Columbus McKinnon Corp (CMCO) 2014 Q3 法說會逐字稿

Welcome, and thank you all for standing by. At this time, all participants have been placed on a listen-only mode until the question-and-answer portion of today's conference. (Operator Instructions). This call is being recorded. If you have any objections you may disconnect.

I would now like to turn the call over to Deb Pawlowski, Investor Relations for Columbus McKinnon. Thank you. You may begin.

Thank you, Jane, and good morning everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. On the call we have Tim Tevens, President and CEO; and Greg Rustowicz, Vice President, CFO. Tim and Greg will review the results of the third quarter and give an update on the Company's outlook and strategic progress.

You should have a copy of the financial results that released this morning before the market, and if not, you can access that at the Company's website www.cmworks.com. Also at the website in the investor section, you'll find the slides that will accompany the discussion that Tim and Greg will be having today. If you turn in the slide deck to slide 2, you'll find our Safe Harbor Statement.

As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what was stated in today's call.

These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the Company with the Securities and Exchange Commission. The documents can be found on the Company's website or at sec.gov. So with that, let me turn it over to Tim to begin. Tim.

Thanks, Deb. Let me move you to page 3 if I could to remind you of our long-term objectives including growing to be a $1 billion business with about a third of our revenue in developing markets and two-thirds in developed markets. Along with the $200 million to $300 million of acquisitions, 12% to 14% operating margin, and a strong working capital level, and overall strong balance sheet, we continue to focus our resources and energy on acquiring companies that strategically add market presence and product breadth and help us grow around the world to achieve these results.

Page 4 provides the highlights of our third-quarter of fiscal 2014. Our gross margins continue to expand up nicely 100 basis points to 29.6% compared to last year's third quarter. Year to date, that margin is 30.9% despite a lower revenue amount. Our revenue in the quarter was negatively impacted by lower volumes at a large heavy OEM manufacturer, larger rail and road projects that did not repeat this year that occurred last year, offset by an Austrian acquisition that we made last quarter.

Having said that, our average sales per day did improve sequentially. Operating income was negatively affected by a $1.4 million atypical acquisition expense that was recognized in the quarter, and income was negatively affected by lower volume as well. We generated $16.2 million in cash from operations, and we have begun to see stronger order levels this past quarter.

Let me just touch on sequentially -- speaking about gross margins sequentially, there's one thing that I would like you all to realize is first of all our third-quarter is a meaningful weaker quarter generally speaking. That third quarter activity is impacted by typically holidays, and in fact, we shut down some of our facilities over at this holiday time period. In fact, we shut down for a couple of weeks many of our facilities, especially in the United States.

When we shut down, we actually were able to ship from inventory but were not able to absorb costs in the third quarter. That cost that are the fixed costs that are resident in our manufacturing operations, and that is why the gross margin, although the highest we have seen in the last 10 years or so, this gross margin in the third quarter, the highest third quarter gross margin we have seen in the last 10 years, it still is lower than the second quarter because of the number of operating days, production days that we are unable to absorb in the quarter.

Let me move you to page 5. We remain focused on profitable growth and making investments in our business to accomplish this goal. We continue to develop new and enhanced products like the one shown on page 5, which adds spark-resistant capabilities to one of -- a line of our hoists. This is specifically for the oil and gas industry. As well, we have added variable speed drives that are for many applications in many industries.

We are on track with our Chinese manufacturing facility expansion, which increases our manufacturing capabilities and adds about 40% more operating space to allow us to manufacture more products for sale into the Asia-Pacific markets. We have implemented a new program this past summer, the in-stock guarantee program, which we talked to you about in the past. This allows us to ship key items to our customers in three days or less. We continue to expand this program and now have over 221 SKUs. That is up 63% from our original launch, and we are seeing the highest level of on-time deliveries to our customers into the 95% area. This is a very high level of service, and our channel partners are -- really appreciate this.

Third-quarter revenues decreased $8.2 million, driven by lower volumes as shown on page 6. As previously mentioned, customers who produce heavy OEM products in the US was the main contributor to this decrease. And outside the United States, we had two rail and road projects totaling $6.5 million which did not repeat this year.

Our emerging markets grew at 8.6% in the quarter and the average sales per day for the Company improved sequentially to $2.4 million. Our bookings in the quarter were the highest we have seen year to date as compared to Q1 and Q2.

And now I will turn it over to Greg to provide more details on the quarter.

Thank you, Tim, and good morning, everyone. On slide 7, our third-quarter gross profit margin increased 100 basis points to 29.6% from 28.6% in the prior year. However, gross profit dollars decreased $800,000 or 1.8%. Pricing improved 1.4% versus the prior year and added $2.1 million to gross profit.

Productivity gains contributed $800,000 to gross profit. Offsetting these positive factors were the impact of lower sales volume and inflation. The earnings impact of lower sales volumes negatively impacted gross profit dollars by $3.1 million. Inflation on raw material costs also negatively impacted gross profit dollars by $700,000. On a sequential basis, gross profit margin was down from the previous quarter; however, as Tim mentioned in his earlier comments, the fiscal third quarter is typically our weakest quarter from a gross profit margin perspective due to less shipping days and reduced activity in our manufacturing plants as a result of holiday shutdowns.

As shown on slide eight, selling expense declined 1.2% from the prior year and represented 11.2% of sales this quarter compared to 10.7% in the prior year. The decrease in selling costs was primarily related to lower selling cost in Europe as a result of lower sales offset by slightly higher selling costs in the emerging markets.

G&A expense increased 19.7% from the prior year and represented 10.5% of sales this quarter compared to 8.3% in the prior year. The current quarter included approximately $1.4 million of atypical M&A expense related to a large acquisition that was not consummated. In addition, G&A expense was impacted by $300,000 for the new ERP system being installed in Europe. Foreign currency translation had a $100,000 unfavorable impact on G&A cost this quarter.

Turning to slide 9, operating income decreased by 21.8% to $11.1 million or 7.7% of sales compared to 9.3% of sales in the previous year. Excluding the atypical M&A expense, operating margin would have been 8.6%. Operating income was impacted by the earnings impact of the sales volume decline amounting to $3.1 million in the higher G&A expense driven by the atypical M&A expense mentioned previously. Improved pricing of $2.1 million partially offset these negative factors.

As you can see on slide 10, income per diluted share for the third quarter of fiscal 2014 was $0.33 per share reflecting a $0.16 decrease from the prior-year period where we reported earnings per share of $0.49. The effective tax rate in the quarter was unusually low at 11.6% due to the reversal of a reserve on an uncertain tax position. This compares to an 11.1% effective tax rate in the prior year quarter, which was also unusually low due to a valuation allowance on deferred tax assets primarily in the US.

Adjusted for a typical M&A expenses and a pro forma tax rate of 30%, earnings per share in the third quarter of fiscal 2014 were $0.31 per share compared to $0.38 per share in the third quarter of fiscal 2013. Our effective tax rate for fiscal 2014 is expected to be between 25% and 30%.

Turning to slide 11, our working capital as a percent of sales was 19.9% compared to 18.3% at March 31, 2013. The increase is largely attributable to an increase in inventory for project type orders as well as additional inventory being carried for our in-stock guarantee program. While inventory turns improved from 3.6 times in the second fiscal quarter to 3.9 times in the fiscal third quarter, it is still below the 4.3 times achieved in fiscal 2013. We do expect inventory turns to improve from their current level by the end of the fiscal year as over $5.5 million of project-related inventory on hand at December 31, 2013, will be shipped in the fiscal fourth quarter.

On slide 12, you can see that we generated $16.2 million of cash provided by operating activities in the quarter and $18 million on a year-to-date basis. Income taxes paid, year to date, were $6 million higher than in the previous year as we are no longer in a net operating loss position in the US. Capital expenditures year to date were $13.5 million versus $7.1 million in the previous year. Capital expenditures are higher than the previous year due to our Chinese plant expansion where we have spent $2.6 million to date as well as our ERP systems implementation. We ended the quarter with $123.9 million of cash, which is net of the $5.8 million of cash used for the Austrian acquisition, which closed in June 2013. We expect capital expenditures for 2014 to be in the $20 million to $25 million range due to the remaining spend on the $6.8 million manufacturing plant expansion in China, as well as capital projects that are expected to generate further productivity improvements.

On slide 13, you can see that as of December 31, 2013, net debt was $27.9 million, and total gross debt was $151.8 million. Net debt to that total capitalization was below 10% at 9.4%. In addition to having $123.9 million of cash on our balance sheet at December 31, we have an additional $93.1 million available under our $100 million senior credit facility net of $6.9 million of outstanding letters of credit. This facility, along with our healthy cash balance, provide significant liquidity to support our strategic growth plan.

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

Great. Thanks, Greg. Let me spend a moment and take a look at our outlook on page 14. We have had strong orders in the third quarter, in fact, the strongest so far this fiscal year, as I mentioned. And as many of you know, our fourth quarter is generally the highest revenue quarter, and we do expect that trend to continue.

We also expect to have our gross margin north of 30% in that quarter as well as it is in fact our strongest quarter. Emerging markets of Asia-Pacific, Latin America, and Eastern part of Europe should continue to grow nicely throughout the rest of the year. Oil and gas remains a good market for us. But we do not see heavy OEM returning to normal levels for the foreseeable future.

Of note is the improved [capacity utilization] in the US now up 77.9% and we are seeing an improved business climate in the Eurozone. We do expect modest growth from that market in the calendar year 2014. Our backlog grew nicely up to 98.4%, and this is predominately normal hoist and rigging growth, not large project growth. We will continue to invest in our business with new and enhanced products, great customer service levels, and customer-oriented in-stock and guarantee programs as well as continue to invest in our Chinese manufacturing and localization business.

We will continue to target strategic acquisitions that add breadth to our product offering as well as enhance our standing in interesting global markets. Productivity improvements we would expect to continue as we focus on the Columbus McKinnon lean business system to improve our processes and ultimately reduce our cost.

And with that, Jane, I will open it up to any questions.

(Operator Instructions). Jason Ursaner.

Good morning. First on the gross margin. Sales were up $6 million sequentially and inventory only declined $1 million from last quarter. So I guess maybe if you could give a little more detail on the commentary, the seasonality-impacted absorption. I guess I'm just not understanding why absorption wouldn't have improved with better production on fewer days.

Therein lies the dilemma. There wasn't better production on fewer days because we actually shut down facilities for the holiday season. In particular, we shut down a couple of our manufacturing plants in the states for weeks. So, of course as you know, the third quarter because of the holidays typically is our weakest. Typically we have lower revenue; typically we have lower margins. But in this case because we did have some bookings, we did suck some inventory out and reduce the inventory, but we still had some unabsorbed cost, in particular, these two facilities that we shut down for a couple of weeks. And therefore, that's why the margin was impacted.

But I will tell you, Jason, if you look back over the years, over the last half dozen years or so, this is the highest third-quarter gross margin that we have seen since fiscal 2008. And fiscal 2008 third quarter we had $10 million more of revenue.

Got it. No, the gross margin is very good, I'm just -- I am not seen it in the inventory. So were you maybe adding some raw materials during the quarter?

Oh, sure. So, no, we -- of course we've had production and we did add to inventory during that time period as well, but we -- most of the sales came out of inventory as opposed to came out of production. Because we didn't -- at least in these two facilities that I am referencing. We didn't -- we actually shut down for a couple of weeks. It was over $1 million of additional un-absorption in those two facilities.

Okay. And then just a question on volume trends. Excluding the rail and road projects and the heavy OEM in the US, what did you see in core volume trends across the US, Europe, or Asia in the quarter?

Yes, actually that's the one I mentioned, Jason. It's pretty positive. Excluding -- well, we don't have any orders coming in for rail and road, and we don't have any large heavy OEM orders coming in. This is the third quarter we have booked the highest number out of the whole year if you compared to Q1 and Q2. And I actually was over the last year's Q3 by about 2.5% to 3% greater. So this is -- think of this booking rate in this quarter as the highest we have seen in the last year or so. Plus, it is mostly normal -- think of it as hoist and rigging bookings. And that is a global phenomenon. It is not just the states. It is also Europe is up, and it is also America, Asia, and Latin America as well. Actually Latin America is flat, but the other three were up.

Okay, great. Appreciate it. I will jump back in the queue.

Schon Williams.

Good morning. Schon Williams with BB&T. I wanted to maybe dig in a little bit more on the China expansion. Could you -- I don't know, I am wondering if you are maybe willing to quantify a little bit more about what the revenue opportunity you think is there, maybe what the margin opportunity is there as you start to export some of that material. And then I wanted to talk a little bit about, I understand we are going to be done with the facilities as of the end of fiscal 2014, but when does it really start to impact the P&L? Do we need a couple of quarters of ramp-up or are we going to be kind of at 100% run rate when those factories come online in the March time frame? I am just trying to get a sense of what are the lead times there that we need to be thinking about.

Yes, good questions. So, let me give you an overview of the projects and then I can dive into some of those specifics, Schon. We started raising some of our buildings and putting and building up new structures on that land about a year ago, actually more than a year ago, and had the designs done. It is about $6.8 million of real property that we are adding there. The primary purpose -- and by the way, we would add about 40% more square footage in China, in those Chinese locations, those two locations.

The primary purpose is to migrate more hoist products. We make some hoist products there that we sell into the market and also that we export back into the states and back into Europe. But the primary reason for this expansion is to be able to make more products that we currently export from America and Germany and sell into China. We want to make those products in China. That gives us about a 30% arbitrage cost reduction if we produce them in China in our facility there and sell them into China.

So actually, the thinking is and the strategy is to expand our market opportunity, the available market for us. So, we had success in our sales team there, selling into the Chinese market product made in America, product made in Germany. It is kind of mind-boggling actually that they have been able to do that because the cost structure is so much higher here and in Europe, that we are going to give them a better fighting chance and be able to sell more product into the Chinese and the rest of the Asian market by making a lot more product there. And when I say a lot more product, I mean like doubling the number of SKUs. So it is a substantial increase.

I would say that to answer your question about timing, the one facility is done, and we are occupying it and moving machinery in now. The other one will be done at the end of March, end of our fiscal year, and we will begin to move equipment in thereafter. So it will ramp-up. It will take some time to be able to migrate all of the product in there. The sales force is already ready and has been selling it. But I would think you will see a nice ramp throughout the course of fiscal 2015. You won't see it immediately in Q1, but I think we began to see it in Q2 and Q3.

Okay, thank you. That is helpful. And then, maybe turning to the headwinds on the heavy OE side. I am just wondering, as I look out at some of the different end markets, what should I be looking for in order to try to get an idea of maybe when some of those heavy OE headwinds start to abate. I mean is this mostly a problem relating to mining equipment demand? Is this primarily a problem related to construction equipment? I don't know is there any kind of one or two things I should be keeping an eye on for when those markets should start to turn?

I would start with mining. I think that most of this is a mining play. But there is certainly some construction-related activity there as well. But mining would be the primary one that I would look at if I were you.

Okay, all right, thank you. That is helpful.

Joe Mondillo.

Hi, guys. Joe Mondillo from Sidoti & Company. Just to jump on top of the last question regarding the China expansion. Just wondering if you could -- very good information regarding the capacity and all of the benefits that you are going to get from that. How is the actual demand that you are seeing in China? Do you think you can ramp up to 90% utilization given the demand? Or just give us an idea what kind of demand you are actually seeing over there.

Yes. It is actually very positive today. It is mostly related to foreign-owned enterprises, so Western companies investing in the Chinese market. And it is all around safety and productivity. So think of oil and gas, think of heavy OEM, think of Western companies that are building and expanding there that need our kind of product. Today that is the bulk of the business we do.

When we start to manufacture these Western design high-quality hoisting products in that market, we now will be able to dip down into the -- not just the foreign owned enterprises, but the Chinese domestic-owned enterprises that care deeply about productivity and safety. And by the way, that is not all of them, but that is the larger ones and the ones that act more globally. And we think that the Chinese market for us is today very small, and one that we think should be eventually over lots of time be producing 20%, 25% of our revenue in the years to come. So it is a meaningful market that as we plant the seeds today, wheat will be reaping in the future.

So you --

It's Greg, just to add on. Earlier last year we talked about our China business being break even. This year we talked about how it had turned the corner and was making profit. It had a very strong third quarter, and it is approaching overall corporate margins. Getting very close.

Okay, good to know. So, do you anticipate utilization at this plant gradually rising over a course of several years once the plants are up and running? Or do you anticipate because of such high demand that over a course of just a few quarters you could get up to very high utilization rates? Just trying to get a better idea of how much demand really is flowing through there.

Yes. So, I think today you would see that our -- I should say the older facilities that are no longer there, they probably ran two shifts. So think about 65%, 70% utilization. The new shifts will -- the new plants that we are starting up will start with one shift and ramp-up slowly over time. And I would suspect that by the end of fiscal 2015, so let's say around a year plus from now, that we would be operating at two shifts there. And a much bigger footprint, many more products, much more revenue at that time.

And max, the max amount of shifts are what -- two or three?

No, I think we could easily -- like many facilities around the world, we easily run two shifts and then flex over time into the third shift so you are running probably 80% or 85% utilization. I think in certain operations we will run three shifts 24 hours a day, seven days a week. Treat and paint and other applications. But assembly typically doesn't need that many hours, so it's a little less utilized.

And they can also flex into the weekends.

Okay, great. My second question -- I know that was a few questions -- but my second question has to do with the gross margin. I am still a little unclear on what is going on there. If you could talk about, one, seasonality and two, I guess the question that I have is if the four -- if the December quarter is seasonally the weakest, I usually think of it as it is seasonally weakest, you are closing down plans so you are operating a little less efficient. So you are not sending out as many products. So your sales are down. And so on the cost basis that you are running at, your gross margin would decline on a smaller sales base. However, we are seeing total sales and sales per day increase sequentially to the highest rate that we saw this year. So, I am a little unclear on why your gross margins would actually decline. I would think they would actually increase on a higher sales base.

Sure. Let me see if I can give a stab at it, and then I will ask Greg to comment as well.

Yes. First of all seasonality. Our third-quarter is not always, but generally speaking our weakest quarter, and it is because the general industrial activity is down broadly speaking. One of the things that we did in the second quarter is actually produced some product and put them in stock. Specifically as it relates to -- you hear me talk about this in-stock guarantee program where we actually need our warehouse system, our logistics network with finished goods inventory. Stocking them up. And we did that throughout the whole summer in anticipation of getting demand. Well the demand came through in the third quarter, the December quarter. And we shipped from that inventory.

Now in the meantime, of course, we keep producing in the first quarter, second quarter, and to a degree in the third quarter, but not -- in the third quarter is much less production activity, in particular, the rigging products where we actually stocked up for earlier on in the year. So we actually shut down our rigging plants for a couple of weeks. And that shutdown doesn't absorb. We don't absorb hours because we are not producing; we are not actually manufacturing hours in that time period. And that is why we see some of the costs come through, but not some of the absorption come through. That offsets the margin basically.

Greg, you want to add anything to that? Well, we did have another weird thing that happened. We bought Austria rigging company back last quarter, and we had a bit of a re-class of costs going on where we move some costs from selling expense over to G&A -- over to cost of sale. So about almost $1 million of cost did migrate from when we bought this company to make them on the same system as the rest of our companies. It migrated from selling expense into cost of sales. So we had that thing going on as well. But that was just to clean them up -- I shouldn't say that. That was to make them consistent with the rest of Columbus McKinnon.

Yes I think, Tim, Joe hit the two points that I would have hit as well. That first of all there is a negative productivity impact sequentially due to the fact that despite what sales were, our plants were running less product through, especially in the two US plants that Tim referenced. And then the cost re-class as we look to put our acquisition on the same consistent cost basis resulted sequentially in about a $900,000 shift out of selling cost, and that was part of the reason we were 1,000,001 favorable in selling sequentially into cost of goods sold. And then the only other little piece to point to is inflation was up a little bit more in the third quarter compared to the second quarter.

The only other thing that I would say or just to respond, wouldn't you take -- wouldn't you record less overhead expenses if you are producing less, less labor expenses, less overhead expenses, so your expenses actually would be down and your sales are actually up? So, I am still -- I mean we can take it off-line, but I am still a little unclear why the gross margins are declining sequentially.

Sure, we can talk about it off-line and we can in further detail. But from a cost perspective there's a certain amount of fixed costs that you have from having a factory. The utilities, your salaried workforce. They are still getting paid whether you are making one hoist or 100 hoists a day.

And so is the hourly because we paid them vacation during that time period. They didn't produce anything.

Yes.

You still have the cost; you just don't have (multiple speakers)

You don't have it going into inventory (multiple speakers)

You are not absorbing that overhead cost.

So we can talk further, Joe, on our call later.

Okay, sounds good. All right, thanks a lot, guys.

Gary Farber.

Good morning. A question on market shares and the competitive landscape. It sounds like in China as you scale up there may be opportunities to take market share and you sort of referenced the Eurozone. You expect modest growth potentially in, I think, calendar year, this year, you were saying. Can you provide an update on the competitive landscape? Has really much changed lately and do you see opportunities in that kind of recovery where you are expanding internationally, some of your markets are getting better to take any degree of market share?

Yes, I think, Gary, the biggest opportunity we have to take market share is in those emerging markets where there's no clear leader just yet and places like China, Brazil, Mexico, Eastern block of Europe, South Africa, Russia, where we have a presence. We have great product, and we are actually growing faster than the economic growth is giving us. So clearly there is some market shift going on there, but also I would add that generally speaking there's a lot of investment going on in those parts of the world.

In China, there still continues to be lots of new facilities going up, and we just are winning more than our fair share of those as we sell hoists into those businesses. That is the biggest opportunity. If you think about the developed markets and you think about Japan and Western Europe, America, not a lot of shift going on there. I think that some of our competitors who build mostly cranes, big heavy good capital equipment like our crane business is challenge today. There's not a lot of spending going on in that. The competitors that are more like us that sell rigging tools and hoists are doing okay like we are. Certainly not growing to the degree we want to, but we are not hurt as much as some of those competitors that just build heavy-duty cranes in the market. So that is a little dynamic that is going on. But at the end of day, Gary, there's not a lot of shift occurring in the Western market.

Okay, thank you.

(Operator Instructions). John Walthausen.

Quick question. You said that you increased your inventory. It sounds like recently, substantially in order to get better service levels. Can you talk about what benefits you are receiving in terms of better sales or something else for doing that? And is there any program underway to see if you can maintain those service levels and bring the inventory back down again?

Yes, great question. Q1 and Q2 is when we dramatically increased our inventory, John, to -- in response to getting our market share back specifically on these rigging tools, forged attachments, and chain, et cetera. And it is working. Our service levels are at an all-time high. I think that it is very important to service our channel partners and add product availability.

These are the kinds of products you might recall if someone needs them, they need them today. They don't need them tomorrow; they need them today. So we have to have availability into our warehouse systems that's scattered around the world to have them on the shelf ready to be shipped, or actually in some cases picked up, believe it or not, at a moment's notice. So I am happy to say that the logistics side of that is working. It's -- we are stocked up. We feel good about it. We are expanding the program up to 221 SKUs now. And I am happy to say, too, that our market strength that we had over the, let's say, last several years has bottomed and is now returning and actually growing. We are seeing the beginning signs of it growing back up. So it is beginning to work.

Now having said all of that, inventory that is sitting idle is waste as you know and moving inventory is actually adding value. So, we do have programs underway to do a better job of monitoring and forecasting demand so we can stock only what we need. And I think over time you will see the inventory become more in line with history and still keep the service levels to a high degree that we are seeing today without having to make the investment in finished goods.

And do you expect that the -- basically the competitive advantage of being able to have those high levels of service is something that is going to increase over time or have you actually seen the benefit in terms of better sales?

No, I would -- we have begun to see the benefit of better sales. I would expect us to see even more better sales in the future. (multiple speakers).

Good. The other question I had is you talked about how the level of day-to-day business was good in the December quarter. Did that translate into the early weeks of January or was some of this the effect of anomalies in the tax structure or other things -- sort of artificial things that might have induced customers to pre-buy?

Well we do have -- as you know we always run some kind of program to help entice people. One of the programs that we run is if people by all of the products from us, we give them incentives and some additional discounts on volume-related activity. We saw some of that buying occur in the quarter, but I didn't see any tax driven incentives at all that would have affected that.

We did see the bookings continue through this holiday season was a little weird because we had holidays in the middle of the week, but compared to last year we are running about the same level as we did last year in the beginning of January. So, a lot of the orders that came in, you noticed our bookings went up about $8 million or $9 million or so. That is a lot of that bookings that occurred in the third quarter that we will see turn into revenues here in January and February.

Okay, good. Thanks an awful lot, Tim.

Joe Mondillo.

A couple of follow-up questions, if you will. The improvement in sales per day, just wondering where you are seeing that I guess geographically.

Sure. Well, we are certainly seeing it in Asia-Pacific. We are actually slightly beginning to see it ever so slightly in Europe, like a couple of points increase. And America is up about three points. So it is fairly broad. Latin America was flat.

And your Asia-Pac demand is that fairly broad or is there a specific region in that region (multiple speakers) that you --? Sorry.

It is mostly China.

Mostly China, okay. So you are seeing still quite strong demand in China?

We are. But we still -- we sell broadly into the market, but the numbers that I am looking at are the bulk of them would be Chinese revenue.

And I was wondering if you could address pricing, that year-over-year growth in terms of pricing was a lot lower than it has been. Could you talk about that and remind us when you -- I guess normal, annual price increases are?

So, the reason why the price percentage has dropped about a point is because typically in Europe we have a price increase in the October time frame, and that did not take place given the weakness in those economies. So that is yet to be determined when we will be raising price and how much we will be raising price in Europe. In North America and specifically the US, price increases are typically the middle of March, and we have plans to move forward with a price increase in the middle of March this year.

And could you potentially at any given moment given increase in demand choose to increase prices in Europe or would it be normally always usually around the October time period?

No, I don't think we would have to wait until October. There certainly would be some notice periods and communication programs to roll it out, but it wouldn't -- that is with -- that's weeks, not (multiple speakers)

We normally give our channel partners 30 days notice. So think of it as a month lag, but it doesn't have to be October. It could be anytime, midsummer, spring, whenever. (multiple speakers).

And then also, the M&A one-time spend, is that your total M&A spend or was that sort of the amount of M&A spend that was one time? Because I know you probably usually have a quarterly amount that is related to M&A given that you are consistently always looking for acquisitions and doing your due diligence and related stuff. So is that total or one-time type stuff?

No, that is just the one-time large acquisition we looked at in the quarter. It doesn't include the normal activities.

Okay.

And, Joe, there was little bit of cost actually in the second quarter as well. There was couple hundred thousand dollars related to the large potential acquisition target in Q2.

Okay, thank you. And, lastly, Greg, I was wondering if you have the shipping days for fiscal 2015 on a quarterly basis.

That's -- we do. I don't have them handy right now, but I can certainly get them and let you know prior to our call.

Okay, great. All right, thanks a lot, guys.

Peter van Roden.

One quick question to start. When does the comparison for the heavy OEM work get better or easier?

Right now.

Right now.

It started about a year ago, yes, so I would say the fourth quarter would be an easier comp, if you will.

Okay. And if you had to pull out your crystal ball and think about how your core business will grow next year, how are you starting to plan for that?

So, I do think that we will continue to see double-digit-ish growth in emerging markets. So lots of activity, lots of investment to support that. I do think Europe will stabilize and actually began to grow again. So next year, as I look to the future, I think America will be decent. It is not going to be robust or off the charts, but I think we will have a decent year, but of course most of our growth activities will come in those markets where we have the biggest opportunity to grow, which is places like Latin America, China, Eastern block of Europe, South Africa, things of that nature.

Okay. That is all I had. Thanks, guys.

(Operator Instructions). I am showing no further questions from the phone lines at this time.

Thank you. Let me summarize by saying we do expect our fourth quarter to be very strong with some momentum in bookings and some increased market activities. As you know, our fourth quarter is generally the best quarter of our fiscal year, and we do expect this quarter, the fourth quarter to be good as well. Our gross margin should the north of 30% as we look to the fourth quarter, and I think everybody will be happy with that, especially as we continue to expand our lean business system to drive productivity improvements. We don't expect inflation to be rampant, and we do have reasonable pricing; should be also positive contributors. Our investments in the emerging markets that we have spoken about continue to be successful, and we do think that a European recovery looks to be gaining some momentum which would be helpful for us.

We are positioned well to continue to execute our strategic plans to profitably grow our business as we have about $124 million in cash and about $100 million revolver. We continue to have acquisition discussions with many businesses that can add strategic value to our Company. We also continue to make strategic investments in selling and emerging markets as well as investing in products and services and productivity-enhancing equipment at our facilities.

I would like to take this time to thank all of our associates around the world for their dedication, the excellence in making our Company stronger market-leading organization. As always we appreciated your time today. Thanks and have a good day.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.