Columbus McKinnon Corp (CMCO) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Columbus McKinnon third-quarter fiscal year 2016 financial results conference call.

(Operator Instructions).

Also as a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Ms. Deborah Pawlowski, Investor Relations for Columbus McKinnon.

Thank you, you may begin.

Thank you, Matt, and good morning, everyone.

We certainly appreciate your time today and your interest in Columbus McKinnon.

As Matt mentioned, we are going to review our third-quarter fiscal year 2016 financial results and discuss our outlook.

I have on the call with me today Tim Tevens, our President and CEO; and Greg Rustowicz, or Chief Financial Officer.

You should have a copy of the financial results that were released earlier this morning before the market opened.

And, if not, you can access those, as well as the slides that we have to accompany our conversation today, at www.cmworks.com.

If you would look at those slides and turn to page 2, I will discuss the 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 following.

These statements apply to future events and 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.

These documents can be found on our website or at SEC.gov.

So with that, I will let you turn to slide 3, and have Tim began.

Thank you, Deb.

And let me also welcome you to our conference call for the results of the third quarter of fiscal 2016.

Page 3 does 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 a couple hundred to $300 million or so in acquisitions, and a steady stream of new products, of target of 12% to 14% operating margin, and a strong working capital level and overall balance sheet.

The Magnetek acquisition has certainly helped us move closer to within this target range.

Page 4 provides the highlights of the third quarter.

Our revenue was up 18.8% or $31.7 million, driven by acquisitions, and also excluding the negative impact of foreign currency translation.

The strong US dollar resulted in unfavorable currency translation of about $7.4 million.

Magnetek integration is off to a great start.

We have already achieved $3.7 million run rate of cost synergies at the end of this quarter.

And our revenue synergies of geographic expansion and product development are well underway.

As a result of the strong cash generated to date, we have also repaid about $30 million in acquisition borrowings.

US revenues were up 23.3% to $102.7 million, of which acquisitions contributed $26.1 million.

Revenues outside the United States were up 12.1% to $64.5 million, driven by organic growth and acquisitions, and also excluding the $7.4 million of negative foreign currency translation.

We continue to increase our gross margin, improving this quarter to 30.9% on an adjusted basis, driven by the acquisitions' productivity-enhancing activities.

Please remember that the December quarter is generally our weakest quarter of our fiscal year.

We did have a great free cash flow generation in the quarter, generating $28.8 million from operations.

And our debt to capital cap, net of cash, now stands at 44.9%, which is a nice step down in the quarter.

Slide 5 gives you a graphic representation of the US industrial capacity utilization, which I'm sure is no surprise to all of you.

It's been a fairly negative slide for the last year or so.

This is certainly a challenge for industrial goods -- capital goods and MRO suppliers in the United States.

Our Q3 revenues have grown $26.3 million or 18.8%, as I mentioned, excluding the negative effects of foreign currency, as shown on slide 6. Magnetek and STB acquisitions represented all of this growth, and more.

Volume was down on the quarter, the result of lower industrial activity in sectors of the economy such as oil and gas, heavy manufacturing, mining, and all of the supporting industries to those key elements of our economy.

We are seeing some good activity in EMEA, our Europe business, up 5.8%, excluding acquisition and FX.

And Asia-Pacific was up 3.9% organically.

Latin America was flat, as Brazil, as many of you know, is basically in a recession.

Now let me turn it over to Greg for some more financial detail.

Greg?

Thank you, Tim.

Good morning, everyone.

On slide 7, our third-quarter adjusted gross profit margin increased 10 basis points to 30.9% from 30.8% in the prior year.

Adjusted gross profit increased $6 million or 13.9%.

We are adjusting gross profit for two purchase accounting adjustments related to the Magnetek acquisition: the inventory step-up expense of $700,000; and the amortization of backlog, which was $400,000.

The reconciliation for adjusted gross profit is included on page 18 of this presentation.

This quarter represents the 21st consecutive quarter of year-over-year gross margin improvement on an adjusted basis.

On a GAAP basis, gross margin was 30.3%, which compared to 30.8% in the prior-year period.

GAAP gross profit increased by $4.9 million this quarter compared to the prior year.

Foreign currency translation negatively impacted gross profit by $2.1 million.

Excluding foreign currency translation, gross profit increased $7 million.

The STB and Magnetek acquisitions contributed $11.5 million to gross profit.

Pricing and material cost deflation added $1.6 million.

A number of items partially offset these positives.

Sales volume and mix negatively impacted gross profit by $2.5 million.

Higher product liability costs reduced gross profit by $1.2 million.

The impact of Magnetek purchase accounting adjustments reduced gross profit by $1.1 million.

These purchase accounting adjustments related to inventory step-up expense and amortization of backlog are now complete.

Finally, reduced fixed cost absorption and productivity, net of other manufacturing cost changes, negatively impacted gross profit this quarter by $1.3 million.

As shown on slide 8, selling expense was higher than the prior year by $1.9 million, and represented 12.1% of sales this quarter compared to 12.4% in the prior year.

The Magnetek and STB acquisitions added $3.2 million to selling expense in the quarter.

Favorable foreign currency translation lowered selling costs by $1.3 million.

G&A expense increased $3.6 million from the prior year, and represented 10.3% of sales this quarter compared to 9.1% in the prior year.

There were one-time deal costs related to the Magnetek acquisition which drove $400,000 of the increase.

Excluding these deal costs, G&A as a percent of sales was 10%.

The Magnetek and STB acquisitions added $2.5 million to G&A expense in the quarter.

Favorable foreign currency translation reduced G&A expense by $700,000.

We expect our quarterly SG&A run rate to be approximately $37 million to $38 million per quarter, including the impact of the Magnetek acquisition.

Turning to slide 9, adjusted operating income was $12.5 million compared to $12.6 million in the prior year.

This represented a decrease of $100,000 or 1.1%.

We have adjusted operating income this quarter for the impact of the acquisition deal costs of $400,000 in purchase accounting acquisition inventory step-up-expense, and backlog amortization, previously mentioned, that together were $1.1 million.

Adjusted operating margin was 7.8% compared to 9% in the prior year.

This reconciliation can be found on page 19 of this presentation.

As you can see on slide 10, adjusted earnings per diluted share for the third quarter of fiscal 2016 were $0.32 per share compared to $0.33 per share in the previous year, a decrease of $0.01 per share or 3%.

Adjusted earnings per share reflect the exclusion of the acquisition deal costs and purchase accounting inventory step-up expense, as well as acquisition amortization of backlog.

GAAP earnings per diluted share were $0.36 per diluted share versus $0.39 per diluted share in the prior-year period.

The GAAP earnings per share include the impact of the items I just mentioned, as well as the actual tax rate in the quarter of 14.1% compared with 23.1% in the prior-year period.

The unusually low tax rate this quarter was due to the utilization of certain tax credits which reduced tax expense by $1.2 million.

This had a 14 percentage point impact on our effective tax rate this quarter.

Our effective tax rate for the full year of fiscal 2016 is expected to fall between 37% and 41%, which is slightly lower than last quarter's guidance of 38% to 42%.

On slide 11, you can see our return on invested capital is 9% on a trailing 12-month basis, and it is comparable to our weighted average cost of capital.

We continue to invest in good capital projects that exceed our cost of capital.

And we expect the value creation opportunities from a full year of the Magnetek acquisition to further increase our return on invested capital over time.

Turning to slide 12, excluding the impact of acquisitions owned for less than one year, our working capital as a percent of sales was 21.6% compared to 22.9% at September 30, 2015, and 20.8% at March 31, 2015.

Working capital as a percent of sales decreased 130 basis points sequentially from last quarter.

Inventory turns were 3.7 turns compared to 3.9 turns one year ago, but improved from last quarter's level of 3.4 turns.

We expect inventory turns to improve to 4 times by fiscal year-end, as this is an ongoing focus of the business.

We will also shift certain large rail and road projects that are in backlog by the end of the fiscal year, which will bring down inventory levels.

On slide 13, operating free cash flow in the third quarter was especially strong, coming in at $22 million compared to $13.4 million in the prior year.

We are benefiting from the cash generation capability of Magnetek, as well as lower cash taxes from the utilization of the NOLs we acquired.

Net cash provided by operating activities for the nine months ended December 31 was $32.9 million compared to $29.9 million one year ago.

Capital expenditures year to date were $15.5 million versus $11.3 million in the previous year.

As a result, operating free cash flow was $7.4 million (sic - see slide 13, "$17.4 million") compared to operating free cash flow of $18.5 million, one year ago.

We expect fiscal 2016 capital expenditures to be within a range of $18 million to $22 million.

The majority of the CapEx is dedicated to productivity and growth projects.

Turning to slide 14, you can see that our total debt as of December 31 was $281.1 million compared to $126.7 million as of March 31, 2015, as a result of the Magnetek acquisition.

We repaid a total of $18.3 million of debt in the quarter.

Specific to the Magnetek acquisition, we borrowed $195 million for the acquisition and deal costs, and made discretionary principal payments in the quarter totaling $15 million, bringing the cumulative amount repaid for the acquisition to $30 million in four months.

Our net debt to net total capitalization was 44.9% as of December 31.

We expect to repay approximately $32.5 million of debt over the next 12 months related to the acquisition, plus an additional $12.5 million of regularly scheduled principal payments related to our term loan, for a total debt repayment of $45 million.

Our focus continues to be on deleveraging the balance sheet quickly.

With that, I will turn it back over to Tim to cover the fiscal 2016 fourth-quarter outlook.

Thanks, Greg.

Let's spend a moment and take a look at the outlook on page 15.

The Magnetek acquisition is certainly a very good one for our Company, and is producing good revenue and earnings growth, more than offset the economic headwinds we are now facing.

Our order rate is down 15% from last year's -- from this last Q2, as a result of slowing end market demand in oil and gas, mining, and traditional MRO and heavy equipment manufacturers, mostly in the US.

I would say that EMEA is the positive, as the order rate is up 12% year-over-year in our traditional hoist business.

And Asia-Pacific is actually up 26% year-over-year in a similar market.

Latin America order rate is flat -- as I said earlier, Brazil is in a recession -- offset by a relatively strong Mexico.

Our backlog of almost $98 million is up over last year, driven mostly by Magnetek.

As you know, we now report them part of our Company.

Given the soft order rate in the States and weak economic environment, we are controlling our costs in those businesses that are directly affected at this point.

So let me also, Matt, just open it up to questions, if I could.

(Operator Instructions).

Michael Shlisky, Seaport Global.

Greg, I want to talk on your comment about debt reduction, going forward.

Looks like about $4 million to $5 million.

Do you have any thoughts of going above that, should we be able to work down your working capital of bit more over the next few quarters?

Or is that pretty much set for the rest of the year here?

No, good question, Mike.

Thank you.

So, absolutely.

We think we have an opportunity to improve our working capital.

We are focused on it, inventory in particular.

And to the extent we generate excess cash, we could use that for additional principal repayments against our debt balance.

I would imagine that's your first priority for any additional free cash that could come in.

Yes, Mike, this is Tim.

At this point, that would be exactly our focus.

Okay, great.

I also wanted to ask a little bit about your Q, on your gross margins in the fiscal fourth quarter here.

Got a nice streak going.

I was wondering if you could maybe, one, just update us on if that streak will continue in Q4.

And secondly, have you made any kind of material changes in the cost structure of Magnetek that are beyond just the opportunities that you had planned -- actual operating improvements there?

So, the first part of your question was the gross margin improvement continuing in the fourth quarter.

Look, as you know, we don't give guidance, so it's hard for us to comment on that.

But I would tell you that we are very focused on cost, and very focused on growing that gross margin.

So, our expectation is here that we would love to see that continue in the fourth quarter, and that would be our target.

Relative to cost structure and Magnetek, when we did this acquisition we gave you a number of around $5 million of cost reduction, which is, for the most part, as we said, through four months of activity, a 60 -- or two-thirds complete.

We're at $3.7 million right now.

And we can certainly see our way clear to the end of the fourth quarter, hitting that target [run] rate, which is fabulous for them.

I would say that as we continue to integrate and work more closely with them -- which, is by the way, culturally a wonderful thing for both companies, we are very much aligned in this regard -- there certainly may be more opportunities above and beyond what we have quoted.

And we will certainly give you a heads up as we identify them and clarify them and quantify them going forward.

And maybe just, Mike, to add on to it, so of the $5 million of cost savings targeted, about 80% of that is SG&A related.

And the remainder is sourcing and manufacturing savings, but more or less looking at opportunities for the two companies to work more closely together.

Okay, great.

If I can just to squeeze in one last one here.

On your last [thought] you had a few end markets that were a bit challenging domestically that you had mentioned there.

Could you maybe give us any kind of thought on volume versus pricing there?

Are you finding in some markets, like in oil and gas, people are getting a little bit more stingy with their money, and either asking for price concessions or going down the curve of fancy features or other kinds of ways to cut upfront costs going forward?

Yes, tough question.

Let me see if I can break it down a little bit.

Our experience in prior recessions, Mike, is that the price we get goes down.

It rarely goes below zero, so it doesn't normally get negative; so, where we give concessions to that degree.

But to be honest with you, in the oil and gas world, we are finding those customers -- and our channel partners that supply those customers -- it's a very challenged environment, and there's not a lot of good projects, just yet, going in there.

So yes, every nickel they spend, they are very cautious with it.

And they only spend money when they absolutely have to, to keep things operating and running, which is our experience.

So, new projects are few and far between, if any, and it's really more of a maintenance activity.

And we find that business to be okay; it's just at a much lower volume than we see with the capital expansion that we had seen last year that is gone.

It's just not prevalent.

But I would expect our price to behave as it has in prior recessions, which is to say that instead of giving the 2% to 3% we would normally see, it would be 1%, maybe even go below 1%, but we'd get some of that -- we should get some price in the market.

So, potentially you're saying, you're not seeing loss of pricing; you're not making concessions, you're just having to adjust your expectations a little bit down?

Correct, correct.

It's just harder to get price in a down market, as you might imagine.

And, Mike, just to review some of the numbers that we typically report.

When you look at it on an overall Company basis, we have been consistent at 1% price year-over-year, all three quarters this year.

So that has not varied.

Okay.

Okay, great, guys.

I will hop back in queue.

Appreciate it.

Robert Majek, CJS Securities.

Magnetek seems to be holding up pretty well.

Can you just give us a little more color of what's behind that?

And if it's reasonable to expect that trend to continue on a -- given the headwinds we're facing?

Yes, yes, good question.

And I probably should have elaborated that a little bit more on my remarks.

So, Magnetek has a different business model than Columbus McKinnon.

It really plays in a world that's different, to a large degree, than what Columbus McKinnon does.

So much of that project work that they are seeing now is dedicated to changing our drives and controls in existing equipment that's already operating today.

Typically these are in -- well, a good example is the large steel mills.

And these controls and drives that they are switching out -- so they are going from 1970s technologies to today's technology -- provide a lot of benefit to the end user.

The first and foremost generally is energy efficiency.

So they actually regen energy in many of these cranes and hoists to create power.

And the multimillion dollar projects that they are seeing with some of these steel companies actually pay themselves back in very short order, typically 1 to 2 years kind of payback.

So we're seeing those kinds of folks make these investments.

The hoist and the crane is fine.

It continues to operate, but they just switch out the controls.

And the payback is very quick.

They are also seeing in their radio business -- about 25% or so of their business is radio -- and this is a device that controls a hoist or a crane, or a mobile crane, or anything hydraulic or electrical, that has -- communicates to the device over radio frequencies, so you are not tethered to a cord.

And they are seeing that grow quite nice, broadly speaking, in the material handling sector, but also outside of the material handling sector.

And the thing that's driving that is safety.

We're getting the operator away from the load that's being lifted, or the operation that's taking place.

And this radio device puts the operator in a position to see what's going on, but yet be a safe distance away from the actual lift that's occurring.

They are seeing very good operations -- a very good lift in there.

And, of course, the thing that we're going to do, Robert, with them is introduce them some markets where we have a very strong presence, like Europe, where they don't today.

And try to push those kinds of products through our salesforce, but also make investments to penetrate some of those sectors that we're not in, as well.

EMEA and Asia Pacific would be the two markets that they will be focused on.

So it's actually different drivers of their business than it would be with Columbus McKinnon, so it actually changes the kind of business Columbus McKinnon has traditionally been slightly.

They are 20% of our revenue or so, and it does give us more lift than traditionally we have seen in the past.

That's helpful.

Thank you.

I will jump back in queue.

Joe Mondillo, Sidoti & Company.

Regarding the Magnetek acquisition and the accretion there, just wondering if you fully realized the NOLs that you were expecting in this particular quarter.

In addition to that, the pension expense also: I know you were expecting that to go from an expense to an income.

Was that fully realized, as well?

Yes, Joe, it's Greg.

So on the NOL side, yes, we are realizing the NOLs as we talked about, a total of about $62 million over -- is the cash value over the 20-year period.

And I believe it was $6.7 million at an annual basis.

In fact, we just had a tax payment due here in December, and we didn't make a tax payment because we were able to utilize the NOLs.

So we are seeing a cash benefit fall into our cash flow.

And your second question?

Oh, the pension.

Yes, that change actually took place back in September; so, yes.

So, if you looked at historical Magnetek, they were running at about a $2 million-a-year pension expense rate.

And now with the revaluation of the pension plan, it's pension income of -- I know it was, like, $1 million -- a little over $1 million for the seven months that we have owned them.

Okay.

Okay, thank you.

Regarding the organic business, just wondering if there is any sort of cost control measures that you are looking at, headed into this next fiscal year?

Are there any things that you are looking at to try to reduce the cost structure, just given the ongoing pressure on the top line that we're seeing?

Yes, yes, on a regular and ongoing basis.

So we have had some reductions in force in America, as our plants don't need to produce as much as they have in the past, obviously.

And those are being executed -- have been executed this past quarter, the Q3, and also continue.

So that's something we monitor very closely so that we don't have excess costs where we don't need it.

And that's something that we view as management to be very serious, and something that we'll continue to monitor and take action on, as needed.

The other thing is we -- as you might recall, we did move from one of our facilities in Germany -- in Heilbronn, Germany -- into our Kissing facility.

That's now complete.

And there was a little bit of restructuring costs that flowed into this quarter that is behind us now.

And that's done, so that restructuring is complete as well.

And I will also tell you on -- predominantly on the G&A side, where we really -- Greg and team focus on keeping our costs as low as possible -- there's a lot of energy around that, as well.

So it's not just the manufacturing facilities; it's the staff functions, and all of our folks here at corporate headquarters, as well as all the G&A across the Company.

The one area that we're actually probably outspending on is product development.

And that's really to integrate Magnetek, take their controls and drives, putting them in our hoisting platforms; also producing new products that we've never had before.

And that's an area that I think is going to drive revenue.

So we have not slowed that investment down at all.

So, yes, very key focus for the Company.

Okay.

So it sounds like it's a fluid type thing, as opposed to taking one big shot at it regarding -- just given the environment.

Is headcount being reduced by attrition, just over time?

No, headcount would be reduced more proactively than just attrition.

Okay.

Some facilities find it better to, for example, instead of working 40-hour weeks, they will work 32-hour weeks.

So the cost comes down, but we keep the skilled workforce engaged.

Some facilities -- on the contrary to that, actually reduced -- in some of our rigging facilities, we've actually taken a number of actions to reduce by terminating employees, unfortunately as that is.

But people are no longer with us.

So it really depends on how the business wants -- chooses to operate that reduction.

Okay.

And then that brings me to just the overall trend in the business, and how that affects the cost, but more so just the top line that you are seeing.

So, the US continues to see pressure.

Do you think we're continuing on a downward slope in the US?

Or where do you see the trajectory in the US part of the business?

And then same question related to Europe.

China is seeing their pressures, and in Asia and everything.

Are we going to start to see that strong growth that you are seeing in Europe?

That has been nice, but are we going to start to see that may be start to slow down, just given what we've seen in China and elsewhere in the world?

Yes, well, as you know, it is a global business.

It does interact with each other.

But let me see if I can take it in pieces for you, and give you at least my perspective on how I think things might play out.

I think the US will remain challenged for quite a while.

I don't know what quite a while is; if it's one, two, three quarters.

I don't know exactly.

As you may recall, our visibility in our normal business is not very long.

We don't have a lot of big projects that are booked out for the next 12 months.

Rather, we need to book 2 months' worth of business in the quarter that we're in to be able to recognize the revenue.

So we're somewhat dependent on what the activity is in the local markets to drive that revenue.

So I think oil and gas will continue to be a headwind.

It will start to lessen because it -- okay, did we find the floor at $31 a barrel?

I don't know, but it's been treading in this area now for a while, and maybe things will level out there.

The supporting industries that have historically supported oil and gas have reduced significantly, and I think you see MRO expenses from some of our -- or MRO revenues from some of our channel partners, they are reporting down numbers, which obviously directly affects us, as well.

I will tell you that we're taking some very good actions to develop some new and interesting products for the marketplace that we think could counter some of that.

So, we would love to see ourselves be counter to the cycle and do things much differently in the marketplace than what our competitors are doing, especially now with Magnetek being part of our Company.

And that's something that we're aggressively pursuing.

In the EMEA, I think they have a nice trend now.

I think they have started out about a year ago, nine months ago, with some positive numbers.

I think Germany and related economies are really helping our business there, and we would expect that to continue.

It's off a very low base, by the way, because for the last two years they have been in a recession, and they are coming out of that.

So we would expect that pace to continue quite nicely, and our bookings this past quarter have indicated that that is continuing.

And Asia-Pacific, let me remind you that particularly China, we have such a small base there.

We do less than $20 million in China a year, so we're really not economically linked there.

It's so small.

And really everything we do is new to us, and it's growth.

So, the team there is very excited.

We continue to bring product into our new facility there, so that they can produce it in China to sell it in China.

So they are actually gaining some good momentum and getting some very good organic growth there.

It's taking market share, generally speaking.

Latin America is troubled, led by Brazil, which is the largest economy there, and they are in a deep recession.

We don't see a lot of activity.

But I'm very proud of our team down in Brazil, who have actually holding sales reasonably flat to slightly down in a very, very difficult market.

But they have introduced some new products: the STB hook line that seems to be doing quite well down there.

So they have offset the economic downturn with some new products.

And Mexico is okay.

I think it's doing fine.

Currency headwind is pretty huge between the Mexican peso and the US dollar, at this point.

But from a volume standpoint, they are doing pretty good, and taking some good market share there.

Joe, I hope that was helpful, but it's (multiple speakers).

No, yes.

Very helpful.

Thank you.

Just lastly, I was wondering if you could give me the backlog, excluding any acquisitions.

Just trying to get an idea of organic backlog.

Yes, I'm sure Greg could do that for you reasonably quickly.

Yes, so, looking at December's backlog, excluding Magnetek and -- be around $81 million.

And how does that compare to --?

Yes, I got that.

I think it's $85.5 million?

So it's down slightly.

Yes, okay.

All right, thanks a lot.

Gary Farber, CL King.

Can you discuss a couple of things?

One, can you talk about the competitive environment?

And are there some markets that are more pressured than others, what you're seeing?

And if there's any influence from foreign competition coming in.

Sure.

So, the competitive environment is just that: competitive, globally.

We are seeing everybody attack the US market, which is not new, Gary.

That's been going on for forever.

And I would say that in Europe, there is -- and America, to a degree -- with the potential Terex/Kone merger, there some concern in the marketplace as to where that's going to head, and what will really happen.

I think to some degree, we have benefited from that.

That's been helpful, both domestically, and in Europe in particular.

And in Asia, it's the wild, wild west.

It's 60 hoist companies all battling for the same ground.

And we're working hard, and our team is doing a great job there.

But nothing really changed significantly in that regard, other than the Kone/Terex merger.

And also can you talk about CapEx for next year?

Or just give some sense of what kind of things you might be spending your capital on, as far as the Company itself?

Yes, so from CapEx perspective, this year, as I mentioned on my prepared remarks, we're in a range of $18 million to $22 million.

We think next year it's going to be more in the $15 million to $20 million range.

We had some bigger projects this year which aren't going to repeat.

And also, clearly, with our push to generate cash, we're going to be especially vigilant on making sure that we get good cash paybacks on the projects that we do approve.

And would you expect your working capital to improve if the environment remains slow, compared -- year-over-year?

I do.

If you look at working capital as a percent of sales, I do think we can improve that metric, more on the inventory side.

Yes.

Right.

We're pretty good on the receivables side, payables.

As we have talked before, we continue to take discounts because it economically makes sense to do so.

But I think inventory is clearly an area that we will work hard on to improve that metric.

It's a short cycle business, but I was just wondering, given that things seem like they're softening -- Tim alluded to maybe a couple of quarters of softness.

Has anything changed, or have you made any changes to your forecasting approach or how you are building up your own internal forecasts?

We haven't changed the approach.

But I think, certainly, the numbers have changed relative to what we believe the rest of the year might line up.

And as a result, and our manufacturing planning has come down in terms of what we need to produce.

Which is why Greg indicated that we would expect inventory to also be reduced, because we will be using the inventory to supply, as opposed to producing.

Right.

Okay, thanks.

Schon Williams, BB&T Capital Markets.

Can you just elaborate, how much are you expecting to go out, this next quarter, for the large rail projects?

Yes, Q4.

Yes, it's going to be just under $4 million.

Shipped.

Shipped, yes, right (multiple speakers).

Or probably closer to $3.5 million.

Okay.

No, that's helpful.

I'm a bit perplexed by the SG&A guide, and maybe it's just a misunderstanding of terminology.

To some extent, you guys have been guiding well above I think where my adjusted numbers are coming in the last couple of quarters.

You actually guided -- I guess you took the SG&A run rate down slightly from what you had expected last quarter, where now it is $37 million to $38 million.

But I'm thinking, if I look at my numbers, I'm adjusting for some of the one-time Magnetek, I'm coming in at something closer to $35 million.

So I'm just trying to get a sense of -- do you still expect an acceleration from current levels, and why would that be?

Or are we just mixing terminology here?

Yes, so I'm looking at -- I guess on the selling side, Schon, I'm looking where you got your numbers from.

If you just took the last quarter, it's about $35.6 million.

And there's arguably about $400,000 of deal costs which go away.

So it's a little over $35 million in the quarter.

Yes.

Selling cost is -- there's a large component of the selling costs which are variable.

And we do expect higher sales in the quarter, which (technical difficulty) traditionally Columbus McKinnon's strongest quarter.

And, so, the selling expenses will be higher.

And we also are investing in some additional resources to help us on the Magnetek revenue synergies side, and some of those costs will be in there as well.

So, it would be reasonable to assume that we would step up SG&A another $2 million to $3 million a quarter, versus where we are today, is what you're saying.

The $3 million might be a little high.

It's going to be probably closer to the $37 million than it is to the $38 million.

Okay.

All right, no that's -- go ahead.

That's, in particular, in Q4, Greg is referring to.

Yes.

Okay.

So, to some extent, we should expect that number to get dialed back as we move into fiscal Q1, given that, again, the volumes seasonally would be -- even assuming that the demand environment stays the same, seasonally we expect the volumes to come in a bit in Q1.

And you would expect that SG&A to come back in, as well.

Certainly on the selling side, but we're in the process of -- our budgeting process right now.

So it's hard for me to say where we're coming in.

But clearly what we're trying to do is reduce our base fixed costs so we can free up resources to invest in growth initiatives, like new product development.

All right.

That's helpful.

Maybe just on the product liability, I noted that it was a bigger headwind this quarter versus last quarter.

Are you seeing increased realization of warranty or liability items there, or maybe just a little detail?

Yes, sure.

So you are right, that is kind of an unusual spike.

And we would attribute it to essentially one case that we really don't want to get into the details on.

But it's one case that is currently underway which has caused the lion's share of that increase.

Yes, let me just add, just so -- make it a little bit clearer.

The one case that Greg is referring to is a product line that we sold a dozen years ago or so.

We don't even make this product anymore.

It's not a hoist.

It's not our basic line.

But we have to defend ourselves in that, and we will -- actually, we're vigorously defending ourselves because it's just wrong.

But having said that, that's what the extra cost is.

And that's all legal defense costs.

But that cost would continue for the next several quarters until you get some conclusions on the case itself, is what you're saying?

Yes, I don't think so.

There will be some more spend, but the lion's share of the (technical difficulty) defense costs have already been spent.

The actual -- if this does go to a trial -- (multiple speakers).

That's coming up shortly, Schon, so the spend will be done in this quarter.

Okay, that's helpful.

And just so I'm clear, back on the discussion around pricing, traditionally you go out in the March quarter with new pricing in North America.

The expectation would be that you will continue to go out with pricing; just will not be as potentially as robust as during other periods where we are seeing significant inflation.

That's correct.

That's correct.

We're normally in this 1 to 3. Think of us, in this upcoming period, as we might get 0.5 point to 1 point.

It will be in that area, probably.

But individual line items are -- just to be clear, we raised prices on individual line items, product by product, to the market.

Some don't go up at all, some go up more.

It really depends on how we view the product's position in the marketplace.

Yes, as well as what the competition is doing.

Is there any opportunity to raise pricing, specifically within Magnetek?

You talked about new product development.

Would that be -- that would be an opportunity to raise pricing?

Their business is a little different.

Most of their project -- are project-related, so they are actually quoting on a project.

And whatever the costs are get folded into the cost of that project.

So it's not -- we can't calculate what the price comparison was to the prior year, for example.

But that's not how their business flows.

But I would tell you that I would expect that the Columbus McKinnon product lines, we would take their products, much of their products, into our Columbus McKinnon hoisting -- powered hoisting products.

And then I would expect that we would increase those prices, right along with the hoists sales that we would normally do through our channels.

All right.

Thanks, guys.

I'll get back in the queue.

Joe Mondillo, Sidoti & Company.

Just a couple follow-ups.

The $37 million to $38 million of SG&A, that is not including the amortization of intangibles?

Is that correct?

Correct.

The amortization of intangibles falls down below.

Right, okay.

And then just lastly (multiple speakers).

I was wondering if you have any idea of what may be the tax rate (technical difficulty).

Hello?

It appears we have a technical difficulty.

Please remain on the line for one moment.

Hello?

Okay, the line should be connected now.

Okay, thank you.

Hello, Joe?

Yes, can you hear me?

Yes, sorry.

Somehow we got disconnected.

I apologize for that.

I don't know what happened.

No problem.

Did you (multiple speakers)?

Yes, I was just wondering if you have any -- by chance, at this point in time, an idea of what the tax rate would be in fiscal 2017 that you are looking at?

Yes.

Greg?

Sure.

So, excluding any unusual items, we would expect that it's going to be closer to a 35% rate, give or take.

Okay.

(multiple speakers) US income from Magnetek, which will blend our overall effective tax rate up.

Okay, great.

All right, thanks a lot.

Peter van Roden, Spitfire Capital.

Just a quick question on the gross margin side.

You mentioned that you are going to be focusing on selling some more products out of inventory in order to reduce working capital this quarter.

How does that impact -- if you take downtime in your plants this quarter, how does that impact gross margins going forward, in terms of the units you're going to be selling next year?

Yes, what really affects the gross margin is going to be the level of activity, and to the extent we absorb our fixed costs in an efficient way.

So, some of the inventory that we will be reducing will be raw materials, and that won't have any impact at all on gross margin.

But I wouldn't expect there to be a material impact to the reduction in inventory to our gross margin percentage.

Okay.

That was all I had.

Thanks, guys.

Okay, it appears there are no further questions at this time.

Management, would you like to make any closing remarks?

Yes, if you don't mind.

I just want to comment that we remain very excited about the combination of Magnetek and Columbus McKinnon.

As is evidenced by our current run rate of recognized cost synergies, the short-term benefit through these synergies is well underway, and we should be complete here in this quarter.

More importantly, the long-term strategic positioning, we are well on our way to create a new lifting capability by combining Magnetek technology into the traditional Columbus McKinnon mechanical products.

We also see the power of the Company as we generate free cash flow and delever our balance sheet very quickly.

I want to thank all of our people around the world for their dedication and excellence in making our Company stronger, a market-leading organization.

Without them and their efforts, none of this can be accomplished.

So thanks very much today.

We appreciate your time.

Have a good day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you.