Columbus McKinnon Corporation (CMCO) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Columbus McKinnon Corporation Third Quarter Fiscal Year 2017 Financial Results Call. At this time, all participants are in a listen-only mode. A 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 Ms. Deborah Pawlowski, Investor Relations for Columbus McKinnon. Thank you, you may begin.

Thanks, Audrey, and good morning everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. We are going to be reviewing our third quarter fiscal year 2017, the fiscal year ends March 2017 and our year-to-date results, as well as discussing our outlook for the business. Then we'll open up the line for questions. 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 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're 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 Web site 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. So you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. But we've provided reconciliation of the non-GAAP measures to comparable GAAP measures in the tables that accompanies today's release and slides for your information. So with that, let me turn it over to Tim to begin. Tim?

Thanks, Deb. Let me start on on page 3. It reminds 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 $200 million to $300 million acquisition and a steady stream of new products, strong operating margins and strong working capital levels, with an overall strong balance sheet. The highlights of our fiscal '17 third quarter on page 4. Let me start with you there. Our revenue is down 3.7% excluding negative effects of currency translation but up sequentially from the second quarter. U.S. revenues were weaker than expected, flat with Q2 but down 4.4% from last year. One item we can point to is that our Magnetek business did not have the larger projects that they saw last year, repeat. Sales outside the U.S. were up sequentially but down year-over-year 2.3% excluding FX. EMEA and oil and gas activity still remains weak. Gross profit was negatively affected by many items in the quarter including lower volumes, higher product liability expenses and some restructuring costs that occurred in the EMEA. We did generate almost $23 million in cash from operations in Q3 and repaid $33.3 million in debt so far in fiscal '17. We are on target to close on the very important STAHL acquisition on January 31 and expect some very positive results. $0.34 accretion in fiscal '18 and $0.51 in fiscal '19 in particular. Supporting the STAHL acquisition was the closing of our debt financing of $445 million or 3% plus LIBOR, about 4% interest expense. This is a significant positive interest rate difference then the debt assumptions we made when we acquired STAHL. We remain bullish but cautious on the U.S. markets. It appears as if the U.S. end markets are stabilizing and the U.S. industrial capacity utilization as shown on page 5, is pointing slightly upwards from its bottom of 74.9%. This is a positive step for Columbus McKinnon. This increase should reflect in positive bookings in the next one to two quarters. As mentioned, our revenues are down 3.7% excluding the effects of foreign-exchange as compared to last year. Mostly because we failed to see significant large projects repeated this year that were recognized last year. Our usually lowest third quarter in fact had more revenue than Q2 which is an [add sequence] [ph]. This is a promising step and indicates to me that the markets are in fact moving in a positive direction. We are seeing good growth in Latin America, especially Mexico and in South Africa where the mining activity has improved. EMEA overall remain soft and Asia-Pacific outside of China is as weak. Now let me turn it over to Greg to provide a little more financial detail.

Thank you, Tim and good morning everyone. On Slide 7 our third quarter gross profit declined by $3.5 million or 7.3%. Our gross margin was 29.4% compared to 30.3% in the prior year. However, there are two atypical items that I would like to call to your attention. First, product liability costs were higher than the prior year by $1 million. Two factors drove this increase. We settled a product liability case this quarter for $500,000 which was accrued this quarter. We also had it increased to our reserves as a result of our year-end actuarial valuation for our captive insurance company. This year we have had three large settlements which have driven up the actuarial estimate of future reserves needed. And that is atypical for us. Second, we continue to look for ways to improve our productivity and have recently implemented a small restructuring plan in EMEA that cost $300,000 but will result in savings on a go forward basis. Together, these items impacted gross margin by 80 basis points. Excluding this, gross margin would have been 30.2%. EMEA restructuring cost is included in productivity net of other cost changes on the Slide. Other items affecting our gross profit bridge included the impact of lower volumes which negatively impacted gross profit by $2 million. In addition, the prior year included $1.1 million of purchase accounting, inventory step up expense and restructuring costs which did not repeat in the current year. This had a positive impact on the change in gross profit. Finally, foreign currency translation negatively impacted gross profit by $400,000. As shown on Slide 8, selling expense was lower than the prior year by $1.3 million and represented 11.8% of sales this quarter compared to 12.1% in the prior year. Selling costs were lower by $1.2 million in part due to lower sales volumes. Favorable foreign currency translation lowered selling costs by $100,000. G&A expense increased $3.4 million from the prior year and represented 13% of sales this quarter compared to 10.3% in the prior year period. G&A expense this quarter included $3.1 million of STAHL acquisition deal costs and $400,000 for the CEO search and retirement agreement costs. Favorable foreign currency translation reduced G&A expense by $100,000. With the STAHL acquisition close in January 31, we will pick up two months of STAHL activity in our fiscal fourth quarter. Under IFRS accounting rules, SG&A costs are not reported so we can't give updated guidance just yet for SG&A cost. However, base guidance remains unchanged for the SG&A run rate for Columbus McKinnon which will remain at $35 million to $36 million per quarter excluding STAHL. Turning to Slide 9. Adjusted income from operations was $8.5 million or 5.5% of sales. This compares to adjusted operating income of $12.5 million or 7.8% in the prior year. The current year adjustment represents the STAHL acquisition deal cost. The prior year adjustment included $1.5 million for the Magnetek acquisition related costs and purchase accounting adjustments related to inventory step up expense and the amortization of backlog. This represents a decrease of $4 million or 32%. Not including these adjustments, atypical costs impacted operating margin by 1.2%. These include the previously mentioned higher product liability cost, EMEA restructuring cost and the CEO search and retirement agreement cost. In addition to these factors, operating margin was impacted by lower sales volume and unfavorable productivity caused by the lower volumes and the impact of inventory reductions in the business. The reconciliation for adjusted operating margin can be found on page 17 of this presentation. As you can see on Slide 10, GAAP earnings per diluted share were $0.02 per diluted share versus $0.36 per diluted share in the prior year period. Adjusted earnings per diluted share for the third quarter of fiscal 2017 were $0.22 per share compared to $0.34 per share in the previous year, a decrease of $0.12 per share or 35%. Non-GAAP adjusted net income in the current year reflects the exclusion of the STAHL acquisition deal cost of $3.1 million and a FX option reevaluation loss of $1.8 million to hedge the STAHL purchase price as well as the normalized tax rate to reflect the 30% rate. The prior year non-GAAP adjusted net income reflects the exclusion of the Magnetek acquisition related cost and purchase accounting items previously mentioned also at a normalized 30% tax rate. The actual tax rate in the current quarter was 66.7% which was impacted by $3.1 million of non-deductible STAHL acquisition deal cost which will also impact the full year of fiscal 2017 effective tax rate which is now expected to fall between 31% and 36%. Turning to Slide 11. Our working capital as a percent of sales was 19.9% compared to 21.6% at December 31, 2015 at 21.5% at March 31, 2016. This was our best result in two years. Working capital as a percent of sales decreased 130 basis points sequentially from last quarter reflecting improved inventory turns. Inventory turns were 3.9 turns compared to 3.5 turns as of September 30 and are expected to improve to 4 turns or higher in the fourth quarter of 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 third quarter was strong coming in at $22.9 million which compares to $28.8 million in the prior year. Operating free cash flow was also solid at $20 million. Year-to-date, cash from operating activities has increased over 45%. The hallmark of the company has always been its ability to generate cash and we continue to do so despite the economic climate we are faced with. Our guidance for capital expenditures remains unchanged at approximately $16 million for fiscal 2017. Turning to Slide 13, you can see that our total debt was $234.1 million and our net debt was $182.6 million as of December 31, 2016. Our net debt to net total capitalization was 38.4%. Year-to-date, we have repaid a total of $33.3 million of debt. With the STAHL acquisition expected to close next week along with our previously announced term loan financing and related [pipe] [ph] equity offering, we will carry significant more debt than we do today, but I am confident that we would be able to delever very quickly to a more normal 30% debt to total capital level. This will remain our focus over the next couple of years. With that, I will turn it over to Tim to cover the outlook for the fourth quarter.

Thanks, Greg. Now let's take a moment and look at our outlook on page 14. Of course, we will have a quarter of STAHL in our fourth quarter. This will have a dramatic impact on that quarter and equally important on the future of the entire company. We will be the second largest hoist company in the world with a strong presence in EMEA and in other places around the world as we plan to jointly develop our hoisting platforms, including smart hoist technology, with the STAHL product line. As we sit here today we are seeing a strong Q4 with increase quotation activity in many sectors. This is generally a precursor to booking and revenue. Combine this activity with a scheduled rail and road projects that will ship in Q4, as well as the scheduled price increase we expect in February in the U.S., this should be the best revenue quarter as it normally is. We are seeing some good economic improvements in Latin America and are very asset optimistic in the STAHL acquisition that will produce some very good results for us. The reduced backlog is indicative of the major Magnetek projects that did not repeat from last year but it's still a very solid backlog at this point. We will continue to focus on wining in the marketplace and of course driving our free cash flow to repay the debt. And with that, Audrey, let me open it up to questions.

[Operator Instructions] Our first question comes from the line of Robert Majek with CJS Securities. Please proceed with your question.

You mentioned a weaker December. What was behind that and did that persist into January?

Yes. You might recall, let me go back to last quarter. We talked about a weak summer and that summer increased from the bottom, let's say June-July and then bookings and revenue proceeded a pace upward. That continued on in the Q3's October and November. They were relatively strong and actually we felt very good about Q3 actually, going into the beginning of December. What happened in December was a couple of things. Let me talk about revenue. I think the first thing is, in the U.S. we [started] [ph] the channel to do a fair, good job of destocking. Not -- delivering product into the marketplace but not necessarily stocking from us in December. That was problematic in December. And as you know in the U.S., 75% to 80% of our business we take an order today and we ship it within a week. So it's a very quick churning business. We also had a fairly large project, rail and road project that we shipped and to be delivered in Mozambique in the third quarter, in the December quarter. The ship was underway, it never arrived in Mozambique on time. So actually that is additional revenue that did not occur in the third quarter that we anticipated but will occur in the fourth quarter. So it's bit of a shift going on there. And those are all pretty good margin business for us going forward. So it was kind of odd. In fact, December is normally our weakest quarter, as you know, Robert. And the fact is, sequentially we are strong than Q2 from a revenue standpoint, which made us feel a little bit better. But the reality is, we could have performed a lot better if we would have solved some normal business flow come through and a large project got delivered when it should have been delivered.

Got it. And on an adjusted basis, gross margin of 30.2% was down a bit sequentially from Q1 and Q2 despite higher sales. Can you just kind of help me understand what's behind that?

That would be -- let me comment and then Greg can add in. That would be a normal -- our Q4 as you know is usually the weakest revenue and also the weakest margin quarter --Q3, I am sorry, the December quarter, is usually the weakest revenue and the weakest margin quarter. So it's not abnormal to see it step down a little bit. So a 30.2% is reflective of very close to what it was last year at 30.3%. So it seemed to be in line on an adjusted basis. Any other comments, Greg.

Yes. I would say that there was less manufacturing activity in our plants as we have looked to reduce inventory levels in order to build up cash. And that had a bit of a negative impact on our absorption levels in our facilities. But that I would say is really more of a temporary item and now that the reductions have been made with a stronger fourth quarter, we should still improve our inventory turns and be able to manage our inventory where it is very close to where it is today.

Appreciate it. And can you breakout the sales of gross profit contribution from Magnetek in the quarter.

So Robert at this point, as you know we closed on the Magnetek deal September 2, 2015, so we have lapped one year with Magnetek so we won't be breaking that out going forward. But I would say that the Magnetek performance as Tim mentioned, was impacted by less of the larger projects which they had in December of a year ago. But in general their gross margins and SG&A costs and operating margins are going to be relatively consistent with what we have historically reported.

Yes. The biggest change we saw was -- you might recall, Robert, a year ago we talked about some big new core crane rebuilds that were going on and Magnetek was the recipient of many very good orders, very large orders last year, same quarter. This year those large orders did repeat. Some did but they were much smaller scale. So that’s the major difference from a profitability and a revenue standpoint that was the reason for Magnetek's step down in the quarter.

Thank you. And lastly from me. You have outlined how you are thinking about the cash accretion from STAHL. How should we think about the accretion inclusive of purchase accounting?

Yes. So, Robert, as you know, purchase accounting requires a lot of detailed calculations and estimates and we will have a better idea when we announce earnings in the next quarter. But it’s kind of a rule of thumb and I would say that if you look at the amount of amortization as a result of the Magnetek deal and kind of scale it up for STAHL, that would at least put you in the ballpark.

Thank you. Our next question comes from the line of Mike Shlisky with Seaport Global Securities. Please proceed with your question.

So, I guess given that these volume declines that you saw last year in your fiscal fourth quarter and you have just mentioned earlier. Is it fair to say, should we finally see an increase in volumes in Europe in your fiscal Q4 this year.

I think that that might be a reasonable expectation. It might be up slightly. We are seeing volumes actually increase flat quarter two to quarter three and up slightly in the U.S. So we are seeing a bit of a churn. So it does seem like we are bouncing of the bottom. Mike, as you know the U.S. capacity utilization is inching its way upward, which is helpful. But also I would say that there just seems to be more decent activity in the markets today which should help our fourth quarter. Having said all of that, as you know, we have very short cycle business where we book and ship very quickly. So we do need basic business coming from the various economies around the road to provide goods to us, orders to us.

And just to follow up on that. You have got some [price] [ph] income and you said, during the middle part of the current quarter. Do you think price might also turn a corner here in the fourth quarter at least to end the quarter.

Yes. So pricing in the U.S. I think is February and Europe is probably January, it's in the fourth quarter as well. We would expect to see prices have been relatively modest given the economic volume downturns, it's not really stuck very well but we would expect it to do a bit better. I don’t recall if price was last year fourth quarter but we would expect the fourth quarter volume to be impacted positively because what happens in the channel is most of our channel partners place orders in advance of that increase to get a bit of an upstart on placing orders before the price hits them.

Got it. That’s true. I also wanted to ask about STAHL's mix, what you had mentioned about oil and gas earlier. Is STAHL's mix as you have outlined, positive right now for that company, given their presence and as flows improve in oil and gas in general? Or do you still feel like oil and gas is just not ready to lift off just yet. I think we have heard from some of the [indiscernible] the folks out there.

Yes. I would say that, as you know of STAHL, about a quarter of their businesses [exposed] [ph] in through oil and gas channel. They believe and we believe looking at the figures that we have seen today, we will see so far, it seems to be at the bottom. And they would expect 2017 and we would expect 2017 to be an upward trajectory. Hard to predict exactly how much growth we see because I think we need to see some evidence of that at this point plus it would be nice to own them so we can get into a little bit more details which we haven't really been able to get into till beginning next week.

Okay. Also, assuming you do close STAHL, and it's probably almost there right now. At that point you will have pretty much met your M&A goal as it was put on to your first Slide. It also looks like with the mix will help you meet your margin goals as you put out on to your first Slide. I guess do you kind of feel like you need to set brand new goals here as a company given that you have accomplished a good portion of the big ones? Or is that maybe a job, Tim, for the next CEO and what that person might have to bring to the table here.

Sure. I think a mix of that. My sense is that, yes, we are certainly pointed towards our long term goals and things with the STAHL acquisition will be additive to that and push us towards that. We have a strategic planning process we go through every spring and summer and, heck, if we have a new CEO in place at that time, that would be fabulous that he or she could add their two cents to that new goal setting and I think that would be an appropriate time to reset the tables. So I think you are spot on. The thing I don’t know is timing. I don’t know exactly when that’s going to happen. But, regardless, it does make sense to try to take a step back and think about our longer term goals that where we are going to head beyond the ones we have put out so far.

Okay. And just one last one from me. I just wanted to [indiscernible] your comments on the changeover in the U.S. presidential administration. Those folks have clearly outlined an energy friendly policy, an infrastructure, construction friendly policy. Can you give us kind of your current mix as to how much you are exposed you think on the infrastructure side, either bridges or everyday hoist that might be a positive for your business, if and when some kind of spending plan can actually get passed.

Yes. Sure. Construction, non-res construction is a big part of Columbus McKinnon and always has been. We make a whole corduroy of hand hoists, ratchet lever hoists, rigging tools, chain, hooks, shackles, lifting tools that are used on construction sites, bridge work, power plants, utilities, the power grid, pretty much any building project that you can think of. Petrochem plant would use our construction tools. But then eventually they also use our hoist as well. So if energy kicks in and we start drilling more, which appears to be in a positive direction, I would expect our tools to be used there but also want the construction site, as you mentioned, infrastructure. It would be fabulous. I just hope we don’t have another [fake out] [ph] like we did eight years ago when we were promised a lot of shovel ready projects and we really never saw them come to fruition. So it would be great. I am very hopeful that we start to see that because it would be very beneficial to our company going forward. I would like to see tax reforms too. I think we pay a high corporate tax rate and our competitors don’t. They pay a much lower rate, so that would be obviously helpful for the company as well.

Thank you. And our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

I was wondering, I am still a little confused exactly what's going on with the gross margins. Could you provide a little more color on -- you talked about how bringing down inventories and being a little more lean in terms of that cause a little of a unfavorable cost absorption. Just confused on how that sort of works. I would have thought the opposite. So any more detail on exactly what's going on there. And that’s being seemingly a headwind actually the last couple of quarters. If you look at that gross margin table that you put in your -- that productivity line has become less and less and less and this quarter became a negative. So any more color on exactly what's going on and why you think that’s actually going to turn going forward, that would be great.

Yes. So the productivity -- maybe Greg can give you the pieces of it because it is a bit confusing. Admittedly, there is lots of moving pieces in here. The inventory draw down is a piece of that but also there is a product liability in there. So Greg, why don’t we just take a moment and walk people through that.

Yes. So the productivity -- I am going back to the page seven of the presentation. So in the quarter it's productivity net of other cost changes was a negative $1.2 million and in my comments and what we have up on top. $300,000 of that was related to restructuring cost and EMEA. So that leaves a balance of about $900,000. And what that really represents is with our manufacturing facilities, we have a portion of our cost structure is fixed and semi-fixed. And so when there is less manufacturing activity, you are still paying for a quality department. You are still paying for a plant controller. You still have a plant general manager. And so those costs get allocated to inventory at a standard for the year which is based on kind of an average amount of production going through the facility and so when you have a quarter that’s below the standard, those variances end of hitting the P&L as opposed to being capitalized into inventory.

And we work fewer hours.

And with the vacation schedule as well and the holiday schedule in December, for the quarter with Thanksgiving, Christmas holidays, in some cases in order to control inventory, I believe we had a few of our plants in the U.S. that were shut down for a week or so.

Yes. An extra week. So the other thing is, when they set the standards at the beginning of the year they assume they are going to work so many days, so many hours. That standard of absorption into the inventory and then they don’t work those hours because as Greg said, for example, we had a couple of plants that shut down an extra week around the holidays that was not planned for. We still have the fixed cost. So we draw down the inventory. We still have the fixed cost sitting there and that affects the gross margin in a negative way. And we saw that happen in a couple of facilities.

Okay. So you a year ago in the same quarter, you sighted about $2.3 million of onetime costs, accounting for that you had a 31.7% gross margin in the third quarter of fiscal '16. So even excluding the onetime cost this quarter around, you are looking at about 150-140 basis points of decline in gross margin. And in terms of what you are saying, is it just primarily or largely just based on volume and so we really just need volume to pickup and if we don’t, we are going to continue to sort of see maybe in the fourth quarter, the first quarter, 100-150 basis points of decline in gross margin. Excluding maybe the rail and road which I understand that does bring sort of higher margins, probably in the fourth quarter. Is that a good way to look at everything?

No, I would say not. From a gross margin perspective, last quarter we had all time record gross margin of 32.7%. Your math is right when you look at the comparison versus last year but as we have lost volume the entire year, that’s impacted the gross margin. But having said that, in the fourth quarter we would expect gross margins back in the low 30% range. One of the factors as well, Joe, that would have to be taken into account, and Tim talked about the fact that we have less of these larger projects in the Magnetek business, and you can do the math based on what we have reported. Magnetek is typically a 37% gross margin business. And in this quarter it was not. And it's not systemic of a long-term trend and lower margins in Magnetek. That was just the unique situation which occurred this quarter.

Let me add just a little bit, Joe, if I can put some more color on Magnetek. One thing that we track is quotation activities as well and Magnetek right now in December and January is seeing their quote volume in terms of sheer number of quotes requested, up 19% and that dollar volume on the same number of quotes up 13%. Now it's a lot more smaller projects, not these large projects that they saw last year but they are seeing a definite increase of requested quotes from the marketplace which is a precursor to bookings and revenue in that business.

Okay. So with the Magnetek sort of bouncing back to normalization and probably the rail and road that got pushed in the 4Q, 4Q looks actually pretty promising. Would you say that there is possibility -- it sounds like you think maybe overall volume maybe flat to slightly up. And with the sort of mix with Magnetek and the rail and road, it sounds like maybe actually gross margins could be up year-over-year in the fourth quarter. Is that actually the way to maybe think about.

Certainly could be. I can't forecast that, again, because we don’t have really fabulous visibility. The only thing that I can point to is some of these leading indicators like quotation activity or the capacity utilization that should give us a little bit more comfort that the fourth quarter should be a reasonable quarter.

Okay. Good enough. Thanks a lot, appreciate that. And then I was wondering--

Sorry, Joe, just one last comment on that as well is, typically the fourth quarter is our strongest from a seasonal perspective. So that issue on absorption where you would expect to go the opposite way. Where we will be absorbing more cost then we did in this last quarter.

Which increases the margin.

Yes.

Great. But the last couple of years you actually saw your fourth quarter be sort of the third weakest quarter of the year.

Correct. Which is very abnormal for Columbus McKinnon.

Okay. Okay. Another think I wanted you to help me understand was the accretion of STAHL. Just wondering if you could walk me through the main components of that accretion estimate, in terms of operating income pre-synergies, the cost synergy that you are expecting, and then the net increase of interest. Because it seems like the number seems a little conservative to me and I am just wondering what I am missing there.

Okay. So it is pre-purchase accounting and pre the onetime cost that are likely to be incurred next year. So the way to think about it, you know the numbers that would make up that accretion are essentially the operating income from STAHL that we would expect in fiscal '18. We would have a...

Those with 17. I am sorry, I was just wondering, is that still the 17% operating margins, roughly.

Roughly, yes. That would be a good proxy. In addition to that, we have the debt that we just placed is at LIBOR plus 3%. LIBOR is currently 1%, so that’s a 4% interest rate. We have assumed two LIBOR rate increases by the fed next year. So that’s, in our modeling we have assumed a 4.5% interest rate on $445 million with the assumed debt pay down that we talked about, I believe of $45 million to $50 million in the first year. And so round numbers that’s going to be a $20 million of interest and remember the interest that we are currently paying goes away. So our run rate currently is about $10 million a year in cash interest. So it's an incremental $10 million of interest at our kind of normalized tax rate which we have talked about is in the low 30% range. And you also have to take into account that there is going to be more shares outstanding as a result of the pipe.

And a big one, the cost synergies.

Yes. The cost synergies are expected of $5 million but we also had roughly $6 million of onetime cost. So net net, they are -- that’s kind of negated in the first year. And then in the second year...

Okay. So you are not including that, okay.

But we are based on one time cost.

Yes. Now the $0.34 accretion...

But the $0.34 accretion includes the onetime cost of $6 million roughly and then net net of $5 million of benefits.

No.

No, I misspoke, Joe. So the onetime costs are actually excluded from that calculation.

This is the run rate earnings that we would expect in year one not including the onetime cost. And that’s about $5 million in cost synergies plus STAHL's operating income, and then the second year we get an extra $6 million on top of the five to total 11 in the second full fiscal year, which gets you to the 51.

Okay. Just one in terms of STAHL also, in terms of the onetime costs that you are putting in. What do we have left, I believe you said in fiscal '17 there was $8 million to $9 million when you announced the acquisition. What's left of that $8 million to $9 million is left. And then your estimate for fiscal '18 is still $6 million of costs.

Yes. So there are deal costs that are being incurred as well as integration costs in fiscal '17 that we estimated for the full year of $8 million to $9 million. You are right, we have spent $3 million to date and there is going to be more cost up to that range. That range...

I guess we would expect that range to hold.

To hold. And for the onetime cost, the $6 million, that is expected in fiscal '18 and the necessary cost to achieve the synergies that we are looking to achieve.

Okay. That’s good enough. And then I was also wondering, in terms of the price contribution starting February in the U.S. You talked about that the last couple of years and you having gotten that much price. So I am just wondering how sort of significant do you think that price increase will be? This year-to-date you are looking at about 0.2% contribution of price. Is it going to be just slightly above that or closer to 1%. Any insight on that?

Yes. It won't be -- historically in normal volume economic times, we get the 2% to 3%. I would expect fiscal, the rest of the calendar year '17 which is basically our fiscal '18 to be better than what we have seen at '17 but not up into the 2% to 3% range just yet. So maybe in this half to a point area might be a realistic expectation. To be honest with you, to put the numbers together now you could get a sense of how big that is. So as we budget for our fiscal '18, so those numbers aren't finalized yet but that’s kind of give you my thinking at this point.

Okay. And then just lastly, I wanted to see if you guys could provide sort of a bigger picture of your revenue synergies of both Magnetek and STAHL. If you could just sort of detail what the big opportunities you think of both are. I know you mentioned in the press release about the variable drive technology with Magnetek and STAHL has different types of customers, different go to market channels. So just wondering if you could sort of break down in a concise manner sort of the opportunities that you are sort of excited about over the next few years.

So you are giving me a challenge to do it in a concise way. Okay. I will work and concise it. So let me start with Magnetek. Clearly it's a drive in every hoist and every powered hoist leading to smart hoist technology. We will be launching two major product lines the beginning of fiscal '18, which is the Lodestar hoist line and the Global Kind hoist line. One is a wire rope and one is an electric chain hoist. And we would expect the market to be very happy with that. And we have some goals in year one which are, I will say modest, ramping up nicely over year two and year three. Longer term that drive in every hoist gives us a computer in the hoist which allows us to do some preventative maintenance testing and self-diagnosing and communicating outward of any issues and be able to monitor the hoist activities that will happen in year two. I think we have gone on record to say that’s at least several million dollars long-term of additional benefit for the company. Secondly, Magnetek is international growth. Magnetek, as you might remember, was predominantly a North American provider, mostly U.S. They didn’t have a sales presence in Europe or Asia Pacific, or Latin America. Columbus McKinnon has brought them that capability and we have been training our people around the world and we are seeing some increased activity in Europe and also in Asia Pacific with some training and development people we have put there to train our people and that’s underway as well. And that again would be over times some multiple millions of dollars of benefit coming back to the company. And that was the predominant reason of long-term strategic benefit of Magnetek is really to drive our digital presence in this somewhat stoic and archaic world of lifting that we live in. Combine that with STAHL. In STAHL we have yet to really work with the management team there but we have some thoughts. And a couple of those thoughts revolve around taking the same Magnetek technology into the STAHL platform. STAHL really does sell variable speed drives but not many at all. So there is a great opportunity for us, first of all to add the Magnetek drive to the STAHL product portfolio and secondarily to bring them into the smart hoist technology along with Columbus McKinnon. They have not embarked on this as of yet. They had thoughts and concepts about it but they have not put pen to paper and put designs down yet. We think we can accelerate that with them and help them position them for the future digital world that we all envision. Secondarily, they have a fabulous line of explosion proof products that [ATEK] [ph] certified. That’s a European standard. And we would expect that we would take that product line and be able to sell it through all of the global Columbus McKinnon sales force that STAHL doesn’t have just yet. We would expect our Columbus McKinnon team to be able to pick that up and sell that globally as well. And then additionally there is some revenue that STAHL could see in Europe, of products that we make in different parts of the world like China or America that they could be able to take, add to their product portfolio and sell into the European market that Columbus McKinnon doesn’t do today and they don’t do today. So there will be another bit of a piece of additional revenue that we would expect. But to be perfectly honest with you, my management team and the STAHL management team needs to come together and strategize over each of these in a lot more depth than we have today. We have scratched the surface. So I would say I am very optimistic about the revenue potential but also at the same time it's very difficult to quantify it just yet until we actually own the company.

Thank you. Your next question comes from the line of Jacob Gomolinski-Ekel with Morgan Stanley. Please proceed with your question.

Most of my questions have already been asked and answered. Thanks for that. The only other quick questions I had were on the oil and gas space. If you are seeing any green chutes post this rebound in rig counts since December 30 and also even going into December in terms of [indiscernible] front or destocking or anything like that.

I would say, yes. I think we have seen some green chutes in the third quarter that we are speaking of now, where some of our rigging equipment has been specified and ordered and we believe it's for some of that rig count increase. Now, to be honest with you Jacob, it's not like through the roof. But it certainly is better than last year.

Okay. Have you seen sort of reduction or an end to stripping in the field?

I think that’s what I am referring to. That there probably has been less of that going on that has caused them to order equipment and hoist and rigging tools from us as new equipment going into the field.

Got it. And then you mentioned, I just want to make sure I heard correctly. You mentioned that there was some destocking. So I guess you could call it continued destocking in December. And then did you say that destocking was being restocked with competitor product or did I mishear that.

No, no, I am sorry. Let me be clear. We have not lost market share. As a matter of fact we have gained market share in this quarter. The market is just smaller and we found our channel partners, especially some of the larger ones to controlling their inventory in their house and have not re-stocked the things that they have sold into the market place of our equipment and they had not restocked it with some of competitors, to our knowledge at least. And we would expect them to neither restock that in the fourth quarter, especially [indiscernible] of our price increase.

Got it. So you said you have been gaining market share in the fourth quarter -- or, sorry, in the third quarter. Is that trend continuing in the fourth quarter and something you foresee in 2017?

That would be my expectation. It's hard to see it week by week because we don’t measure it weekly, to be honest with you. We measure it monthly. So I would have to wait for January to be concluded here. But it does feel like we have not lost market share at all in the quarter. It seems relatively solid at this point.

Can you just talk to what's been the driver of that though? The driver of the increased market share for you guys.

Yes. Predominantly our ability to deliver products in a timely way and of course our brand name and our quality and our ability to configure our hoist right to the order and ship that very quickly. And I would also say that we have been able to, and our rigging tool has been able to recapture some of the share we lost several years ago when we were unable to deliver and that seems to be heading in a positive direction just by ability to deliver. We have also added a couple of new hoist. We have a Load King Light, which is a low headroom hoist for heavy loads, that was accepted very well in the marketplace and that seems to have been doing very well as well. So kind of combination of multiple things.

Great. Thanks. And then last question is just on the pricing. I think I just missed it, you said that, what was the order of magnitude in terms of the pricing increase you were expecting in February?

Yes. So we are working on that right now but I would expect the pricing to come in at a couple of points and we would recognize a half to one or so. That’s kind of how we would expect it to come through. To be honest with you, I don’t have the hard numbers in front of me, it's more of a feel than anything else.

Thank you. And our last question comes from the line of John Sturges with Oppenheimer. Please proceed with your question.

All my questions have been answered. So thank you very much, gentlemen.

Ladies and gentlemen, this does conclude our question-and-answer session. At this time I will turn it back over to management for closing remarks.

Thank you, Audrey. As you might imagine, we look forward with great enthusiasm as we close on the STAHL acquisition and begin the next phase of growth for Columbus McKinnon. We have clearly recognized that our debt load is a big higher than we would like but we will generate good free cash flow and quickly repay this higher than normal leverage. Smart technology along with our overall digital strategy is on the right path on being able to help STAHL execute their digital plans, is incredibly exciting for the future of our company. Greg and his finance team did an excellent job in issuing some additional equity and putting in place an excellent debt structure that is very cost effective for our company. At this point I would like to take the time to thank Columbus McKinnon associates around the world for their dedication, the excellence in making our company a stronger, market leading company. Without them and their significant efforts, none of this can be accomplished. And as always, we appreciate your time today. Thank you.

This concludes today's conference call. At this time you may disconnect your lines and thank you for your participation.