product liability claims as those greater than $1 million. In the 20 years under our existing product liability insurance program, we have only experienced seven claims of such magnitude.

On a non-GAAP basis, excluding the costs associated with the large product liability claims and facility consolidations, gross margin was 26.8%. As a reminder, we are ramping up to realize approximately $3.3 million to $3.8 million of savings on a quarterly basis, representing $13 million to $15 million annually from the three facility consolidation projects that were completed in June, and we expect to reach that run rate during the latter half of fiscal 2011.

On a year-to-date basis, consolidated gross profit grew $1.8 million, resulting in 23.6% margin. In addition to the matters previously described, the half-year results were impacted by Q1 factors, which included high material and temporary freight cost increases which resulted from supply-chain constraints, as well as restructuring-related costs. Most of the supply-chain constraints have been alleviated, and the restructuring-related costs are diminishing.

Despite the higher revenue, consolidated selling expense decreased $100,000 compared with the prior year, to 11.7% of revenue this year, whereas last year's quarter was 13.5% of revenue. Currency translation had a $0.5 million favorable impact, so the actual increase resulted primarily from increased sales commissions as well as investments in our Asian sales organization in accordance with our strategic growth plan, partially offset by reorganizational changes implemented in fiscal 2010.

Consolidated G&A expense increased $1.1 million, compared with the prior year, to 7.4% of revenue, whereas last year's quarter was 7.6% of revenue. $300,000 of favorable currency translation impact was offset by investments in our international management teams to drive growth in those regions as well as variable compensation. The year-to-date fluctuations in SG&A followed similar trends.

Restructuring charges of $300,000 during the second quarter of fiscal 2011 reflect the winding down of this facility consolidation initiative. Charges in future quarters are expected to moderate further. Last year's restructuring charges of $2.7 million reflected the beginning of those projects.

Excluding the $2.9 million of large product liability claims and $1.6 million of restructuring-related costs, as I've just described, non-GAAP income from operations was $9.7 million, or 7.4% of revenue, in the fiscal 2011 second quarter, as compared with $6.6 million, or 5.8%, in the year-ago quarter, adjusted for similar items.

Regarding income taxes, the effective tax rate for the fiscal 2011 second quarter is 41%, and it was not meaningful relative to the prior-year quarter's pretax loss. The 2011 quarter's rate was unfavorably impacted by jurisdictional mix. On a year-to-date basis, the fiscal 2011 effective tax rate is 27.4% and the fiscal 2010 benefit rate was 22.2% on pretax loss.

Looking forward, 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 second quarter of fiscal 2011 was $0.24, doubling the year-ago quarter's $0.12 on a same basis, as summarized on a table within the earnings release. On a year-to-date basis, non-GAAP income per diluted share was $0.28, reflecting a 75% improvement over the prior year's $0.16 on the same basis, as summarized on a different table within the earnings release.

Depreciation and amortization were $2.8 million and $3.1 million for the fiscal 2011 and 2010 second quarters, respectively. Capital expenditures were $2.3 million and $2.8 million for the fiscal 2011 and 2010 second quarters, respectively. Following a very modest capital spending year in fiscal 2010, reflecting the economic climate, we expect capital expenditures for fiscal 2011 to be in the $10 million to $12 million range.

Reflecting primarily temporary inventory increases to overcompensate for supply-chain constraints experienced in the first quarter as well as normal increases in business activity, net cash used in operating activities was $800,000 in this year's quarter, comparable to $19.1 million of cash provided by operating activities in last year's quarter.

Last year's operating cash flow was favorably impacted by declines in business activity that were experienced during that period. In this year's quarter, operating results provided $6.3 million of cash, while operating assets and liabilities used $7.1 million. In last year's quarter, operating results provided $1.6 million, while operating assets and liabilities provided $17.5 million of cash.

We continue to focus attention on our working capital utilization, especially opportunities to improve inventory turns in alignment with our long-term goals.

At September 30, 2010, debt net of cash was $74 million and total gross debt was $132 million. Net debt to total capitalization was 28%, continuing to approximate our 30% debt to total capitalization ratio goal. The majority of our outstanding debt relates to our senior subordinated notes, which expire in November of 2013.

In addition to having $58 million of cash on our balance sheet, we have an additional $76 million available under our $85 million senior credit facility, net of $9 million of outstanding letters of credit. With our available cash and nothing drawn against the revolver, we continue to demonstrate significant liquidity to support our strategic growth plans.

Consistent with our long-term goals, we're ultimately targeting an investment grade rating to give us further flexibility to support our growth strategy, which includes strategic bolt-on acquisitions regardless of the point in the economic cycle.

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

Nikki, we will open the line up for questions now.

(Operator Instructions). Jason Ursaner, CJS Securities.

Just first, the product liability. What was this related to?

There were two cases. Karen, why don't you go through them?

Sure, Jason. There were two cases that relate to different products. One was a large C-hook that the person was operating and lifting up a piece of steel, and they weren't using it correctly and they got injured, and so there was really no fault of the product.

The second was related to a manual chain hoist that was about 14 years old, and hadn't been inspected and really probably shouldn't have been used, but it was, and the hook gave way and the person got injured. So, they're quite different but unusual situations.

The latter one that Karen referred to where the hook gave way was actually a poor application of a manual chain hoist that they had been using that way for 14 years to raise an oven door, and it was a very bad environment, never inspected. Of course, OSHA requires every hoist to be inspected annually, and it wasn't.

We don't think we have liability in either one of those, but it's wise to settle them -- many of them because before we go to a jury trial.

Okay. But since this was two cases, is this not the maximum liability charge like it was last year?

These were not the maximum, that's correct.

And then, just revenue and volumes. I'm just trying to make sure I understand all the moving parts here, and I guess what I'm really concerned with is normalized organic sales growth on a sequential basis. So, you quantified about an $8.5 million catch-up in revenue out of backlog, I think. In the press release? That's right? So if I shift that back into Q1, it's roughly $127 million versus $124 million for like a negative 3% organic revenue. So can you just talk a little bit about the magnitude of seasonality in your business with shutdowns in Europe in Q2?

Sure, we'll try to. First of all, it's all organic, Jason, organic meaning it's grown from the base business, so the comparable periods have the same product line and there's no acquisitions in there, other than the small divestiture that we made last year.

So, I think that as we look toward the future and you think about backlog moving, you might recall we said it was up about $17 million in the last quarter from the prior quarter. And that $17 million, I think we said we'd do about $8 million or $9 million from that.

But the backlog, of course, continued to grow as we continued to book orders. In particular, Pfaff had a fairly strong booking quarter. Many of Pfaff's projects -- a lot of their work is project-oriented, where it's -- our product would be shippable in the future and not really shippable now. Kind of unlike the current business that we have here at Columbus McKinnon where we normally, as you know, receive an order today and ship it very quickly within days.

So, backlog becomes somewhat immaterial as long as the flow of the product is solid. So we did see some of that backlog come out and go down, but the bookings in the quarter continued to be at a double-digit pace. So that's why the backlog, at least on the form itself, only came down about $4 million. Is that helpful?

A little bit. Did you give orders on a sequential basis, though? I guess what I'm really trying to understand is if capacity utilization domestically has been stable around 72% since May, if we hold at this level, it should continue to accelerate the replacement cycle. Is that the right way to think about it?

The right way to think about it is if it continues to improve, our revenue will continue to improve.

And it's not a perfect -- as you know, we lag it by a couple of quarters, right, so utilization today at 72% is really not meaningful to Columbus McKinnon. What is meaningful is that several -- a couple of quarters ago, it was lower. I don't know the exact number, but let's say it was in the high 60%s. That movement from the high 60%s to 72% is the increased activity in the market, which drives the replacement business for us, a couple of quarters later, normally.

Right, but I'm saying, even if it holds flat at 72% for a couple of quarters, we should still see that accelerate -- the replacement cycle, over the course of an annualized basis.

To the prior year.

As long as you compare it to the prior year, yes. If it holds stable, eventually our revenues will stabilize and become flat as well.

Ted Kundtz, Needham & Company.

Question for you. Just going back to the product liability claims, don't you guys have insurance for this?

We do. We are self-insured for the first $3 million, and then we have coverage above that.

Oh, okay.

So these claims came out of the first $3 million.

Right, and they are -- have nothing -- obviously, nothing to do with the product you're producing. It's just an isolated incidence, and you really (multiple speakers)

Well, we have a series of product liabilities claims all the time. Many -- most of these claims have absolutely nothing to do with the product, Ted, and it's all about the application or an unsafe working environment or the products being misapplied or abused, and in the case of these two that Karen referred to, one of them, though, is the product was completely misapplied.

We, in fact, felt we had absolutely no liability, but we settled as opposed to going to a jury trial. This is where a person got injured.

And the other one was operator error in using a very large -- it's called a C-Hook. It's a fabricated piece of steel that was in perfectly good working operation and was just operated in a -- mishandled, if you will. It was carrying a very large coil of steel, and that coil of steel hit -- somehow hit an operator. Actually, we're not 100% sure how it hit him, but he was injured as well, and that, too, is very similar in that we settled before we went to court.

Okay, just want to avoid a jury trial in both cases.

Yes. Welcome to America.

So this goes on all the time, but you just normally don't break it out because they're not unusual items.

Yes, these are the bigger ones, right. (Multiple speakers) a pool that goes through all the time. These are just (multiple speakers)

Yes, exactly, because it's like an ongoing expense of doing business. So I'm not quite sure how to treat it, but we'll, anyway, highlight it.

Secondly, could you give us a little thoughts on your gross margin trends here, given that these savings are going to start kicking in? Would we expect to see gross margins start to inch up and where would your targets be for those margins?

Well, our targets for, at a normal economic level, operating income remain in the 12% to 14% area.

We -- because of these two cases, the gross margin and the operating income margin was depressed. So if you remove that, I think the gross margin in the quarter, and by the way, these are products -- one was sold in 1996 and one was sold in 2000, I think. Yes, 2000. So these are products that we made and sold a long time ago.

If you remove that, because it really has -- those products sold that long ago have very little relationship to the current quarter, our margin was somewhere around 25 and change. I don't --

26.8.

26.8. (Multiple speakers). So that's what the gross margin would've been without these settlements. More indicative of what we would expect.

I would also add that as we see revenue continue to come up, Ted, we continue to think about operating leverage in the 30% area on operating margin. So that, you know, we can see some incremental improvements in that regard, and that's where the $13 million to $15 million of closures, of restructuring, would start to bear fruit.

And of course, as you know, we don't give guidance in the future, so it's hard for us to talk about a number relative to the next quarter (multiple speakers)

Right, okay, so your targets remain on the operating margin side.

Yes.

You haven't given us any gross margin targets.

Correct.

And then lastly, maybe, Tim, if you could just kind of maybe walk through some of the different sectors you're servicing and what kind of conditions you're seeing there and maybe comment on the current trend you're seeing in October in the --

Sure, let me -- can I start with geographies --

Sure.

-- from a market standpoint? Europe remains very positive, very robust. Karen reported that markets outside the United States we saw revenue increase 24%. It's quite amazing at how faster paced markets in Latin America, Asia, and Europe are compared to our home market here in the United States.

U.S. is up about 14% year over year in comparison. So it's okay. It's just not as solid or as positive in the United States.

I would say that for most of our business in Latin America, we never really saw a downturn. Things flattened out a little bit, but they're back on track with pretty good solid growth.

And as you know, Ted, we're investing in the Asia-Pacific market right now by adding our sales force to organically grow that market, and that's doing very nicely for us. We're right on target with our original growth plans with that.

So the only market that I give pause to is the United States, not that it's bad, but it's not as improving as well as we'd like it to. It's not as robust as it normally would, coming out of fairly deep recession.

And I just think back to the days in 2001 to 2004 when we recovered, we recovered a lot faster here than we are right now, and I think it's much more concerns in the marketplace with the general climate, the somewhat antibusiness climate that we're feeling. People aren't worried about where to make investments and how to make investments [is going] to result. It's retarding, somewhat, our growth in sales into the marketplace.

Okay. And through October, have the trends been similar (multiple speakers)

October (multiple speakers) similar. It's slowed a little bit, but let me give you -- a really weird thing. Last October, we had a very solid booking month, so the comparison to last October is -- it's better than last October. It's just that last October was such a very positive month, but on a dollar basis it's continuing to pace at the same dollar rate.

Great to hear. Are you -- do you feel you're gaining share in Europe? Is that one of the reasons for the large growth there?

I think so. I think to a (multiple speakers)

It could be share gain in addition to just some -- the core strength because I didn't think Europe was all that strong.

I think you're right. In some markets, in particular Europe, it's hard for us to measure share. They don't have the same level of trade association reporting like we do here in the States, so we don't have hard numbers, but we feel as though we're doing quite well in the marketplace.

Lance James, Voyageur Asset Management.

Congratulations on a strong quarter. My questions are really focused on the large product liability claims, and you've addressed most of them. I guess the one additional question would be, the decisions on the settlements, are those your decisions corporately or are they driven really by your insurers who are insuring you for anything above the $3 million mark?

No, they have no impact on whether or not we settle those claims generally. In these two, they didn't. Since we own the claim, we are the first in line, if you will. We drive the settlement discussions and we make the decision.

The second question would be, again, you gave a very helpful description on market conditions, geographically. Again, in terms of different industry sectors that you sell into, any comments on pockets of either strength or weakness here?

Our entertainment market has rebounded very nicely globally. It was very lull last year, so call it an easy comp, if you will, but it's up, back into normal levels today, so that was very nice growth.

General industry is up nicely. Oil and gas was, I think, impacted by some of the slowdown in the Gulf with some of the moratoriums that were put on place there, and we are seeing some nice orders as a result of that coming back online.

The mining sectors are good globally, very strong. Construction continues to be flat, and it was down last year, so it's flat off a very bad number. So those would be some of the markets that come to mind.

Terrific. Thank you very much, and again, congratulations.

There are no further questions at this time.

Wonderful. Well, thanks for your time this morning.

Let me just summarize by saying our focus remains to have excellent customer service. Our balance sheet is solid, and we remain committed to growing our revenue through prudent investments in emerging markets, as well as introducing new products and services.

We continue to search for acquisitions that will add value to our Company and help us grow globally. There's a fair amount of effort around that today; we just don't have anything to report to you just yet.

But I would like to take the time to thank all of our associates around the world for their dedication and excellence in making our Company stronger and well positioned. Thanks and we appreciate your time today.

Nikki, is there one more question?

Yes, there is one more question. Would you like it?

Sure. Sorry about that.

Holden Lewis, BB&T Capital Markets.

It's all right. I jumped in a little bit late. Don't feel like you have to do that wrap-up again, though.

It's already covered.

Are you tired of hearing it, Holden?

No, I missed it because I was signing in with a question, but the -- and I'm sure no one else wants to hear it.

The -- first, just a little bit of me trying to understand, what was the fiscal Q1 savings that you saw from the restructuring? You said it was 1.5 in Q2. What was it in Q1?

I think it was -- we quantified it at about $2 million. It's difficult to quantify with precision, some, Holden.

Okay. But you think it was around that $2 million in Q1 realized and about a million -- and $1.5 million realized in Q2 in general.

Yes.

And that $13 million to $15 million, that's not what you expect to realize for the full year, that's your ultimate run rate?

Correct.

Correct.

So what kind of ramp can we expect -- we should just sort of run it up to $3.5 million in Q4 and just sort of do a linear kind of from 1.5 to 3.5 to get there?

I would say that it's -- normally speaking, that we would expect that, and this is what we anticipated when we did the restructuring projects, our plan was to have the full run rate, the 3.5, if you will, area implemented by our fourth quarter -- fiscal 2011 fourth quarter.

So, we would be at that rate about then. And as Karen said, it's really tough to estimate perfectly how that's going to come through, but we're still planning on that.

And then, could you comment a little bit on your SG&A? When you add up the components together, you've really had, over the past four quarters, a very stable number, kind of in the $25.5 million, $26 million level, despite the fact that, as you say, you've sort of been investing in the business. So can you talk about what level of investment in cash terms you think that you had in Q2 and of late? And presuming that that spend is going up, what's coming out that's kind of keeping that SG&A level flat and how should we be looking at that going forward?

Last year, we put in place a new go-to-market strategy for North America. And that new go-to-market strategy focused on a couple of things.

Number one, certainly our channel partners, selling to our distribution, if you will, but also put in place some vertical market specialists who focus on some of these key markets that use material handling equipment, like oil and gas, construction and mining, entertainment, et cetera.

But it also -- what it did is allowed us to change that cost profile in North America a bit, so some of that cost actually came out, and that shifted over into the emerging markets. So at a total level, you wouldn't see it significantly different, just exactly as you say, but in reality what we're doing is we're moving dollars around to go after some emerging markets.

Then when you talked about moving dollars around, so the changing cost structure essentially shifted some of your selling costs on to channel partners and off of your model effectively?

I would say not. I would say that some of our costs shifted to become more end-user focused and create pull through our distribution channel partners.

It also -- what it allowed us to do is to reorganize some of our sales force in North America. That reorganization created some cost savings. That cost savings then got shifted, and the investment -- the offsetting investment was made in Asia-Pacific and in EMEA regions of the world, and Latin America to a smaller degree.

Okay. So, basically, the benefit of that net change has been offset by the increase in investments and the increase in volumes that you've seen, is the way to look at that.

That's exactly the way to look at it, Holden.

And when does all of that anniversary, so that we begin to see the SG&A going up along with revenues and along with your investment? Is that -- when should we see a little bit more standard trend there?

Well, I would say that that SG&A cost -- first of all, G&A probably is not going to move a lot, but the selling side of that might begin to move up as the revenue goes up as well, globally.

So, as we begin to add more headcount in China, for example, or we began to pay higher commissions because of the revenue going up and the penetration of the markets. (Multiple speakers)

I would expect that to happen in another -- it's hard for me to say. I haven't thought about it from that standpoint. I don't know when we'd see it start to escalate. It's still within the range, though, of our long-range plan of 12% to 14% operating margin. We are counting on those investments to continue and to stay within that range of 12% to 14%.

Okay, so, fair enough. Then, just going back to the first question about revenues, I am running kind of the same exercise about shifting $8.5 million in revenues from Q2 to Q1, and I guess when you do that, you kind of get a dip in the Q2 revenue levels versus the Q1 revenue levels, and I guess my questions about revenues are twofold.

First, if orders are continuing to grow at double digit, when do we see revenues begin to grow at double digit to reflect that? Because, again, adjusting for that deferred stuff, you kind of had 7.5% growth in Q1 and Q2. So when does that happen?

And then, secondly, are you surprised that if you make that adjustment, that the revenues in Q2 were below the Q1 levels, given what you're seeing in the markets out there?

I don't think it's fair just to shift all 8.5 million. We haven't done this exercise, to be perfectly honest with you. It's somewhat meaningless to us.

But as we look to the future, a couple of things happen. We've got a currency shift going on as well, right? You've got the euro -- the translation of the euro to dollars being negatively impacted by a fair amount.

Yes, it was -- just to quantify that for you, Holden, that was $2 million more in the second quarter than the first quarter.

Just in the currency switch alone.

Yes, just the currency impact. And then, recall earlier in the year, we did -- we believe that there had been some inventory restocking going on. So, that kind of stabilized.

Okay. And then, just last thing, I'll jump back in. Pricing, I know you've put some price increases through. You're kind of at 0.7. Is that kind where you expected it to be? Is there -- has it been -- has it not stuck like you would've hoped it would? Are there plans for more price increases with raw materials coming through?

Yes, we would increase price for some of our steel-based product, not all of them, but some of them where we were seeing some significant steel movement, which we would do. But the prices are coming in and staying pretty much as we expected for those products that we did increase price on.

Okay. So you're just kind of expecting that pricing component to be around that 1% kind of level?

Yes, I think if you look at it historically, it's somewhere between the 1% to 1.5% every quarter as a normal thing.

All right, great, thank you.

Nikki, is that our last question out there?

Yes, there are no further questions.

Well, I will not trouble you with my summary again, but thanks very much for your time today. If you have any questions, certainly don't hesitate to call us. Thank you. Bye-bye.

This concludes today's conference call. You may now disconnect.