Columbus McKinnon Corp (CMCO) 2011 Q3 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode until the question and answer session of today's conference. (Operator Instructions)Also at this time, I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Tim Tevens. Thank you, sir, you may begin.

Thank you, Katherine. Welcome to the Columbus McKinnon conference call to review the results of our third quarter for this fiscal year 2011. With me here today is Karen Howard, our Vice President of Finance and Chief Financial Officer. We do want to remind you that the press release and the conference call may contain some forward-looking statements within the meaning of the private litigation reform act of 1995. These statements 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 these risks.

Our revenue was up nicely this quarter, 11% or so, net of the currency and divestiture that we made last year. Our bookings have also remained strong in this quarter, and actually through the beginning of the fourth quarter for the first three weeks of January or so. We continue to see increasing global economic activity,The United States industrial capacity utilization number is now up to 73.6 and the Euro zone is up to 77.6.As many of you know, our bookings and normally revenues track the industrial utilization figures; and as we see these utilization rates increase, our revenue follows, albeit lagging by a quarter or two. And based on the discussions with our channel partners and a variety of end users, we do believe that this recovery is indeed behind us and is well underway; we are pointed in a positive direction. I think, though, still a bit slowly; maybe slower than we'd like it, but still slow and positive.

We did complete the implementation of our planned facility rationalizations in North America; it is reducing our operating square footage by 0.5 million square feet, and our fixed operating costs in the area of $13 million to $15 million in annualized savings. We have seen some benefits this quarter, mostly from our hoist group as they continue to ramp up through fiscal '11. As indicated in our press release, and I'm sure we are going to talk about it more at length, we are disappointed in our work and our effort that the forging consolidation has not proceeded as planned. We are behind the ramp-up of our planned savings, and in fact have been operating it very inefficiently in this business.

We have made numerous changes to the business, including management and some actual manufacturing changes, and we are now beginning to see improvements in this business; specifically in January, quite honestly, the last three weeks or so have been much more positive. We do expect this improvement to continue through the fourth quarter and into fiscal '12. We are headed in the right direction, and are confident we are going to achieve the targeted savings of $13 million to $15 million annually. It's just taking longer for us to achieve these benefits.

Our free cash flow this quarter was impacted with rising inventories; it's still our goal to free up cash from working capital, and that's one of our key targets going forward. On a non-GAAP pro forma basis for the quarter, our EPS was $0.03 versus $0.06 for last year.The lower than expected results are driven by the issues in our forging consolidation; by far and away the bulk of them either non-GAAP restructuring or inefficiencies which total to about $3.4 million.

And we also had an actuarial adjustment for our product liability of about $1 million, which also had an impact on this profitability of the quarter. Also, and maybe not directly seen in the numbers that you're looking at, but we are also the foregone forging restructuring benefit that we would have expected by now, and that's in the area of about $1 million for the quarter.

Now I'll ask Karen to lead us through some of the details, and then we will open it up to questions.

Thanks, Tim. And good morning, everyone. I'm pleased to have the opportunity to review with you some of the financial highlights of Columbus McKinnon's fiscal 2011 third quarter and year-to-date that ended on December 31.

Consolidated sales of $128.7 million were up 8%, compared with last year's third quarter, US volume was up 3% for the quarter, and non-US volume was up 22%, resulting in a consolidated volume increase of 12% over the prior year on the same number of days basis. Foreign currency translation negatively impacted revenue by 3%, and pricing was favorable by 1%. Additionally, having one fewer shipping day in this year's quarter, unfavorably impacted the sales change by nearly 2%, and the divestiture of the Company's American Lifts business in October of 2009 resulted in about 0.5% unfavorable impact on revenues 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 nearly 8% over last year, with volume on the same number of days basis contributing nearly 11%, and pricing contributing nearly 1% to the growth; offset by currency translation of 2%, one fewer shipping day of 1%, 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 59 shipping days and the prior year had 60 shipping days, but the next quarter had 64 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, as well as the upcoming year, fiscal 2012, for your reference. Overall, third-quarter consolidated gross profit increased 9%, and gross margin improved 30 basis points to 22.8%.

The gross margin benefited from approximately $2 million, or 150 basis points from our facility consolidation initiative, but was unfavorably impacted by $2.3 million, or 180 basis points, relating to ongoing integration issues with our forging operation; as well as $1.1 million, or 90 basis points, of restructuring-related costs in cost of goods sold, and $1 million, or 80 basis points, due to an actuarial adjustment to our product liability reserve. Accordingly, absent those significant items that unfavorably impacted our gross margin this quarter, it would have been 26.2% on a normalized basis. The fiscal 2010 third-quarter gross margin was unfavorably impacted by $3.2 million of restructuring-related costs. Without those, gross margin last year would have been 25.2%.

As noted in the earnings release, a significant amount of attention is being directed to our forging operation to fix it, and realize the full benefits of the manufacturing consolidation. Additionally, 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 now expect to reach that run rate during fiscal 2012.

On a year-to-date basis, consolidated gross profit realized a 23.3% margin, as compared with 23.9% in the prior year. In addition to the matters previously described, the year-to-date results were impacted by Q1 and Q2 factors, which included some unusually large product liability claim settlements, high material and temporary freight cost increases, which resulted from supply chain constraints, as well as restructuring-related costs. The restructuring-related costs are diminishing as we are completing integration at the facilities which received the production from those that were closed.

Despite the higher revenue, consolidated selling expense decreased $300,000 compared with the prior year, to 12.1% of revenue this year; whereas last year's quarter was 13.3% of revenue. Currency translation had a $500,000 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 $800,000 compared with the prior year, with both quarters representing 8% of revenue. $300,000 of favorable currency translation impact was offset by investments in our Asian and European management teams to drive growth in those regions, and variable compensation. The year-to-date fluctuations in SG&A followed similar trends.

Restructuring charges of $200,000 during the third quarter of fiscal 2011 reflect the winding down of the facility consolidation initiative. Charges in future quarters are expected to moderate further. Last year's restructuring charges of $3.6 million reflected the early stages of those projects. The items cited above as impacting gross margin similarly impacted operating margin in the third quarter. Excluding those costs, as well as the restructuring charges noted previously, normalized operating income would have been $7.6 million, or 5.9% of revenue in the fiscal 2011 third quarter, as compared with $4.3 million, 3.6% of revenue in the fiscal 2010 third quarter.

Below operating income, foreign exchange loss of $600,000 was realized in the fiscal 2011 third quarter due to the significant strengthening of the US dollar relative to the euro, and its impact on an inter-company loan. Further, $2.1 million of other income was realized in last year's third quarter, resulting from some asset sales.

Regarding income taxes, we recorded a $39.7 million non-cash valuation allowance against our deferred tax assets in the most recent quarter, as required by the relevant accounting standards. It should be noted that the establishment of this valuation allowance doesn't impact our ability to utilize the tax assets. Additionally, we will have the opportunity to reverse the allowance in future periods. Given the impact of this non-cash charge, the effective tax rate for the fiscal 2011 third quarter is not meaningful. And the fiscal 2010 third quarter effective tax rate of 26.8% was impacted by the mix of income or loss among taxing jurisdictions, specifically US versus non-US jurisdictions, and the impact of state taxes in the US.

Due to the valuation allowance charge, the year-to-date effective tax rate is also not meaningful, and the fiscal 2010 year-to-date effective tax rate of 23.7% was unusually low for the same reasons previously cited for the quarter. On a go-forward basis, the actual effective tax rate will be significantly different from a normalized rate, due to the existence of this deferred tax asset valuation allowance. Accordingly, we expect that rate to be approximately 10% to 15%.

Income per diluted share on a non-GAAP basis, as delineated in the earnings release for the third quarter of fiscal 2011, was $0.03 compared with the year-ago quarter's $0.06 on the same basis. The current year quarter was unfavorably impacted by the cost of goods sold items previously noted, amounting to approximately $0.11 per diluted share, which are not segregated for the non-GAAP EPS calculations. On a year-to-date basis, non-GAAP income per diluted share was $0.31, reflecting a 48% improvement over the prior year's $0.21 on the same basis, as summarized on a different table within the earnings release.

Depreciation and amortization were $2.6 million and $3.1 million for the fiscal 2011 and 2010 third quarters, respectively. Capital expenditures were $4.3 million and $1.9 million for the fiscal 2011 and 2010 third quarters, respectively. We expect capital expenditures for fiscal 2011 to be in the $13 million to $15 million range, which includes nearly $3 million for the initial investment in our multi-year global ERP system implementation. Reflecting temporary increases in inventory to support our facility integration activities, as well as an increase in accounts payable payments, net cash used in operating activities was $9.2 million in this year's quarter, comparable to $6.8 million of cash used in operating activities in last year's quarter. In this year's quarter, operating results provided $3.4 million of cash, while operating assets and liabilities used $12.6 million. In last year's quarter, operating results used $2.8 million, while operating assets and liabilities used $4 million.

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, 2010, debt net of cash was $85 million, and total gross debt was $132 million. Net debt to total capitalization was unfavorably impacted by the non-cash deferred tax asset valuation allowance charge against equity as previously described, increasing that statistic to 36%, but otherwise continuing to approximate our 30% debt to total capitalization ratio goal if calculated excluding the tax charge. The majority of our outstanding debt at that date consisted of $125 million of our old 8.875% senior subordinated notes, which are in the process of being refinanced and replaced with $150 million of new 7.875% senior subordinated notes that were just issued earlier this week. We expect the old notes to be completely refinanced during this March quarter.

In addition to having $46 million of cash on our balance sheet at December 31, we have an additional $71 million available under our $85 million senior credit facility, net of $14 million of outstanding letters of credit. With our new subordinated notes in place, our available cash, and with nothing drawn against the revolver, we continue to demonstrate significant liquidity to support our strategic growth plan. 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 cycle.

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

Thanks, Karen. Katherine, we're ready for questions.

Thank you. (Operator instructions) Our first question is from Jason Ursaner, CJS Securities. Please go ahead and ask your question.

Good morning, Tim and Karen.

Good morning Jason.

Jason.

Just first on revenue, you mentioned improved shipping rates. Was there any meaningful catch-up revenue still in the quarter? Or was the bottleneck from Q1 completely cleared up at this point?

I think it's pretty cleared up at this point.

Okay.

It's bookings flowing through to revenue in a much more linear fashion than it was.

Okay. And I understand that it's not a backlog business, but if I look at the $77 million compared to $72 million last year with some larger projects in there, can you talk a little bit more generally about the rate of orders coming in on a daily basis compared to where we were last year?

Yes. The rate is consistent. We're in the mid-single-digits through the quarter. And so far in the beginning of the fourth quarter, well into double-digit kind of rate growth for, as you know, most of our hoist and rigging business, it is a take the order today and ship it within days, working days. Pfaff and our crane business are the ones that have a tendency to bounce backlog around a bit. So as we take an order that's due in six months or 12 months, either in those two businesses, you'll see the backlog sit there for longer than it traditionally has been. And those two businesses together are about 20% of revenue or so.

Right.

But they do have an impact on the backlog bouncing around.

Right. But as I think about the industrial capacity utilization, we've seen steady recovery. How should I think about the rate -- whether it's accelerating or just being positive in terms of a rise in the capacity utilization?

Yes, I think we track it quite nicely, actually. As we see capacity utilization move up, and of course it's moved up quite well in the last quarter at least, both in the United States and the Euro zone, we would see that demand come through to us at a similar rate of improvement. In this case, our revenue is up about 11% over last year, and that's probably what our bookings are up about the same time -- same relative amount. It doesn't correlate perfectly because it's skewed a bit from utilization, as we talked about, a one or two quarter lag. And sometimes it depends on the type of product that we sell. But without getting into those details, any increase in utilization generally means an increase in our bookings and therefore, revenue in our hoist and rigging business.

Okay. Great. And then on gross margin, I just want to make sure I'm looking at it on an apples to apples. Without the non-GAAP restructuring and the actuarial adjustment, it looks like it's around, I guess, 24.5% or so?

I'll let Karen just check that because we also backed out the problems we're having in our forged division as well to get to the 26% number.

Yes.

Okay.

Obviously it depends on what you adjust out. If you just adjust for the $1.1 million in restructuring costs that are included in cogs and the -- shoot. And the -- I think that --

And the actuarial was $1 million.

Yes actuarial. And that's $1 million. So that adds $2.1 million to the $29.4 million actual, so you get a 24.4% margin on that basis.

And then the forge is in addition to that or that is the non-GAAP --

No. The forge is in addition to that.

Okay.

So, it's an additional $2.3 million or 180 basis points and that's what gets you to the 26.2%.

Okay. So, in terms of looking at it versus the first half on an adjusted basis, pretty similar on kind of similar revenue trends?

Say that again?

So, if I look at it versus the first half of the year on an adjusted basis, pretty similar relative to where we have been on an adjusted basis?

Okay. So you're saying the results of that gets you pretty similar, yes.

Yes.

I'm sorry. I didn't follow what you were saying.

And then G&A obviously showed a nice sequential improvement in terms of cost and these are the investments in emerging markets and you talked about some traction in sales and marketing in Asia. So I was just wondering if you could provide some more details on maybe the magnitude and timing of how you think the education process in that region unfolds?

Yes, it's proceeding quite nicely, Jason. We're up to 24 salespeople in China with six offices now scattered in the at least the top six industrial cities in China that -- at least that we have identified for our kind of products. So we're executing our strategy that we've talked about for a while now and it's in place. We've signed up about almost 50 distributors in those scattered around China as well that could -- would hold and stock our product as well as, in many cases, we do have to train them. But that's actually driving some of the increase in revenue that we've quoted in here. As you know, it's still a very small percent of the total revenue of the Company, but it's growing quite nicely and we're pretty much on target with our strategic plan to grow in that part of the world.

And at 3% of sales now, I mean, do you have any target investors to look at what that might be in three or five years?

No. We've not broken out that in detail, other than to say that we're still pointed toward the $1 billion organization with about half of the revenue coming from outside the US. My expectation is that China growing at 60% plus right now will continue for quite a while. We have big opportunities. We have an infrastructure in place now. We've got a trained sales force that is gaining some traction in the market. So I would expect to see these high level of double-digit growth for quite a while. I have -- don't have a specific number in mind other than some of our really detailed strategic plans that our Asia-specific team put together. And we've not really divulged those details just yet. But you would expect that an economy the size of China over the next three to five years would be a fairly substantial part of our revenue stream in that time period. Not 3%.

Right. And I guess the hope there is we should continue to see growth in the number of distributors?

Correct. Yes.

Okay.

Offices, it's kind of a -- I like to call it hand-to-hand combat. You actually have to be on the ground, boots on the street, and take China a city at a time or a block at a time. So you need the people to cover it because the distribution channels are not nearly as efficient as what we see in America or Europe. So we have to have coverage to cover those distributors. So as we ramp up the sales force, we'll get more distributors who will then in turn get more sales.

And with the few cities you've been in, how have you gotten a sense for your brands and products versus some competitors in the local markets?

Yes. As perceived originally, these are premium brand names, western brand names to them that are well-liked and known. And a premium is gotten over the local producers as well. So it is ramping up as we expected. We're not going after the whole market. You can actually break the Chinese market, like any market, into pieces and the top piece of the foreign-owned enterprises are clear targets of ours, as well as the higher class indigenous manufacturers who are looking for productivity and/or safety improvements. And that is -- that's where we're getting the traction, quite honestly.

Okay. Great. Thanks for taking my questions.

Thanks, Jason.

Thank you. Our next question is from Lance James, RBC Global. Go ahead, your line is open.

Morning, Tim and Karen. Two areas I'd just like to focus on. One is with regard to the forging situation. Can you give me some insights into -- was it a restructuring of the forging operations that caused the difficulties? That's number one. Number two, how many quarters do you feel it's going to take to get that where you would expect it to be? And three, you talked about getting some of your forging done by outside sources. When do you expect to be able to do all the forging internally that you want?

Good question, Lance. I do believe that the restructuring activity to consolidate our two forges into one was conceptually and planned out well. We executed poorly. So, I don't necessarily say that strategically it was the wrong thing to do. I just think that we had the wrong execution management team focus to get this done and get it done like we've done every other restructuring, by the way, in a positive and well thought out and executed well. So, I guess you can say the restructuring activity did cause these inefficiencies, but it's more on the execution side than the planning side. How many quarters -- we're ramping up now.

I'm actually looking -- we do a mini P&L every day for the forging group just to track things like variances in inefficiencies, productivity, shipments, gross margin of shipments, extra spend in maintenance, outsourcing, those kinds of things. So that we have a sense of how we're tracking against where we thought we were. And in January, we actually saw a turn and become much more positive than it was up to that point. And it's not just by happenstance. It's actually by some specific activities that we took back in the third quarter, earlier in the third quarter, to drive these changes -- including putting a new general manager in that business back in November, including things like becoming incredibly focused on bottlenecks that were causing the problems, including building up and training forging and machining people, new folks especially, to get them productive up to the standard, including putting a supervisor in charge of the shipping department. Something as simple as that, Lance, to get incredible focus on flow.

We also had some machine uptime issues, so we've invested in bringing in some help out from the outside, some pros with the forging and machining that could help us solve some very fundamental problems into why our uptime isn't as high as it was. Those activities are now bearing this fruit that we're seeing in January and the results of that, which is helpful. In terms of when we're going to see it come through, I think we're beginning to see it right now in this quarter. I think it's going to probably take a couple quarters or so before we ramp up into the area where we think we could get, number one, the normal margin out of that business plus begin to see the restructuring benefits or the fixed cost reduction of closing one facility in our forging business. So, it'll be sometime, I would think, this summer before we see both those come at us.

Okay. That's very helpful. And again, I think for many of your investors, the interpretation of whether these will be a one or two quarter problem, as opposed to an ongoing, shall we say, ongoing margin problem, I think that's reassuring. I'd like to also ask about your positioning in China, and I think you've made a few of those comments to Jason. But is your positioning with your products, there's always a question, will you be the high priced alternative there? Are you going to have just a multitude of cheaper cost competitors over in China? How do you really position yourself and penetrate that market? And if you could also comment on, in terms of what you're offering there, what your technological or product value added is there that you think is going to make you successful in China versus possibly lower cost, lower quality competitors?

Sure. So, the position is a premium one. It is not low end, low cost. It is higher cost, higher productivity, higher safety factors equipment, higher uptime. So we're -- if you think about the marketplaces as, in our minds three tiers. The first tier being the foreign owned enterprises which are American, European companies that are established there and many times our brand is spec, but in many cases we need to go after that market in a bigger way. So the distribution partners and our vertical market people are focused on these people who would appreciate automatically, Lance, the premium in the brand and spec it.

The second level is another area that we think is important. These would be indigenous Chinese manufacturers who understand the value of uptime, the value of safety in their own operating environment. And that group could be either educated or shown or trained or demonstrated to that if they buy our product, they get 100% uptime versus 20% uptime. Or from a safety standpoint, you won't have accidents, you won't drop loads, that kind of thing, that would, even though the premium is substantial 20% to 30%, depending on the product, is well worth it and we can show the pay back of that. And then the bottom tier is one that we are not focused on, which is the masses and probably the biggest portion of China as it exists today and that's the low cost, I just want to spend as little as I possibly can to operate. That's not a market we're after at all. I do think that, and we're seeing that, people migrate from one level to another. They just keep moving up as they become more educated, informed, understand productivity, get smarter in how they operate, people move in this pyramid and they're typically moving up, not down.

Got you. If I could ask one last quick question, which is, would you say that for the quarter you're reasonably happy with your revenue growth, that you're maintaining your share, et cetera? And that any disappointment would have been on the margin side? Or how do you feel about your revenue growth in the quarter and going forward?

I think the growth was respectable.

Yes.

The most disappointment, as you probably can tell, Lance, is that the forging issue that I'm wrestling with now, and we're seeing it turn and become more positive. But very disappointed in our performance and we're -- I don't have any manager in my company that's happy with this at this point. So, we're incredibly focused on that. So, the margin is the issue in my mind. I would say that because we're also not able to deliver effectively from our forging group, we probably are impacted on revenue in that business as well.

It may not show through to the top of the total corporation. But in that specific business, that revenue is going to have to turn as we begin to reposition ourselves as a good provider of product. In a consistent and timely way, we're going to have to go back and get that revenue back later on.

Okay. Terrific. Thank you very much.

Sure.

Thank you. Our next question is from Holden Lewis, BB&T. Go ahead, your line is open.

Thank you. I just want to make sure I heard a few things correctly. In terms of the tax rate, I think you cited a 10% to 15% tax rate. Is that -- is that Q4, is that ongoing? How should we be looking at your tax rate on an ongoing basis?

Yes. Holden, I'll take that one. That is ongoing and that's why I cited it. It's unusual because the -- there will be no tax provided on the US income because of the deferred tax valuation allowance situation. So, as we gain -- as we generate income in the US, there will be no tax provided on it. So that resulting effective tax rate of 10% to 15% is the blending of tax outside the US with no tax in the US on the consolidated pre tax income.

Okay, so when we're building our models now, even into 2012, 2013, we should be using a 12.5 % type tax rate?

Yes. It seems kind of crazy and, again, it's temporary, I'll say, until we have the opportunity to reverse that valuation allowance. And I'm fearful it'll bounce around from quarter to quarter depending on that mix.

Okay. And when you say temporary, I mean, how long do you anticipate maintaining your margin -- or your rate at that level?

You know what? That's a good question. And I should also reemphasize the fact that this has no cash impact.

Right.

This is a non-cash charge. So, we're currently in an NOL, net operating loss, position in the US and will continue to benefit from that. So it doesn't impact cash at all. The SEC just has very strict rules around when companies are required three quarter valuation allowances and we got caught up in that. Primarily, they look at it on a three-year cumulative basis and primarily, because we had significant restructuring charges last year that was a key driver as to why we are in this cumulative three-year loss position. So, the SEC then looks to see a pattern of cumulative income before they'll let companies reverse the valuation allowance. So we're hoping it'll be a relatively short time frame, maybe a year or two.

Okay. And then, with regards to what you said about the order rate, did I hear this correctly that in fiscal Q3 you saw, what was it, mid -- I guess mid-single digit order growth? And then, in January so far, you're back up into teens? Is that what you guided on orders?

Yes.

Okay. Now, if I remember correctly, I think your fiscal Q2 orders were reasonably solid. What caused -- it seems like it's in US since you're talking about 3% growth in orders in US or in volume? It seems like that represents a bit of a drop-off. What was the -- what was behind the weaker orders in the quarter and I guess specifically in the US?

Yes, the biggest -- so let me just back up and just remind you that we sell to a distributor, so we don't have 100% clear vision all the way through to the end users all the time. But I can tell you that based upon the product, and based upon conversations with channel partners, it seems to us that the third quarter continued to be negatively impacted for our explosion-proof product, our highly engineered product that's used in the oil patch predominantly. And we have a lot of folks that are pointing at drilling or lack thereof, lack of activity. Even though the moratorium on drilling has been lifted, it's apparent to us that the regulations around drilling continue to hamper what we consider to be normal activity there, which is putting a lack of demand on some of our explosion-proof hoisting product. That seems to be the bulk of the area.

Okay. And those same products seem like they're improving in this current quarter?

No, not yet. It's other products that are improving in the current quarter.

Okay. But this business -- these products you're talking about are related then to rig count? Because I thought that's been actually faring quite well?

It's related to all of the ancillary support business around rig count. Rigs certainly would be part of it, but we're -- there's a lot -- there seems to be depressed activity in the entire region.

Yes. Okay.

It's not 100% clear to us, by the way. I'm just looking at a product line and saying why is that depressed in the quarter? That's the piece that I'm questioning.

And that product line is big enough to explain up 14 to up three?

The bulk of it, a lot of it.

Okay. And if that's not -- if that line rebounding is not what's getting you back into teens growth, what is accelerating to get you there?

The other product line is -- we talked about the forging business not performing.

Yes.

It also has an impact on the revenue in that business. And that revenue was depressed as well because of our inability to perform and ship product in a timely way. That's starting to come back a little bit now as well.

Okay. Got it. Got it. Okay. And then, on the forging issue, so when we -- when I think about the savings that you're getting, the past three quarters you've kind of been at a $2 million -- sort of a $2 million run rate. You're looking to get to a $3.5 million run rate let's say. Is that entire delta between $3.5 million and $2 million, is that entirely due to the forging business? So really the key to getting there now is simply just getting forging on track?

Yes, it's the bulk of it Holden. Not 100% true but by far and away the bulk of it is the forging business.

Okay. And so, you think you'll get that $3.5 million by sometime in fiscal year 2012, but we're talking probably about Q3? I mean is that kind of the timing?

Yes, I think that's probably reasonable. And I have made promises to you all in the past that I've not kept. And I prefer not to make another promise, but I'd rather say to you that we are very focused on making that happen.

Okay. So, you'll get to the 13/15 but you won't realize 13 to 15 in its entirety in fiscal year 2012 at this point?

Probably not. Right. Right.

Okay. And then just last thing, refresh our memories on your expectations for core incremental margins. And as we're thinking about revenue growth next and what kind of incremental margins we should be assigning to that, I know that you have these sort of add backs, but I'm just thinking about the core business. How are you thinking about incremental margins nowadays if you don't consider the add-back stuff?

If I don't consider the add-backs?

So, in other words, you're going to have a very good incremental margin because you're going to be adding back in the issues from Q1 and the issues in Q3, right? But I'm just saying excluding that, what kind of a core ongoing incremental margin -- how do we think of that?

We're still in the 30% area on a normalized basis.

Okay.

And it's going to bounce around quarter to quarter, believe me, like we saw in 2001 to 2004. Sometimes it's double and sometimes less. On an average trend line, I think if you use 30 that's probably reasonable.

Okay. All right. Thanks I'll jump back into queue.

Thank you. I show no further questions at this time.

Okay. Thank you, Katherine and thank you all for participating in our call this morning. We appreciate your focus and attention on Columbus McKinnon. We remain focused on customer service and obviously turning around this forging business. And we have a solid balance sheet to help us make these prudent investments around the world and grow in places like Asia and Brazil and Europe. We will continue to search for acquisitions in [our] to help add value to our Company and grow globally. Just want to thank all of our people around the world, especially those that are working diligently to add value to the Company and make our Company a stronger, more well-positioned organization. And as always, we do appreciate your time and support. Thanks. Have a good day.

Thank you and that does conclude today's conference. Thank you for participating. You may disconnect at this time.