Columbus McKinnon Corporation (CMCO) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Columbus McKinnon Second Quarter Fiscal Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host to Ms. Pawlowski, Investor Relations for Columbus McKinnon. Thank you, you may begin.

Thank you, Matt, and good morning everyone. We appreciate your time today and your interest in Columbus McKinnon. We are going to be reviewing our second quarter of fiscal year 2017 that ends in March 2017, the financial results of the quarter and year-to-date as well as discuss our outlook for the remainder of the year. Then, we'll open up the line for questions-and-answer. On the call today are Tim Tevens, our President & CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the financial results that we 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 turn to Slide 2 of our slides, I will discuss the Safe Harbor statement. As you're aware, we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements imply the 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 in 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've provided reconciliation of non-GAAP measures to comparable GAAP measures in the tables that accompanies today's earnings release and slides. I also want to mention -- no, I don't want to mention, Tim is right here with me -- sorry. So with that, let me turn it over to Tim.

Thanks, Debby, yes and I'm here. And welcome to our call. Let me add our welcome. Let me start out with you all on page 3, we want to remind you of our long-term objectives which include growing to be $1 billion business with about a third of our revenue in developing markets and two-thirds in developed markets, along with $200 million to $300 million in acquisitions and a steady stream of new products and a strong operating margin of 12% to 14% with good working capital level within strong balance sheet. The highlights of our fiscal '17 second quarter on page 4, indicates that our revenue was up 4.9% excluding the negative effects of currency translation, revenue growth was driven by the Magnetek acquisition. Sales in the United States were up 11.7% to 98.3 million and the Magnetek acquisition more than offset the lower volumes elsewhere. The negative effects of the oil and gas downturn and related supporting industries continued to have a negative effect on our volume, but it does seem as if we have hit the bottom and are seeing much more positive of signs of our rebound in quotation and booking activities. Sales outside the U.S. were up 5.3% excluding unfavorable FX impact. We continue to be very pleased with Magnetek integration activities as we integrate Magnetek control technology into our leading power hoist brand, as well as moving forward with our smart hoist and lifting system technology. This technology will allow for hoist activity monitoring to increase productivity and safety of our customers’ operations. Gross margin increased to a record 32.7% and cash from operations was very positive at 18.4 million. We have repaid $10.8 million of debt in the quarter and $27.6 million year-to-date. We are ahead of our annual target of $43 million of debt repayment for the full fiscal '17 year. We now stand at 39.4% of our net debt to total cap at the end of the second quarter. The next page, it shows that the -- it appears as if the U.S. end markets are stabilizing and the U.S. industrial capacity utilization is beginning to point slightly upwards from its bottom of 74.9%, which is you all know is a positive step for Columbus McKinnon Corporation. This increase should reflect in our booking for the next quarter or two. As mentioned in -- our Q2 revenues were up 4.9% or $7.2 million excluding the negative effects of currency translation, as shown on Page 6. This increase was driven by the Magnetek acquisition and more than offset the volume declined in the quarter. Price contributed to small amount as well. We did see an uptick in U.S. revenue up 4.7% sequentially, and the U.S. industrial economy seems to be beginning to recover. We are growing market share in the United States as we focus entirely on our customers’ needs and leveraging our strong channel partner relationships. Compass our digital platform is being used by our customers to design specified quote and order, a lifting system; and this eliminates many hours of engineering work and our mutual businesses, and allows our customers a 24/7 access to drive their business improvements and expansion. And with that, I'll turn it over to Greg to provide more details.

Thank you, Tim. Good morning everyone. On Slide 7, our second quarter gross profit grew by 2.8 million or 5.9%. The two additional months of the Magnetek acquisition contributed 5.9 million of gross profit. Productivity net of our cost changes added $700,000 to gross profit as we continue to benefit from our lean program and restructuring actions taken in the past year with the facility consolidation in Germany. The prior year also included $700,000 of purchase accounting inventory step up expense and restructuring cost, which did not repeat in the current year. Pricing and material cost inflation was slightly negative in the quarter, reducing gross profit by a $100,000. Higher product liability cost was the result of legal settlement in the quarter. The impact of lower volumes negatively impacted gross margin by $3.6 million. Finally, foreign currency translation negatively impacted gross margin by $400,000. On a GAAP basis and adjusted basis, we achieved all time record gross margin of 32.7%in the quarter. This compares to 32.6% on an adjusted basis in the prior year. The prior year adjusted gross margin was adjusted for the previously mentioned purchase accounting inventory step up expense and European facility consolidation cost, which together totaled $700,000. The reconciliation for adjusted gross profit and margin is included on Page 17 of this presentation. As shown on Slide 8, selling expense was higher than the prior year by $1.6 million and represented 12.5% of sales this quarter, compared to 11.9% in the prior year. The two additional months of the Magnetek acquisition in the quarter compared to the prior year added $2 million to selling expense. Other selling expense costs were lower by $200,000. Favorable foreign currency translation lowered selling cost by $200,000. G&A expense decreased $5.7 million from the prior year and represented 10.7% of sales this quarter, down from 15.1% in the prior year period. The prior year included 7.6 million of acquisition deal and severance cost related to the Magnetek acquisition. The impact of two additional months of the Magnetic acquisition added $1.2 million the G&A expense in the quarter. Favorable foreign currency translation reduced G&A expense by $100,000. We continue to expect our SG&A run rate to be approximately $35 million to $36 million per quarter in fiscal 2017. Turning to Slide 9, income from operations was 12.6 million or 8.3% of sales, this compares to adjusted operating income of $15 million in the prior year. The prior year includes adjustments of 8.5 million for acquisition related cost in European facility consolidation cost. This represents the decrease of 2.4million or 16%, which was driven by lower sales volumes, partially offset by an additional two months of Magnetek ownership in the quarter. Magnetek contributed 1.9 million of income from operations for the month of July and August. Adjusted operating margin was 8.3% compared to10.3% in the prior year. This reconciliation can be found on Page 18 of this presentation. As you can see on Slide 10, GAAP earnings per diluted share were $0.33 per diluted share versus a loss of $0.02 per diluted share in the prior year. Adjusted earnings for diluted share for the second quarter of fiscal 2017 were $0.36 per share, compared to $0.43 per share in the previous year, a decrease of $0.07 per share or 16.3%. Adjusted earnings per share in the prior year reflect the exclusion of the acquisition related cost in European facility consolidation cost previously mentioned, as well as the normalized 30% tax rate. The actual tax rate in the current quarter was 34.8% which compares to 111.5% in the prior year period, which included the impact of recording as the differed tax asset valuation allowance and differed tax assets of certain foreign subsidiaries of the Company. The effective tax rate for fiscal 2017 is still expected to fall between 30% and 32%. Turning the Slide 11, our working capital as a percent of sales was 21.2% compared to 22.9% at September 30, 2015 and 21.5% at March 31, 2016. Working capital as a percent of sales decreased 120 basis points sequentially from last quarter, reflecting improved DSOs and investment turns. Inventory turns were 3.5 turns compared to 3.4 turns as of June 30th and are expected to improve further in fiscal 2017, which will add to our cash generation capabilities and ability to repay debt. On Slide 12, net cash from operating activities in the second quarter was especially strong coming in at $18.4 million compared to $900,000 in the prior year. We're benefiting from the cash generation capability of Magnetek including lower cash taxes from the utilization of the NOLs we acquired as well as improvement in working capital of $4.3 million. We have lowered the previously given guidance for capital expenditures from approximately 80 million to approximately 60 million in fiscal 2017. Turning the Slide 13, you can see that our total debt was $239.8 million and our net debt was 194.1 million as of September 30, 2016. Our net debt to net total capitalization was 39.4% as of September 30th. We repaid a total of 10.8 million of debt in the quarter and a total of 27.6 million year-to-date, which puts us ahead of our target of $43 million. We have repaid $61 million of debt utilized to acquire Magnetek. Our focus continues to be on de-levering the balance sheet quickly. With that, I will turn it back over to Tim to cover the outlook for the second half of fiscal 2017.

Thanks, Greg. Let me just take a moment and look at Page 14. As we look to the near-term future, we see some stabilization in the U.S. end markets and in fact some moderate growth. Our orders are up 6% from Q1, which is a good first sign for a while, that we've seen in a while. Latin America seems to be stabilizing in Brazil and Mexico is at the bottom or is producing more quick -- and is producing more quotation activity for us. Asia Pacific is mixed. China still remains the bright spot for us in that market. Europe remains challenged as Brexit and the geopolitical environment is the new challenge for our economy there. Our backlog is up nicely to a $107.1 million as our customers are experiencing a positive result and improved responsiveness, but also we do have some projects that we'll shipping here in the next quarter which are very helpful in this rail and road business. So, now Matt, let me open it up for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Robert Majek from CJS Securities. Please go ahead.

You mentioned that you were seeing some pick up in order activity towards the end of the quarter, I was just hoping give us a little more color around that perhaps quantified in magnitude and how those orders continued into October?

Thanks, Robert. First of all good to hear from you. Yes, I would say that it was a very soft summer in particular bookings July and August seem to be much lower than normal; it was challenged time for us. I would say that September was incredibly robust both for a quotation activity, but more importantly actually booking, magnitudes higher than the august booking time period. And so far through the month of October at least I have the first three weeks of October in front of me here. It continues maybe not at the same incredibly robust pace that we saw in September, but a very solid pace.

And when you say a stronger back half of the year looking at the core business, I mean volumes could still be down bit the single digits year-over-year and sales would be strong relative to the first half. I might kind of understand your expectations there correctly?

That certainly could be the case, but if the order pace picks up, keep in mind that we were beginning to lap one year of the downturn. And we started to see that last fall and then continued through the winter and into the summer. It's possible we could exceed in the back half, but at this point of time what we are expecting is bookings to improve moderately through the second half. And then therefore, our revenues would improve as well because as you know we turn bookings into revenues pretty quickly generally, so that, we would expect the second half of the year to be stronger than the first half.

And when we see volume pick up, should we still expect 40% or so incremental even margins that you've kind of outlined at the Analyst Day last year?

Yes, in the core business of hoist and rigging tools in North America, which is our -- which is what we are seeing to pick up. We would expect the 30% to 40% operating leverage going forward as revenue increases.

And you know Konecranes is divesting extreme units stall, if you could you comment, is that something you might be looking at and how long that's that been through your existing business?

It's fair to say that we would be interested in making acquisitions of this nature in the material handling space to increase our presence around the world and our product portfolio. And as you know, I can't comment specifically at any one particular acquisition. But definitely, we would look at a broad array of these kinds of companies that are for sale.

Our next question is from Joe Mondillo from Sidoti & Company. Please go ahead.

Just to tag onto some of those questions just passed, in terms of backlog order trends are you seeing stronger or weaker activity at the core business relative to Magnetek? Just wondering how margin profile is shifting or changing, if it all going forward because I know the Magnetek does carry sort of higher margins than the core business.

The businesses that we are seeing an increase in is pretty much North America hoist and rigging is the primary driver. Magnetek bookings are improved from the summer. I think they are heading in the positive directions. I would say that both businesses have very strong margins.

And could you just-- I was just wondering if you could provide us an update on the Magnetek synergies since the Investor Day, a few months ago just regarding the integration of the drive technology and Columbus was your core hoist Compass 1.0 or anything else, regarding those synergies related to that. Just maybe you provide an update?

Sure, not a lot has changed in the couple of months that since we met. But I would see that, it was continue pace, we would expect to be launching our hoist with Magnetek drives in them sometime in the next several months. I think, we’re scheduled for the end of the fourth quarter right now, timing-wise, beginning of the first quarter of fiscal 2018, end of the fourth quarter of fiscal 2017. That timing is unchanged, Joe, with still remains heading in a positive direction. We continue to work on the further integration of Magnetek into the Columbus McKinnon company, and I think there is some good headway being made there, nothing to report just yet. But I think, there is some opportunity to continue to further integrate the two businesses together to create the strong collective business that we referenced. I would say, we continue to be on the same trajectory that we talked about when we’re together couple of months ago.

And just one last question and I’ll hop back in queue. The CapEx reductions that your guidance implies, what is that, is that related to something being pushed out or what is the reasoning behind that?

Joe, it’s Greg. I would say that it’s looking at the first half spending and the anticipated needs for the second half of the year were be in a specially diligent about any capital we spend and as result of that review exercise to decide to take our guidance down by $2 million.

[Operator Instructions] And our next question comes from Mike Shlisky from Seaport Global. Please go ahead.

I wanted if you can give you thoughts on the pricing and FX expectations for the next couple of quarters as you close out the year. It seems like FX is kind flattening out, but the pricing here especially net of the materials was actually somewhat mutual in the quarter. Can you give kind of thoughts there, I would appreciate that?

Sure, so will be wrestling with that exact question over the next several months as we lay out our pricing strategy, going into the beginning of the calendar year, that’s the typical timing that we try to increase prices. So, it’s hard to say at this point, Mike, what exactly what we will do. But I would expect us to have the normal kind of price increases going forward. It won't be robust, Mike. I think it won’t be the 7% increases that, we might have done in the past, it might be in the more 1% or 2%. But more to come on that, Mike, I think it would be best if we put our thoughts together on what to do and then report to you shortly thereafter.

Okay, I just want to ask about your market share as I recall back whether you have a lot of products that kind came out this year, some of them were pretty revolutionary, some of them were evolutionary. Kind of your thoughts on, if you got any sort of benefit from share in your second quarter here, and if you have any good outlook for your share for the sort of rest of the fiscal year?

Overall, our share has improved a bit in the past and we would expect that trend to continue. We’re talking about individual percentage points here in terms of market movement, which is at end of the day is volume and helpful. The problem is in the overall market shrinks more then we grow from our market share stand point that it's hard offset that shrink. I like the stabilization of the market, maybe the market growing and our market share growing is two very positive things that we would like to see over the second half. And I think we've the potential to have both of those continue begin to move in a positive direction. The market growing and our market share growing which would certainly give us some excellent volume in the second half. And to be honest with you, we were actually having an expectation that both would do so to give us a stronger second half.

I do want to turn back to one of the questions asked earlier. At this point now you've got your Magnetek deal kind of comped in fully here starting in this quarter. And I was curious if you can give me your thoughts as to how you intend to get your gross margins kind of staying on the upward trend here. Is it simply sort of waiting for more volumes if you do get them in fact or do you have other kinds of lean project plans for the back half of the fiscal year here?

Yes, we do. As you can tell our margins have been improving certainly some added by Magnetek, but at the end of the day our margins have been improving in a lower volume environment, so that tells me that our lean program across the Company is working pretty well because we're having net improvement. Prices from a commodity standpoint and the sourcing is basically stabilized to some individual movements that we try to offset with negotiation with suppliers, but I would expect our margin to continue to improve upward and top of those activities because we do have some other opportunities to reduce some of our operating costs internally. We've not announced anything as of yet, and at this point in time, we're not prepared to announce anything. But there's some additional ability to remove some fixed costs from our structure both, around the world to be honest with you, in different parts of the world.

Got one last one for here, I didn't see a big uptick in the sort of like working capital as sales you're looking at hopefully a better sales outlook for the back half of the year. So, I'm kind of wondering if you could maybe kind of split for us, is it little bit more fourth quarter weighted here. You haven't seemed to have built up much inventory here going to the third. Just want to make sure I have that kind of straight here?

Yes, we've plenty of opportunity to continue to adjust our inventory levels to maintain high customer service, but still reduce the working capital needed to provide that service. So, we've teams working on that right now. So, we would expect inventory to continue to improve going forward in the second half, which should as you know, Mike, should have a positive impact on the working capital as a percent of revenue.

So, you feel good about both the third and fourth quarter as far as your volume is down, at least, versus the first half of the year?

Yes.

Our next question comes from Joe Mondillo from Sidoti & Company. Please go ahead.

Just a couple of follow-up questions, in terms of the SG&A run rate that you reiterated here, is there anything within that you anticipate that falls off later or next year or is that just sort of -- is there nothing abnormal in there that's going to pull off?

Hi, Joe. It's Greg. I would say that where we sit right now we would say that that range is appropriate and we're hoping that we'd be more at the lower end of that range than the higher end of the range as we look to continue to drive our cost out of our business.

Okay and also, Greg, in terms of the interest expense that you saw in the quarter despite the debt falling, interest expense was sort of sequentially pretty similar. Is there anything else that’s going into that line? Or was the debt pay down at end of the quarter just wondering --

We have been pretty consistent in making monthly payments. And we are ahead of our goal of delivering 43 million. What you referring to has been the increase in three-month LIBOR over the last three months. But I would say that we would expect with our pricing grade that our margin is going to drop 25 basis points, which will help us in the upcoming quarters.

Okay, great and then just lastly just wondering the D&A fell a little bit, not too much, but what is your general annual D&A normalized outlook?

Our depreciation and amortization in total for the first six month was 12 million and of that, amortization was 3.5. So, essentially that leads about $9.5 million. So, if you double it that gets you to about $19 million, $18 million to $19 million depreciation number.

And the amortization is included is roughly about 6 million or so?

Amortization 7 million.

Our next question comes from Brian Rafn from Morgan-Dempsey Capital Management. Please go ahead.

You talked a little bit about the rebound in the kind of the toughing and rebound in the U.S. market. So, I am just wondering, Tim, if there any granular visibility you can give on any specific end markets that you are seeing stronger big core activity?

Nothing that really fix out materially, I think it's across the Board, it seems like major projects are being actually non put on the backburner any longer, but are coming to the front-burner where people would like to actually execute those projects. So that’s encouraging. And then the general industrial activity broadly speaking, maybe led by and I am not sure Brian if it's really 100%. But maybe led by, the rig count improvements over the last several months, up into the 500 range, oil stabilizing around this 50-ish dollar level where people are not afraid to maybe make further investments in that part of the world. So, we look at it is kind of more general industrial, not 100% sure I know that’s the root of that is just yet.

I appreciate the color. Being in Milwaukee, we're on your Magnetek tour here. When you look at the smart technology with the hoist, do you guys see those sales coming from new digital hoist, the smart technology replacing or legacy hoist or can you integrate that technology on hoist that are now installed in field?

At this point of time, we are modifying the existing hoist to accept the technology. We have not though about how to modify the existing in the field. I think it’s a possibility, certainly, specially, with the word of hoist line, but we could certainly add drives to the areas that we don’t have driver. We don’t have a program just yet to do that. So, our expectations that it was on a go forward basis it'd be new hoist sales into the market, at least short-term Brian.

Yes, I know, I get you on that. What is your sense with that type of technology, disruptive technology coming and certainly safety and all the issues? How does that -- do you have a number of industrial customers that might be kind a first mover initiative where they would look at that and that can actually drive orders or is just simply, when a hoist breaks down or crane brakes down, we got to replace, so we’re going replace it with this new state-of-the-art technology?

We think that the potential buyers of this technology would be in the category of the Fortune 1000 Companies around the world. So, pick of them is the more larger and industrial concerns that do a lot of lifting in there processes and in your business. That would really be incredibly interested in this and have expressed to us the desire for us to, show them in more detail how it would work. So, the exact group of customer, predominantly, and I think I would be those group of customers that are investing in or modifying, enhancing their existing environment and making change anyways. The best example I can give to you is, when you look an automobile plant and they do a model changeover and when they change the models over every four, five, six years, they do a complete redo of the facility, all of the old equipments comes out, new equipment comes in. That is most opportune time for them to invest in this new technology at that point of time. And that’s the kind of people we would expect going forward.

Okay, now it’s that excellent. And then just across your kind of material speed start, are you seeing any inflation or any maybe even deflation and, how are you respond to that?

It’s basically flat. There was a couple of bumps in the road this past summer where it’s spiked a little bit, but came right back down in a more normal levels. So, I think looking forward we expect flat to slight growth. And that’s the thing we have to better understand to also think about our own prices increases to the market palace. But at this point in time, there is not a lot of inflation or price increases that we can mitigate.

And, then finally, Tim, from the stand point of, what you guys kind see as the normalized operating debt to capital level that would allow you opportunistic M&A activity. What’s kind of that target range from the cash adjust to 39% rate you had now?

We like the 30% area of debt to total cap, net debt to total cap, that's way we can use the cash globally. That's kind of our normalized level and then we flex that 30% into the 50% area normally, when we’re do acquisition, it's very similar to what we just did with Magnetek. And as you can see on a very short order, we did flex up to 50% and now we’re already back down to this 39% and headed, continue to head south. But we would expect in the next six to nine to be back in this 30% area.

I'd now like to turn the floor back over to management for any closing comments.

Thank you, Matt. Let me summarize by saying hopefully you all recognize that driving profitable growth in the down market is our target, and it's evidenced by our improved gross margin this quarter. The combination of Magnetek and Columbus McKinnon is helping us to create smart technology that will allow more productive and safer lifting systems for our customers. Our digital platform Compass is the beginning of leveraging technology to help our customers design lifting systems and reduce work in our mutual operating environments. We're going to continue to develop new products and leverage new market opportunities to help drive our growth. One consistent strength of the Company is to generate this free cash flow as we just talked, regardless of the cycle and we'll use this cash to right now de-lever our balance sheet. I'd like to thank all of associates around the world for their dedication to excellence in making our company a stronger market leading organization. Without them and their significant efforts none of this could be accomplished. And we appreciate your time today. Thanks very much.

This concludes today's teleconference. Thank you for your participation .You may disconnect your lines at this time.