Columbus McKinnon Corp (CMCO) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Columbus McKinnon Corporation Fourth Quarter and Full Fiscal Year 2017 Financial Results.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Deb Pawlowski, Investor Relations for Columbus McKinnon.

Thank you.

You may begin.

Thanks, Melissa, and good morning, everyone.

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

On the call with me are Mark Morelli, our new President and CEO who just recently joined us at the end of February; and Greg Rustowicz, our Chief Financial Officer.

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

And if not, you can access those as well as the slides that will accompany today's conversation at cmworks.com.

If you'll turn to Slide 2 of the slide deck, 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 Q&A session.

These statements apply to future events, which 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 with other documents filed with the Securities and Exchange Commission.

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

During today's call, we will also discuss some non-GAAP financial measures.

We believe these will be useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided reconciliation of the non-GAAP measures to comparable GAAP measures in the tables that accompany today's release and slides for your information.

So with that, please turn to Slide 3 and I will turn it over to Mark to begin.

Mark?

Thank you, Deb.

Since joining Columbus McKinnon, I've spent my time with customers, employees, board members, and investors.

Over this initial period, I've come to understand unique strengths and opportunities at Columbus McKinnon.

This is a very good company with a solid platform from which to build, and we have an excellent runway of opportunities for profitable growth.

I came to the company knowing that Columbus McKinnon counts decades of commitment to quality and reliability, which has provided a solid value proposition for our customers.

Our products cover a wide breadth of material handling applications and our globally recognized brands.

We have long-standing distribution channels in diverse markets, including general industrial, automotive, construction, energy distribution and production, aerospace and defense, agriculture, natural resources, and entertainment.

We have a history of strong cash generation throughout the business cycle.

Our financial flexibly, broad installed base, and strong position in diverse markets positions us well to take advantage of a market favorable for growth.

As I was joining Columbus McKinnon, we've just closed on our acquisition of STAHL CraneSystems.

STAHL's an excellent cultural fit joining together a family of businesses that are like-minded.

We're making progress integrating the businesses and laying the foundation to capture synergies and long-term value.

This addition strengthens our position in Europe, the Middle East, and Africa.

It also expands our explosion-protected hoist offering, deepens our reach into independent crane builders in these regions and complements our existing business, which sells to independent crane builders in the Americas.

So this gives us opportunities to cross-leverage new market channels and customers.

Recent acquisitions such as STAHL and Magnetek move us up the value chain of more engineered solutions with higher gross margins and helps us define ourselves as an industrial technology company.

We have opportunity to further rationalize our business and focus on operating efficiency and this represents a significant runway for improvement.

The value proposition is also solid as our strong cash flow performance enables us to delever the balance sheet with the conversion of debt-to-equity value in the form of a higher share price.

The opportunities I see to take the company to a new level of operating performance lead me to conclude that it's an exciting time to join Columbus McKinnon.

Let me first provide some brief commentary on the financial results of the quarter and fiscal year.

Greg will follow going into greater detail.

I will then take some time to further discuss my impressions of the business after my initial months.

We ended the year on a strong note with organic volume growth in the fourth quarter.

Sales for the quarter were $183.7 million.

Having 2 months of revenue from STAHL was the primary reason sales were up 18.4% in the quarter.

Excluding the acquisition, revenue was up 2.5%.

This is encouraging since this is the first time we've had organic volume growth in the last 2.5 years.

The growth in the quarter was from the U.S., Latin America, and Asia.

In the U.S., we saw an increase in specifications for buy American products.

Retrofits and capacity additions for the steel industry are driving demand for new digital controls for Magnetek for crane systems.

Construction spending seems to have improved in advance of summer projects and both midstream and downstream oil and gas projects showed some signs of life.

Some channel partners have placed stocking orders, but the level of optimism is uncertain.

Our hoist and rigging business also benefited from a relatively strong entertainment industry in the U.S. We are cognizant though that the tragedy at the concert in Manchester, England last week could impact concert attendance and consequently demand for our products globally.

In Latin America, general manufacturing improved in Mexico.

Channel partners placed restocking orders in March but there is uncertainty over trade agreements with the U.S. so it's difficult to determine how this will ultimately affect us.

In Asia Pacific, China specifically, overall demand in the automotive industry is slowing after 10 years of double-digit growth.

However, there's been demand for battery-powered vehicles.

Local manufacturers realized sales growth from government policies aimed at improving the air quality in certain heavily populated regions and cities such as Shanghai.

We also had higher demand for our premium Lodestar chain hoist directed toward some large projects for the entertainment segment in China.

This was partially offset by continued weak demand in oil and gas in Southeast Asia.

While the organic growth was encouraging, we are hesitant to call the quarter the beginning of a trend.

After adjusting for some significant unusual items, we had similar performance as the prior year quarter.

Adjusted net income was $8.9 million or $0.40 per diluted share.

We recognized approximately $21 million of unusual operating income adjustments, which Greg will walk you through in his section.

Given the unusual cost, we posted a GAAP net loss of $4.7 million.

We generated about $12 million in cash from operations in the quarter and $60 million for the full fiscal year.

We used the cash to pay down $12.8 million in borrowings in the quarter and $46.4 million in the year.

This was a significant accomplishment and even better than the aggressive projections a year ago.

Our goal is to continue to pay down debt ahead of schedule.

Now I'll turn the call over to Greg to walk you through the results of the quarter and the full fiscal year.

Thank you, Mark, and good morning, everyone.

On Slide 4, we outlined the pro forma adjustments that have been recorded in the fourth quarter.

In total, we had $21.2 million of nonoperating cost.

The 2 largest items relate to the STAHL acquisition.

We have recorded in cost of sales the purchase accounting impact of the inventory and backlog step-up expense.

This amount represents the full amount associated with the inventory step-up.

There will be no further step-up expense to be recognized in future periods.

The next several items impacted our G&A expense.

We incurred $5.7 million of deal and integration costs.

Combined with the $3.1 million of deal cost booked in December, we are in line with the guidance that we provided on transaction cost that will be recognized on the acquisition in fiscal '17 of $8 million to $9 million.

The second item affecting G&A were costs associated with our former CEO's retirement in the amount of $3.1 million.

There will be no further cost with this item going forward, either.

The third item affecting G&A relates to $1.4 million of cost for a legal action against our prior product liability insurance carriers related to asbestos litigation.

We expect to recover certain past costs and a share of future costs under pre-existing insurance policies.

We expect that there will be additional legal cost for this item in fiscal '18 as this legal action progresses.

Finally, we also recorded $1.3 million of debt extinguishment cost related to the refinancing of the balance sheet and $1.1 million for a trademark impairment.

We also had a gain on the sale of the FX option that we purchased to hedge the STAHL purchase price.

Turning to Slide 5. Consolidated sales in the fourth quarter of $183.7 million were up 18.4% from the prior year.

STAHL added $24.7 million of sales for the 2 months of ownership, which represented 15.9% of the quarter sales growth.

The rest of the business grew $3.9 million or 2.5% despite a slight foreign currency headwind of minus 0.6%.

Sales volume was up $4.9 million or 3.2% and price was slightly down by $100,000 or 10 basis points due to selected U.S. sales promotions that were run in the quarter.

Overall, this was the first quarter of organic growth since September of 2014.

We saw markets improve in the U.S., Latin America, and APAC, as Mark has highlighted.

EMEA sales were down slightly as a result of approximately $1 million in customer-related delays for a project in Africa.

For the quarter, U.S. sales were up $3.3 million or 3.3% compared with the prior year period.

STAHL contributed $1.5 million to our U.S. sales.

Sales outside of the U.S. were up $25.3 million or 46.1%.

STAHL contributed $23.2 million of sales.

Both Latin America and APAC saw double-digit organic growth, while organic sales in EMEA were down due the previously mentioned project delay.

On Slide 6, our fourth quarter gross profit increased by $1.9 million or 4%.

Adjusted gross profit was $59.2 million, an increase of $9.3 million or 18.6% compared to the prior year.

Our adjusted gross margin was 32.2%, unchanged from the prior year.

The STAHL acquisition added $8.3 million of adjusted gross profit, which represents a 33.7% adjusted gross margin.

The core business had a 32% adjusted gross margin.

We did see positive productivity in our plants this quarter of $1.2 million, which increased gross profit.

Other items affecting our gross profit included the impact of higher volumes, which impacted gross profit by $700,000.

In addition, the prior year included $1.5 million of adjustments related to a product liability settlement for a previously sold business and an impairment charge on a building held for sale, which did not repeat in the current year.

This had a positive impact on the change in gross profit.

Pricing, net of material cost inflation, product lability cost, and foreign currency translation each negatively impacted gross profit by $300,000.

As shown on Slide 7, selling expense in the fourth quarter was higher than the prior year by $2.8 million.

STAHL added $2.9 million to selling costs.

Favorable foreign currency translation lowered selling costs by $100,000.

As previously discussed, adjustments affecting G&A expense were $10.1 million in the quarter.

Excluding adjustments, G&A expense increased $2.7 million from the prior year.

STAHL added $1.5 million to G&A expense this quarter.

With the STAHL acquisition now closed, we expect our quarterly SG&A run rate to be $44 million to $45 million per quarter, excluding STAHL integration and onetime cost.

Turning to Slide 8. Adjusted income from operations was $16.9 million or 9.2% of sales.

This compares to adjusted operating income of $14.2 million, or 9.2% in the prior year.

STAHL added $2.8 million of adjusted operating income, which represents an adjusted operating margin of 11.5%.

The current year adjustments to operating income totaling $20.1 million are detailed on Page 4 of this presentation.

The prior year adjustments totaling $2.4 million related to a product liability settlement and impairment charge on a building held for sale and facility consolidation costs.

The reconciliation for adjusted operating margin can be found on Page 19 of this presentation.

As you can see, on Slide 9, GAAP earnings per diluted share were a loss of $0.22 per diluted share versus earnings of $0.29 per diluted share in the prior year period.

Adjusted earnings per diluted share for the fourth quarter of fiscal 2017 were $0.40 per share compared to $0.39 per share in the previous year, an increase of $0.01 per share or 2.6%.

The reconciliation of GAAP earnings per share to adjusted earnings per share can be found on Page 20 of this presentation.

All adjustments are tax affected at a normalized tax rate of 30%.

On a GAAP basis, we benefited from a tax rate in the current quarter of 43.8%, which resulted in an income tax benefit of $3.1 million.

The favorable tax rate in the quarter was due to the reversal of a valuation allowance on deferred tax assets in certain foreign subsidiaries, which more than offset the nondeductible STAHL acquisition deal costs.

Turning to Slide 10.

GAAP earnings per diluted share for the full fiscal year were $0.43 per diluted share versus $0.96 per diluted share in the prior year.

Adjusted earnings per diluted share for fiscal 2017 were $1.32 per share compared to $1.54 per share in the previous year.

The tax rate for the full year was 31%.

For fiscal 2018, the effective tax rate is expected to fall between 21% and 25%.

This is lower than our historical rate and is due to the STAHL acquisition, which adds significant interest expense in the U.S. as the parent company was utilized to finance the acquisition in the capital markets.

Turning to Slide 11.

Our working capital as a percent of sales was 18.6% compared to 19.9% at December 31, 2016, and 21.5% at March 31, 2016.

This was our best result in 4 years.

Working capital as a percent of sales decreased 130 basis points sequentially from last quarter, reflecting improved inventory turns.

Inventory turns were 4.1 turns compared to 3.9 turns as of December 31.

We are focused on further improving our inventory turns in fiscal 2018 and expect to improve from the current level as we look to generate higher cash flow to pay down debt.

On Slide 12, net cash from operating activities in the fourth quarter was strong coming in at $11.9 million compared to $19.7 million in the prior year.

Free cash flow was also solid at $8.8 million.

Year-to-date cash from operating activities increased 14.8%.

Our cash flow was actually stronger than what is represented on the slide as we paid over $8 million in cash related to the pro forma adjustments previously mentioned.

The hallmark of this company has always been its ability to generate cash and we expect this to continue in fiscal 2018.

Our guidance for capital expenditures is estimated to be $20 million to $24 million for fiscal 2018.

STAHL represents approximately $5 million of this total.

The remainder represents CapEx for productivity projects and maintenance CapEx.

We expect to judiciously manage our CapEx and will be selective in which projects we approve.

We will prioritize projects with good returns and quick cash paybacks.

Turning to Slide 13.

As a result of the STAHL acquisition, our total debt was $421.3 million and our net debt was $343.7 million as of March 31, 2017.

Our net debt to net total capitalization was 50.2%.

Since the STAHL acquisition closed, we have repaid a total of $12.8 million of debt.

I am confident that we will be able to delever very quickly to a more normal net debt to net total capital level of 30%.

We expect that we will repay $45 million to $50 million of debt in fiscal 2018 and are targeting a 3x net debt to EBITDA level by the end of 2018.

We believe a more comfortable leverage ratio for the company on an ongoing basis is 2 to 3x net debt to EBITDA.

As a reminder, we have a covenant-lite term loan B, which has no leverage maintenance covenant as long as the revolver is undrawn.

With that, I will turn it back over to Mark.

Thanks, Greg.

Turning to Page 14, I'd like to discuss my perspectives after my initial tenure with the company.

As I mentioned earlier, I've traveled and met with key customers and visited operations during my first several months.

Columbus McKinnon is a great company with a solid platform to grow as a world leader.

But I also see there's significant runway for improvement.

One thing that is consistent is the depth, capabilities and experience of Columbus McKinnon employees.

We have the expertise to address the increasingly complex needs of our customers who look to lift, move, and position materials in diverse end markets.

The dedication of our employees to make this a better company should not be underestimated.

We're implementing a new operating system, the way by which we conduct ourselves internally.

Coming from United Technologies, I've grown up with a more disciplined and structured operating environment.

How we come together as a management team around our businesses, what we measure, how we hold ourselves accountable, and drive to achieve results, needs improvement.

We are launching a more disciplined operating environment, and I expect this will be evident in our results as we create more of a performance culture.

The acquisition of STAHL is on track.

It brings a well-established brand and excellent reputation for quality and strong customer relationships.

As I mentioned earlier, the acquisition provides a strong cultural alignment, deeper reach into independent crane builders, and balances us geographically.

Given STAHL prior parents predominantly was a crane builder, they were prevented from selling to crane builders in the open market.

As part of Columbus McKinnon, they now join our team to sell solutions to crane builders expanding their addressable market.

STAHL also advances our evolution as an industrial technology company.

They offer a more highly-engineered product with their line of explosion-protected hoist, and they are well positioned with engineering and procurement contractors.

The higher value adds for engineering delivers a stronger margin business model.

Likewise, the acquisition of the Magnetek in September of 2015 has provided excellent technology and the path for cost effectively integrated motion control in our hoists.

While we've made strides with embedding Magnetek technology, there remains more opportunity to transform the way that we do business through intelligent lifting.

Operationally, we have a sound base, but I see opportunity to improve in this area as well as with our financial performance.

By driving accountability and operational excellence, we can both improve our competitive advantages, while strengthening our earnings power.

I believe we have further opportunity to build a culture of performance and accountability.

We are creating a more structured operating system to provide a new cadence in the organization.

This new approach to reviewing our business drives accountability and execution.

I expect this to promote the operating discipline needed for improved entrepreneurship and execution.

And this establishes a system that will enable us to better identify and manage risk and opportunities.

Please turn to Page 15.

Our priorities for the year will establish the foundation to define our strategic path.

Critical to our progress is the establishment of the structured operating system and strong performance culture that I was discussing.

We will also focus on the following 4 areas.

First, the integration of STAHL.

We've made good progress to date with the integration.

The cultural fit is strong and the team's recognized the intrinsic value created with this combination.

We expect that we can deliver $5 million in synergies in the fiscal 2018 that will be realized through supply chain advantages, opening market channels, and blending our global sales forces.

Our plan is to achieve a total of $11 million of benefit in fiscal year 2019.

While the economics of the acquisition are not dependent on revenue growth, we're already realizing growth opportunities from the independence of STAHL from its previous owners and the customers that they can now pursue.

Our second area of focus is on leveraging our Magnetek technology.

We are furthering our efforts to develop an intelligent lifting solutions by cost effectively embedding Magnetek advanced control technology in a number of our products.

The launch of new hoists with cost-effective electronic controls will continue in fiscal year '18 and extends the applications that include remote control of hoist and rigging via radio control for enhanced safety.

In addition to what we've gained with the advancement of our hoist with digital drives, longer term, we envision that the company's products will include information intelligence.

This will enable exciting capabilities such as preventive maintenance testing, self-diagnostics, remote monitoring, and data capture.

Connectivity is a driving force behind higher levels of industrial technology and processes, and we believe we can be a leading force in this evolution in the world of material handling.

Thirdly, we're going to strengthen our core business.

We have a great starting point with unparalleled brand and distribution coverage in the industry.

Our brands have the potential to provide a strong source of growth.

I believe that we need to focus our many brands with better market segmentation and consequential product positioning to push to be more competitive.

We need stronger investments in R&D to drive innovation in new products that solve customer problems.

We need to afford this investment by cutting back on SG&A to fund more growth from new and improved products.

And we need to be easier to do business with by simplifying our offerings and improving delivery and lead times.

I expect that achieving this will help strengthen our core business.

Finally, we'll maintain our mantra of paying down debt.

As Greg discussed, we've identified the path to reduce debt in fiscal 2018 by $45 million to $50 million, and further eliminate another $50 million to $55 million in fiscal 2019.

We'll focus on reducing working capital requirements and we'll elevate the valuation of capital expenditures with a keen eye on better utilizing our capital base.

In terms of outlook, we're encouraged by the recent uptick in demand.

And even though it's still early, the processes we are implementing to create a new operating system are taking hold.

We expect that by concentrating our resources on the critical few priorities that I've discussed, we can effectively drive results in the fiscal year and help define our strategic path.

Melissa, we can now open the line for questions.

(Operator Instructions) Our first question comes from the line of Mike Shlisky with Seaport Global Securities.

So I just want to have -- just get a few slide-related questions out of the way.

First, I didn't see in your slides, which almost was preliminary as your analysis of some of the broad industrial macro factors that have in the past driven your sales at least directionally.

I'm kind of wondering if those numbers were estimated for a reason or if the current industrial capacity utilization numbers that we're seeing do suggest that favorable outlook for your sales this year?

Or does adding STAHL to the mix change how you feel about how those macro factors drive your sales?

No, Mike.

I can talk to that.

It's not an indication that things like industrial capacity utilization are not relevant to us, but they're relatively flat.

There's been a very slight uptick year-over-year but quarter-to-quarter, it's been a very flat number.

It's kind of in the mid-70s right now.

As you know, in the past, when it's gotten up towards the 80s, it's been really strong demand generator for us.

But right now the demand and growth we're seeing is not necessarily due to a dramatic change in the industrial capacity.

It's just flat.

Got it.

A second question, similar and it was obvious as you've done in the past have always seen sort of a slight outline your long-term goals for the company with $1 billion of sales, you've got margin goals, growth goals, et cetera.

Mark, do you have like a new set of goals that you're kind of working on right now?

Is there a new plan that might come out may be next quarter?

Could you give us a view of perhaps where those goals might be at least at the very early stages here?

Sure, I'm happy to talk to that.

So the 4 priorities that I outlined, I think are really the low-hanging fruit that we need to work on and focus on as a company, but it's not a substitute for more strategic goals.

We have a strategic planning process that we're now working on.

It will run through the summer.

It will be heavily informed by us working on these 4 strategic priorities in depth.

And I expect by the end of this calendar year, we'll launch our new strategic priorities with another set of strategic goals that we can articulate.

Got it.

Also, want to touch on the SG&A numbers.

I think, you guys mentioned that you're looking at the cost structure in several different ways here.

Is the $44 million to $45 million SG&A run rate outlook exclusive of anything you might find going forward, Mark?

Or is that already baked in?

Is it possible that it could be below the $44 million run rate by the end of the year, if you buy things over the next few months to cut?

Yes, that's the run rate numbers that you should probably model.

As I'm going around and understanding our business better, we'll come up with further guidance when we know specifically what we want to do or how we want to do it.

But right now, we're not in a position to guide anything different than that.

Okay.

One final one for me and I'll pass along here.

On the STAHL accretion, you previously put out a guidance number in the past as to how you think that might contribute in fiscal '18.

We can kind of back into it when you put out here in the numbers but do you have an official number you could point to for accretion this past quarter and as your outlook for the accretion for fiscal '18 changed at all from a cents per share standpoint?

Mike, it's Greg.

So the previous guidance that we had given was $0.34 in fiscal '18 and $0.51 in fiscal '19, and that was prepurchase accounting.

So the purchase accounting is very far along and we had the additional amortization expense of $6.7 million, there's a couple million dollars more, that's for the write-up on fixed assets as well as a favorable supply agreement.

So when we look at where we expect EPS accretion from the STAHL deal to come in, in fiscal '18, we're in the $0.12 neighborhood, so positive $0.12.

And for fiscal '19, the best estimate today is in the low $0.30 range.

Just to kind of confirm, those numbers aren't much of what you had initially thought postpurchase accounting, et cetera, from that when you first you did the deal, correct?

Yes, they're very close, if not slightly better.

Now once again, just to be clear, the numbers, the $0.34 and the $0.51 that have been talked about have always been couched as kind of prepurchase accounting and pre any kind of nonrecurring cost, onetime cost.

So the numbers, the $0.12 and the low $0.30 range is after purchase accounting.

But it's still prior to any onetime cost that might be incurred.

Just one quick follow-up there then, I guess, based on last comments, is that based on sort last year's STAHL run rate for sales, it sounds like there might be some opportunities to add some growth this year at STAHL.

Could that accretion exceed what you just mentioned if STAHL doesn't actually grow due to its independence or even due to oil and gas strength going forward?

Yes.

So the numbers quoted are our best estimates today with the current expectations from the STAHL business.

In the past, we've talked about the fact that there were significant Russian projects with STAHL, which we don't anticipate reoccurring.

So we did -- in our 8-K/A we published audited financial statements on an IFRS basis for STAHL and I believe the numbers were roughly $165 million of sales and that would have included some of these onetime sales, which once again, we wouldn't expect to continue in fiscal '18.

(Operator Instructions) Our next question comes from the line of Robert Majek with CJS Securities.

You had mentioned organic volume growth was up 3% for the quarter.

Can you give us a break-out by month?

And then maybe if you could comment on -- if you saw demand also tick up in April and May and kind of what's driving that demand?

Sure.

The most uptick that we had in the quarter actually occurred in January.

If you may remember, the December quarter was relatively weak for the company and there were some push-outs in orders also from the December quarter.

So we did have a pretty decent January.

It softened a little bit in February and March, but still slightly above.

So I would say, demand is not necessarily robust.

We're certainly seeing uptick in demand, and we're really encouraged by that.

What we're seeing so far in this quarter is kind of more of the same.

It's not a very strong growth environment that we're operating in, but I think we're beginning to see some of the projects that we talked about last quarter continuing.

You see North America as an example with the general industrial doing pretty well, we're seeing some in utilities, particularly in the midstream and the downstream.

We're seeing some entertainment growth.

So I think we're pleasantly encouraged by what we're seeing, but I would definitely not say that this is a strong robust environment that we're operating in.

On the quarterly SG&A guidance, it's a roughly $9 million increase for the previous guidance.

How much of that is incremental SG&A from STAHL versus an increase in the core business?

Yes, so Robert the increase from STAHL is in the neighborhood of $35 million to $36 million on an annual basis, so divided by 4.

Got it.

And then just lastly from me, on inventory turns.

What kind of target's built into your for free cash flow guidance for the year?

So we have a slight improvement in inventory turns and once again, our goal is to pay down more than $50 million of debt and certainly managing inventory is a key initiative for us and one that the entire business is energized around.

Maybe just one more for me.

On the 21% to 25% tax rate guidance for the year, are there onetime benefits in there?

Or is that a sustainable rate over the next few years?

It's a sustainable rate over the next few years.

Our next question comes from the line of Mike Shlisky with Seaport Global Securities.

I guess, I wanted to also follow up on the trade market impairment in the quarter.

Could you just tell me a little more color as to why something was impaired?

Is there a branding?

Is there a marketing change to one of your brands that might make it lower tier or what was behind that in the quarter?

Yes, it has to deal with our STB company that we bought a few years ago.

And as you know, it sold heavily into the oil and gas industry and with the fall off in oil and gas over the last couple of years, as part of that purchase accounting there was money allocated to indefinite life trademarks that with the current falloff in the revenue, we felt the need to impair that trademark.

So that represents 100% of the purchase price allocation to that trademark, so there won't be any more impairments related to that going forward.

Okay.

And I think I want to ask about pricing in the quarter.

I guess, the number that you released, it wasn't quite well looking for my model a little bit short.

Kind of curious if you tell us how the pricing has gone so far in fiscal '18 and what do you think we'll be seeing positive pricing for the coming year?

Yes.

So I'll answer it and I'll let Greg follow up as well.

So part of our normal price increases we went out with a couple of percent price increases.

It led in Europe in January and then in March in the United States.

But as normal, we probably didn't expect all of it to stick and we probably had about 50 to 100 basis points to stick.

Do you want to add any color to that, Greg?

Yes, so specific to the fourth quarter, we did run some promotions, I had mentioned in the U.S. and that impacted pricing in a negative way.

I would view that as kind of a one-off promotion in a sense stopped and the goal there was to drive some more volume and reduce some inventory and generate some more cash.

And it had a pretty positive impact.

But the net result was when you look at pure pricing, we did have some price impact in the U.S. in the fourth quarter, but not expected to continue.

And as Mark said, from a modeling perspective, we expect more pricing than we had in this past year, which was in the 10 to 20 basis point range to somewhere between 50 and 100 basis points will be kind of the range to expect for the coming year.

Our next question comes from the line of John Sturges with Oppenheimer & Co.

You had mentioned, did I understand this correctly, a 6.6% ForEx headwind?

In the quarter, no.

The impact of FX in the quarter was 60 basis points.

60 basis, okay, I misunderstood that.

60, yes, 0.6%.

Okay.

We've had a change in ForEx obviously in the last couple of months.

Would that have a positive impact for you?

It should, specifically the euro.

Where we've seen some weakness has been in the Sterling and the South African rand.

And to some extent, the Brazilian real.

Okay, those are really understandable.

Our next question comes from the line of Joe Mondillo with Sidoti & Company.

So Mark, just the big level question here, first for you, it seems like over the last -- for as long as I've covered Columbus McKinnon, that the value of the company, it's maybe not reflective as what some investors, including myself, think that it should be.

And as CEO, I think one of the biggest parts of your job directly is to actually try to flesh out the value and increase value for shareholders there.

So I'm just wondering, I know you gave a lot in your prepared remarks, but if you could may be sum up the biggest areas that you think can improve the company, that will lead to increased value in the stock per se, and what metrics that we should be looking at that you think there's upside in to track that?

Yes, I'm happy to.

First of all, I'm very excited to be here because I think the Columbus McKinnon has a lot of untapped value.

If you look at the portfolio of business right now, and in my remarks, I touched on it but let me just try to perhaps say it another way.

It's just a great platform, but the real value, I think, is going to come from the fact that this company needs to be an industrial technology company from a relatively cyclical industrial company and it's got the elements to actually drive that.

If you look at the recent acquisitions, there are much more engineered products.

It commands more margins from customers because they're solving tougher problems whether it's explosion-protected hoist, it's just a great combination or the digitization of what needs to happen in industry 4.0.

These are all great opportunities that the company can now really begin to leverage off.

I'm not going to go in there and break things that aren't broken because it's a good platform but there's a huge amount of leverage that we can get.

And in terms of metrics, we need to think about top line growth for sure when you look at that aspect.

A second aspect is this platform has room to grow in terms of -- excuse me, get better in terms of its operating performance.

And that operating performance needs to really show up in how we are good stewards of capital, and how we ring out efficiency improvement, and this should show up in better gross margin, it should show up in return on invested capital.

And it's something that I know the company has looked at before, but I think we can do a lot better job on return on invested capital to get that into double digits.

And then lastly, is to delever the balance sheet, I think, also represents an opportunity.

We throw off good cash, and we're going to continue to focus on that and making sure that we don't do things that are going to spoil that cash flow and we're going to focus that on paying down debt and we think that it can also be good for the company as well and for the shareholders.

Great.

I appreciate that.

In terms of the STAHL deal, are we still looking at $6 million of cost this year?

And can you give us an update on where we're at with the synergies, maybe update us again, on what the revenue synergies and the cost synergies are related to that business, because I know that's supposed to take place over the next year or 2. Just give us update there, please.

Yes, sure.

Well, Joe, the synergies that we're looking at is actually $5 million that was the number that the company had previously stated.

And it's been really exciting for me to jump in on this acquisition and really pull the covers off it.

So I'm pretty optimistic that this is going to be a great addition to Columbus McKinnon.

And how we're going to get there on that roughly $5 million is mostly through cost synergies.

We're right now north of $4 million on a roll-up on cost synergies for this fiscal year and we see opportunities on top of that in the cost side.

But on top of that, we also see on the revenue side that we can add some more.

So I think we're holding to that $5 million number that we told you previously.

And hopefully, we can push on it and do better, but it's not what we're committing to right now.

Joe, just to add on.

When we looked at the deal and came up with synergies, there were no revenue synergies that were contemplated, although now that we've had several months of ownership of STAHL, it's very clear that there are going to be opportunities for STAHL to pursue business than it previously wasn't able to pursue.

And so we would do that as a revenue synergy.

Okay.

And in terms of the cost synergies, I thought we were at $11 million total but I guess part of that is in...

Year 2.

Right.

Yes, we basically -- the guidance that we had given was $5 million in fiscal '18, increasing to EUR 10 million, roughly $10.6 million in fiscal '19.

So your recollection is correct but it takes 2 years to get there.

Okay.

And everything is on track in terms of all that?

Where we sit today, yes.

And Mark, right now, we're focused on working the $5 million number this year, and we're beginning to work on some of the longer lead items that will have a positive impact in fiscal '19.

We're on track, and we feel good about those numbers.

Okay, great.

In terms of the overall business, sounds like maybe Mark, you see opportunity to, I guess, may be at least improve efficiencies, if not take cost out.

Are we expecting down the road once you get more time on your belt to hear about improved efficiencies that's going to be able to leverage your cost structure as is right now?

Yes, I really look forward to that conversation.

Obviously, right now, I'm still spending a lot of time out in the operations.

What I'm telling you today is reflective of what I've learned as we, as a team, I think, digest these opportunities and deploy around them and understand how much we think we're going to get from it, how we like to put markers out there in terms of what we want to measure.

And I'll be really happy to do that as we make more progress and as we put some stakes in the ground for you folks to watch us make progress.

So I really look forward to that.

Okay.

And then in terms of the debt pay down, I was surprised to see the cash balance increased so much.

Is there a reason to that?

And given where the cash is, and, I guess, also depending on EBITDA, is the $45 million to $50 million, is that a set goal or is that dependent on profitability of the company?

And can that be increased?

And relative to the cash increasing in the fourth quarter, do you think there's a chance of paying down more debt throughout the year?

Yes, so let me -- there's a couple of parts to that question, so let me start with the first one on the surprise on the level of cash.

So we ended the quarter with about $77.6 million of cash.

Virtually all of it was overseas.

There was approximately $4 million that was sitting in the U.S. And included in that was a significant amount of cash going off of memory of roughly I think it was around $28 million related to STAHL.

And as part of the deal, there's a profit sharing arrangement where we -- STAHL owes Konecranes about EUR 14 million -- $14 million, sorry, and that's going to get paid here in the next week or 2. So that was contemplated and known at the time of the SPA and so our cash balance is going to go down for that item.

So the second part of the question is, how confident are we on the $45 million to $50 million, and we're very confident.

We think we have a clear path to get there and we hope to exceed that $45 million to $50 million level.

Okay.

I also wanted to ask you about what you experienced in Europe over the last quarter.

So I was a little surprised on how weak you did see your organic business over there.

It seems like we're starting to hear a lot some positive trends within the European region and to be off slightly, I was expecting at least a little bit of growth in Europe.

Could you talk to what you're seeing over there?

Yes, so Joe, we had talked in the previous call on a large project to Africa.

And the bulk of that project shift, but there's about $1 million of revenue that flipped into April and that's since been booked.

So if that $1 million had been booked, there would have been some slight growth in Europe in the fourth quarter.

We think some of our business in Europe is also lagging, because it's more of a project based business, particularly coming from STAHL.

We do see some activities in oil and gas as we spoke about that are coming to market.

It's not particularly robust market, particularly because most of our products are sold in the upstream or offshore, but we are seeing some downstream activity.

So I think you'll see some of those projects start slowly coming to market through the remainder of this fiscal year.

Okay.

And then just lastly, just -- could you tell me what the purchase accounting related to STAHL is on a quarterly basis?

And what's your anticipation on quarterly total D&A for the company is going to be?

Yes, so the full year amortization right now was estimated to be $6.7 million, so you can divide that by 4. There's another $2.2 million of purchase accounting annually that's going to hit up in cost of sales, so it's going to affect gross margin, that's for the step-up on fixed assets, so extra depreciation.

And then also, it would include an amortization on a favorable supply agreement.

So that's the purchase accounting impact.

Okay, and then the total D&A, what do you expect for that to be?

Yes, give me one second on that.

I'm looking for it right now, Joe.

If you have another question, let me maybe you can go ahead and ask that.

That was really my last question.

I could follow up afterwards, that's fine.

Okay, sounds good.

Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management.

We're here in Milwaukee and Magnetek is right up the street.

What is the opportunity to embed intelligent lifting and digital drive in legacy cranes and hoists not just new products that you develop?

Or is it really that conversion about selling new cranes and hoists and just replacing the old?

Yes.

Thanks for the question, Brian.

First of all, Magnetek technology can be put into an existing crane and hoist and there's really 2 ways it can happen.

One of which is a lot of times you might be looking at a steel mill that's going through a retrofit and the girders of the cranes are perfectly good and they're going to retrofit with modernizing the control systems.

And this is actually what's driving some demand right now in Magnetek, exactly in that type application.

So you're starting to see some of that capability.

The other thing is in an existing product, even though it might be out there in the marketplace, they can add to those control systems with Magnetek controls.

And so there could be a variable speed drive in that case might be added on in that application.

However, we think the biggest opportunity going forward is to embed it into the controls because it will be more cost effective.

Because when you're doing a new drive system, you can implement this across the platform, and you can more cost effectively get that technology in there, which we think we'll be more disruptive.

Okay, appreciate the color.

Mark, you mentioned a little bit about hiking up R&D, I'm guessing, as a percentage of sales.

You got any kind of early bogey as to what that might be or where you'd go from your legacy Columbus McKinnon to where you want to go?

Yes.

It's not a defined number yet, but we spent about 1.5% of sales on R&D today and that just seems pretty low.

If you're going to be an industrial technology company, you're going to have to boost that.

And we need to do this in a way that we don't increase our OpEx as a company and I've done this before in other companies and I think it can work quite effectively.

And we need to find areas of opportunity to be more efficient and take that cost down and redeploy it in a way that can really add to growth.

And I think it's pretty exciting opportunity for us because 1.5% is really not a very strong spend in this space.

Got you.

Do you guys measure by chance the percentage, either some companies do 1 -- 12 months, some do 2- to 3-year of new products developed in the last couple of years as what they are as a percentage of trailing 12-month sales?

Yes, the companies reported on that in the past, and it's roughly about 18% that was launched within the last 3 years.

And I've been a fan of that metric.

I've used it in prior companies that I've managed.

But I don't particularly find that a very strong number.

And the companies that are really innovating and offering new products to market like the kinds that we've talked about and the kinds that the companies talked about, that number should be well north of that.

Okay.

And then adjust some maybe qualitative aspects of the cultural synergies, history between STAHL and Columbus McKinnon, differences, similarities and just looking for more of a qualitative comment.

That's a great question because it's something that you test obviously very early on and it's something really difficult to fix if you have a cultural mismatch.

And I'm really pleasantly surprised, it's kind of like we're long-lost brothers.

And the reason being is that the business model predominantly inside Columbus McKinnon is to sell to crane builders, independent crane builders are our customer.

And when you look at STAHL, STAHL also sells to crane builders.

So culturally, we have a strong match.

And in fact, culturally, they didn't fit very well inside Konecranes because Konecranes prevented them from selling to crane builders in the marketplace.

So we see the market and culturally we address the market very similarly, so we've gotten along fabulously well.

In the early days, obviously we ask for tough things to be done but we're getting through that, we're working through that and in culture, I think, this will be a really strong bond.

Yes, your comment about leveraging the sales growth, and like you say in Konecranes preventing them from selling to crane builders, is that something you're looking at?

Do you think you're going to see momentum early out of the blocks with them, or is that sales synergy going to play out over years?

Yes, I don't think it will be over years.

But keep in mind, some of these are fairly large projects and they take some time to come to market and it's fairly a new endeavor.

So I think we start seeing some quoting activity, we're showing up obviously on the doorstep of folks that we haven't called on before, and so it will take some time like not an immediate like couple of months thing, but it will -- it's something that we should certainly begin to see in the fiscal year.

And I think it'll obviously be pretty sticky for us because if you look at the customer relationships they've built, they really established some great customer relationships.

So I think it's something that we really look forward to capturing.

Yes, let me ask you, Mark, just from United Technologies, having had some experience with General Electric and that, were you talking about more of a disciplined strategic focused structure, anything on property, plant and equipment rationalization or SKU count or anything, a lot of times, guys come in, they come from a more disciplined background that there are a lot of things that they might come in and take a look at like I said rationalizing product inventory or SKU counts, so I'm just looking for your thoughts.

Yes, I think the right way to approach this is to look at the marketplace and understand how our products and brands are positioned.

And I do think there is opportunity here.

Obviously, it flows back through the number of SKUs that you might carry but if you rationalize it really from a customer back perspective and focus on how can we optimally compete and how do we -- how are we easy to do business with and I think there's opportunity there when you listen to our customers and to our forward facing employees.

So I would expect we will do that, and it will make us more competitive in the marketplace as well as I think it can take out some cost structure.

Our next question comes from the line of Robert Majek with CJS Securities.

Just wanted to follow up on a previous question on the quarterly SG&A guidance.

I believe you mentioned that the STAHL synergies aren't built into the figure that you're giving out today.

So is that due to conservatism or are the synergies perhaps more back-end loaded and more likely to see that change later in the year?

Yes.

Robert, I think it's not something that we fully digested.

It's conceptually the opportunity we see.

But we guide to it if we knew what a better number would be or how it would impact because obviously these things take some time to really address and to make sure that you roll them out effectively.

And also we're going to add back on some R&D.

So overall, OpEx numbers -- so we just can't responsibly guide to that, so I think the numbers that Greg talked about are the most responsible numbers we have for the business right now.

Yes, and just to be clear, Robert, the $44 million to $45 million is the current run rate, and it does not include any potential synergies in that.

So you'd have to layer the additional $5 million of earnings on -- it's going to be in a number of different areas, it's not all SG&A.

Mr. Morelli, there are no further questions at this time.

I'll turn the floor back to you for any final comments.

Well, thank you for joining us on today's call.

I'm really excited to be here and I look forward to updating you on our progress as we further implement the operating system that we talked about, and we focus on those strategic priorities.

So thank you very much, and have a good day.

Thank you.

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