Deborah Pawlowski - Timothy T. Tevens - Chief Executive Officer, President and Director Gregory P. Rustowicz - Chief Financial Officer and Vice President of Finance.

Jason Ursaner - CJS Securities, Inc. Christopher Schon Williams - BB&T Capital Markets, Research Division Michael Shlisky - Global Hunter Securities, LLC, Research Division Gary Farber - CL King & Associates, Inc., Research Division.

Welcome to the Investor Relations of Columbus McKinnon. [Operator Instructions] This call is being recorded. [Operator Instructions] Now I'll turn the meeting over to Ms. Deborah Pawlowski. Ma'am, you may begin..

Thank you, Gabby, and good morning, everyone. This is our Second Quarter Fiscal Year 2015 Earnings Results Conference Call. We certainly appreciate your time today and your interest in Columbus McKinnon. On the call, I have with me here Tim Tevens, our President and CEO; and Greg Rustowicz, our Chief Financial Officer.

Tim and Greg are going to review the results for this quarter and for the year, and give an update on the company's outlook and strategic progress. You should have a copy of the financial results that were released earlier this morning before the market. And if not, you can access those at the company's website, www.cmworks.com.

You'll also find at the Investors Relations section of the website the slides that are going to accompany the discussion that Tim and Greg will be having today. Let me start by having you turn to Slide 2, where you'll find our safe harbor statement.

As you are aware, we may make some forward-looking statements during the formal discussion as well as during the question-and-answer session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what was stated in today's call.

These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed with the Securities and Exchange Commission. The documents can also be found on the company's website or sec.gov. With that, you can turn it to Slide 3, and I'll turn it over to Tim.

Tim?.

Thanks, Deb.

On Slide 3, we just want to remind you of our long-term objectives, which include growing to be a $1 billion business, with about 1/3 of our revenue in developing markets and 2/3 in developed markets, along with the $200 million to $300 million in acquisitions, a 12% to 14% margin -- operating margin, strong working capital levels and, overall, very strong balance sheet.

We continue to focus our resources and energy on acquiring companies that strategically add market presence and product breadth to help us grow around the world to achieve these results. Let me move you to Page 4, if I could, which provides highlights of our second quarter of fiscal '15.

As you can see, we had a solid quarter, with sales growth in most of our markets. The U.S. and the emerging market led the way, with EMEA -- Europe basically -- holding steady, as that economy continues to have some headwinds. Our operating leverage in the quarter was very strong at 47%.

And the recent acquisition we had of Unified Industries continued to perform well for us, as we spread their product through the Columbus McKinnon global sales channels. Our revenue in the quarter increased about 6%, up to $147 million. U.S. revenue increased 7.7% or $6.1 million. And sales outside the U.S.

were up $3.5 million (sic) [ 3.5% or $2.1 million ], with emerging markets such as Asia Pacific and Latin America leading the way. And as I said earlier, EMEA was flat. Gross margins continue to expand, and we have reached our historic peak at 32.1%.

I think we do believe that we can continue this trend as we see volume, pricing and acquisitions all contribute to future earnings growth. Operating income was up nicely in the quarter by $3.8 million or 31%. And the margin was up to 11%, with very strong leverage, as I mentioned, at 47%.

And as is normally the case, we also generated some very nice cash at $6.3 million in cash from operations in the quarter. Our focus remains on profitable growth as depicted on Page 5. As you all know, we help people lift, position and secure material that requires safe and productive solutions.

This is a very broad-based need that covers most components of our global economy. As we work closely in some key vertical markets and develop closer customer intimacy model, we are better able to provide products and solutions that meet the specific needs of our customers.

We've also developed the Columbus McKinnon University that has global reach to help train users and distributors alike on safe lifting. As we announced last quarter, our Chinese facility expansion has been completed, and the production activities are up and running quite well. This will help our Asia Pacific team grow their revenues.

Our business is performing well, as our initiatives to improve the quality, on-time delivery and operations is working. We do stand behind the timing delivery of certain products with our In-Stock Guarantee program that guarantees a 3-day delivery to our customers.

As it has been the case for many years, our Columbus McKinnon Lean Business System allows our team to focus on improving the daily activities of our business and drive productivity. Second quarter revenues increased 5.9% or $8.1 million, as shown on Page 6.

The Unified acquisition, volume and additional operating day and price were the primary drivers of growth. U.S. sales grew nicely, as I mentioned, 7.7%, up to almost $85 million, with volume leading the way. And sales outside the U.S. remained positive, up 3.5%, as I mentioned, mostly driven by emerging markets.

The average sales per day increased 4.2% over last year, driven by stronger bookings in the quarter, which we can talk about in a bit. At this point, let me turn it over to Greg who will provide some more financial details..

Thank you, Tim, and good morning, everyone. On Slide 7, our second quarter gross profit margin increased 20 basis points to 32.1% from 31.9% in the prior year. Gross profit dollars increased $2.9 million or 6.5%. The Unified acquisition contributed $1.2 million to gross profit. The higher sales recorded in the quarter added $900,000 to gross profit.

Pricing, net of material cost inflation, added $900,000 to gross profit. In addition, we experienced slightly lower legal expenses related to product liability costs, which positively impacted gross profit by $300,000. All of these factors more than offset the negative impact of an inventory reserve adjustment of $300,000.

Productivity was flat in the quarter, as strong productivity in the U.S. facilities was largely offset by negative productivity in our European facilities. In addition, foreign currency translation negatively impacted gross profit by $100,000 as a result of the weaker euro.

This quarter represented the 16th consecutive quarter of year-over-year gross margin improvement. In addition, the gross margin percentage tied for the highest gross margin in our history as a public company, which last occurred in the quarter ended June 30, 2008.

As shown on Slide 8, selling expense was essentially flat with the prior year and represented 11.7% of sales this quarter compared to 12.4% in the prior year. Foreign currency translation reduced selling expense by $100,000. Increases to selling expense related to the Unified acquisition of $200,000 were offset by cost reductions in the base business.

G&A expense decreased $900,000 from the prior year and represented 9% of sales this quarter compared to 10.2% in the prior year. The prior year period included approximately $600,000 in professional services and personnel-related costs, which were nonrecurring and did not repeat this quarter.

Cost controls in the base business more than offset the impact of the Unified acquisition, which added $200,000 to G&A. We expect our G&A run rate to be approximately $31 million to $32 million per quarter for the remainder of the fiscal year. Turning to Slide 9.

Operating income increased by 31.3% to $16.1 million or 11% of sales compared to 8.8% of sales in the previous year.

The increase in operating income reflects the operating leverage of the business as higher sales drove higher gross margins, as well as the cost-containment actions to control SG&A expense in the base business, while still funding investments to drive future top line growth.

These initiatives include the impact of our acquisitions, new product development, vertical and emerging markets and our global services initiative. As you can see on Slide 10, pretax income was up 31% from a year ago to $13.4 million.

Earnings per diluted share for the second quarter of fiscal 2015 were $0.53 per share compared to $0.36 per share in the previous year, an increase of $0.17 per share or 47%.

The tax rate this quarter was unusually low at 21.1% due to a recently issued tax regulation that will result in the utilization of tax credits relating to previous fiscal years. The credits result in an income tax benefit of $1.4 million this quarter.

In a more normalized 30% tax rate, earnings per diluted share were up $0.11 per share or 31% to $0.47 per share. Our effective tax rate for fiscal 2015 has been lowered and is now expected to be between 27% and 32%. Turning to Slide 11. Our working capital as a percent of sales was 22.1% compared to 22.4% at June 30, 2014, and 21.7% at March 31, 2014.

Working capital as a percent of sales is expected to end the fiscal year at approximately the same level as last fiscal year-end. Inventory turns have improved to 4.0 turns from 3.8 turns last quarter and are expected to improve further over the remaining 2 quarters of the fiscal year.

Inventory turns were 11% higher compared to the inventory turns reported in the fiscal second quarter last year. On Slide 12, you can see that we generated $12.7 million of net cash provided by operating activities in the 6 months ended September 30, 2014, compared to $1.7 million in the 6 months ended September 30, 2013.

Capital expenditures year-to-date were $7.6 million versus $8 million in the previous year. As a result, we have generated $5.2 million of operating free cash flow so far in fiscal 2015. With this positive operating free cash flow, we have paid $1.6 million in dividends as of September 30.

We also just announced that our board declared a regular quarterly dividend of $0.04 per share payable on or about November 17 to shareholders of record as of the close of business on November 7. With the remaining operating free cash flow, we believe we have ample opportunities to invest in high-return projects.

Consequently, we expect full year capital expenditures to be approximately $20 million for fiscal 2015. On Slide 13, you can see that as of September 30, 2014, total gross debt was $151.2 million and net debt was $36.7 million. Net debt to net total capitalization was 10.8%.

In addition to having $114.5 million of cash on our balance sheet as of September 30, we have an additional $94.7 million available under our $100 million senior credit facility, which is net of $5.3 million of outstanding letters of credit.

This facility, along with our healthy cash balance, provides significant liquidity to support our strategic growth plan. Finally, I would like to mention that we are reviewing our options for refinancing our 7 7/8% notes, which are callable beginning in February of 2015 at a redemption price of 103.938%.

We plan to evaluate the various options over the next several months, and we'll have more to say on this on the January call. With that, I will turn it back over to Tim to cover the fiscal 2015 outlook..

Thanks, Greg. Let's take a moment and look at that outlook, which is on Page 14 of the slide deck. We do continue to see improved order trends and expect this trend to continue through the rest of the fiscal year. As we see the growth, our operating leverage should reflect that and continue to expand our margins.

Right now, we're seeing an improved North America business activity, with orders up about 7.4% over last year. The U.S. industrial capacity utilization continues to improve, albeit slowly. Asia Pacific is seeing some very good orders and quoting activity, as well as Latin America.

But although we think Brazil is going to have a drag on Latin America for us, given some of the slowness we're seeing in that market. In Europe, we continue to see headwinds, especially in large capital goods, engineered projects, we see them being continued to be delayed. Our normal hoist business does appear to be stable and growing slightly.

Our backlog is down a bit. But as you know, that's not really an indicator of our future revenues as the time from bookings to shipments and revenue recognition generally happens very quickly in our business. Continue to focus our energy in driving profitable growth. And the results of our work are clearly evident in the results of this quarter.

Investments in products, markets, Lean, the Lean Business System, revenue producing vertical markets such as oil and gas, entertainment and mining will all lift our revenues throughout the rest of fiscal '15. We continue to be very aggressive in our pursuit of acquisitions. And at this point in time, we have multiple targets in sight.

With that, Gabby, let me open it up to questions to the group, and we'll answer those before I summarize. Thank you..

[Operator Instructions] The first question comes from the line of Jason..

Just first, I wanted to ask a little bit qualitatively about revenue. The recovery in industrial production is certainly a little more tenuous now than it was a few months ago.

So just at a high level, Tim, how are you feeling now about global industrial production when you look out over the next 6 to 12 months? And is there any concern, at this point, that the modest growth you're seeing in the core business, which has less visibility.

I guess, just how do you balance that with the decrease in backlog and the continued softness you're seeing in the longer lead time, heavier project business?.

Yes, the decrease in the backlog, let me take that piece first, Jason, really is tied to the large capital projects that we have seen a slowness, clearly, a slowness. We don't see people placing big bets around the world.

I will say that in our Chinese business, we have landed a couple of the nuclear power plants, which has been helpful, but those are few and far between. If you look at Europe, we see more delays than we see any project coming out.

I would say in America, also we're seeing a bit of softness in large capital projects and, therefore, large capital goods that we would sell into the market.

Contrast that with our -- what I would consider to be our lower selling price per unit hoist and rigging business seems to be going better, which you might know that, Jason, is our MRO kind of business, which is more maintenance and expense-oriented. It seems to be better than it was this past summer and the quarter before.

It seems to be a little bit more solid and gaining some legs. Actually, Europe is up slightly in that business even though that -- those economies are really challenged, especially outside of Germany.

So as I look at the markets around the world, let me de-link industrial production for a moment because we actually lag capacity utilization, which usually lags industrial production. So we're behind that indicator normally by quite a bit, I would argue.

As a result though, thinking about our channel partners and end-user customers and the activity we're seeing, I think we feel better today than we did 3 months ago relative to the general markets that we're living in, except for these large capital projects, mostly in Europe..

Okay. And then on the gross margin, you're sort of entering uncharted territory as you march up into the low and now mid-30% range.

So I know you alluded to it a little bit in your prepared remarks, and I kind of ask that every quarter, but just how much confidence can we have in sustainability of margin? And at what point do you risk maybe either customer acceptance or some pushback with distributors in generating that margin?.

Yes, a couple of thoughts there. I think, you're right, this 32% area for this company is a little different than it has been. But as I look at our activities in the company and our productivity investments and our markets and the new products that we're launching, I see nothing but upside here.

There's a lot of very good activity that we control that's going to drive that margin higher. I will tell you that price, as you can see in this quarter, is not as big as it has been in prior quarters. It's certainly a number. It's a positive number, which is great, but it's not the primary driver. We like to see volume come to our facilities.

Our volumes -- our facilities have plenty of opportunity to take on that volume. I will tell you they're, for the most part, performing very well, much better than I've seen in my tenure in terms of productivity, quality, on-time delivery, customer satisfaction. All of those metrics for us are very good today, which bode well for the company.

And then the initiatives behind that, to continue to drive cost down, to continue to drive productivity up, I think will continue to push this gross margin up north. Volume is a wonderful thing for our business. And if we can get a little bit more volume through our facilities, it's absolutely wonderful as you can see..

Okay. And just last question for me. I wanted to quickly walk through the balance sheet.

The revolver, other than the letters of credit, Greg, you said the $100 million facility, it's basically undrawn?.

It's correct..

Okay.

And right now it would be around LIBOR plus 100 basis points?.

That is correct as well, if we were to draw on it. Yes..

Okay.

Does that change dramatically? It has an accordion feature, I think, of $75 million, does that change dramatically the rate, if you have to use that at all?.

No..

Okay.

So just given -- I mean, you mentioned the net debt of, I think, 10%, given where you are down on the net debt, just help me walk through when you're evaluating some of these opportunities, why wouldn't -- just using cash, taking down the remaining net amount on the revolver? I mean, because it looks like you would have maybe a 600 basis points or so interest rate savings.

So I just want to make sure I understand sort of what the choices are other than that one because that one looks pretty good at this point..

Yes. So one of the key aspects to this is looking at what our liquidity needs are going to be over the next 3 to 6 months and certainly, acquisitions play a role in that. So our thought process is similar to what you're thinking in that it probably will make sense for us to refinance the 7 7/8% notes. We're looking at a number of opportunities.

And we would expect there to be substantial interest savings as a result of whatever we do..

The next question comes from the line of Schon Williams..

Could -- can we just talk about pricing as we move through the remaining 2 quarters of the fiscal year? I know that your U.S. pricing has already been put through. Normally, we would kind of, seasonal trends, we would expect that pricing contribution to revenues and gross margin to maybe fade as we get into the back half of the year.

Can you just talk about, I don't know, what you're seeing in terms of pricing environment? Is there anything, any reason to believe that kind of those normal seasonal trends would not be repeating in the back half? Is there any new pricing that we should be expecting?.

No, no. I think it should reflect this fairly low, on the low side for us at least, level of pricing going forward. I don't see anything changing that..

Yes, Schon, as we've talked in the past, in the U.S., we typically will raise prices in our fiscal fourth quarter and that would be -- we would expect to do that again as well. But that, typically, would take effect towards the latter half of March..

Okay, that's helpful, guys.

And then on the gross profit, could you just describe what the inventory adjustment was?.

Yes, so we have a process of looking at our inventory from a slow-moving perspective. And so we ended up having to take an additional $300,000 of kind of a slow-moving reserve. It doesn't mean that the inventory is obsolete. It just means that we have uncertain products.

We have more than a typical amount of usage, so we ended up taking a reserve for that. So if we're able to sell it, which we hope to, we would expect that reserve to reverse in the future..

And you feel comfortable that you've captured that this quarter that, that would not be an ongoing issue kind of moving forward?.

We would not expect that to be an ongoing issue, but we do look at it every quarter..

This isn't abnormal, Schon..

This was in one particular location that had....

Too much inventory..

Too much inventory..

That's helpful. And then productivity flat this quarter. Normally, that's a little bit of a tailwind.

Can you just talk about what you're -- as we move into the back half of the year or maybe even for next fiscal year, I mean, would you expect productivity to continue to be neutral? Or should we expect some tailwind there moving forward?.

I would expect productivity to return to be positive in the future. Let me tell you why. So in the markets that we're getting some level of growth like America, Mexico, Asia, productivity actually is positive this quarter and will -- should continue to be positive if we get some level of growth. The offsetting entry this quarter was Europe.

The volume was down in these large projects, and we need to think about the right cost structure for that -- those businesses going forward to, let's say, live in a lower-volume world that they're facing right now..

The next question comes from the line of Mike Shlisky..

I wanted to touch briefly on your SG&A run rate. I think back to last quarter you had mentioned you would be doing about $33 million a quarter. You clearly came in around $30 million this quarter, and now you're thinking around $31 million, $32 million.

I guess, is the current view -- does that assume that your cost control efforts are kind of over? Or is there a chance that things go on from here and you'll actually be able to actually get below the $31 million, $32 million range here in the back half? Is there any chance at all that your next few quarters could actually be below this range?.

Well, I think that's possible, but what we do to try to look out into the future, Mike, is anticipate the investments we're making in the global markets and new product, et cetera, that's going to drive SG&A into this $31 million to $32 million per quarter. That's our best estimate as we sit here today..

Okay. Okay. Perhaps to ask a different way, in this past quarter you had pretty good operating margin. Clearly, you are, I would say, sniffing the long term 12% to 14% range, just based on this past quarter alone. Can you give us any sort of time frame as to when you might be able to actually reach that range? You're getting awfully close at this point.

Any thoughts as to -- if that came in the next, let's say, 12 to 18 months?.

I think that would be great if we continue to see the volume increases like we have seen this quarter. If we see that run rate coming at us, and we see the leverage that we saw in this quarter, I would expect us to be in that range in the time frame that you mentioned..

Your next question comes from the line of Gary Farber..

Just a couple of questions.

Can you speak about the overall competitive environment, particularly in Europe, what it looks like? And also given your -- the last down, overall industrial downturn, is there anything that particularly stands out as a lesson that you learned from that one that you might apply if things sort of weakened in Europe at this time?.

Sure, competitive landscape, Gary, for all intents and purposes, is unchanged. There's always specific initiatives that each competitor is trying to go after and pursue. But at the end of the day, it feels and looks like the same one that you and I have looked at for the last 5 or 6 years.

Europe is a little tougher because the volumes just aren't there. So it's just a lot more aggressive there, I would say. But nothing that's earthshaking at this point in time.

Relative to downturns and thinking about if Europe does go into another double-dip recession, it's incumbent upon us as managers to be in front of that curve as opposed to being behind it and making sure that our cost controls are adequate and timely. I think that would be the biggest lesson that we would learn..

And can you give us also some sense of what level of capacity your own plants roughly, even if it's not a number, just how they're running, what level relative to where their peak levels? Because you're getting good margin improvement and the volume backdrop seems sort of mixed.

So I'm just wondering how much excess capacity you actually have even though your margins are getting better..

Yes, we -- I don't see any constraint at this point. Most of our facilities are in the 2/3 to 3/4 percent kind of utilization. Let's say a couple of shifts per day. We have weekends. We have third shift. We have plenty of room to grow and expand our capacity to meet demands coming at us. That will not be an issue..

Gary, just to add on, as we talked about a year ago, we were in the process of expanding our Chinese facility by 40%. So that has added capacity to the system..

Right. Okay.

And then just lastly, these large projects in Europe, can you give a sense at their peak what percentage of European revenue they might have been and sort of where they are now?.

The projects you're referring to, the engineered....

Yes, like how big a piece of revenue might they be if they're at their peak? And are they sort of -- and if they're at their bottom now or where do they sort of stand relative to that?.

If you think about peak to trough, these are, let's say, $3 million to $5 million off. It's a chunk of change, there's no question..

The next question comes from the line of Schon Williams..

Just a follow-up on the acquisition pipeline. I mean, you've talked about for 2 quarters now a couple of acquisitions, sounds like in line of sight.

I mean, what's the bogey on completing those in the -- completing something in the next 12 months, say?.

Schon, we got a lot of activity, a lot of energy around this initiative. There's a number of conversations going on as we speak. I have nothing to report today. I would absolutely love to tell you about a couple that we're working on here shortly, but you know as well as I do that it's a bit of a crapshoot when you're doing an acquisition.

You got to get across the finish line. And unfortunately, we don't have any across the finish line just yet. But I would love the next 12 months to talk to you about a couple of these..

Okay. No, that's helpful color. And then I just wanted to talk about maybe your CapEx expansions -- sorry, expectations for next year. Obviously, some spending going on with the ERP system that you'll be lapping kind of the spend from the Chinese facility.

Should we be thinking about, I mean, CapEx at these kind of levels moving into next fiscal year? Or should they actually dial back a little bit given you'll be complete with the China factory?.

Yes, I think they'll be a bit lower, Schon. You're spot on. That expansion is behind us now. I would -- if you think about $15 million to $20 million as opposed to 20-plus, you're probably in a better ballpark..

[Operator Instructions] No question at this time. [Operator Instructions].

It looks to me like there's no more questions. We'll take it from here, Gabby, okay? So let me just summarize for everyone and please if you have another question, don't hesitate to chime in. As you can see, this was a solid quarter for us and one that we look forward to demonstrate to the rest of the fiscal year.

As a reminder for you all though, our third quarter is usually the weakest of the year, historically speaking, and our fourth quarter is usually the strongest of the year. So just to set the stage for you, if you're thinking about the rest of fiscal '15.

Investments in our Lean, new product development, emerging markets will continue to bear fruit for us and help grow our company for the foreseeable future.

We are well capitalized and remain positioned to continue to execute our strategic plans to grow profitably as our business has about $114 million of cash, $100 million untapped revolver, we have some capital structures, Gregory talked about a little while ago that we have to think through in our fourth quarter, but then we'll be coming back at you shortly.

We continue to have acquisition discussions with many businesses that I believe can add good strategic value to our company. I'd like to thank all of our people around the world for their dedication, their excellence in making our company a stronger, market-leading organization. And as always, we certainly appreciated your time today.

Thanks, and have a good day..

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

Thank you..