Columbus McKinnon Corp (CMCO) 2012 Q3 法說會逐字稿

Welcome, and thank you for standing by. At this time all lines 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. I would now like to turn the meeting over to your host, Mr. Tim Tevens.

Thank you, Sherry; good morning, everyone. Welcome to the Columbus McKinnon conference call to review our results for our fiscal '12 third quarter. With me here today is Greg Rustowicz, our Vice President of Finance and CFO.

Please take a note that we have once again included some summary slides for your help -- to help understand the quarter for your review. They can be found at our website at www.cmworks.com/investors. Hopefully that will be helpful to you as we walk through some of our scripted materials today and, if need be, we can certainly reference those slides as well.

We do want to remind you that the press release, accompanying slides 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 Columbus McKinnon files with the SEC to be sure you understand these risks.

So if you have the slides in front of you, please go to slide 3, if you would, and let me give you a couple comments around that. Our revenue growth continued a nice positive trend, up 10.9% in the quarter. The United States is beginning to gain some momentum, whereas Europe is still growing, but just at a slower pace. China and Latin America are small and growing more rapidly for us.

Our bookings in the quarter also continued a very nice positive trend and are up double-digit range over last year. Our backlog is up to $110 million -- or up about $31 million over last year and sales outside the United States are now at about 48% of our total revenue.

We continue to see increasing global economic activity. The United States industrial capacity utilization is up to 76.4% in December. And in the euro zone industrial utilization decreased slightly, but still around the 80% area, which is fairly positive.

As you may know, our bookings and normally our revenues track the industrial utilization figures and as the utilization rates increase so does our revenue. Based upon discussions that we have with our channel partners and end-users alike, we do believe that the industrial economies that we serve remain pointed in a very positive direction.

As you all know, many times we get the question if we're seeing some signs of a looming recession. And at this point we are not. Our biggest issue does indeed remain keeping up with this demand.

Slide number 4; our operating profit increased almost 307% to $12 million. Operating margin excluding the gain on the sale of a facility in Iowa is at 7.4% and the operating leverage is at 54% for the quarter, which is a fairly robust number. With this strong operating leverage in the quarter we do now expect the operating leverage to range between 30% and 40% for the entire year.

Our long-term goal remains to achieve a 12% to 14% operating margin once our revenue fully recovers and our forging business is completely on track. The earnings per share for the quarter was at $0.44. And if you exclude a couple of extraordinary items that Greg will review with you momentarily, that number would look like $0.33. We had nice cash flows from operations in the quarter at $9 million and $13.5 million year to date.

Our cumulative savings on our consolidations are about $6.4 million with our hoist and chain consolidations exceeding our expectations at $13 million. Our savings for the quarter is about $1.2 million and our forging business has improved very nicely to the point where it's contributed $1.9 million to gross profit this quarter.

We are not yet at the full benefit, but we certainly have improved dramatically and to the point where we're now contributing to profits, which is a positive sign. And let me just turn it over to Greg now who will move us through more details on the results of the quarter.

Thank you, Tim, and good morning, everyone. I'm pleased to have the opportunity to review with you the financial highlights of Columbus McKinnon's fiscal 2012 third quarter that ended on December 31, 2011.

Turning to slide 5, consolidated sales were $142.8 million, up 10.9% over the prior year period. We continue to see solid volume growth with overall volume growth of 7.8%. For the quarter US volume was up 10.5% and non-US volume was up 4.8% over the prior year despite one less shipping day. Pricing added an additional 2.8% to revenue and foreign currency translation had a 0.4% favorable impact this quarter.

We typically have our strongest sales performance in our fiscal fourth quarter and the weakest in our fiscal third quarter. We will have seven more 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 31.5% and our gross profit margin improved 420 basis points to 27%. Our gross profit benefited by $5.8 million from the increased sales volume previously mentioned. Our forging operations positively impacted gross profit by $1.9 million or 133 basis points.

In addition, we experienced lower product liability costs this quarter which favorably impacted gross margin by $1.3 million. On a sequential basis we expect continued improvement in our forging profitability, but expect lower year-over-year improvement as the prior-year fourth quarter had higher sales in this segment than we are currently anticipating.

Turning to slide 7. On slide 7 consolidated selling expense modestly increased from the prior year in dollar terms and decreased to 11.2% of sales this year compared to 12.1% last year. The increase in selling cost is primarily related to the overall increase in sales. Currency translation was insignificant this quarter.

Consolidated G&A expense increased $1.3 million compared with the prior year, representing 8.1% of sales versus 8% in the prior year. The increases are related to our investments in Asia and Latin America and higher variable compensation expense.

Turning to slide 8, operating income increased by $9 million to 8.4% of sales compared to 2.3% of sales in the previous year. Included in operating income was a gain on the sale of a previously closed facility that Tim mentioned. Excluding this one-time gain operating margin was 7.4% and operating leverage in the quarter was 54%.

This improvement in operating income has been driven by the sales volume increases previously discussed as well as the benefits of our hoist consolidation. In addition, operating income benefited by $1.9 million from improved performance of our forging operations when compared to the prior year.

As you can see on slide 9, income per diluted share for the third quarter of fiscal 2012 was $0.44, reflecting a $2.52 increase from the prior year period where we had a loss of $2.08 per share. Positively impacting the third quarter was the previously mentioned gain on the sale of a closed facility as well as an $850,000 gain on the re-measurement of an investment related to our recent South African acquisition. Excluding these unusual items diluted earnings per share would have been $0.33 per share.

The third quarter of fiscal 2011 included a non-cash tax provision of $2.08 per share related to a full valuation allowance against our deferred tax assets. The effective tax rate in the quarter was 16.4% and year to date is at 25.1%. Our expected effective tax rate for fiscal 2012 has been reduced to 20% to 25% resulting from the geographic mix of earnings that we anticipate.

On slide 10 we have compared our year-to-date performance for several key metrics. Year-to-date revenue is up 13.8% largely driven by volume and price increases as well as favorable currency. Year-to-date operating income is up 239% and includes both the gain on the sale of the closed facility as well as the pension curtailment cost that was incurred in our fiscal first quarter. Year-to-date earnings per share is at $0.92 versus a loss of $2.02 in the previous year.

On slide 11 you can see we generated $13.5 million of cash provided by operating activities through the first nine months of the fiscal year. Capital expenditures were $10.5 million for the first nine months of fiscal 2012 versus $8.9 million in the previous year period. This increase is being driven by our global ERP system implementation where we have spent $4.7 million year to date on this project. We expect capital expenditures for fiscal 2012 to be in the $13 million to $15 million range.

Finally, on slide 12 you can see that as of December 31, 2011 debt net of cash was $72 million and total gross debt was $154 million. Net debt to total capital was at 28.9% which is in line with our 30% debt to total capital ratio goal. In addition to having $82 million of cash on our balance sheet at September 30, we have an additional $70 million available under our $85 million senior credit facility net of $15 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 and emerging markets. With that I will turn it back over to Tim.

Thanks, Greg. Okay, Sherry, let's open it up to questions, if you would.

(Operator Instructions). Jason Ursaner, CJS Securities.

On the forging first, the $1.9 million year-over-year improvement in the quarter, what's the full year and how much of that's still done relative to fiscal year '11?

We actually are positive now. If you remember, in our first quarter we reported a $900,000 negative; in the second quarter we reported a $400,000 negative. So with this $1.9 million, if my math is right, I think we're $600,000 ahead, so through the first nine months.

And last year was still about $7 million down from fiscal year 2010 though?

That's correct. I want to say it's like $6.7 million (multiple speakers).

Generally, what's the revenue base on that business?

It's about 8% of our sales.

Okay. And then, Tim, you mentioned the US gaining momentum. Are you actually continuing to see bookings accelerate there with utilization picking up?

Yes. It's fairly robust right now. As you know, Jason, we felt like the US was lagging. A year ago this conversation was where is the recovery, seems to be slow especially after a very deep recession. But now it seems to be gaining some momentum in a variety of areas.

And as we look at the markets, certainly general manufacturing, certainly heavy OEM equipment, mining are some -- our entertainment business continues to be up dramatically. So right now the bookings momentum seems to be accelerating in the US.

Still sort of double-digit rate -- low double digits?

That's right.

Okay. And in Europe you mentioned the slower pace. Is it just the euro that's really impacting it or are you seeing volume come in at a bit of a slower pace?

Volume is a bit of a slower pace. So that's more like mid-single-digit growth as opposed to double-digit growth which we've seen there for many, many, many months. It is indeed slowing.

Okay. And in the emerging markets, you said you're seeing strength there as well. Is it -- how do you break down whether it's -- the overall market is still strong or whether some of these investments might be offsetting a cooling pace there?

Yes, you probably can guess given the relatively modest position we have in those markets it's really difficult for us to get our arms around -- especially with an incredibly limited reporting in our industry in those regions -- kind of how we stack up against is it just economic gain or is it truly market share gain. So it's really impossible for me to give you anything other than color, and it feels like it's both right now because the numbers are just so small.

Yes, that's fine. And then just a little bit more -- could you talk about the acquisition strategy, what you're seeing out there and how things are going for you?

Sure. Well, you've probably read that we did acquire a very small business in South Africa that serviced the mines down there. This was actually a partner of ours that we had invested in 10 years ago -- a long time ago.

1997.

Yes, so there you go, 14 years ago or so. And basically it was a fella who had great mines, the mines, there are seven or eight of them down there that we have great relationships with and he was the agent that sold our hoisting products and then serviced them in the mines. And the service is a big aspect of the mines; they really expect you to be on site and make the equipment work and basically don't have it go down for all intents and purposes.

The business flourished in this time period. The gentleman, our partner there -- we owned 20% of it from day one, he owned 80% -- wanted to retire and move on. And then we just bought out his 80%. And that is a good example of a relatively small bolt-on acquisition that makes a lot of sense for us to support our strategy in terms of servicing a very important sector for us, which in this case is the mines.

There is other activity that were in the midst of around the world, nothing to report just yet, other than to say that there is a significant amount of interest in our part as well as other partners -- potential partner's parts that could flourish here. The relatively small -- maybe bigger than this one, the South African one, but still modest in size at this point in time.

Okay, great. I appreciate the commentary. Thanks, guys. Congratulations on the good quarter.

Schon Williams, BB&T.

First just a housekeeping question. You didn't -- it looks like you had one less day this quarter versus last year. I'm assuming that was about a 160 basis point drag on the year-over-year growth, is that right?

I want to say it was $2.1 million roughly of the one less day.

So does that mean that the volume number that you -- the 7.8% that you called out in the press release, does that number really need to be adjusted higher for that date adjusted or where is the --?

Yes, what we did was for internal purposes we track it the way you do, but for an external reporting purposes we've lumped that one last shipping day into the volume number.

Okay, and then can you call out the US volumes versus international volumes (multiple speakers)?

Yes, we did. I want to say the US volume was up 10.5% and the non-US volume was up 4.8%.

Okay. And any color around how either Europe specific or just international volumes, how they progressed through the quarter? Were you seeing deceleration throughout the quarter or was it lumpy? Just any color you could add there would be helpful.

Yes, it's growing. I don't recall anything unique, Schon, about lumpiness or anything out of the ordinary that we saw anything come through. I think it's just in the US in particular it's given our strong position it's really the economic activity is leading that. We did launch a new product -- a brand-new LoadStar this past quarter, but basically that's replacing a 50-year-old design unit.

So there was some acceleration around that, but that was actually the prior quarter when we launched in the entertainment world and Europe really seemed to take off on that product line. So nothing out of the ordinary I would say.

Is the new LoadStar introduction, is that -- I guess can you just talk about the acceptance in general and then is that accelerating pricing because it looks like pricing actually picked up nicely here in the quarter.

I wouldn't have expected pricing to really accelerate until maybe more in the spring. I mean normally you guys are doing increases in February, March if I'm recalling correctly. Can you just talk about if LoadStar had any effect on pricing and then what you see coming over the next quarter or two?

Yes, we've always averaged in this 1% to 2%. So you're right, the 2.8% does seem a little bit high, although last quarter was 2.5%. We did -- as you know, it's kind of a rolling thing. So when we implement price changes in the spring you get that full effect throughout the year. Sometimes with different contracts and agreements it takes a little while to get it, but eventually over time you do get it.

And I think this is nothing more than our normal price increase that has averaged around the world somewhere between 2% and 3%. And we seem to be getting most of it come through in our volume numbers here. But on average if you think about us over a cycle it probably averages between 1% and 2%.

And what about as we move into fiscal Q4 and fiscal Q1, should I -- there's no reason why that should accelerate though, right, I mean that shouldn't start to --?

Right, no. You're right, it should be in that 2% area, that's right.

Okay. And then just quickly on forging. Did I hear that you and expect the year-over-year gain to actually be I guess lower in Q4 versus what you put up in Q3 and that's because of just some lower volume activity?

Yes, we expect sequential quarter-over-quarter performance. So our Q4 in forgings is going to be better than our Q3 in forgings. It's just that when you compare it to the prior year's quarters we had an extremely strong sales quarter in the forging segment. Don't ask me why, but it was very, very strong. And as a result were going to put up less of a year-over-year improvement than what we showed in the third quarter.

Yes, what we did last year fourth quarter, Schon, just to give you a little more color on that, is we really accelerated our production in the quarter to get some of the backlog out of the way. You may recall we talked about backlog was our primary problem a year ago, it's not today, by the way.

About a year ago it was and we really accelerated production to get as much backlog out of the way as possible to service our customers. And that's what created a large fourth quarter last year in terms of revenue.

I guess -- well, help me think about in terms of the delta in next fiscal year versus fiscal 2012. I mean could we be -- if we're slightly ahead of breakeven year to date, we'll get a little bit more in Q4. Should we be talking about a -- $5 million year over year as we move into next fiscal year, $10 million year over year assuming that volumes hold or pick up from these levels?

As you know, it's tough for us to give you specific color around this because that's not what we do, we don't give guidance in this area. But let's just talk about the forging business and maybe the color will help you get some area of relief in your mind.

We have been showing improvement, it's been a very solid trend line over the last couple years. As you know, we had a mess and we're working our way out of the mess to the point now where it is a positive contributor. And we've always said this is a very solid business and one that should produce decent margins, let's say around the Company average margins going forward. Right now it's nowhere near that but it's certainly working its way toward that.

And I would say that we would get that margin back sometime next fiscal year if our trend line continues. So if you think about what we lost year over year in fiscal '11 it was about $6.8 million; our first quarter of fiscal '12 we lost $0.9 million; second-quarter was $0.4 million negative; and now the third quarter is $1.9 million.

We would expect to see that trend continue to trend in a positive way. Put the fourth quarter aside for a moment that we just talked about the extra volume that we had last year we still should we be making more money and we will be making more money pushing our way towards the corporate average through fiscal '13.

Okay, thank you, that was very helpful. And then just last question here, can you give us I guess an update on where we are with the ERP role out?

That's a great point, thanks for the question, Schon, because I forgot to actually cover that. We started our global ERP implementation maybe a year ago now and we selected SAP to go to our facilities. We put together a global implementation plan and our first site was due to go live this past November, November of 2011. And happy to say we did go live. So, effective December 1 we went live on that global ERP system that we designed and are putting in place at our Duff-Norton facility.

Now the reason we took this approach is because Duff-Norton is a relatively modest sized small business, it's about $30 million in revenue or so and we could easily get our arms around it and use it as a -- think of it as a training ground for our people to help roll this out globally now.

We had success certainly not without a bump in the road here or there, not without issues that we had to wrestle to the ground, but I'm pleased to say that our team did a great job of executing and it's running in -- the business is actually back up at a run rate of what it normally would do. So that's good news.

And now we're onto the second location which most likely would be a location in Europe and that will be coming online sometime next summer. So well underway, a lot of learning going on and we feel good about the position we're in in terms of getting that going. And eventually over the next couple of years or so we'll be having our entire business on one system, which will be wonderful from an efficiency and information sharing perspective.

Okay, thanks a lot for the update and congrats on the quarter.

Gary Farber, C.L. King.

Just two questions. I don't know if you touched on this yet on the competitive environment, if some of your markets are accelerating and some are sort of slowing. Can you talk about what you're seeing from your competitors in markets that you think are accelerating? Are people raising prices in markets that are slowing? Is there any price dynamic going on there? And then also discuss your trends in raw materials?

Yes, I think -- thanks. Competitors are acting rational, no one is doing anything crazy. It's kind of a normal recovery, as I would phrase it and having lived through a couple of these, our competitors are doing what they normally would do, what we'd expect them to do, which is be competitive, raise prices and in some cases follow our lead, in some cases we follow their lead depending on the product line.

So for all intents and purposes in the US it's call it business as usual given the strong recovery. And finally now, a strong recovery.

In Europe it's a little different in that the product lines that we sell there might be slightly different -- a little less power hoist, a little more manual hoist, a little more rigging tools. And we think we're taking a little bit of share there because some of our competitors -- most of Europe gets imports from China on these product lines and they've had incredible supply disruptions.

We have had some as well too but not as bad. And we think as we look to how we've performed there compared to what the market has done that we've actually taken a little bit of share in Europe. And given the growth in the Latin American countries as well as the Asia-Pacific region, strong competitors in all of those regions, some very local, some global competitors, and they too are acting in a normal way.

We just have such a smaller position that it's hard for us to get our arms around sometimes why we win or why we lose, but we're working hard at that. The good news is both are growing at a rapid pace.

Right, okay. And then -- raw materials?

Oh, I'm sorry, supply-chain, yes. I would say that we're in more of a moderating price environment there for the most part. Steel does have a tendency to bounce around a bit, but it's not hugely up or hugely down. We buy a lot of motors, we saw a huge spike in increase about a year ago given the price of copper. That seems to be moderating now as well.

So inbound materials seem to be not a huge drag, although we are seeing some levels of inflation, especially in China, where labor is going up dramatically, energy costs are up dramatically. But we're also seeing that the whole market is pricing along with those cost increases as well.

In Latin America, I think Mexico is not seeing increases, they're seeing the volume is about flat there right now given the US hasn't really recovered as much to the effect Mexico just yet. And Brazil is I'll say business as usual in terms of supply chain as well, we're not seeing any huge spikes there just yet either.

And then just one last one, just on your customer base. You can sort of see it in demand to report, but any sort of thing anecdotally you want to pass along geographically. As the surveys come out, ISM month-to-month, sometimes people are confident, sometimes they're not confident. I guess if there's anything anecdotal to pass along what you're hearing from your customers by geography?

I think it's positive around the globe. A lot more caution in Europe, as you might imagine. We're not seeing -- we're seeing growth, but it's a lot slower growth, so we're cautious. We're cautious and it seems like everybody else is cautious, not knowing where this whole sovereign debt debacle is going to end up maybe just yet.

So that's probably the most cautious part of the world. Everybody else -- so China is growing at 8% instead of 9%, it's still incredible growth. We're seeing good growth in America as well. And the US seems to be the one that has, in the last couple of quarters at least, really accelerated in terms of demand and our channel partners' demand of us to supply them.

We're also seeing some heavy OEM guys like Deere and Cat just invest incredibly heavily around the world which we're pleased with as well, as you might imagine, given our ability to participate with that too.

Right. Okay, thanks.

Joe Mondillo, Sidoti & Company.

Good morning, guys. First question, I just sort of have to sort of jump on that last question in terms of your on US businesses. It seems like just compared to your US business, obviously weaker than US in terms of the growth.

First off, are you sort of surprised at that just given the GDP growth that we're seeing, stronger growth within Latin America and Asia? And also in terms of that 4% growth in volume, is Europe the one region that -- in terms of that average 4%, is Europe the one region that you're seeing under that 4% or is there anywhere else that you're seeing sort of weaker than that average 4%?

Yes, okay. So, the bulk of our revenue outside of the United States is indeed Europe. So if you look at the components of it I think it's the lion's share at this point in time of our -- so it's heavily weighted toward a slower growing environment.

So our non-US sales have expanded heavily -- much more heavily weighted by Europe which is slower growth than let's say Latin America or Asia Pacific which are smaller components but growing much more rapidly. So it feels about right to me in terms of what you'd expect I guess.

Are you seeing negative volume in some places in Europe? If the average is 4% volume and you're seeing pretty good growth elsewhere, are you seeing any negative contraction in volume anywhere in Europe?

Yes, there is some negative growth in -- keep in mind the bulk of our European business is Germanic based, the northern part of Europe, that's still growing very nicely, UK is up, France is flat, Spain is down. We don't do much in Greece, Italy is very small for us today and that's still reasonably small growth but still growth.

So I would think that Spain would be the primary contractor, Poland is up, Eastern block of Europe, Hungary and Russia are up, but we have a small presence there so it's hard to say whether that's economic or whether that's us just doing a better job in an area we've been investing in.

So the only one I can point to as negative is Spain and it's a small component of our total European business as well. The German piece is very good and very positive. But as you might know, 30% or 40% goes out of the country in terms of export and they export around the world.

Right, okay. So you guys say that Europe, Middle East and Africa make up about what, like a third of your business?

Yes -- exactly.

About right, yes.

And of that third Europe makes up how much?

Europe -- okay, the bulk of it --.

30, 35.

30 of the 33.

Yes.

30 of the 33, okay.

I'm pulling that one off the top of my head, but it feels about right.

Okay. And then in terms of sort of your Latin America presence, what kind of growth are you seeing there? Are you seeing high-single-digits or double-digit still?

Double-digit, double-digit growth.

Okay. I guess the next question just in terms of pricing, any changing and pricing anywhere in the world or how is that looking?

As you know, we typically put pricing increases through annually and when things get really hot maybe even more than annually. But we had our normal price increase, it seems to be rolling through around the world. We seem to be achieving what we targeted, so really nothing out of the ordinary around price.

So you usually increase pricing or change pricing when -- in your June quarter or --?

It's usually April, the month of April.

Yes, the negotiations have already begun.

For the beginning of this coming -- I guess it really coincides with the fiscal year.

Yes.

Okay. And then one of your primary international expansion goals was in China. Just given the slowing growth that we're hearing over there, has that tempered or changed your thinking? And if not, where are we within that sort of goal?

We're probably halfway up the investment curve I would say, a ball park. It has not tempered our point of view. We do think that China -- the industrial portion of China -- the mines, the power plants, general manufacturing -- are going to continue to grow robustly. It certainly has slowed economically, I read the same numbers you do, but that's not from our perspective because we're so new to the market we just started investing two years ago.

We're up to over 30 salesmen, about a dozen engineers, we're in eight offices scattered across the country and really making a presence and that investment is making a difference for us there in terms of just seeing additional sales, setting up distribution, making contacts with the OEM users, end-users, doing training on our products. So we still feel very good about it and plenty of room to grow in that market.

On an absolute basis where are we at in terms of how much sales are coming from China at this point?

I think it's up 3% or 4%.

3%.

3% of our total revenue is in that area.

So the growth has been incredible, very high growth rates, but it's coming off a small basis.

Right, okay.

And we've essentially stepped this so that from a cash flow perspective in essence we're at a breakeven level within the region despite adding these investments because the sales are growing at such a rapid pace.

Okay. And given your investment time line where do you think this can be as a percent of your total business within a year or two?

It will still be relatively modest. I would expect the same growth rates to occur there as we invest and continue to invest. So you can see these high growth rates out of this small 3% base over the next year or two. But long-term, which is our vision, strategically this part of the world should he 15% to 20% of our total revenue as we look down the road, much further than one to two years.

Okay. And then just lastly, just given the concern and ominous feeling of the economy, what sort of contingency plans do you guys look at just in a just in case type scenario?

Sure. Well, first on our list is EMEA, so the European piece. We have downside scenario planning underway that has been done actually that says that if it drops 5% we would execute X in terms of cost control, and if it drops 10%, etc. So we have these different models that point us toward what actions we would take.

And we would have to see a contraction for us to do that so we know when to pull the trigger, so to speak, when to start to implement that. Because it would be painful if we do it too soon and disrupt our channel partners and our end-user customers with flow of product for any reason. That would be first.

We do have other scenario plans around the world, but in the emerging markets probably they're not done as robustly only because of the investments that we're looking at there, it's a much more strategic investment. In the US it's fairly complete as well in terms of any kind of downturn. But, Joe, that's not what we're anticipating or seeing, as you might imagine. But we're very (multiple speakers).

Right, sure. I'm just wondering just in case. You said you implemented some sort of downside or downsizing in Europe or did I hear you wrong?

Oh, no, not yet. No, no, not yet. We've got to be careful about when we pull that trigger because the demand is still growing, right, so we still have customers to serve and people who need our products. So we have to be cautious about when to pull that trigger. And really we don't pull it until we see our business start to contract and go negative.

Yes, what Tim mentioned was that we have contingency plans in place.

Right. I thought I heard in his first remarks that he implemented something, but I heard you wrong, so. All right, I think that's all I've got then. Thanks a lot.

(Operator Instructions). Matthew Dodson, Edmunds White Partners.

A quick question for you guys. Is the pickup in demand in the US, is that going to fully offset any weakness you might be to seeing in Europe?

I would certainly think so. We saw Europe actually recover much more quickly than the US about a year and a half ago. Europe came out of the blocks gangbusters for us predominately driven by Germany and the US was somewhat reticent and somewhat delayed in their recovery until just this year.

Now we're seeing the US being robust and Europe being slow. But still 53% cover revenue comes from the United States, so -- and only 30% comes from Europe. I would expect that to be the case, that it would more than offset any downturn.

But we are growing in Europe, so -- it's slowing growth but there is still growth. And the US is obviously growing much stronger as the US economy gets stronger.

Got you. And next, with your forging business coming back so nice is there any reason that we wouldn't see operating margins get to the low end of your target next year?

We're in the process of putting our budgets together for next year, so it's fairly early --.

It's not clear just yet. But to your point, we do target 12% to 14% operating margins when we have a revenue base that's consistent in the -- well above $600 million, but low $600 million and the forging business does recover. And we would expect that to happen -- well, it's hard to say exactly when.

It's a little premature.

Sometime in the next year or two I would guess.

But those I think, Tim hit on the two -- the two key points to get to that 12% and 14% are additional volume and the operating leverage on that volume and then continuing to improve in Chattanooga. And doing those two things are going to have -- get us back to that 12% to 14% margin with volume being the primary one.

Right.

Got you. Thank you.

At this time I have no questions in queue.

All right, thank you, Sherry. Well thanks, everyone, for your time today. Just to summarize for you all, I think and we all think here at the Company we're well positioned to continue to execute our strategic plan to profitably grow our business. Our operating leverage is improving nicely and you saw that at 54% this quarter and we have $82 million in cash to help us execute our growth plans.

We also continue to make strategic investments in emerging markets such as China and Brazil and invest in new products and services as well. To demonstrate that execution of the plan, we did acquire that Yale South Africa business that we mentioned to you, albeit small, very strategic in our sense in terms of leveraging our knowledge in the region as well as in the mines.

I also want to thank all of our associates around the world for their help and dedication to execute this quarter very nicely and make our Company a stronger well-positioned organization to continue that growth. And as always, we appreciate your time today. Thanks and have a good day.

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