Columbus McKinnon Corp (CMCO) 2012 Q2 法說會逐字稿

Please stand by for real time transcript. Thank you for standing by. The call will start in just a couple of minutes. Again, thank you for standing Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions)Now, I would like to turn the call over to Tim Tevens, CEO for Columbus McKinnon Corporation. Thank you. You may begin.

Thank you, Diane. Good morning, everyone andwelcome to the Columbus McKinnon conference call to review the results of our fiscal twelve second quarter. With me today is Greg Rustowicz, our new Vice President of Finance and CFO. Welcome, Greg, to the first call.

Thank you.

Please note we have once again included some summary slides of the quarter for your review. They can be found at our website at www.cmworks.com/investors. This should help you follow our earnings call and maybe add some comments if you would like.

We do want to remind you that the press release and accompanying slides and this call may contain some forward-looking comments, and 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.

A little bit about our quarter. Revenue grew very nicely and continued a nice, positive trend up about 13.3%. Our bookings in the quarter also continued a very positive trend, and we are in the double-digit range over last year. Our backlog is up to $107 million and our sales outside the U.S. remain at 47% of total revenue. That backlog number is a little high. We did book some fairly substantial larger projects that are scheduled into the future. And as you know, most of our business is really short-term business in terms of by the time we book an order, we ship it pretty quickly.

The United States industrial capacity utilization is up to 75.7% and the Euro Zone, their industrial utilization remains in the 81% area.

As many of you know, our bookings, and normally the revenues do track this utilization figure, and as the utilization rates do increase, so does our revenue. Based on discussions with our channel partners and end users around the world, we do believe that the recovery continues to be pointed in a very positive direction. Many times, we get questions that we are seeing signs of a looming recession and at this point, we are not. Our biggest issue in the company today is keeping up with the demand as well as thinking about our leading indicators. They continue to trend in a very positive direction. So we are feeling fairly bullish in this regard.

The operating profit increased 137.5%to $12.3 million. The operating margin is 8.2%and our leverage in the quarter was at 40%.

EPS for the quarter is $0.34 up three-fold from last year's $0.10. We have completed the implementation of our planned facility to rationalization in North America that reduced our operating square footage by about a half a million square feet. And, of course, our fixed costs came down as well. We expect to save about $15 million per year from that effort.

We have recognized about one and a half million in the quarter and we have had some recognition in the last year or so. We are not quite at that annual rate just yet. Our Forging operation is indeed improving. We have not yet reached that level of productivity or profitability we planned on. In the quarter, we saw only about $400,000 less gross margin than last year, that was about 27 basis points.

This is indeed a meaningful improvement from the prior quarters and we are headed in the right direction and plan on achieving our targeted savings but at a slower than anticipated rate. We did have a strong cash flow in the quarter generating about $5.2 million in cash from operations and we have about $78, almost $79 million in cash. At this time, let me ask Greg to lead us through more details in the quarter.

Thank you, Tim, and good morning, everyone. I am pleased to have the opportunity to review with you the financial highlights of Columbus McKinnon's fiscal 2012 second quarter, that ended on September 30th, 2011.

Turning to slide 5, consolidated with $149.9million, up 13.3%over the prior year period. We continue to see volume growth with overall volume growth at 6.7%.

For the quarter, USvolume was up 3.5%and non-USvolume was up 11% over the prior year. Pricing added an additional 2.5% to revenue and foreign currency translation at 4.1%favorable impact this quarter.

We typically have our strongest sales performance in our fiscal fourth quarter and weakest in the fiscal third quarter. We will have six less shipping days in the upcoming quarter. A table showing the number of shipping days in each of the quarters of fiscal 2012 and fiscal 2011 is included at the end of the earnings release.

Moving to slide 6, our second quarter consolidated gross profit dollars increased by 25.6% and our gross profit margin improved 260 basis points to 26.2%. The gross profit benefited from the increased sales volume mentioned above.

In addition, our Hoist facility consolidation favorably impacted gross profit by $1.5 million, or 100 basis points. Our forging consolidation negatively impacted gross profit by $400,000 or 27 basis points but is improving on a sequential basis.

A significant amount of time and attention continues to be directed to our forging operation so that we can realize the full benefits of a manufacturing consolidation. On slide 7, consolidated selling expense was unchanged from the prior year in dollar terms and decreased to 10.3% of sales this year compared to 11.7% last year.

Currency translation had a $700,000 unfavorable impact. So in terms of local currency, our actual costs were down with favorable cost reductions more than offsetting higher sales commissions relative to higher revenue. Consolidated G&A expense increased $1.1 million compared with the prior year representing 7.3%of sales versus 7.4% in the prior year.

Currency translation had a $400,000 unfavorable impact. We continue to invest in emerging markets to drive growth in these regions, specifically China and Brazil.

Turning to slide 8, operating income increased by $7.1 million to 8.2%of sales compared to 3.9% of sales in the previous year. Operating leverage was 40.6%. This improvement has been driven by sales volume increases previously discussed as well as the benefits of our Hoist consolidation. In addition, operating income benefited from $1.8 million of lower product liability costs and a decrease of $1.7 million in restructuring costs when compared to the prior year.

As you can see on slide 9, income per diluted share for the second quarter of fiscal 2012 was $0.34 reflecting a 240% increase from the prior year period of $0.10 per share. The effective tax rate in the quarter was 31% compared to 41% in the prior year period. Our expected effective tax rate for fiscal 2012 has been updated to 25% to 30% resulting from geographic mix changes and earnings.

On slide 10, you can see we generated $4.4 million of cash from operations for the first six months of the fiscal year. Capital expenditures were $7.2 million for the first six months of fiscal 2012 versus $4.6 million in the previous year period.

This increase is being driven by our global ERP system implementation. We expect capital expenditures for fiscal 2012 to be in the $13 to $15 million range, which will include approximately $3 to $4 million relating to our global ERP system implementation.

Finally, on slide 11, you can see that as of September 30th, 2011, debt net of cash was $75 million and total gross debt was $154 million. Net debt to total capital was 30.6%which is in line with our 30% debt to total capital goal.

In addition to having $79 million of cash on our balance sheet as of September 30th, we have an additional $69 million available under our $85 million senior credit facility, net of $16 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 which includes strategic acquisitions in emerging markets.

With that, I will turn it back over to Tim for Q & A.

Thanks, Greg. Good overview. Okay Diane, we would open up the lines for any questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Jason Ursaner, CJS Securities, your line is now open.

Congratulations on a good quarter. Volume in the first quarter had been above 9% has continued to moderate a bit in this quarter to nearly 7%. However you mentioned very strong bookings, I think you said double digit, and you showed a nice increase backlogs. Are you seeing a re-acceleration in orders and should we continue to expect an improvement in that daily sales rate despite that the total number of days in the next quarter is going to be lower?

I think it will slightly improve. I tell you why I think that. I think the United States is doing much better than it has been in the prior quarters. I think Europe is indeed moderating. It's still growing. Just a little softer than the growth we have seen in the past. And even though when you look at Latin America, Jason, and Asia Pacific, these are small basis in which we are growing from. It's huge growth but small dollars. I think in total if you add that whole mix together, we should continue to see some positive growth through the rest of the year.

Okay. On the operating income side, obviously a very nice sequential improvement. Most of the leverage was on the operating expense side. Your selling in G& expenses are actually booked down on a sequential basis. Currency was pretty flat sequentially so just to try to help me understand what's keeping these lower? Was it just Chattanooga? Or were there some other things that helped with the favorable cost reductions?

Well, the cost reductions on the SG&A or the cost of sales side?

SG&A.

I think it's just good prudent business oversight on our part, you know, just making sure we block and tackle every day and do it well. There is nothing really extraordinary that I have knowledge about that, you know, we've cut back on. We are still making investments around the world in this area. We are just, I think we are just doing it in a very prudent way. And that's what gave us some of that leverage, of course, and as you know, a lot of our investment in the SG&A is fixed to a large degree. So that incremental volume does flow through very nicely to the operating income and gives us that leverage that we talked about.

And then on the gross margin side last quarter, adjusted for the pension charge gross margin was actually pretty flat. So with the better revenue, why wouldn't we see more expansion of the gross margin side with better utilization? Did you see any commodity cost increases or anything that would have held that back?

Commodity costs are, It depends upon the commodity, of course, but are moderating a bit. Theydon't have as much inflation as they did, let's say, a quarter or two ago. So I would expect that to flush through and be beneficial to us in future quarters. I don't have a reason, Greg,maybe you can comment on why the cost of sales or the gross margin would be relatively flat for the prior quarter. It actually should be improving. The forging business, Chattanooga held it back slightly, 27 basis points. So it's obviously not a big deal any more.

Jason, this is Greg. I don't see anything that stands out specifically in terms of why we are not seeing a greater increase in our gross margin percentage. I think to Tim's point where the inflation is moderating we do have the pricing that we got earlier in the year. And that's for the most part offsetting the inflation, and it's a fairly comparable, as you said, gross profit margin percentage.

Just maybe for inventories of either components or commodities, how much would you typically stock? I mean is it a quarter or two where we may see this benefit?

Our turns are between 4 and 5.

Right.

4.6, I think, was turning in quarter.

So, yeah, several months, three months, let's say.

Okay. Great. I will jump back in the queue.

Sean Williams, BB&T Capital Market. Your line is open.

Hi, good morning.

Hi, Sean.

Tim, I wonder if you could just maybe give us a little bit more detail on that international side of the business. Obviously, growth continues to be very strong there. You know, obviously, the biggest portion of that business is out of Europe. That's where most investor concern is focused on right now. Can you talk maybe a little bit, you know, dig in a little bit deeper on that international side and kind of, talk about exactly what type of growth rates you are seeing and where it's coming from?

Sure. Germany remains strong, and I think that that's comprised of the general German market as well as the export market. So we have pretty robust growth in that part of the world, that part of Europe at least. Eastern Europe is also growing very nicely, you know, if you think about in our case, Turkey, Hungary, Russia, those parts of the world.

We are seeing some pretty good growth rates off of very lows, by the way, you know, coming out of the recession, that part of the world had gone down quite a bit for us. I think that France is relatively flat. The UK is up slightly. The rest of Europe, which is small, let's say small in comparison is doing okay. South Africa is actually in our case down slightly. I think it's somewhat the economic conditions that are in that part of the world.

You know, we think that that will recover in a normal sense of things. And over time, it would be just fine. But right now, in this quarter, we saw a bit of a decrease.

I think it's maybe some of the minds flushing some inventory through on some of the contracts they have with us or other general economic slow down in that part of the world. So I think from a growth standpoint, we got some currency translation benefits in the quarter. From a volume standpoint, Sean, we were seeing well in the double digits throughout the last year and a half or so. Now, we are seeing from a volume standpoint, let's say, more single, mid-single-digit growth. Still growing, but as I said earlier, moderating.

Okay. Then maybe on some of the other international arena's, especially within emerging markets, where are you seeing the highest growth rates there?

Well, certainly China. You know we have invested heavily in the Chinese market with our sales force, eight sales offices, engineers, manufacturing capability has increased quite a bit in our (inaudible) operation. So we are seeing some pretty big wins in that part of the world. Again it's off a very low base. So the percentages are very high, which is good and positive and we feel good about our strategic direction as well with the current position we have on that direction that we are on. So that's very positive.

And I think if you look down into Latin America, I would say that Brazil remains the hottest part of that market for us. Still very growth oriented. We are making some in roads there from I think growth standpoint. Although it's always hard to get your arms around that number in terms of quantifying how much it is. It's kind of more of a feel than anything else.

And then, also, just the general Brazilian economy seems to still be going quite well. We are doing pretty good in the northern part of South America out of our relatively new Panama warehouse which services that part of the world, seems to be doing okay. Again, a low number. Mexico seems to be the one that's a little bit lower than everything else. I think it's still growing if I am not mistaken, I'm doing this from memory. But it's not as high of growth as some say the Brazilian market would be.

Okay. And then just kind of back on Europe a little bit. I mean one of your European competitors had noted that, you know, they are seeing some slow downtown on the service side within their business. I know you guys, you really aren't in the service business, but you do do some, you know, spare parts. Can you relate, you know, how does that maybe relate to your business?

Don't know. I don't know which competitor you are referring to because there is a couple of them that are having some difficulties beyond service. So it's hard for me to compare. I can only tell you that most of our sales in Europe are not in the service industry of the maintenance business. It's mostly new units, new hoisting units in particular and primarily manual hoisting units. That's a pretty fundamental level of the economy that we are not seeing that slow downtown.

Do you think you are taking market share in those arenas? Is that how you are out performing?

That's possible as well. This is a market, too, Sean, you might recall, wherewe do not have accurate market share data, but we have estimates, and it's quite possible we are taking share there, too.

Okay. The last question, you noted this, the pace of progress, I guess within Tennessee, is still maybe a little bit slower than what you had expected. Would you still think that by the end of the fiscal year that operation would no longer be a drag on earnings?

I am hoping it won't be a drag before that. We are planning on it to be much more positive in the next couple of quarters. I would say that that's our current plan. I think we have a good management team now on the ground leading this effort. I think we are headed in a positive direction. I think we are winning back the marketplace so our channel partners are now seeing that we are able to deliver product in a timely way, good quality product in a timely way. So I think there is a lot of positive signs, mostly leading indicators that I am looking at that give me hope for a turnaround here in the next quarter or two. So I am still in that camp, that it's not going to be a drag. The real question, I think, is, Sean, when will we get back to the level of profitability that we have targeted? And I think that's going to be sometime next fiscal year.

Okay. Thank you. Thanks for the update and congrats on the quarter.

Thanks, Sean.

Joe Mondelo, Fidelity & Company, your line is now open.

Good morning, guys. Two quick questions. First off, your order breakdown in terms of international versus US,is that similar to the sales break downtown?

I think it is. Let me pull out a sheet here and look at it. Yes. Yes. Very similar.

Okay. The second question I had was in reference to the SG&A expenses. They came down sequentially from the first quarter. Ithought you mentioned, did you mention on the prepared remarks that 1.5 million of that was from restructuring? Is that correct?

Yes. Compared to last year?

No. Is that compared to last year?

Talking about sequentially?

Yeah, basically your sales went up 7% sequentially and you saw SG&A come down 4% sequentially so I am just wondering what's happening there. And should we expect this number to sort of be the flat-line number going into the third quarter, or should we expect more improvement? Or what's the outlook there?

I think Greg's comments were compared to the prior year.

They were. They were. We were flat compared to the second quarter of last year. But down in terms of selling expenses as a percent of revenue.

Joe's question is sequentially, is the SG&A cost going to be close to Q2 going forward? I think that's your question, right?

Yes, that's correct.

We had a couple of moving pieces in the SG&A. We had some healthcare and product liability. Is product liability?

No, that's cost of sales.

Yes. Some healthcare came through in that.

I guess I would answer it this way, Joe, in the first quarter of this year, we had about $16 million of selling expense. This quarter is about $15.5 million, you know, the run rate is in between there.

Okay. And the G&A?

About 11 and a half in the first quarter. About 10.9 here so it was similar.

Similar would be. Yes, I would say it would be in between those two levels.

Okay. Okay. All right. Great. Thank you.

Thanks, Joe.

Our next question comes from Gary Farber, C.L. King. Your line is now open.

Okay, thanks. Good morning. Just some questions. Can you just talk about your end markets, a little bit, whether it's construction or other end markets, things that are looking better to you and things that might be looking about the same and a little bit less and an update on your acquisition strategy?

Thank you for that. End markets, well as you know, I hate to be repetitive, but we sell to distributions so it's a little fuzzy when we look at end markets but I can just give you some general comments. You know, it looks like in America it's industrial America. Broad-base maintenance repair operating businesses seem to be back on track and growing nicely for us. People are repairing again and operating and utilization rates are really driving that, Gary, which is very helpful. We have seen some heavy OEMs. Customers like Cat and Deere really accelerate some of their global projects to manufacture their product around the world. And we've been earning our fair share, if not more, of those projects globally as well. So that's very positive.

We think that the oil patch in the Gulf of Mexico is kind of beginning to awake right now and the supporting industries seem to be doing much better than they were a short quarter or two ago. That seems to be positive as well. Entertainment market is robust as well. You know, this is that material handling equipment and hoists that we sell to live theater and concerts seems to be going. I think people are spending money in this arena so everybody is out on a tour, seemingly. So that's very helpful for us. I will tell you that the OEM and government is down slightly, and I think that's a direct result of less DOD, it's a small percentage of our total business. But I think it's defense-related spending is down slightly, and we are seeing a pretty good market in indoor bridge cranes around the world and again, this is just general industrial mining, power plant production seems to be going quite strong as well.

Okay. That's great.

Second question was acquisition strategy?

Yes.

Gary, lots of activity inside the company going on in this arena now. We continue to look at these relatively small, modest full-time acquisitions in emerging markets in places like Brazil, China and others around the world. They give us a better foot print and a better selling instrument into those emerging markets than we are organically building today. Lots of activity, lots of discussions, lots of work, Unfortunately, I have nothing to report to you just yet other than, you know, we continue to be positive about landing one or two of these.

Okay. Thanks. That's very helpful.

Thank you.

(Operator Instructions). We have a call from Jason Ersner, CJS Security your line is open.

Hi Tim, just a follow-up on the last question you got there. You did a great job pushing the debt out, (inaudible) the decade, reduced the debt and you have been growing cash. And we've been talking about strategic investments for a while now. I wanted to get your sense for how you measure that versus an investment within your own company. And do you have an allocation for an authorization for a buy back in place and how do you think about that versus acquisitions?

Great question. We consider sand think about all uses of our capital including buy backs or dividends and things of that nature but we still believe that the best application of our cash and our capital is to grow this company at the top line, especially in emerging markets where we can accelerate the growth that we already have or are getting organically so we believe the use of our cash is best used in acquiring complimentary companies that could help us grow at a much faster rate. So at this point, I have no authorization from my board to do any buy backs or anything of that nature other than the direction and the agreement from them to continue to pursue the strategic acquisitions.

Okay. Then just for Greg, on the tax rate, when do you expect, I guess, to reverse the tax allowance and for fiscal year 13, how are you beginning to think about what a tax rate for next year might look like?

Well, I believe we have about $27 million of NOLs. It's going to take a couple of years for us to utilize those.

But does it get reversed on the P&L?

We will have to demonstrate several quarters of positive results, which we already are doing. And once we have probably two or three-quarters of positive results in the U.S., we should be able to reverse that. But that's a question we will work through with our auditors.

Last time we went through this, Jason, it might have been before your time. It was back in the early 2000's and it seemed to take longer. It seemed to take a year or two to get it reversed but I think as Greg said we will have to work to figure out the right time on that.

Okay. And if it does get reversed, can you just talk a little bit about how free cash flow might look versus net income? And would you still expect cap ex to be a little higher than D&A? Or could pre-cash flow be above 100% of net income?

It certainly could. I think we have done that in the past. But I think, and I would expect as these NOLs, because that's a cash impact, of course, we would generate a lot of free cash by utilizing those NOLs especially as we begin to make more money in the United States. From a CapEx standpoint, I think our CapEx really this year is a little higher than it normally is. And that's predominantly because of the implementation of the global ERP system that we have underway. Our normal CapEx is right in line or very close to D&A expense as it historically has been except for this year. This year seems to be up, you know, several million dollars. And last year, I think it was up 2 or 3 as well because of this extraordinary investment we are making in putting in new businesses in around the world in our company. So our CapEx will be in the $12 to $14 million area like it always has been, and I think our D&A is somewhere in that area, too?

Yeah, the D&A is around 11.5 million. So, you know, the global systems project that we have is essentially driving it above the depreciation and amortization levels that we typically would see.

Okay. Appreciate the commentary. Thanks, guys.

Thank you.

Bob Franklin Prudential Financial. Your line is now open.

Thank you. I am trying to look at your sales and margins and comparing them to what they were before the great recession and trying to figure out how far you can go from there. Is that an appropriate way to look at things and where do you think you are for the how versus how far you can get with what you have now?

Our target, Bob, is to drive towards the 12% to 14% operating margins that we have experienced in the past. We need a bit more volume to get there. We need to fix our forging business to get there, but there is no reason to believe that we can't get back there. And that includes investments that we are making in emerging markets like China and building a sales force which to some degree is certainly a drag on our operating margin.

Okay. You've got a ways to go to get back to 12% to 14% then as I do the math. Is that right? Or am I looking at that wrong?

No. That's correct.

Okay. Do you have a timeline for that?

We don't provide that. We don't give guidance. So it's hard for us to talk about that. I think I would rather demonstrate it to you as we execute and drive our business forward, especially as the volume grows, we should, you know, with the operating leverage that we showed here, it's about 40% or so. It really, if you can do some math at the top line and drop incremental margins, increasing 40% is, you know, you don't have to get a lot more volume to get to the 12% to 14% area.

Okay. And then, on the, I'm sorry?

No. We didn't say anything.

Okay. On the forging operation, I have been following the story there. What I think you have put into this press release that I hadn't noted before were the concepts of getting back customer confidence and your market position and I didn't realize that you had lost that much. Can you comment on that?

Yeah. I think as we had reported in the past, that our service levels had deteriorated in the past year or so to the point where we were unable deliver product to the marketplace and our channel partners successfully. They had demand and so they turned elsewhere and bought similar product from other companies, other manufacturers. That now has begun to reverse and we are feeling that the product that we are making is in the market place, is in our warehouses.

We are seeing additional demand from our channel partners and we are beginning to see the reversal and it's basically driven, Bob, by the concept of the ability to deliver product in a timely way. And we are getting much better at that. Our past-due backlog is down substantially. It's going to be under $500,000 here, which is significantly below the well over $2.5 million that we had in past due backlog. So, those indicators tell me, and conversations with channel partners indicate to me, that we are certainly not perfect and we have a ways to go to get to the level of service, but it's a lot better.

And are the competitors who were supplying that product at your level or beyond your level of service? I am trying to figure out if you lost any permanent market share here.

You know, my sense is we did not lose permanent market share. We lost orders, but we didn't lose customers or channel partners. Yeah, and they scattered into a variety of different other suppliers. You know it's hard to exactly say where exactly that business went, but it seems to me that it's scattered amongst several, at least several.

Okay. Thank you very much.

Thank you.

And if you have any further questions (Operator Instructions).

Is that it, Diane?

I show no further questions.

Thank you. Well, thanks, everyone, today. We appreciate your time. Just to summarize for you. I think we are well positioned to continue to profitability grow this business. Profitability is indeed improving. As the level of business is recovers and we grow our revenues in the USand around the world, I think that we will continue to show the operating leverage that we demonstrated here. We always target in the 20% to 30% area and we actually exceeded it this quarter.

We also are making strategic investments specifically emerging markets such as China and Brazil and we're investing in our new products and services as well. I think if you combine this with our strong balance sheet, you can see that we are very well positioned to grow. I would like to thank all of our associates around the world for their dedication and excellence to our company in making it a much stronger, well positioned organization. And as always, we appreciated your time here today. Thanks and have a good day.

This concludes today's conference call. Thank you for participating. You may disconnect at this time.