Columbus McKinnon Corp (CMCO) 2011 Q4 法說會逐字稿

Welcome, and thank you for standing by. At this time all participants are in a listen only mode. (Operator Instructions) Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I would like to introduce your host for today's call, Mr. Tim Tevens, President and Chief Executive Officer of Columbus McKinnon. Sir, you may begin.

Thank you. Welcome to the Columbus McKinnon conference call this morning to review the results of our fiscal 2011 and fourth 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 be sure you understand these risks.

Relative to the quarter, our revenue was up nicely about 17% about 10% for the year. So we are beginning to see the economic activity certainly come through to our business. Our bookings were also up double-digit in the quarter and remained reasonably strong through the beginning of the first quarter of fiscal '12. We continue to see increased global economic activity. This United States industrial capacity utilization increased to about 75%. And in the Euro Zone that industrial utilization also improved to 77.6%. As many of you know, our bookings and normally our revenues, track these utilization figures, and as these rates increase so does our revenue. Based on the discussions with our channel partners and end-users alike, we believe that the recovery continues to be pointed in a very positive direction.

As we reported last quarter, we completed the implementation of our planned facility rationalizations in North America that reduce our operating square footage by about 0.5 million square feet, and reduce our fixed costs by about $15 million annually. We have begun to see the benefits of this quarter, actually last quarter and continue into this quarter. And we saw about $1.1 million recognized. And we are about halfway through recognizing that annual run rate in fiscal '11, so we're about half of the $15 million.

As you may know, we have experienced some issues with our forging facility consolidation. We see the situation now improving. It's certainly not yet at the level of productivity or profitability that we had planned on but we are seeing continued improvement in the operations. In this past quarter we remain about $1.7 million less in gross margin or about 120 basis points below last year. And this is an improvement from the Q3 numbers that we reported. Our improvements through the quarter are on track and we remain on plan. We are heading in the right direction and we are going to achieve our targeted savings.

The operating leverage in the quarter was 25%, and 21% for the full year. This is the additional operating profit dollars on the incremental sales dollars as compared to last year. And certainly if our forging business was at the same level as last year we would have seen higher leverage of about 50% for the quarter and 36% for the full year. We had a great quarter as far as cash flow was concerned. We generated about $20 million in cash from operations and that netted us about $3.5 million for the year. And, as you know, generally, that cash flow is one of our key attributes of our Company. On a non-GAAP pro forma basis for the quarter we had $0.20 earnings per share versus $0.10 for last year. And $0.51 for the full fiscal year versus $0.32 for the prior year.

And now I will ask Karen to lead us through more details of these results.

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 fourth quarter and our year that ended on March 31, 2011.

First of all, consolidated sales of $144 million were up 17% compared with last year's fourth quarter. US volume was up 11% for the quarter, and non-US volume was up 18%, resulting in a consolidated volume increase of 14% over the prior year with 1 more shipping day this year than last year. Foreign currency translation favorably impacted revenue by 1% and pricing added an additional 2%. A table summarizing these fluctuations is included within the earnings release.

For the year, consolidated sales increased 10% over last year, with volume contributing 11% and pricing contributing 1% to the growth. Offset by unfavorable currency translation of 1% and the impact of our American Lifts divestiture by 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 and the prior year had 63. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal 2011 and 2010, as well as our new year fiscal 2012 for your reference.

Overall, fourth quarter consolidated gross profit increased 18% and gross margin improved 30 basis points to 26.0%. The gross margin benefited from approximately $1.1 million or 75 basis points from our facility consolidation initiatives. In addition to $800,000 realized in last year's fourth quarter. However, margin was unfavorably impacted by $1.7 million or 120 basis point related to ongoing integration issues with our forging operation, which reflects improvement from the trough in the December quarter. Accordingly, absent the unfavorable forging operations results, gross margins would have been 27.2%. Additionally, we anticipate an incremental $1.5 million to $1.7 million per quarter of savings from the facility consolidation initiatives which are ramping up. The fiscal 2010 fourth-quarter gross margin was unfavorably impacted by $800,000 of restructuring related costs. Without those, the fiscal 2010 fourth-quarter gross margin would have been 26.3%. A significant amount of tension continues to be directed to our forging operation, to fix it and realize the full benefits of the manufacturing consolidation.

For the year consolidated gross profit realized a 24.1% margin as compared to 24.3% in the prior year. In addition to the fourth quarter matters described, the annual results were impacted by first through third quarter factors previously disclosed, which included some unusually large product liability claim settlements, high material and temporary freight cost increases which resulted from supply chain constraints early in the year, as well as restructuring related costs. Despite the higher revenue, consolidated selling expense increased over $100,000 compared with the prior year to 11.6% of revenue in this year's quarter. Whereas last year's quarter was 13.5% of revenue. Currency translation had a $200,000 unfavorable impact. So consistent with prior quarters, the actual cost included higher sales commissions relative to higher revenue, as well as investments in our Asian sales organization in accordance with our strategic growth plan, offset by reorganizational changes implemented in fiscal 2010.

Consolidated G&A expense increased $500,000 compared with the prior year. With the fiscal 2011 quarter representing 7.5% of revenue, and the fiscal 2010 quarter representing 8.3%. The change was impacted by $100,000 of unfavorable currency translation, as well as investments in our Asian and Latin American management teams to drive growth in those regions. The annual fluctuations in SG&A found similar trends. Restructuring charges of less than $300,000 during the fourth quarter of fiscal 2011 reflect the winding down of the facility consolidation initiatives. Last year's restructuring charges of $4.4 million related to those projects.

The items cited above as impacting gross margin similarly impacted operating margin in the fourth quarter. Excluding those costs, as well as the restructuring charges noted above, normalized operating income increased to $9.6 million or 6.6% of revenue in the fiscal 2011 fourth quarter. As compared with $5.1 million or 4.2% of revenue in the fiscal 2010 fourth quarter on the same basis. Below operating income, $3.9 million was reported as the cost to redeeming our previously outstanding bonds in conjunction with our senior subordinated debt refinancing. Additionally, interest expense includes $200,000 of nonrecurring interest expense during the time that both our old as well as our new bonds were outstanding. Interest expense also includes nearly $200,000 of additional interest expense due to the new higher debt outstanding despite the lower coupons. Investment income reflects $1.9 million of gains resulting from a reorganization of our non-operating securities portfolio.

Regarding income taxes, the effective tax rate was 40.2% in the fiscal 2011 fourth quarter. It was unfavorably impacted by the $3.9 million of bond redemption costs for which no tax benefit was recognized. It was also unfavorably impacted by about $600,000 of tax valuation allowance recorded for some small foreign subsidiaries. Excluding those items, the effective tax rate would have been 12.5%, in line with our expected 10% to 15% effective tax rate. This low expected rate results from recording a US deferred tax asset valuation allowance in the third quarter of fiscal 2011.

Income per diluted share on a non-GAAP basis as delineated in the earnings release for the fourth quarter of fiscal 2011 was $0.20, doubling the year ago's quarter $0.10 on the same basis. It should be noted that the current year quarter was unfavorably impacted by $0.05 for the underperforming forgings operation, which is not segregated for the non-GAAP EPS calculation. For the year, the non-GAAP income per diluted share was $0.51 reflecting a 59% improvement over the prior year's $0.32 on the same basis. As summarized on a different table within the earnings release. The fiscal 2011 year was unfavorably impacted by $0.22 for the underperforming forgings operation as compared with fiscal 2010. Which is not segregated for the non-GAAP EPS calculations.

Depreciation and amortization were $2.8 million and $3.3 million for the fiscal 2011 and 2010 fourth quarters, respectively. Capital expenditures were $3.7 million and $1.3 million for the fiscal 2011 and 2010 fourth quarters, respectively. For the year, fiscal 2011 capital expenditures were $12.5 million, including about $4 million for the initial investment in our multi-year global ERP system implementation. Fiscal 2010 CapEx was $7.2 million. We expect capital expenditures for fiscal 2012 to be in the $13 million to $15 million range which will include approximately $3 million relating to our global ERP system implementation.

Net cash provided by operating activities was $20.3 million in this year's quarter, exceeding last year's $12.7 million. This year's quarter was favorably impacted by the improved operating results. For fiscal 2011 cash provided by operating activities was $3.3 million as compared with $29.9 million in fiscal '10. With fiscal 2011 recording more working capital, particularly inventory. We continue to focus attention on our working capital utilization, especially opportunities to improve inventory turns in alignment with our long-term goals.

At March 31, 2011, debt net of cash was $74 million and total gross debt was $154 million. Net debt to total capitalization at 31.4% continues to be in line with our 30% debt to total capitalization ratio goal. The fiscal 2011 fourth quarter included a refinancing of our debt, replacing $125 million of former 8.875% senior subordinated notes with $150 million of new 7.875% notes which will mature in 2019. In addition to having $80 million of cash on our balance sheet at March 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 our 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 economic cycle.

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

Thanks Karen. Okay, Evan, we will open it up for questions now.

(Operator Instructions) Jason Ursaner with CJS securities.

Good morning. On the demand side, revenue is a little bit stronger than I expected. Can you just give a sense for how much of the increase in volume is finally the pull through from better capacity utilization versus some of the orders to get ahead of the April price increase?

The bulk of it is economic activity. I don't have an exact number in front of me but it feels like it's about 75% economic and maybe 25% of that additional volume would be pull through orders, pre-price increase orders.

Okay. And as I think about the fiscal Q1 comparison, because it will be skewed because of the shipping delays from fiscal year '11, how are you thinking about the daily booking rate on a sequential basis ex currency? Is there seasonality in that too, the $250,000 or so run rate you are running this quarter?

There shouldn't be.

A little. Our fourth quarter is typically a little stronger than our first quarter. So on a sequential basis, on a per day basis, I would expect that they would be similar but perhaps slightly lower. The number of days, let me just double check here for you, Jason, the number of days in the quarter we just ended, like I said, was 64. The upcoming quarter, the first quarter of fiscal '12, has 63 days. So there is 1 fewer day we need to take into consideration.

Okay. And on the cost side, just to start with the forging operation, did you expect to see any faster progress on getting the consolidation on track? I know last call you mentioned the turn in January. Was there a step down from that or is it still on track for a summer time line to see the full benefit?

Yes it is still on track. And we think that it is going to be another quarter of 2 going out here before it gets back to the level that we would want it to be at. It is not a perfect world in terms of the changes going on in that business but it is pretty much on track.

Okay. And then can you just speak a little bit about inflationary pressures you're seeing in general for some of your specialty steels and alloys? And relative to what you have been holding in inventory, when do you see this starting to hit or are the April cost increases?

The price increase for April would offset those inflationary pressures that we see across the business. Steel is certainly bouncing around. Some grades of steel are actually down for us, some are up. We saw motors come up, mostly because of the copper content in motors. Some castings came up. But, as you know, it is our goal and our policy to remain margin neutral, so that any price increases we see from the marketplace we pass on to our channel partners in the form of a price increase. Did I answer your question?

I couldn't hear the answer.

Let me do it again. The cost increases that we have seen, certainly we have seen them mostly in motors given the copper increase. Copper is a major component of motors. Our supplier had increased our prices now. It's a strategic supplier and a commodity supplier to us so that we did not get hit with the full whack of increase. And also we have steel, some going up, some going down, depending on the specific grade and type of steel. But as you know, we do issue price increases and it is our intent and policy to remain margin neutral as we see costs coming into the business of raw materials of this nature. We offset that with a price increase which is what the April price increase did.

Gary Farber with CL King.

Good morning. Just a couple of questions. Are there any particular end markets you can call out driving your volume gains?

I think the first one that comes to my mind, Gary, is what I consider to be the very traditional MRO markets here in the United States this quarter. It seemed like the US somewhat woke up and really came back to life stronger than it was. The markets outside the US have been doing very nicely for us earlier than the US did. And it's the traditional MRO channel which is mostly general industry buying maintenance items and repair items. And our hoist and our rigging tools get sold through that channel and that seemed to have a very strong quarter. So general industry, I think the oil patch is still a little slow down in the Gulf area. Some of our explosion proof hoists, we are seeing some activity but we are not seeing orders just yet. Those are the ones that I would point towards.

Okay. And then can you just give us an update on acquisitions? What does the market look like for acquisitions? What kind of things are you looking at? Are you looking more for product expansion, geographic expansion?

Sure. We remain interested in growing in emerging markets, places like China and Brazil, the Eastern Bloc of Europe, to name a few. And the targets that we are looking at in those areas, we're having conversations with, most of these companies are not for sale. We have to develop a reason for the owner privately-held companies to be sold, and it is mostly on strategic discussions. Some of them are going very well and we are getting close to a letter of intent at this point. Some are far off. It really depends on the individual company that we are having conversations with. We have nothing to report. We are not doing due diligence on any of these companies just yet. But they are typically relatively small $20 million to $40 million in revenue. And we pay either net asset value basis or a multiple of EBITDA, and the multiple of EBITDA is the very traditional industrial range of the 6 to 8 area.

Jason Ursaner CJS Securities.

Thank you. Lastly, just for cash flow and working capital, Karen, did you mention you expect higher working capital in '12?

No. I'm trying to think -- no, I did not mention that. I would actually expect our working capital utilization to improve. I think over the past couple of years, during the downturn we saw, obviously, a sales dip. Our inventory can't come down at that same slope. So our working capital as a percent of revenue went up a bit. And then during that time, too, as we were conducting the facility consolidations, we had to build up some inventories so that it would not be disruptive to the customer base. So now that those activities are behind us, we are seeing the economy obviously improving, our expectation is to improve our working capital utilization.

Holden Lewis with BB&T Capital Markets.

Hello, thanks. This is John Cooper on for Holden this morning. Just wanted one little clarification. On the cost of the bond redemption, that had no tax impact?

Yes, let me just touch on that. I know it gets confusing. The reason that it had no tax impact on the financial statements is because of the situation we are in with being in a deferred tax asset valuation allowance situation. We do get an actual tax deduction for that on our tax return. So it is just the accounting treatment, because we are not providing any income tax expense on our income in the US now. And therefore we do not get any tax benefit on the expense. It's really because of that valuation allowance situation. I just want to re-emphasize, that is different from the actual tax return treatment because we do, in fact, get a deduction for tax return purposes.

Okay. So that just adds on to the loss, on the tax return?

Yes.

Okay. But then as far as it is on the P&L, there is no tax implication because you still have enough of the NOLs coming through?

Yes. That is a way to think about that. It is more confusing than that but effectively yes.

All right. And then on the general savings run rate, that you expect to be at the $1.5 million to $1.7 million, how does that ramp up now from that $1.1 million that you had in the fiscal Q4?

The $1.5 million to $1.7 million is per quarter so that is an additional $6 million to $8 million or so for the year. And we expect that to ramp. We have not given specific numbers on a per quarter basis, but that is incremental to what we have already realized. Remember, we had estimated a total savings of about $15 million associated with the facility consolidation activities. We have been realizing part of that. We started at the end of fiscal '10, so in the fourth quarter of fiscal '10 we realized about $800,000 of so of that savings. And then that continued into fiscal '11 by quarter. So thus far we have realized about half of that $15 million through fiscal '11, and we would expect then the rest of that to be ramping up in fiscal '12 over the next several quarters.

Okay. And so it will be completed, though, in fiscal 12?

Yes.

Okay. And then just quickly on the forging piece, $1.7 million, I believe it was, around $2 million, in Q3, does that continue to become less of an effect over the next 2 quarters as you guys straighten that business out? Can we expect that to swing?

Yes. $2.3 million in Q3, $1.7 million in fourth quarter. We would expect it to be less of a drag going through '12 and then eventually spin and start to be positive to get the fixed costs reduced in the forging business to start to come through, as well.

Okay. So does that eventually drop out in fiscal '12?

Sure. That's exactly our thinking.

At this time we have no other questions in queue.

Thanks, Evan. Thanks, everyone, for spending the time with us this morning. Just to summarize, strategically I think we are very well-positioned to continue to profitably grow our business. Our profits are improving as the level of business recovers from, as you all well know, the worst recession we have seen in decades. Additionally, we do expect to generate more profits as a result of these restructuring efforts, and they are now being completed and behind us. This will allow us to make strategic investments in emerging markets such as China and Brazil, and invest in new products, as well. Combine this with our strong balance sheet and we are well-positioned to make strategic acquisitions and also expand our strategic alliances. I would like to thank all of our people around the world for their dedication to excellence in making our Company a stronger, more well-positioned organization. And as always, we appreciate your time today. Have a good day.

This concludes today's conference. You may disconnect at this time.