Columbus McKinnon Corp (CMCO) 2013 Q4 法說會逐字稿

Welcome and thank you all for standing by. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session.

(Operator Instructions)

Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I'll turn the meeting over to your host, Mr. Tim Tevens. Sir, you may begin.

Thank you, Merlynn.

Welcome, everyone, to the Columbus McKinnon conference call to review the results of our fourth-quarter and full fiscal-year 2013. With me here today is Greg Rustowicz our VP of Finance and CFO. Please note that we have included some summary slides for the quarter and for the year for your review, and they can be found at our website, cmworks.com/investors. Hopefully this will help you follow our earnings call comments.

We do want to remind you that the press release and accompanying slides on this conference call may contain some forward-looking statements within the meeting 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 the risks.

So if you have the slides in front of you, I'm going to start, actually, on page 3, aAnd remind you of our long-term objectives, including to grow to a $1 billion business with about a third of our revenue in developing markets and two-thirds in developed markets. This, along with the $200 million to $300 million or so in acquisitions and we are expecting to be in the 12% to 14% operating margin range with a strong working capital level and an overall balance sheet. We continue to focus resources and energy on acquiring companies that strategically add market presence and product breadth to help us grow around the world and achieve these results.

Page 4 provides some highlights of the fourth quarter. As you can see on this slide, our revenue was down 9.4%. This was negatively affected by two major things. Number one is a divestiture that we did last summer, that was about 4.6%. And we actually had three fewer shipping days in this quarter compared to last year, that was about 3.5%. And volume was down 2.8%, and most of that being from Europe.

The US revenue actually, excluding the divestiture and these three fewer shipping days, was up. Sales outside the US were down 14.1%. The bulk of this was volume related, about $7.6 million out of a $9.7 million shrink and $3.2 million was fewer shipping days.

Europe continues to be weak at this point in time, but our emerging growth does continue to be strong albeit from a smaller base. Our global bookings were down about 5% to 6% compared to a very strong prior-year fourth quarter. Some bright spots that we looked at in the quarter were our material handling specialists and the entertainment industry. We have found that special hoists that serve specific markets such as oil and gas and entertainment seem to be going quite well.

Europe seems to have bottomed in the fall, early winter of last year and now we're just beginning to see some positive trends in their order rate. Asia Pacific and Latin America are small but certainly continue to grow rapidly. This, of course, is driven by strategic investments in those markets as opposed to economic, general economic, activity.

Our margins expanded nicely in the quarter. Gross margins improved 290 basis points over last year, up to 30.6% and our operating margins improved to 10%, up 150 basis points. Overall the operating leverage for the year was very strong at 73.5%. Of course the lower sales growth given the divestiture, as well as some very good productivity and cost control, drove this very large leverage.

EPS of $2.64 for the quarter is up from $0.46 last year. Of course there's some weird things going on in the quarter that affect that. We did reverse a deferred tax asset valuation allowance in the quarter. Greg will touch on that in a little bit more detail in a moment. If you exclude that reversal and normalizing the business to a 38% tax rate, our EPS would have been $0.37 in this quarter, and that compares to $0.30 in last year's fourth quarter. We also generated some very good cash flow from operations at $16.1 million for the quarter and $42.4 million for the year.

Page 5 summarizes full-year fiscal '13 and overall our revenues were up modestly, arguably flat. This was negatively impacted by that divestiture that I mentioned and foreign currency translation. Emerging markets grew nicely at 13% excluding the effects of currency. Our margins were very strong and gross margins improved to 29.2%, are up 260 basis points from the prior year.

Operating margin improved to 9.1%, up 150 basis points as compared to the prior year. And as I mentioned earlier, our operating leverage was 173.5% for the whole year. If you exclude the reversal of the deferred tax asset valuation and normalize the tax rate at 38%, fiscal year '13 EPS was $1.34, compared to $1.04 last year. This was up about 29%.

Page 6 talks a little bit about revenues. Down compared to last year's Q4 and again, as I mentioned, negatively affected by three fewer shipping days and the divestiture we made last year. In the US if you exclude the three fewer shipping days and the negative impact of the divestiture, our revenues actually grew about 15% or 16%. Sales outside the US were down 14%, and again as I mentioned, primarily lower in Europe and Canada.

So at this point, the me turn it over to Greg for some more details about the fourth quarter and then we'll come back to me.

Thank you, Tim, and good morning everyone.

Turning to slide 7, our fourth-quarter consolidated gross profit dollars were unchanged from the previous year, despite $15 million of lower sales. As a result our gross profit margin improved 290 basis points to 30.6%. Lower volumes negatively impacted gross profit dollars by $2.6 million, as did raw material inflation by a negative $1.6 million. Offsetting these negative factors were favorable pricing of $3.2 million and productivity gains of $800,000. We also had lower product liability costs of $500,000 compared to a year ago. Additionally foreign currency translation had a $400,000 negative impact on gross profit this quarter.

On slide 8, selling expense declined 5.4% from the prior year in dollar terms and represented 11.3% of sales this year, compared to 10.9% last year. The decline in selling cost was primarily related to the divestiture of our Gaffey Crane business, accounting for $300,000, as well as cost-containment actions instituted as a result of the lower-demand environment we are in.

In addition, foreign currency translation had a favorable impact on selling expense of $300,000 this quarter. G&A expense was essentially unchanged compared with the prior year, representing 8.9% of sales versus 8% in the prior year. At the current sales levels we expect our SG&A run rate to be approximately $30 million per quarter going forward.

Turning to slide 9, operating income increased by 6.3% to $14.5 million, or 10% of sales compared to 8.5% of sales in the previous year. The improvement in operating income was driven by the net pricing gains over materials inflation as well as productivity gains in our facilities, due to our lean manufacturing program coupled with the benefits of our CapEx projects, training programs, and safety initiatives.

In addition, lower selling expense also contributed to offset the negative impact of the lower sales volume. As you can see on slide 10, income per diluted share for the fourth quarter of fiscal 2013 was $2.64 per share, reflecting a $2.18 increase from the prior-year period where we were reported earnings of $0.46 per share. The large increase in reported earnings per share was largely due to the reversal of a valuation allowance on the majority of our deferred tax assets, that resulted in an income tax benefit of $40.2 million.

Excluding the impact of this reversal, on a pro forma basis at a normalized tax rate of 38%, earnings per share the fourth quarter of fiscal 2013 were $0.37 compared to $0.30 per share in the fourth quarter of fiscal 2012. Our effective tax rate for fiscal 2014 is expected to be between 30% and 35% based on the geographic mix of earnings that we anticipate.

On slide 11 we have compared our full-year performance for several key metrics. Fiscal 2013 revenue was up slightly, but excluding the impact of net divestitures and foreign currency translation, revenue was up 5.4%. This was largely driven by volume and price increases totaling $36.9 million, offset by $17.1 million of unfavorable foreign currency translation, the volume impact of two fewer shipping days of a negative $4.8 million and net divestitures of a negative $9.6 million.

Gross profit was up 10.5% and gross profit margin expanded 260 basis points to 29.2%. Higher volumes and net pricing over material inflation along with manufacturing efficiencies, drove the margin expansion. Full-year operating income was up 20.4% as a result of the additional gross margin. Operating leverage for the year was 173.5%. Finally, earnings-per-share for the year were $3.98 per share versus $1.38 in the previous year. On a pro forma basis at a 38% tax rate, earnings-per-share were $1.34 per share versus $1.04 per share in the previous year, an increase of 29%.

Turning to slide 12, our working capital as a percent of sales increased to 18.3% in the current quarter from 17.6% at March 31, 2012. However if you exclude the impact of the deferred tax asset valuation allowance reversal, working capital as a percent of sales declined to 17.1%. DSOs remain constant at 50.5 days compared to 50.6 days as reported last fiscal year. Inventory turns remained unchanged at 4.3 times, but in dollar terms declined $13.9 million for the full year, and in fact dropped $7.3 million in the fourth quarter alone. The reduction in inventory balance was due to management initiatives that have been ongoing which we expect will continue in fiscal 2014.

On slide 13, you can see we generated $42.4 million of operating free cash flow for the full year, and ended the year with $121.7 million of cash. Capital expenditures were $14.9 million versus $13.8 million in the previous year. We expect capital expenditures for fiscal 2014 to be in the $20 million to $25 million range due to investments in China, as well as capital projects that are expected to generate further productivity improvements.

Finally on slide 14, you can see that as of March 31, 2012 net debt was $30.4 million and total gross debt was $152.1 million. Net debt to net total capitalization was 11.2%. In addition to having $121.7 million of cash on our balance sheet at March 31, we have an additional $89.9 million available under our new $100 million senior credit facility, net of $10.1 million of outstanding letters of credit. This new facility, along with our healthy cash balance, provides significant liquidity to support our strategic growth plan.

With that, I will turn it back over to Tim to cover the fiscal 2014 outlook.

Great. Thank you, Greg.

So if we continue on the slide show to page 15, I think at the end of the day we continue to expect slow growth. I think emerging markets are doing well and especially given our investments in those regions of the world, I would continue the order rate to be in this low double-digit area.

Order activity in the US is flat compared to last year, but this is a positive signs in the market, as I mentioned, the oil and gas and entertainment. But at the end of the day it's still tentative out there, with some of these exceptions. Capacity utilization was 77.1% in March, basically this has been the flat for all of 2012. It's hovering in the 77% to 78% area.

Europe is down from a very strong Q4 last year in bookings. But the interestingly thing, and I know one point does not make a trend, if you look at the sequential booking rate in Europe since about the fall and winter of last year, we have seen a turn-around. And in fact our fourth-quarter booking activity sequentially compared to the third quarter, was up about 10%.

The tax utilization was down to 77.2% at the end of March. But it's actually up from the low in December of 76.9%. So, there's a little bit more activity in Europe, maybe the beginning signs of something that could turn, yet to be proven out.

Our backlog does remain solid at $99 million. Obviously this was negatively affected by that divestiture we announced last summer, by about $4.6 million. And as always is the case, seemingly in this area, about two-thirds of our backlog is scheduled to ship in this first quarter of fiscal '14, and the balance is beyond that. We continue to execute the strategic plan that we've talked about for a while, in making investments in emerging markets of the world, like China, the Eastern Bloc of Europe, Africa, Latin America.

And as hopefully you all know, we continue to look for acquisitions to accelerate that growth in the other regions of the world, as well. Nothing to report just yet but lots of activity and discussions.

So, Merlynn, at this point let me open it up to questions, if I could.

Thank you.

(Operator Instructions)

C. Shawn Williams.

Hi, good morning. This is Aaron Reeves sitting in for Shawn.

How are you?

Doing well. I was just wondering if you could talk a bit about how demand developed throughout the quarter? Did you see -- was it about the same throughout, or did you see any trends you could maybe give us some color on?

I think the trends throughout the quarter were very weak in the beginning portion of the quarter, and improved as the fourth quarter went on. And that's true across the Company. So I would say January was the weakest, and then a little stronger in February, and then March was the best.

Could you maybe talk about what you're seeing in April early on? Does it look a bit like March?

Looks more like March than it does January.

Fair enough.

A lot more like March, yes.

Okay, and I do want to ask another question about volume. Suppose volumes -- maybe they don't move much from current levels. Are there any levers that you could pull to maybe keep operating margins in the 12% to 14% range you've talked about?

As you can see, in this quarter we had very little -- actually we had sales shrink in the quarter, and profitability was up tremendously. There's a couple things going on there. We're beginning to certainly see the activities that we took two, three years ago to reconstruct our facilities and remove some fixed costs. That's being beneficial to us today as we operate. Our lean business system is generating some great productivity gains in our manufacturing facilities. So we're much more productive. Gives us a higher gross margin rate, which is pushing in now, arguably to the 30% -- lower-30% area. So as we, even if stay at these levels of sales volume, we would expect, given these initiatives, to generate more profits.

All right. Thanks for the color. I'll hop back in the queue.

Okay, thank you.

Thank you.

Jason Ursaner.

Good morning. Congrats on a nice end to the fiscal year.

Thank you, Jason.

Obviously, I want to talk about the margin improvement, but first, just following up on the questions on revenue, since that did come in a bit light. In the US, stripping out the divestiture and the shipping days, you mentioned volume and price combined for almost 5% growth. So still seeing that volume increasing in the low-single digits. So you mentioned the global bookings down 5%, 6%, but combined with this improving trend through the quarter. How do you see that growth holding up throughout the whole fiscal year? And just where your outlook really is for volume trends in the balance of the year?

Yes, I think, Jason, it is in this category of slow growth. I think that there's some hot spots, but there are also some weak spots. And I think overall, the US is going to continue to be reasonably positive -- these low-single digit kind of area. I think, I'm encouraged by some of the activity in Europe. It's early -- arguably very early. But there is more activity -- more recent activity there. And of course, we're seeing the emerging markets, and as you know, Jason, it's a very small piece of our business today, but they are continuing to do quite well for us. So if you add that all together, and you look out over the course of the year, I think we're thinking about low-single digit, mid-single digit kind of feel to the year, as we sit here today at least.

Okay. And so in the quarter, volume growth in the US obviously offset fairly significant declines in Europe, as you mentioned. So I'm wondering, how much of this was the Engineered Project work? And how do you think about that part of the business internally versus the traditional core industrial product space?

Yes, I think that both were negatively affected in Europe. So they were both impacted. The Engineered Product business would have been more negatively impacted than the traditional Hoist and Rigging business that you know us as, around the world. That was not down as much as the Engineered Projects.

Okay, Jason, just to add on. The Engineered Products business, as we've talked before, is lumpy. When we have these large projects, they can be millions of euros of business. We talked in the last quarter where we had two that actually shipped in the same quarter, and that was about EUR6 million. So we tend to get one to two of those projects a year of that magnitude.

Okay. And was there any last year that would have -- (multiple speakers)

Not in the fourth quarter.

Okay. And then on the margin -- best gross margin you guys had since before the downturn. And it's been a slow climb up to get back above that 30% level. So just want to ask about the sustainability. And then also, you made a hire in early April for a new Chief Procurement Officer. Do you still see benefits that you think you can achieve there on the sourcing program?

Yes. Answer the first question first, I do believe that these gross profit margins in the low-30% area are sustainable. And that's given the hard work that our folks have done to get more productive, and reduce costs. So overall I would expect, even on slow growth, that to be maintained.

The Chief Procurement Officer, Larry Gavin, a super guy, and look forward to you meeting him, Jason. He just started two months ago, and he's getting his arms around the Business now. But I think as he looks out to our Organization, we've had a sourcing program for many, many years -- 15,20 years. But I think he sees some opportunity for us to do more work in this area, and achieve even better results. It's early in the game at this point.

Okay, and last question for me, still on the margin. Something we haven't heard about for a couple of quarters, but maybe an update on Chattanooga and some sense for the drag that business is still having on consolidated gross margin at its current volume rate.

Yes, it's still a bit of a drag, although it was more of a benefit, I'd say, in this quarter. They have their costs in line, and they're much more productive now, and we're getting quality product, servicing customers very, very well today. I'm very pleased in that regard.

The thing that the Business lacks today is the volume. It's got a very low volume compared to what we think is available in the marketplace. So if we can get an incremental $5 million to $10 million to the business, their margins will recover very, very nicely back up into the area that they were at before the consolidation. So I think we're positioned well. We just need to work hard on the sales side to get our fair share -- arguably more than our fair share of the market back.

Okay, appreciate it. Thanks.

Thank you, Jason.

(Operator Instructions)

Joe Mondillo.

Good morning, guys.

Good morning, Joe.

The productivity gains of $800,000 that you mentioned, was that year over year or quarter to quarter?

That was year over year compared to the fourth quarter of last year. So for the full year, our productivity was $5.3 million.

Okay, so sequentially it was less than $800,000?

Sequentially, if you remember, last quarter we had a slightly negative productivity numbers because of the December shutdowns that we had in reacting to the lower volumes. So this is actually -- you're going from a slight negative in our fiscal third quarter, to this positive $800,000 on a year-over-year basis.

So sequentially, you're looking at maybe over $1 million of improvements?

A quarter -- in the quarter.

Okay. I guess what I'm trying to understand is -- with your sales -- looking at the sales per day, they were down -- almost the lowest levels for the year, or for over a year. And given that, and with the sales much higher -- they were down 9% sequentially. Given the huge improvement in gross margin -- I'm just trying to understand that. If you could maybe give a little bit more detail regarding that?

Yes, so once again, as Tim had mentioned, where we are gaining in our gross margin, in my mind, are really due to two factors. One, our pricing that we've gotten has exceeded our raw material inflation, which has been relatively tame, and then the productivity. And it's really -- those are the two primary causal factors. And when you get into the productivity, it's due to the benefits of the restructuring from a couple of years ago, as well as our lean programs, as well as we have been focused on deploying our capital. And so to the extent we have good capital projects that out-earn our cost of capital, we're starting to get some traction there as well. But it's really those two factors.

So if you add $1 million to the cost of -- or you subtract $1 million to the cost of goods sold in the third quarter, you're still only getting this 29.2% or so gross margins in the third quarter? You're still seeing another 140 basis points sequentially in the fourth quarter. You didn't see any price improvements sequentially, right?

Yes, there was. There was some --

Oh, you did a --

Yes, yes, that should be in the press release. In the press release -- (multiple speakers)

So you initiated -- you did increase prices in the --?

Well, it's not that we increased. In the US, our price increases are typically in the March timeframe. It's just on a year-over-year basis, for the whole Company, we had $3.1 million of favorable price on a year-over-year basis.

Okay, but compared to the third quarter, did you see any price increases or any improvements there?

Are you asking did we have any new price initiated?

Yes.

We would have because in the US we typically raise prices in the March timeframe.

Okay. The next question I have -- just regarding Europe. I believe the last quarter you said orders were up sequentially 19%. This quarter you're saying their orders are up 10% sequentially. Trying to decipher the differences that we're hearing. It seems like a lot of the environment seems to still be weak/bottoming. Those orders seem quite strong, and the fact that you guys usually lag one to two quarters, just wondering if you could give a little more color on what you're seeing there?

Yes, I don't -- I'm trying to find the plus-19% from last -- in the third quarter. I think that you're referring to, Joe?

Yes, that's what I have written down.

[Could] have been sales, not orders. Because we benefited from the two large [rail and road] projects in the fiscal third quarter.

Because I'm showing on my schedule here a minus 3.5% at order level Q3 versus Q2 of 2013.

I had written down -- project work was up 19% in Europe. Maybe that's wrong. (multiple speakers)

We did ship those in that quarter. So that may be revenue, and not orders, Joe.

Okay.

I'm looking at the bookings here, and it's more like a negative 3.5% in the third quarter, and the fourth quarter is a positive 10%.

And those are sequential, not year over year.

Okay. And then two last questions. The CapEx investments for 2014 -- could you just expand exactly what you are doing, especially over in China?

Sure. So we have our normal productivity investments -- [this year in] equipment, normal maintenance, and normal safety expenditures. Plus $2 million, $3 million for SAP? The continuation of the roll-out of our ERP Global Enterprise Resource Planning System. And then I'll say $6 million to $7 million area right now in China. And what we're doing is we're refurbishing our Chinese manufacturing footprint there, to be able to accept a broader array of products to produce in China, predominantly for the Chinese, or the Asian market, I should say. And this is a broad array of hoists that are Western design units that we make in America today for the Americans, that we're transferring into our Chinese facility. So they needed to reorganize their facility. In fact, for the most part, add on quite a bit, and maybe even tear down some old buildings that were in the way, and create new space so that we can produce a line of wire rope hoists, electric chain hoists, manual chain hoists, et cetera. So it's more of a expansion.

Okay, and you don't expect any expenses to be -- additional expenses that are associated with the capitalized expenses with that?

It was very small -- less than $200,000, Joe. Any moving and re-installation costs end up being expensed, but that was a small part of the total project. (multiple speakers)

Okay, and last question, just regarding pricing. I believe this past year you were looking at 2.5% to 3% or so of a benefit from pricing. What are you guys anticipating for 2014?

Historically, we've always been in this 2% to 3% area, Joe, and I think that we would expect that to continue for the next fiscal year.

Okay. Great. Thank you.

Thank you.

Bob Franklin.

Hi. With Prudential Financial. Following up on the CapEx questions, do you anticipate this being a one-year bump, or could you see spending this level going forward after this?

I think this is indeed exceptional, given the investment in the Chinese locations. We do have a strategic plan that goes out three years, and it's probably going to be lower than this level that we're currently at right now.

Okay. And then, on the cash from operations line, this was bigger than we've seen in a while. Can you comment on what you think of that going forward?

Sure. I think we did a, first of all, pretty decent job, as Greg mentioned. Not only, obviously, generating operating income, but also reducing the inventory level. We had a $10-million benefit from inventories. That was a lot of hard work and focus from the teams to get those in line and restructured. We're down, actually quite well now. The level of inventory is below --

$94.2 million.

-- $94 million -- because the cost of sales number was so low, the turns look bad. But generally speaking, it's going pretty well. And I would think, in these kinds of economic environments -- the slow growth environment -- the activities that we have to reduce our costs going forward, it wouldn't surprise me at all to continue to see this kind of cash generated from our operating activities going forward.

Okay, well, was the $10 million inventory a one-time thing or --?

Well, it's been a part of our ongoing initiatives. We went from $108 million of inventory to $94 million. So that's almost a $14 million reduction. So we wouldn't anticipate getting another $14 million out of our inventory line this year. I expect that there would be some further reductions, based on just managing our inventory smarter, and we've got a number of initiatives to do so.

Okay. I would love to see $42 million cash from operations every year. It just sounds like it's a big leap and, again, the sustainability is what I'm getting after. You are saying you think you can do that?

Well, I think our net income is going to grow. I think that inventory -- I think you're right, Greg, getting $14 million out might be a challenge, but we should get some more out.

The other thing you have to factor as well is that we will now be paying more in cash taxes, as we've utilized a lot of our NOLs in the US.

Okay. And then just a bigger-picture question. Have you ever commented publicly on the multiple at which your shares trade, and where you think they should trade?

Yes, we have. We look at the share price, and scratch our head and shake our head, and try to figure out why it is what it is. I think that, historically speaking, Columbus McKinnon has traded in the 7 multiple of EBITDA to 8 multiple -- somewhere in that general area. And this level is lower than that. And we don't necessarily understand the reasons why, especially as we continue to grow, but also grow our EBITDA quite nicely. So I think what we need to do is continue to put up good numbers and continue to perform, and I think eventually the markets will recognize that and reward it.

Okay. Terrific. Thank you very much.

Thank you.

(Operator Instructions)

At this time, sir, we don't have any questions on queue.

Thank you. Thank you very much, Merlynn.

Let me summarize by saying we do expect fiscal '14 to be in the slow growth kind of environment. But we do expect our operating profits to continue to improve as our lean business system, the results of our fixed cost reductions that we did several years ago, and just general overall good cost control to bear fruit. The investments we're making in emerging markets continue to be successful, and we expect the US to continue to grow, albeit slowly. I think Europe is going to be a very slow environment for a while, although I am buoyed by the more recent positive trends that we've seen of late. We are positioned to continue to execute our strategic plans to profitably grow our Business, as we have about $121.7 million in cash and a $100 million untapped revolver to help execute these plans.

Continue to have multiple discussions with businesses that certainly can add strategic value to our Company. Our acquisition-targeting process takes time, as these businesses are generally not for sale. So introductions and in-depth discussions need to take place before any agreement can be reached, and of course, as you know, this takes time. We continue to make strategic investments into emerging markets -- China, Latin America, EMEA regions -- as well as invest in new products, services and productivity-enhancing equipment in our manufacturing facilities. And as always, I'd like to thank all of the Columbus McKinnon associates around the world for their dedication and excellence to making our Company a stronger, well-positioned Organization.

And as always, we do appreciate your time today. Have a good day. Thank you.

Thank you for participating in today's conference. You may disconnect your line now.