Columbus McKinnon Corp (CMCO) 2015 Q3 法說會逐字稿

Welcome and thank you all for standing by. At this time, all participants are in listen-only mode until the question-and-answer session. (Operator Instructions). This call is being recorded. If you have any objections, you may disconnect at this point. I will turn this meeting over to your host, to Miss Deborah Pawlowski, Investor Relations for Columbus McKinnon. You may begin.

Thank you and good morning everyone. Welcome to Columbus McKinnon's third-quarter fiscal year 2015 financial results conference call. We certainly appreciate your time today and your interest in Columbus McKinnon.

On the call I have with me Tim Tevens, our President and CEO, and Greg Rustowicz, our Chief Financial Officer. Tim and Greg are going to review the results for the quarter and year-to-date and give an update on the Company's outlook and strategic progress.

You should have a copy of the financial results that were released earlier this morning for the market, and if not, you can access those at the Company's website, www.cmworks.com. At the Investor Relations section of the website, you can also find the slides that are going to accompany the discussion that Tim and Greg will be having today.

Let me start by having you turn to Slide 2, where you will find our Safe Harbor statement. As you are aware, we may make some forward-looking statements during the formal discussions as well as during the question-and-answer session. 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 materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed with the Securities and Exchange Commission. The documents can be found on our website or at SEC.gov.

So with that, you can turn to Slide 3 and I'll turn the call over to Tim.

Thanks Deborah. An on Page 3, we just want to remind you of our long-term objectives, which include 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 about $200 million to $300 million worth of acquisitions, revenue acquisitions, 12% to 14% operating margin, and strong working capital levels, and obviously a strong balance sheet to be able to accommodate that growth. We continue to focus resources and energy on acquiring companies that strategically add market presence, and we'll talk about one here in a moment, and product breadth to help us grow around the world and achieve these results.

Page 4 provides you with the highlights of our third quarter of fiscal 2015. We had solid growth in the United States. Unfortunately, that was overshadowed by foreign currency translation. The US sales increased 5.4% or $4.3 million and gross margins continued to expand up 120 basis points to 30.8%. Operating income increased $1.5 million, or 13.6%, and the operating margin increased 130 basis points to 9% in this quarter. We had a fabulous cash quarter, generating over $17 million of cash from operations.

We also acquired a very nice business, STB, which we will review in a moment here. It does extend our lifting capacity of hooks that lift up to 2000 tons. We also announced this past Friday and subsequently on Monday that we have called our notes and established a new credit facility, saving our company $7.6 million in cash interest or about $0.27 in earnings per share for fiscal 2016.

Our focus remains on profitable growth as depicted on Page 5. As you all well know, we help people lift, position and secure material that requires safe and productive solutions. This is a very broad-based need that covers most components of the global economy. As we work closely in some key vertical markets and develop a closer customer intimacy model, we are better able to provide products and solutions that meet the specific lifting needs of our customers. We continue to focus on new product development, which now accounts for 24% of our revenues, coming from products developed in the last three years. Our backlog is up on some recent bookings from our European rail and road business, and Greg will talk about that in a moment.

You know that we expanded our Chinese manufacturing footprint by 40% last year to capitalize on the growing business in Asia-Pacific. We have been successful in localizing our hoist products into those new Chinese facilities. We continue to drive operational excellence activities with our lean business system and are recognizing enhanced productivity, increased customer service and lower defect rates, all for the betterment of our customers and our company.

Our in-stock guarantee program continues to expand, now up to 280 stock keeping units as we guarantee delivery of these products to the market in three days.

As shown on Slide 6, at the end of December, we did acquire Stahlhammer Bommern, STB, for $25.8 million in cash, and assumed $6.2 million of debt. There is a potential earnout of an additional $3.7 million if certain profit targets are earned by the end of calendar 2015. This 100-plus year old steel forging business primarily designs, manufactures and sells large capacity hooks to a variety of industries that have heavy load requirements. Construction, manufacturing, mining, marine, oil and gas are some that use those products today. They primarily sell into Europe and Asia, and we expect that our global Columbus McKinnon sales force will also sell these products into other areas of the globe, including North America, Latin America and other parts of EMEA where we already sell smaller capacity hooks. This is an example of a product line expansion that our global sales force can now sell around the world into markets previously untouched by the prior owner.

Pictures do say 1,000 words, so if you just peruse the two photos on the right side of the slide, you can see some of the product offering, and certainly imagine the forging capabilities of this company. Calendar year 2014 revenues were $17.8 million for STB, and they had about a 16% operating margin.

Third-quarter revenues were negatively impacted by currency translation as the US dollar strengthened against global currencies like the euro, the Canadian dollar, the Brazilian real and the Mexican peso. FX represented a $4.3 million or 3% or all of the difference of our revenue compared to Q3 of last year. Volume is down primarily in Europe, but also in our tire shredding business and certain highly engineered hoists in North America. We continue to see volume pressure on capital intensive projects globally. We also have lumpier shipping days as compared to last year.

Our positive impacts include pricing and an acquisition that we closed on last year in Q4. The average sales per day were flat in the quarter with the FX and the volume impact.

Now let me turn it over to Greg, who will provide us more financial detail.

Thank you Tim and good morning everyone.

On Slide 8, our third-quarter gross profit margin increased 120 basis points to 30.8% from 29.6% in the prior year. Gross profit increased $400,000 or 1%. The acquisition we completed last year in the fourth quarter contributed $1.5 million to gross profit and productivity gains added an additional $1.1 million, led by strong productivity in our rigging facilities.

Price net of material cost inflation added $1.1 million to gross profit. Higher product liability defense costs negatively impacted gross profit by $700,000. The lower sales volume recorded in the quarter reduced gross profit by $1.4 million. In addition, foreign currency translation negatively impacted gross profit by $1.2 million as a result of a strengthening US dollar. This quarter represented the 17th consecutive quarter of year-over-year gross margin improvement.

As shown on Slide 9, selling expense was higher than the prior year and represented 12.4% of sales this quarter compared to 11.2% in the prior year. The acquisition added $300,000 to selling expense and the remaining increase was due to investments made to drive future sales growth, partially offset by favorable currency translation. G&A expense decreased $2.4 million from the prior year and represented 9.1% of sales this quarter compared to 10.5% in the prior year. The prior-year period included approximately $1.4 million in atypical M&A professional services which were nonrecurring.

Cost controls in the base business and favorable foreign currency translation more than offset the impact of the acquisition, which added $200,000 to G&A. We expect our SG&A run rate to be approximately $30 million to $32 million in the fourth quarter, excluding the impact of the STB acquisition.

Turning to Slide 10, operating income increased by 13.6% to $12.6 million or 9% of sales compared to 7.7% of sales in the previous year. The increase in operating income reflects the continued gross margin expansion as a result of accretive acquisitions and productivity as well as the cost containment actions to control SG&A expense in the base business while still funding investments to drive future topline growth. These initiatives include the impact of acquisitions, new product development, vertical and emerging markets and our global services initiative.

As you can see on Slide 11, pretax income was up 35.6% from a year ago to $10.2 million. Earnings per diluted share for the third quarter of fiscal 2015 were $0.39 per share compared to $0.33 per share in the previous year, an increase of $0.06 per share or 18%.

The tax rate this quarter was 23.1%, reflecting the expected refinancing costs related to the previously announced call of the outstanding senior subordinated notes. In a more normalized 30% tax rate, earnings per diluted share were up $0.09 per share, or 35%, to $0.35 per share. Our effective tax rate for the fiscal 2015 has been lower, and is now expected to fall between 23% and 28%.

On Slide 12, you can see our return on invested capital is a healthy 12.5% on a trailing 12-month basis and exceeds our weighted average cost of capital. We continue to invest in good capital projects that exceed our cost of capital and look for synergistic and value producing acquisition opportunities that will also exceed their risk-adjusted cost of capital.

Turning to Slide 13, excluding the STB acquisition, our working capital as a percent of sales was 19.6% compared to 22.1% at September 30 and 21.7% at March 31, 2014. Working capital as a percent of sales improved as a result of lower DSOs. Inventory turns, excluding the STB acquisition, were unchanged at 3.9 times compared to one year ago and were slightly lower compared to last quarter. We do expect working capital improvement in the last quarter of the fiscal year as the fourth quarter is typically our strongest quarter from a sales perspective. We do expect that the STB acquisition will negatively impact our inventory turns for a period of time.

On Slide 14, you can see that we generated $17.1 million of net cash provided by operating activities in the three months ended December 31, 2014 compared to $16.2 million for the three months ended December 31, 2013. Capital expenditures year-to-date were $11.3 million versus $13.5 million in the previous year. Year-to-date, we have generated $18.5 million of operating free cash flow compared to $4.5 million one year ago. We have also paid $2.4 million in dividends year-to-date and we will pay our regularly quarterly dividend of $0.04 per share on or about February 17 to shareholders of record as of the close of business on February 6.

We believe we have ample liquidity and opportunities to invest in strategic acquisitions and high return projects. We expect full-year capital expenditures to be approximately $15 million to $20 million for fiscal 2015, the majority of which is dedicated to productivity and growth projects.

Turning to Slide 15, you can see that, as of December 31, 2014, total gross debt was $157.5 million and net debt was $55 million. Net debt to net total capitalization was 15.3%, which was higher than last quarter's 10.8% because of the cash used to acquire STB, which closed at year-end.

Moving to Slide 16, we announced this week that we've entered into a new $150 million senior secured revolving credit facility and a new $125 million delayed draw senior secured term loan facility, the proceeds of which will be used for the redemption of our $150 million of 7 7/8% senior subordinated notes due in 2019. This new capital structure will provide us with significantly more flexibility to utilize excess cash to pay down debt or, alternatively, to borrow funds as necessary for strategic acquisitions. It also adds an additional $25 million of liquidity at a low cost. We estimate that this refinancing will significantly reduce our cash interest expense by $7.6 million based on a weighted average interest rate of 2.8%, which reflects our policy of maintaining a 50% to 70% fixed interest ratio. This is expected to result in approximately $0.27 per share in fiscal 2016. We do expect to record a debt retirement charge of approximately $8.5 million in the fourth quarter of fiscal 2015, which includes the call premium on the notes.

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

Thanks Greg. Let's just spend a moment and look at our outlook for the rest of fiscal 2015 on Page 17.

We do expect a reasonably strong fourth quarter, as we normally do, especially in the US and Asia. Foreign exchange currency translation will continue to be a headwind for us as the euro and other emerging markets have declined and the US dollar strengthens.

We have seen orders improve since Q3 with some large orders being added at the end of December, especially in Europe. And our hoist business is doing reasonably well there as well. North America and Asia-Pacific should be strong, and that would be offset by a lower order rate, particularly in Latin America.

Our backlog is up compared to Q2. And we will have strong volume growth if you consider the STB acquisition as well as our normal release of some new products and our vertical market focus. Our acquisition pipeline is reasonably full and we'll continue to use our balance sheet and the new bank facility to acquire strategically synergistic businesses that add value to our company.

And with that, let me turn it back to you for opening up to questions please.

(Operator Instructions). Schon Williams.

Hi, good morning. Tim, I wonder if we could just dive in a little bit more on some of the volume trends that you are seeing globally. Can you talk about what the volume looked like on the international side? If we strip out the FX, what would the volume margin volume price component look like there?

And then what specifically were we seeing -- you talked about I guess in North America just perhaps some headwinds at the car business and some of the engineered products. Can you give a little bit more clarity there?

Sure. So the volume clearly is challenged in Europe. I think if you look at our -- starting with our engineered systems solutions business, CMET, that you hear us refer to, year-over-year, they are not seeing the same business activity in quotations as well as orders. Now, they did book a couple of decent size orders in December but still, year-over-year, that would be down. Our hoist business has held up reasonably well there, which is our normal standard hoist business that we sell across Europe. That was down a bit year-over-year as well, mostly pressured from some specific economies, and I'll mention France in particular seemed to be off. But also I will say that our South African business is just now beginning to recover from the mines that were closed all the way through December, and now they're just starting to see some order activity coming from there as well. So it's spotty in Europe. And Germany is holding up well. France is down. UK is holding up well. South Africa is just now starting to recover.

Of course, as you might imagine, the Eastern block is spotty as well, especially in the Ukraine, which our business there has gone to essentially zero. And Russia is going to be challenged as some of these economic sanctions come into play and we are faced with our inability to export from Germany into Russia going forward.

Relative to the rest of the world, Asia in the quarter, in particular China, was down a bit. It was an odd quarter. I'll say it was an odd quarter from a booking standpoint around the world. We seem to globally see November being very soft. Our total is strong, December or November very soft, and then December rebounded to a more normal level for December's purposes. And that was true in Asia as well in China. And now we are seeing it recover through January, which is good.

Brazil and Latin America, from a volume standpoint, is very challenged. I think that economy is, if not in a recession, very close to a recession.

Our tire shredder business, as you know, is lumpy. We have some wonderful quarters and it depends on when the machines get shipped and then therefore be booked in revenue. And it's just up and down quarter to quarter. It happened to be last year they had a strong quarter. This quarter, they had an okay quarter. Overall, it's down. And then our engineered hoist business is really tied to more capital-intensive projects, which seems to be off. The normal standard hoists seem to be strong and doing well. You know, the normal hoist that we would sell through industrial distribution, the catalog houses seem to be doing okay. But the highly specialized engineered ones seem to be off a little bit year-over-year. So that's the goal. I think I covered -- was that your question?

Yes, yes, that's helpful. And just in light of kind of a challenging macro environment, especially when I think about Europe, essentially three years of very kind of a soft macro environment there. Does this change your outlook in terms of needs for further restructuring within that business? I don't know. Can you talk about -- are there thoughts about product line simplification? Is there gains that could be had from taking out some fixed costs there? How has the macro environment altered or not altered your thoughts about the cost structure there?

I'm not sure the macro environment has altered our view around costs. It's always been how do we become more productive in all of our businesses. And we used a lean business system to do that for us. There is opportunities to take out some fixed costs that we are taking right now in this quarter, and that's underway, in particular in PONY in Europe right now.

I think that, if the businesses that don't recover to a normal level, there might be more activity along those lines, but I suspect not. I just think that, overall, we continue to look at opportunities to remove cost. And we take those actions and we will continue to take those actions regardless of the macro environment.

I do think that obviously the currency headwind is going to be stronger in the fourth quarter given the continued devaluation of the euro, the real, the peso, the Canadian dollar. The US dollar strength is certainly showing itself right now. But at the end of the day, we still make money in Europe, we still make money in Latin America, we are still profitable in Asia, which is all great things. And we will generate positive cash flow in all of those regions of the world. So I think it still is prudent for us to continue to invest in those regions.

That's helpful guys. I'll get back in the queue.

Jason Ursaner.

Good morning. I just want to also try to focus on volume. US was obviously still a modest positive. Europe and some of these developing markets you just talked about were clearly off a bit. But maybe just looking at Europe in particular, the industrial production figures there have actually been pretty decent recently. So, I'm just wondering if maybe you could break down at all what you're seeing between capital items versus MRO spending, and then maybe tie this in with the order strength that you've seen compared to the trailing quarters.

I think the MRO spend seems to be reasonable, and that's more tied to industrial production, as you might imagine. That seems to be okay although, as I mentioned, earlier we had this odd November. In my almost 24 years with the Company, I have not seen anything pause like I saw in November globally. I can't tell you why it happened, but it just seemed odd to me. But having said that, the MRO business generally in places like Germany and the UK in particular where we have a nice position is strong and okay. But then you get into the engineered products business where we are trying to sell multiple million dollar projects across Europe, and we are not seeing the activity there, so we are not seeing the capital investment or the capital spend. Even though capacity utilization has expanded up nicely in Europe at this point, I don't think people are placing the large bets that they used to place and spending the capital that they used to spend in today's environment, at least at this point in time. So that's the trend that we are seeing. That trend has not stopped. We've talked about this on this call for the whole fiscal year, I think. And so I don't foresee that changing very much. The only thing that's different of course is the translation now is hitting us.

Okay. And in the US, the issue you had had previously with the heavy OEM sector, some agriculture companies, that kind of stuff, any update there on capacity buildout or what you are seeing from them and whether -- how big a drag it still is (multiple speakers)

It still is a drag. It continues to head south. Those large heavy OEM customers continue to not procure what they have historically. So, we are continuing to see a bit of a drag. Obviously, it's been going on for more than (technical difficulty) years. Lots of a drag now but I would say we are not seeing those companies invest in capital projects like they have historically. So that will continue to be a problem.

On the bright side, our rigging business is doing wonderful and we've got some great growth going in those parts of the business. The normal hoist business that gets sold through the MRO channels is doing great in America, so that's fine. And as you know, that generates a fair amount of profits for us. And of course the acquisition we did last fourth quarter, this small rail business that we bought, is performing very well and meeting our expectations in that regard as well.

Okay. And you generated nearly $0.85 of cash from operations during the quarter, which just seems very strong. Greg, you mentioned working capital should still be trending favorably. I'm just wondering. As you look forward longer-term, any thoughts on free cash flow in terms of EBITDA or net income conversion? It just seems like it's been very strong to date. I'm wondering if that's sustainable.

Yes, I do think it's sustainable. As we look down the road over time, I think eventually long-term interest rates are going to move up. And that will significantly reduce our pension contributions, which right now we are not required to make any but we are as we move towards 100% finance funding levels.

But the other big factor from a cash flow perspective will be the cash interest savings on the notes, which is going to be in the neighborhood of $7.6 million, which is -- we will begin to recognize that starting in fiscal 2016. So, those are two pretty big positive factors from a cash flow perspective looking forward.

And the $8.5 million charge, how much of that is cash? Is it entirely a cash charge or some of that is noncash?

An $8.5 million charge.

(multiple speakers)

The cash piece will be the calls, which is going to be about $5.9 million. There will be some transaction costs, but those will get in essence capitalized on the balance sheet and amortized as interest expense on a go-forward basis.

Okay. I'll jump back in the queue. Thanks, guys, for the clarification.

Schon Williams.

Okay, guys. Thanks for having me back on. I wondered if we could maybe dial into some of the other pieces. Tim, could you maybe give us an update on where you are with the ERP rollout? I believe most of Europe was supposed to go live here in the last quarter. Any, I don't know, any kind of initial benefits that you're seeing from that? And maybe just talk about maybe the timeline of benefits on that program. Is that something where we can start to see either cost savings or, just in terms of spec-ing and pricing, those sort of things, maybe some topline contribution in the next couple of quarters? How should we think about those being -- are those immediate tailwinds? Do they take more like a couple of quarters to play out? Just what are your thoughts around the rollout, and kind of some of the benefit coming out of that program?

Okay, thanks. Let me just back up and remind you all that we have now about 30% of our revenue covered with the new SAP system that we've installed. Our CMIP, the hoist business in Europe, specifically Germany and the UK, went live on November 1. And that was very successful, I would say. You know, there's always a bit of training that you have to go through with your people and some hiccups along the way, but I would say they were modest and small maybe compared to some horror stories that we've all heard about over the years.

So now we are at about 30-ish% of our revenue covered, business activity. Looking forward, we would expect that to continue to grow, and I think we are planning on doing a couple of more -- one more country in Europe and then heading to Latin America to cover that for this coming fiscal year, which would push us more toward the 40%, 50% area. And of course, the last, not that we would like to do, is the United States and Canada, and that will be the last implementation that we do, and that won't be until fiscal 2017. And then we will be 100% covered.

We will begin to recognize benefits along the way as we roll the system out and implement it globally. Initially, across Europe, I would expect that, over some period of time here, we will begin to recognize some of the working capital benefits, not necessarily commerce just yet until I get most -- if not most, all of the revenue on the same platform. So I would expect things like inventory management should be improved, and I would expect that to begin in 2016, the upcoming fiscal year, and continue to improve as we roll on more and more platforms.

And then, finally, when we get the United States on, I think you will begin to see -- we will begin to recognize efficiencies around the commerce side, and the ability for us to spec our product globally in a much more efficient way.

All right. That's helpful. And then I wanted to maybe talk a little bit about the STB acquisition. I don't know. Beyond some of the geographic or new product lines, synergies, are there technologies or engineering know-how, maybe best practices, that could be shared between that business and your existing forging business and kind of vice versa? I'm just wondering. Was that -- I don't know, was that a big piece of the pie in terms of your thought process on the acquisition there, or is that -- that's more of kind of a tailwind and more of a background consideration?

Yes, I would think it's the latter. It certainly would be a consideration, and we will share best practices, but that's not the driver of this acquisition. Clearly, the driver was taking and extending our forged hook offering to the marketplace and extending it into the multiple thousands of tons of lifting capacity. That was the first and foremost.

Now that our sales team around the world will have an ability to sell these products globally that this company, STB, was not doing. They just did not share that product line globally. They had a few select customers and that was it. So, it's our view that we have an opportunity to take a very nice company, a profitable company, and grow the topline, and then therefore obviously the operating income as well.

I've got time for one more if I may. As I look at Slide 5 and kind of the focus on profitable growth, obviously a number of initiatives here to try and get the topline moving. I wonder if, I don't know, as we look across some of the points outlined here or maybe just as you think about kind of more the macro in general, what -- Tim, can you think about -- could you name, like what are the one or two things I guess that you're most excited about in terms of kind of the topline opportunities that are out there, given that you certainly have some headwinds on the ForEx side, you are certainly, you're dealing with a bit of a soft macro environment. Just what are the things that get you excited kind of internally that you guys are doing to drive that topline, if you had to focus on one or two?

Can I give you three?

Sure.

The first one that comes to my mind is the work that we've done in China to facilitate the ability to produce product there, to sell into that large market that we have a very small portion of today. So as I think about the future and the positioning of that business and the products that they manufacture today and now excelling there today, that's a huge opportunity for us at the topline. And we'll continue to focus on that and drive our resources toward that part of the world to grow our revenue in places like China and Indonesia and Malaysia, and now India as we just opened up a sales office in India as well. So, I think about that as a huge opportunity.

I would also tell you that we have invested and continue to invest heavily in our new product development activities. So we added an executive. His name is Jeff Armfield. Jeff is a fabulous guy, and he is overseeing this activity as far as globally now so that we are much more aligned on a product development platform for the globe as opposed to individual regions. And I expect that to produce some topline benefit for us as I look to the future as well.

And I also think, given our strength in America, you know, we have a number one position in many of our products that we offer in the United States, and I feel very good about some of the activities we are seeing in America, maybe some of the oil and gas play is going to be diminished over time. We are not seeing that just yet by the way, but that could be a headwind for us. But I would say the rest of the US economy seems to be going pretty good. If we get some of these heavy OEM problems behind us and we get some investment in manufacturing in America, I think that's going to -- and construction, by the way, which I think infrastructure buildout will be very helpful for our company, I think that that is going to be a wonderful topline add to Columbus McKinnon as well.

All right. That's helpful perspective. I appreciate the time.

Gregory Macosko.

The operating income there is 16%. That's above what you expect on a longer-term basis for the entire Company. Given it's -- that's existing, do you see that margin improving?

I'm sorry. We missed the front part of your question. I just want to make sure that I understand it fully. Could you repeat yourself?

The operating income of STB, Stahlhammer, that looks like highly attractive, higher than your longer-term goal. Do you see that you can extend and maintain that margin as you sell product throughout the world through your sales force?

Yes. I actually think that it could be improved actually, because they have the manufacturing and design capabilities today in their business to grow another shift or two. They actually operate only one shift. They use overtime, obviously, to accommodate some of that. So, as we expect volume to come into that facility to produce products that our Columbus McKinnon sales team would sell globally, that added volume to the same fixed cost obviously levers that fixed cost and will give us additional leverage on the operating income. So, I'd like to see that 16% go higher, and that's our expectation. As our team understands the product line and we convince the market that we are the right people to sell that to them, that would be my expectation going forward, is that, believe it or not, Greg, it goes north.

That's great. And then finally, with regard to China, you are saying you're just really beginning that lower penetration. Do you expect to be manufacturing there and expand through manufacturing?

Yes. So, we have a plant there. We've been manufacturing there since 1992. We've recently expanded our facility in March of 2014, so just this past March. We've expanded about -- added 40% of our manufacturing capability footprint there. And then we've added our design hoist to their product portfolio to manufacture there. So instead of shipping the hoist from America into China like we have historically done, and we've built our sales up over the last four or five years doing that, now we can manufacture the product on the ground, in the local currency, with local people, much better responsiveness to the marketplace, a lower cost structure to manufacture there. And it will be our intend to continue to add product into that manufacturing footprint to be able to sell into the Asian market going forward.

Okay. Thanks very much.

(Operator Instructions). Mike Shilsky.

Good morning. Can you hear me okay? I wanted to touch on the topic of FX again. Most of my questions have been answered. Has the current FX environment changed your targeted markets or your current timelines for M&A going forward? Have you changed the countries in which you are focused, the urgency with which you want to get things done? And have you had a sense of whether FX rates have changed the seller's desire or ability to sell?

The first part of that is I would answer strategically that the FX changes have not changed our strategic intent to grow globally, nor has it adjusted in what part of a region. We really look for opportunities to have deeper market penetration to sell our products, or targets product, by the way, globally like we're doing with STB. And that's the intent, to add value from that perspective.

I recognize that FX is a headwind and it's problematic today, but of course, as you well know, if you wait another year or two, that will change again and things will move. And it's tough for us to try to expect what that would be. So, strategically, we are really looking to add volume and have deeper market penetration, get better market shares globally.

And from a seller's standpoint, I have not heard of any change in their perspective over this at all.

No, most of the targets we look at are selling in-country and the purchase price is in their local currency, so from their perspective, it doesn't have an impact on their thought process.

Got you. And could you maybe remind us? I know your long-term goal (technical difficulty) is the $200 million, $300 million range. With STB now behind you, sort of how far along are you in total from that -- on that long-term goal from when you first set it?

Yes, so that's a good question. Let me just reflect on that a moment. So if you add about, let's say, round numbers, $18 million plus when we did last March, so Greg is just telling me there's about $35 million or so that we have added in the last couple of years. We have a ways to go, obviously.

And we did have (multiple speakers) in that time frame as well.

Okay, got you. Okay. And then finally if I could just go back to the oil and gas question, I know that is not your primary end market but it is certainly an important one. Could you maybe just kind of share with us, if you can, whether you have more exposure to the upstream markets or more to midstream-downstream markets in your business?

Yes, good question, so let me see if I can answer it here. We play in all sectors of the stream, up, mid, and down. So when a chemical plant comes online, for example, or a refinery comes online, they would buy our hoist and trains to install in their facility, mostly in the maintenance areas of the facility, not in the processing areas. And then -- let me go to exploration, which is where we spend most of our time in drilling. And most of our activity is offshore. If you think about an oil platform, most of our explosion-proof hoists, for example, are used in the offshore facility to move equipment, or to move items on the platform itself. So, it's mostly an offshore play. And by the way, tied to that would be MRO.

So, the operating rigs offshore obviously use our equipment that needs to be replaced over time in a certain sequence. And we would expect that MRO business to continue as long as those rigs in the Gulf and other places around the world continue to operate. So, those would be the primary areas that we would operate.

And just to give you a sense of magnitude, all the supporting industries around oil and gas, if you think about Texas, Louisiana and other parts of the globe that are oil-centric, we sell to industrial distributors who support the local industries that support the oil and gas as well, and that would be mostly our MRO play that gets sold through our channel partners in those local regions.

And Mike, we lose track of all of the different sales that go on through distribution and what's going to go in oil and gas, which ones go into normal industry or general industry, so it's hard for us to say. But if you think about oil and gas as a percent of the general economy, general economic world, it's probably 8% to 10% and we've always estimated that the total impact of revenue on our company is probably similar to what oil and gas is as a percent of the general economy as well. So we are probably in that 8% to 10% area as well.

Got it. And of course, it sounds like a good portion of that is MRO as opposed to new construction.

It's both, but the bulk of the business remains MRO.

Got it, great. That is great color. Thanks so much.

Brian Rafn.

Good morning guys. Just a question, you guys talked a little bit about some of the weakness over the past year in some of the heavy OEM. Being a small-cap value manager, we have a number of industrial companies in our portfolio that are doing very well, their small-cap company sense of urgency. They are building property, plant, and equipment. They are expanding factories. They are hiring people. Do you guys see any divergence between the heavy OEMs being somewhat retarded on property, plant, and equipment expansion and maybe smaller companies that may be actually aggressively trying to seek market share by building out their factory floor?

Ours maybe a little more particular. Let me see if I can explain that well. Our normal hoist business and crane business gets sold to general industry, and we are seeing a fair uplift in that part of the world, especially in America. And that's where the 4% or 5%, 6% kind of growth that we are seeing today comes from. But in particular, we have a couple of end-user partners, strategic partners, of ours that we support globally, that we sell hoists and cranes into their platform, into their part of the world. And they are excellent customers of ours. The problem is that they are not spending today. So when you go from $30 million, $40 million a year spend annually with these one or two major end-user customers to near zero, because they are just choosing not to invest in capital given the problems in their own business, that's a major impact on our company, and that's the piece of the heavy OEM that we are not seeing come through today.

Okay. Is there any difference in the heavy OEM? Obviously some of these are international conglomerates. But is either the heavy OEM US piece versus the heavy OEM Europe piece any worse or are they both about the same, near zero?

They are both about the same.

Okay. Any comment, Tim, commodity feedstocks, raw materials, inflation trends, what you're seeing?

Yes. Good question, thank you for that, Brian. We are seeing input costs be very modest, increases very modest. Steel is relatively flat. Motor prices actually may be coming down a touch. So, generally speaking, very low material cost inflation, if any at all. And our thinking is that's going to continue on for the foreseeable future coming at us.

I would expect, and we are beginning to see -- you know, when we make some of our steel-based products, we heat treat those products. And a lot of times we use electricity, but we also use natural gas. And of course those input costs I would expect to continue to come down as we've had a rapid decline in the oil price that we should be seeing some of our manufacturing costs come down in those particular facilities.

And if you see rising volatility and/or a delta change in movement, do you guys go out and purchase forward? Do you stockpile at all, or you pretty match your raw materials to your end market orders?

The latter. We try to match as best we can our order base. But the one thing we do is we have a commodity buying group that goes out and tries to negotiate on a regular basis with our suppliers. So if we see rapid declines in prices, whether it's copper or steel or whatever, we will try to renegotiate those prices downward. And our team has been pretty successful in that, as well as holding off any kind of price increases coming at us.

Okay. You talked a little bit about the feedstocks. What is your sense for wage and salary growth, obviously healthcare being a wildcard going forward?

I'm glad you pulled healthcare out of that because I'm not (multiple speakers) I don't know where that's going. But normally we would be in the 2% to 3% wage increase kind of level, and that would probably be true going forward.

Okay. If you look at -- you said obviously you've got a fair amount of rigidity with the heavy duty equipment you guys sell. How much repair, maintenance, rebuilds of your business would something that's already in infield position need a hoist or a crane, so what would you guys have in a normal year as a percentage of sales?

So by far and away, especially in markets where we've had this 100 year plus relationship with the market and selling into the market, we have a huge install base of hoists that have been operating out there for many, many years. And the bulk of our revenue is this MRO play.

The only time we see an added pop is when there's capital expansion, there's expansion of manufacturing facilities. And we certainly have seen that in China as we've just supplied three nuclear power plants there. China is building out 12 nuclear power plants. That's great expansion for us. We love that. But most of our whole markets, our markets where we've had this long-term selling into, is an MRO play today.

Okay, okay. And then you talked a little bit about some of your vertical markets. You mentioned oil and gas. Could you just, maybe for visibility, kind of talk maybe globally construction versus industrial, maybe versus chemical, aerospace, defense, anything that you would see ex your comments on oil and gas?

So, first of all, the general industry is obviously a bigger use -- a big user of our equipment, and it seems to be doing fine globally except for those parts of the world where they're either in a recession or going in a recession.

Construction is an interesting play today. It's been very depressed over the last several years. As long as I go back to maybe even longer than that, it's been down quite a bit. We are beginning to see some spurts upward of that as infrastructure buildout comes on the play. I mentioned the nuclear power plants in China, the Tappan Zee Bridge, we have some equipment, some hoist, manual hoist equipment, in that project. So as these projects pop up, that should be beneficial for us and we are looking forward to those as well. And I think that should be some upturn coming at us here in the future.

Of course, we have a line of our equipment that goes in the entertainment market. That's been very strong globally for us as we sell hoist and rigging tools into concert and life theaters and things of that nature.

The mining industry has been very, very difficult for us over the last couple, three years as commodity prices have come down. And in our case, we service the mines, the deep shaft mines, in South Africa. And they were on strike for six months, just came off a strike in December. We're hoping to see some activity that will drive some of our use in the mines, in particular deep shaft mines like gold, platinum, palladium, copper, silver would be a good example of users of our equipment. Those would be the ones that come to mind besides the oil and gas play that I already talked about.

Okay. Thank you very much. I appreciate it.

Thank you. At this point, we have no other questions in queue. (Operator Instructions).

Are you done with the questions? Is that it?

Yes sir. At this point, we still have no questions in queue. You may proceed.

Thank you. Let me just summarize by saying that our business is performing well, as demonstrated with the strong profitability and the closure of an accretive acquisition that we did and this wonderful recapitalization that Greg just shared with us of our debt and calling of our notes recently here. We expect our earnings per share to improve as the result of these activities.

Obviously, the headwind going forward for us will be the FX translation. We continue to see the euro and other currencies devalue further in this fourth quarter, our March quarter, here. But as a reminder, our fourth quarter is usually the strongest from a revenue and profitability perspective. Add to that the STB acquisition and the recapitalization of the balance sheet and we should see a very nice uptick in earnings, putting aside the $8.5 million one-time debt retirement charge that Greg spoke about.

Investments in our Columbus McKinnon lean business system and new product development in emerging markets will continue to bear fruit and help grow our company for the foreseeable future. We are well capitalized. We remain positioned to continue to execute our strategic plans to profitably grow our business. And we have about $102 million of cash and the new $150 million revolver, and the $125 million senior secured loans that are outstanding now. We continue to have acquisition discussions with many businesses that could add strategic value to our company.

I'd like to thank all of our people around the world for their dedication, excellence in making our company a stronger, market-leading organization. And as always, we appreciate your time today. Thank you.

That concludes today's conference. Thank you all for participating. You may now disconnect.