Columbus McKinnon Corp (CMCO) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Columbus McKinnon fiscal 2012 first quarter earnings conference call. All participants will be in a listen-only mode until the question and answer session. (Operator Instructions) Today's conference is being recorded. If you have objections, please disconnect at this time. I would now like to introduce Mr. Tim Tevens, President, Chief Executive Officer for Columbus McKinnon. You may begin.

Thank you, Wendy. Good morning, everyone, and welcome to the Columbus McKinnon conference call to review the results of our fiscal '12 first quarter. With me today here in Amherst is Karen Howard, our Vice President of Finance and Chief Financial Officer. Please take note that we have for the first time included some summary slides of the quarter's results for your review. They can be found on our website at www.CMworks.com/investors. I hope that this should help you follow along with our earnings call comments this morning.

We do want to remind you the press release and accompanying slides of 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 these periodic reports that we file with the SEC to be sure you understand the risks.

A little bit about the quarter. Our revenue growth continued a nice positive trend up 17.4% in the quarter. Our bookings in this quarter also continued their positive trend and are in the high single-digit range over last year. The backlog is up almost to $99 million, and our revenues outside the United States have now grown to be about 47% of our total revenue.

We do continue to see increasing global economic activity. The United States industrial capacity utilization is up to almost 75%, and the euro zone industrialization also improved to 81%. As many of you know, our bookings and normally our revenues track the industrialization figures. As the utilization rates increase so does our revenue. Based on our discussions with channel partners as well as end-users, we do believe that the recovery does continue and does continue to be pointed in a very positive directions.

As we reported last quarter, we completed the implementation of our planned facility rationalization in North America that reduces our operating square footage by about 0.5 million square feet and our fixed operating costs by about $15 million annually. This quarter, we have recognized about $2.5 million of benefits which is trending up, I might add, since the last couple of quarters.

Our forging operation is indeed improving. We are not yet out of the -- not at the level of productivity or profitability that we planned on, but we're seeing continuing improvements in this business. In the quarter we remained about $900,000 and less gross margin or about 60 basis points below last year for this forging group. I might note it is improvement from prior quarters which was much higher. We are headed in the right direction and are going to achieve our targeted savings.

The operating leverage for the business in total for the quarter was 29%. As you know, this is additional operating profit dollars on the incremental sales dollars as compared to last year. Our cash flow remained positive in the quarter, and we generated rated almost $1 million in cash from operations. If we remove the non cash pension curtailment which Karen will describe for you just in a moment here, we're at about $0.20 in earnings per share in this quarter versus an actual loss of $0.04 for last year. Now I will ask Karen to lead us through the more details of the results of the quarter.

Thanks, Tim. Good morning, everyone. I am pleased to have the opportunity to review with you some of the financial highlights of Columbus McKinnon's fiscal 2012 first quarter that ended on June 30. Reflecting solid order activity, consolidated sales of $139.8 million were up over 17% compared with last year's first quarter. US volume was up 12% for the quarter, and non-US volume was up 6% resulting in a consolidated volume increase of 9% over the prior year. Pricing added an additional 2% and foreign currency translation had a 6% favorable impact this quarter. 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. A table showing the number of shipping days in each of the quarters of fiscal '12 and fiscal '11 is included at the end of the earnings release.

Overall, first quarter consolidated gross profit increased 27% and gross margin improved 200 basis points to 25.5%. The gross margin benefited from our facility consolidation initiative as well as increased sales volume. However, gross profit was unfavorably impacted by $1.2 million, or 80 basis points, relating to a non cash pension curtailment charge. Additionally, gross profit was unfavorably impacted by about $900,000, or 60 basis points, from operating issues with our forging operation which does, however, reflect continued improvement from prior quarters. Accordingly, absent the pension curtailment charge and unfavorable forging operations results, gross margin would have been 26.9%. A significant amount of attention continues to be directed to our forging operation to fix it and realize the full benefits of the manufacturing consolidation.

Consolidated selling expense increased $800,000 compared with the prior year to 11.5% of revenue this year whereas last year's quarter, it was 12.8% of revenue. Currency translation had a $1 million unfavorable impact so in terms of local currency the actual costs were down with the favorable cost reductions offset by higher sales commissions relative to higher revenue. Consolidated G&A expense increased $1.7 million compared with the prior year with both the fiscal 2012 and 2011 quarters representing 8.2% of revenue. The change was impacted by $0.5 million of unfavorable currency translation as well as investments in our Asian and Latin America management teams to drive growth in those regions.

Realizing the benefits of our lower cost structure and increased sales volume, operating margin increased significantly to 5.2% in this year's quarter, realizing 29% operating leverage. However, the items cited above as unfavorably impacting gross margin similarly impacted operating margin in the first quarter. Excluding those costs which consisted of a $1.2 million pension curtailment charge and $900,000 negative forging operation performance, as well as some minor restructuring charges, normalized operating income would have been $9.7 million, or 7% of revenue, in the fiscal 2012 first quarter as compared with $4.2 million, or 3.5% of revenue, in the fiscal 2011 first quarter on the same basis.

Regarding income taxes, the effective tax rate was 32.8% in the fiscal 2012 first quarter. It was unfavorably impacted by the $1.2 million pension curtailment charge for which no tax benefit gets recorded for accounting purposes. It was also unfavorably impacted by jurisdictional mix of pre-tax income. Our expected effective tax rate for fiscal 2012 has been updated to 20% to 25% resulting from geographic mix changes. 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 for the first quarter of fiscal 2012 was $0.14, reflecting a significant turnaround from the year ago quarter's $0.04 loss. It should be noted that the current year quarter was unfavorably impacted by $0.06 for the pension curtailment charge and an additional $0.05 for the underperforming forgings operation.

Regarding cash flow items, depreciation and amortization were $3 million and $2.9 million for the fiscal 2012 and 2011 first quarters, respectively. Capital expenditures were $3.2 million and $2.2 million for the fiscal 2012 and 2011 first quarters respectively. We expect capital expenditures for fiscal 2012 to be in the $13 million to $15 million range which will include approximately $3 million to $4 million relating to our global ERP system implementation. Net cash provided by operating activities was $900,000 in this year's quarter compared with $7.1 million of cash used in last year's first quarter. This year's quarter was favorably impacted by the improved operating results. Last year's quarter was unfavorably impacted by working capital usage. We continue to focus attention on our working capital utilization especially opportunities to improve inventory turns and alignment with our long-term goals.

At June 30, 2011, debt net of cash was $76 million and total gross debt was $154 million. Net debt to total capitalization at 31.1% continues to be in line with our 30% debt to total capitalization ratio goal. In addition to having $78 million of cash on our balance sheet at June 30, we have an additional $66 million available under our $85 million senior credit facility, net of $19 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. Wendy, we'll open it up to questions, please.

Thank you.

(Operator Instructions)

Our first question today is from Jason Ursaner from CJS Securities.

Good morning.

Good morning, Jason.

The charge from the forging operation definitely is a big improvement over last quarter. I think it's about half what you quantified last quarter. Did most of this come early on in the quarter? Did you notice an improvement month-to-month and are we nearing the completion of everything?

I am trying to recall. I think it was reasonably split amongst all of the months, but we are trending in a favorable way. Some of the things that I measure that are a little different than the financials would be like -- reworking scrap, for example, and I am noticing that's coming down greatly which is driving some of this improvement. I would say that it would be -- think about it maybe as evenly split over the months.

Are we still thinking about end of the summer -- that's when --?

I think we said end of the calendar year.

Okay.

In that area, to get back to what we believe to be a normal profitability plus beginning to see some of the restructuring benefits come through. As you noticed, we had $2.5 million of restructuring benefits. That's primarily from the hoist restructuring we did. That piece is --.

Okay. And then revenue. If I am looking at that 17% growth number, and I go back to fiscal Q1 last year and adjust it for maybe that $8 million of unfilled orders, it is closer to 10% growth comparison. And ex-currency and pricing, that would be more low single-digit, but you're mentioning bookings in the high single-digit. I guess where is there more growth embedded in there? And can you talk a little bit about your expectations for moderation in the back half?

Sure. I haven't done that math that you referenced about some of the growth we had in backlog last summer -- last Q1. The only -- I am looking at is by market, by product group, by distribution channel, the revenue is up quite a bit mostly in the US.

Europe is beginning to moderate slightly as you might recall. The last several quarters we talked about Europe being very, very strong. That seems to be not as robust as it was. Of course, the comps are becoming a little more difficult as well. But I would say that we continue to see bookings in this high single-digit area through the summer. And that's bookings, that's not revenue, right?

Yes. I guess if I am looking at that recovery in US manufacturing capacity utilization, it has been holding in this mid-74% level for about six months. So if we talk about lagging by one to two quarters, are you fully caught up to the recovery if we don't see a continued improvement? Or is it still that catch-up replacement demand?

I think we're still in the catch-up mode right now. If we see that hold in the 73%, 74% area as we have the last several months, that will take another quarter or two for us to see that revenue. Then that revenue would flatten out in the US. But based upon the activity that we're seeing and the relationships with our channel partners, we're not seeing that slow in the US. We're seeing that actually accelerate right now.

Last question for me. Can you talk broadly about some of the benefits you expect to see from a global ERP system once it's put in? And is this something that you need to compete effectively or do you anticipate real positive returns on the capital invested there?

Yes, we would expect significant return once it is completely installed which, Jason, you might know is going to take some years to do. It is actually scheduled for the next two and a half or three years, somewhere in that area.

I think that the way we look at our business today is that we -- there is a fair amount of integration amongst our businesses depending on where they sit in the globe. So a person sitting in Hungary who -- let me give you a better example. A person sitting in Brazil who is servicing Petrobras needs to communicate directly and specify product directly from a plant in the United States who would build hoisting products for the explosion-proof oil and gas industry. Today, it is a very cumbersome process to go through for that demand to be understood, specified, communicated back into the manufacturing facility. Ultimately, then delivered and put in place in the end-user market.

What the global ERP system will do for us is allow us to do that in a seamless information flow method so that an engineer sitting in Brazil can communicate directly with the plant wherever it might be in the world to build that product and deliver it to the end-user markets in the right form at the right time. That's going to be the primary driver.

In addition to that in Europe -- we have disparate systems in Europe today. So not 100% true, but generally true for every country there is a different ERP system that runs the business, and linking them will allow us to better manage our inventory because many of those countries/sales offices sell the same product. By combining them on the one platform we'll be able to place demand on a centralized distribution center and ship them across Europe as opposed to having to stock the inventory in each local jurisdiction to the degree we do today. So that would be a pretty good return on the investment as well as this demand helping our sales force as well as our engineers place demand on the right factory at the right communication and in an efficient way.

Okay. Great. Appreciate those details, and I will jump back in the queue. Thanks.

Thank you. Our next question is from Sean Williams with BB&T Capital Markets.

Hi. Good morning.

Hi, Sean.

Tim, you mentioned you are seeing some good chatter out of some of your channel partners. I was wondering if you could give us some more specifics on either specific geographies that you're seeing some pickup and strength in? Or specific end markets where you are seeing some strength?

Sure. You might have heard me talk about -- I know you are new, Sean -- not new necessarily but you're just picking up coverage on us, but I will give you some history here. The last year or so we saw much more dramatic growth out of markets outside of the US. So Europe was extremely positive for us, Latin America, Asia Pacific, mostly because of the investments we're making in those market from a selling standpoint.

The US seemed to be lagging and didn't seem to be as robust. This past quarter or two now we're seeing the United States -- I will use the word wake up a bit and go back to work. And if you look at the US which is still a little bit more than 50% of our total revenue, it is broadly speaking the MRO channels. So if you think about the distributors that service those markets, and you might think about the bigger ones like McMaster Car or Grainger, Fastenal, MSC and others. That business is very strong for us today and has really caught up very nicely, and I think it is a direct result of this utilization number that has increased to the 74% level. People are beginning to need to maintain or replace their equipment that's out there working every day.

I will also tell you that there is another area in the States that has done very nicely for us, and that's the large OEM kind of business where folks like Deere and Caterpillar and others that would specify our equipment are investing and they're investing heavily. And that's helping us help drive our business especially in the crane and hoist business to service those markets. And it happens to be not just here but also globally where when Caterpillar builds a plant in China we're servicing the cranes and hoists to do that kind of work. So that seems to be very robust as well. That's the US.

I think that from an end market standpoint I was negative on oil and gas for a while, but I think that's coming back and we're starting to see some demand for our explosion proof units, especially in the Gulf area. That seems to be going back to work now. Not at the level we would like to see just yet but seems to be doing better as well. I think just general industrial America, general manufacturing seems to be positive which is driving the MRO business for all intensive purposes.

When you get into Europe, it is mostly driven by Germany. I think that the UK is doing fine and France is doing fine. We don't do a lot of business into the southern portion of Europe -- Spain, Italy, Greece, to name a few. So we're not really directly affected by any financial issues that are going on there, but the German market seems to be going very well for us. And of course driven by a lot of exports that they do.

And the eastern block of Europe is exploding to a large degree as well. Although a smaller portion of our revenue today, it seems to be doing quite nicely.

And of course in Asia, it is all about new investments that we have made over the last year to add salesmen and engineers and open sales offices there is now, and that's driving that growth as well. And we're just tying on to the market right now. We're strategically positioning our product against the competitors there, and that seems to be going well for us.

Okay. And in terms of the restructuring savings that you've obviously have been making some nice progress there, what is the timeline for maybe getting to that whole kind of $14 million, $15 million run rate? Is that -- do you anticipate hitting that by the end of this year? Or is that coming at the beginning of next year?

We would expect to be at the run rate by the end of the year, that's right. As you can see, we're probably two thirds of the way there right now, maybe three quarters of the way there. And once Chattanooga gets to their level -- the forging business gets to their level of capability, we'll be there and we think that's toward the end of the year.

Thanks for the update guys.

Thanks, Sean.

Thank you.

(Operator Instructions)

Our next question is from Gary Farber with CL King.

Good morning.

Hi, Gary.

Just a couple of questions. One on the forging. It is not that much of a change from your prior commentary as far as the timing, but has anything changed since the last quarter as far as when you think that thing is going to get fully ramped up again as far as the timing? It seemed like it was more like the end of the summer, and now it is toward the end of the year. Is anything different?

I think that they are doing -- they are improving. The plant itself is improving. What we need to do now is reach back into the marketplace and recover our revenue that we have lost because of our poor performance quite honestly. And we have a recovery plan in place to do that. And that's taking our sales force some time to roll out and just communicate it effectively to our channel partners and just get that in place and stabilize so that we can begin to see some additional bookings in the business right now. That piece has taken a little longer than I wanted it to, and that's maybe why it is pushed out a bit.

Okay. And then can you also comment on raw materials, what you are seeing there as far as your input costs?

I think generally speaking it continues a slight upward trend. I just had the steel numbers out, and since the beginning of the year, some of our --most of our steel is up around 10%-ish or so depending on the grade and the type of steel. And the things that we have done is we put in place some price increases to offset that like springtime. I don't remember the exact timing. Karen, maybe you do? April, May.

April.

Kind of timing to try to offset some of that. We have seen some increases in some of our motors -- motor business as well. Mostly driven by the copper, but again that was offset in our case by some price increases as well, and everything else seems to be reasonably flat.

Okay. And then just lastly, assuming that at least in the US that the recovery -- the big picture recovery is sort of modest. How would you characterize where you are in your own earnings recovery?

That's a good question. I would say given what we're seeing today from the markets, given what we're seeing from our performance today, we're -- if I said we're about in the halfway up the steep climb back up to a normal operating income for this Company, that would feel about right. I know that's a broad statement. We have a ways to go to get to the level that we're happy with, Gary.

Right. Okay. And then just lastly, freight? Is that much of an expense to the Company? Shipping or anything like that?

It is. It is. Some of the freight is paid by our channel partners, some is paid by us. We see a fair amount of it. I don't know if that's moved very much in the last couple quarters. Maybe Karen has some commentary on that.

We haven't seen a significant fluctuation in our overall freight costs, Gary.

Okay. Thanks.

Thank you.

Thank you.

(Operator Instructions)

I am currently showing no questions.

Thanks, Wendy. Thanks for your time today, everyone. We have certainly appreciate that.

Just to summarize strategically, we're well positioned to continue to profitably grow our business. Our profitability is indeed improving as our level of business recovers and we begin to recognize the benefits of our restructurings. We'll also continue to make these strategic investments in the emerging markets around the world such as China and Brazil and invest in new products and services. If you combine these activities with our strong balance sheet, we're well positioned to grow our top line as well as our profits.

I would like to take the time to thank all of our associates around the world for their dedication to excellence in making our Company a stronger, more well positioned organization. As always, it is really nice to speak to you, and you take care. I am sure we will talk to you soon. Bye.

Thank you. This does conclude today's conference. Thank you for participating.