Columbus McKinnon Corporation
Q3 2008 Earnings Call Transcript

Published: 25 Jan 2008

[Operator:]

Welcome to the Columbus McKinnon’s fiscal 2008 third quarter earnings conference call. At this time, all participants are in a listen only my mode. Following the presentation we will conduct a question and answers session. (Operator Instructions) Now, I’ll turn the meeting over to Mr. Timothy Tevens, President and CEO. Sir, you may begin.

[Timothy T. Tevens:]

Good morning everyone and welcome to the Columbus McKinnon conference call to review the results of our fiscal 2008 third quarter. Earlier this morning, we did issue a press release with corresponding financials, hopefully you all have. With me today here in our headquarters is Karen Howard, our Chief Financial Officer, Derwin Gilbreath our Chief Operating Officer, and Joe Owen, Vice-President and Hoist Group Leader. We do want to remind you that the press release and this conference call may contain some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements contain known and unknown risks and other factors that could cause the actual results to vary. You should in fact read the periodic reports that Columbus McKinnon files with the SEC to be sure you understand these risks. Overall, our revenue for the second quarter exceeded the same quarter last year by a healthy 9.3%. This was led by our products segment, which was up 10.7% and negatively impacted by our focus on profitable revenue at Univeyor in our solutions segment, which was down about 3% as well as the divestiture of Larco, which occurred in the fourth quarter of our fiscal 2007 year. As we have been saying for a while now, we continue to experience a strong global industrial economy. Our gross profit was up almost 21% and income from operations increased almost 29%, leading to a solid operating leverage of 32%. Our actual net income was up about 9.5% over last year and as you can see this was a very solid quarter for Columbus McKinnon. Revenue for the products segment in the third quarter was up 10.7% as I mentioned. This was compared to the same quarter last year and flat with our second quarter of fiscal ‘08, which has actually improved because this quarter is normally the weakest quarter as Karen will review with you in the moment. The increase from the same quarter of last year is primarily driven from addition of volume which is about 8.4% of it. And this is a result of increased demand from end users as well foreign currency translation 2.9%, a price increase of 1.3% offset by the Larco divestiture of 1.9%. Our international sales were up 15% over last year. This was 12% if you exclude the impact of currency translation as well as that of Larco divestiture. This is again driven by strong Pan-European and Latin American economies as well as investments in the products and the market presence that we have made over the last several years. Product segment gross profit was up 17.4% over the same quarter of last year and gross margin was strong at 31.5%. The operating income was up about 17% and the margin was very strong at 13.5%. The operating leverage continues to be positive for the products segment at about 20%. At this point, we did not see our end market slowing to any great degree and we continue to be buoyed by the activity we see in the various distribution channels that we sell through. Bookings for the products segment continued to be strong in the quarter and overall we are up once again in the mid-to-high single digit levels over the same quarter last year. Our backlog in the product segment was flat compared with the second quarter. As you may recall, cycle times for most of these items in the products segments is a day or weeks and therefore our backlog number represents about a month’s worth or so of shipments. Turning now to our solution segments, the sales were down about 3% from the same quarter last year, but up about 33% from last quarter or second quarter of ‘08. As we have been reporting to you, we have refocused Univeyor, the largest business segment on profitable revenue, which continues to negatively affect the revenue on the segment, although more modestly in this quarter. This quarter continues the trend in improving our solutions business by changing the business model Univeyor to allow them to have solid profitable revenue. It is the first time in the last six quarters where we had a profitable solutions segment. Univeyor is not operating to the levels that are acceptable just yet but it has dramatically improved and the other portions of the solutions segment, the other businesses of the solutions segment are performing very well. Backlog is up nicely to $17 million reflecting strong bookings for most of the businesses in this segment. And as we have previously promised you all, we have reported in January, actually about a week and a half ago or so, that we will pursue strategic alternatives for Univeyor. We have spent a considerable amount of time and diligence in studying this business and have concluded that there are better owners for Univeyor that can help them to be more successful than Columbus McKinnon. This process has begun and we expect to have something report to you sometime this summer, although as you may know in the M&A business timing is somewhat in question. You should also note that Univeyor has excellent reputation in their industry and we have already received numerous calls from potential buyers expressing their interest. Cash flow from operations was once again very strong at about $14 million and funded debt net of cash was down to $88.8 million at the end of the quarter. At this point in time, we are 24% net debt to total cap, which is a nice number. At this point, let me just turn it over to Karen to give you some more details.

[Karen L. Howard:]

Thank you Tim and good morning everyone. I am pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon’s fiscal 2008 third quarter and year to date that ended on December 30th, 2007. Consolidated sales increased by 9.3% to $155.2 million in the third quarter of this year compared with last year’s third quarter. Products segment sales which accounted for approximately 91% of total sales in the quarter increased by $13.6 million or 10.7% with strong double-digit sales increases reported by our Columbus McKinnon in Europe and our domestic crane groups and mid to high single-digit growth reported by our domestic hoist and rigging businesses. Our Larco Canadian crane business which contributed $2.3 million of revenue to last year’s quarter was divested on March 1st, 2007 resulting in a 1.9% reduction in segment revenues. Accordingly the combination of volume and additional shipping date contributed to an 8.4 percentage point increase for this segment over last year. Further, pricing and foreign currency translations favorably impacted the change by 1.3 and 2.9 percentage points respectively. Solutions segment sales decreased $0.5 million or 3.0% compared with the third quarter of fiscal ’07, driven by the decision to transition the business model of our Univeyor operations but benefiting from strong backlog coming in to the quarter. As previously indicated, we are transforming this material handling systems business to be more product and service maintenance oriented, as we pursue its potential divestiture. On year to date basis, consolidated sales increased $21.8 million or 5% over last year. Products segment sales were up 8.7% while solutions segment sales were down 24%. The company’s quarterly sales pattern assuming a period of consistent economic conditions typically shows sales strongest in the fourth quarter and weakest in the third quarter, which such comparisons being impacted throughout fiscal ’08 by the March 2007 Larco divestiture. The recent quarter had 60 shipping days, one more than the year ago quarter and the next quarter will have 63 shipping days. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal’08 and fiscal’07 as well as our upcoming year fiscal ’09 for your reference. Overall, third quarter consolidated gross profit increased $8.1 million or 20.8% with gross margin expanding to 290 basis points to 30.1%. Products segment contributed an incremental $6.5 million or 17.4% with its gross margin expanding 180 basis points to 31.5% from 29.7% in the year ago quarter. During this quarter, we realized relief from our September 4th price increase that affected our steel intensive rigging products. We also realized margin expansion and volume and productivity improvements. The solution segment contributed $1.5 million of incremental gross profit on $0.5 million lower revenue for the fiscal ’08 quarter, realizing a 16.8% gross margin compared with 6.4% in the fiscal ’07 quarter. This gross margin represents the highest level in the past eight quarters. Favorably contributing to these results Univeyor is realizing the benefit of the restricting of activities and focusing on more of a products and services orientation. We are pleased with the significant progress made as we also pursue the potential divestiture of this business for strategic reasons. On a year to date basis, consolidated gross profits is up $16.7 million with gross margin expansion of 230 basis points to 30.0%. Consolidated selling expense as a percent of sales was 11.5% in the third quarter, up from 10.6% last year due to the continued investments in both our domestic and international markets in accordance with our strategic growth initiative and consistent with prior quarters of this fiscal year. On a year to date basis, consolidated selling expenses followed a similar pattern, an 11.3% of fiscal ‘08 year to date sales compared with 10.4% for fiscal ‘07 year to date. Consolidated G&A expense was 6.1% of sales in the fiscal ‘08 quarter relatively comparable to fiscal ‘07 of 6.0%. Year to date G&A expenses were also relatively consistent year over year; it is 6.1 % of sales. With operating income increasing by $4.3 million or 28.6%, our operating margin expanded 180 basis points improving to 12.3% for this year’s quarter compared with last year’s 10.5%. A consolidated operating leverage contributed 32% to income from operations for each incremental sales [inaudible] in the quarter, exceeding our stated sustainable 20% to 30% goal. On a year to date basis operating margin expanded 110 basis points to 12.4% realizing 36% operating leverage over the prior year. With steady revenue we see further sustainable opportunity for operating leverage growth. Interest and debt expense was down to $600,000 or 14.6% over the prior year’s quarter and $1.5 million or 11.6% year to date due to lower debt levels. We incurred bond redemption cost of $200,000 or $0.01 per diluted shares during the quarter upon purchasing $3 million of our 8 7/8% notes, which will save $300,000 or $0.01 per diluted share of annual interest cost point forward. During last year’s quarter, we incurred $400,000 of similar cost representing $0.01 per diluted share. On a year to date basis, we have incurred $1.6 million upon redemption cost in fiscal ‘08 representing $0.06 per diluted share compared with $4.9 million or $0.17 per diluted share for fiscal ‘07 bond redemption cost. We realized $300,000 of investment income on our captive insurance company assets this quarter compared with last year’s $3.8 million. Last year’s $3.8 million included $3.4 million of gains resulting from a reallocation of the asset portfolio. Further, we recognized $800,000 of other income in this year’s quarter primarily interest on invested cash compared with $200,000 last year. Regarding income taxes, the effective tax rates for the fiscal ‘08 and fiscal ‘07 third quarters were 40.8% and 38.2% respectively. This year’s quarter was unfavorably impacted by the establishment of evaluation allowance against Univeyor deferred tax assets. On a year to date basis effective tax rates were 39.0% and 39.5% for fiscal ‘08 and fiscal ‘07 respectively. On a go-forward basis, our expectations are for an effective tax rates in 38% to 39% range for normal ongoing operations which continues to include a non-cash portions relating to the utilization of US federal net operating losses or NOLs. The NOL carry forward currently amounts to approximately $6.2 million representing approximately $2.2 million of future cash tax savings. Therefore, the cash tax payments savings for US Federal tax that we have been realizing will expire when the NOL is fully utilized which is expected to be in the upcoming fourth quarter of fiscal ‘08. Earnings per diluted share for the third quarter of fiscal ‘08 were $0.52 versus $0.48 in the third quarter of fiscal ‘07. After adjusting for the tax affected bonds, financing cost, and unusual investment gains previously described, the pro-forma non-GAAP diluted EPS for this fiscal ‘08 third quarter of $0.53 compared with the pro-forma non-GAAP diluted EPS for the fiscal ‘07 third quarter of $0.38 reflecting a 39.5% improvement. Actual year to date diluted EPS of $1.51 reflects a 23.8% increase from last year’s $1.22. Upon removing the tax effected bond redemption cost from both periods and fiscal ‘07 tax affected unusual investment gain, the fiscal ‘08 year to date pro-forma non-GAAP EPS of $1.57 compares favorably with the fiscal ‘07 year to date pro-forma non-GAAP EPS of $1.27 or 23.6% improvement. Depreciation was $2.0 million and $2.1 million for fiscal ‘08 and ‘07 third quarters respectively. On a year to date basis, it was $6.3 million compared to $6.2 million last year. Capital expenditures were $2.4 and $2.5 million for the fiscal ‘08 and ‘07 third quarters respectively. Year to date CapEx was $7.4 million with last year being $6.8 million. Spending included investments and our new product development activities, our growing low cost international facilities, productivity improvement equipment as well as normal maintenance CapEx. Looking forward we expect capital expenditures per fiscal ‘08 to be in the $11 million to $12 million range. Net cash provided by operating activities was $14.1 million in the quarter with earnings contributing $17 million and operating assets and liabilities using $2.9 million. Within working capital reduction and receivables and increases in payables generated cash but were partially offset by increases in inventory and decreases in other current liabilities which utilize cash. We continue to focus attention on our working capital utilization. A long term target remains 15% working capital as a percent of revenues. At quarter’s end, debt net of cash was $88.8 million and total gross debt was $150 million. At quarter end, availability on the $75 million revolver provided for under our senior credit agreement was $63.6 million representing $11.4 million of outstanding letters of credit and nothing drawn against the revolver. We were comfortably in full compliance with all financial covenants related to this agreement. While our strategy emphasizes profitable sales growth with international expansion, it continues to include focus on debt and interest expense reduction to further improve our profitability and provide capital structure stability. During the quarter net debt decreased by $11.8 million reflecting continued improvement in our net debt to a total capitalization percentage to 24.1%. Gross debt to total capitalization improved to 34.9% at the end of the quarter down from 42.7% a year ago. Reflecting improvement in our credit statistics and overall capital structure during the quarter Moody’s updated our overall corporate credit rating to be A3. Ultimately, we are targeting a sustained 30% to 40% debt to total capitalization ratio with an investment grade rating to give us flexibility to support our growth strategy which will include strategic [inaudible] acquisitions regardless of the point and the economic cycle. And with that, I thank you and turn it over to Derwin.

[Derwin Gilbreath:]

Thank you, Karen, and good morning to everyone. The local products segment sales representing 91% of our total business continuing to show strength with an 11% increase in the third quarter of FY ’08 compared to prior year. Solutions segment sales were down 3% compared with prior year, although up 33% compared to previous quarter as we progress in the transition of Univeyor to a more products and service oriented company. In total Columbus McKinnon sales increase 9% in the third quarter versus previous year. Domestically, sales for the quarter up to the general industrial distribution representing 61% of the total were up 5.1% over last year. We did recognize continued strong sales to rigging shops to the commercial construction industry. Sales through domestic especially distributors which included catalog houses, material hammering specialists, the entertainment industry, consumer, OEM, and government were also up 5.1% and represent 19% of all domestic sales. Sales from our crane building division, CES, were up 17% for the quarter and represents 17% of all domestic sales. Growth in this division continues to be driven by investment and energy and public works infrastructure and total domestic sales for the quarter was 7% higher than one year ago. Internationally, growth for the quarter was 13% excluding Larco, which was divested in March of ’07. Univeyor international sales growth was 24% with positive exchange effects that is going for half of this increase. Continued geographic and market expansion combined with generally robust economies is driving this growth. For the fourth quarter on fiscal year, we expect to see continued solid sales in our product segment, both domestically and internationally, driven by a continued focus on targeted attractive end user markets in the international expansion activities. Relative to operations, our operating leverage continues to be strong at 32% in the quarter. Our employees continue to pull together all the dimensions of our strategy to achieve this range of success quarter after quarter. Our strategic goal of superior customer excellence are supported with detailed and initiatives in operational excellent, people development, new products, and services as well as new markets and geographies to drive sales growth. Investments in all of these areas occurring all throughout the company. For example, in the new geographies category last quarter, we selected the distributor in the Middle East and one in India where the sophisticated entertainment markets are just developing. Our global entertainment business has had a compound to annual growth like more than 20% over the last five years. In Europe, we have just opened a sales office in Italy to penetrate independent industrial distribution. In Russia, we hired someone and will be opening an office very soon and are also on the brink of opening a bonded warehouse in Panama to support South America. Our sales in Poland have been growing nicely and we are investigating sales office opportunities there as well. In total, CMCO has 43 active operational excellent cross-functional teams, focusing on goals that will achieve a superior customer excellence. One very small example at one plant is a team using [perado] analysis discovered that 86% of customer complaints in fiscal ‘07 were due to products being damaged or lost during shipment. They worked with their carriers and shipping supply companies and they determined that box construction and box taping methods would be the most effective routes for improvement. This resulted in complaints being down over 50% over last year. Turning to inventory, our inventory increased over the quarter by $800,000. Europe increased $1.8 million for the same timeframe. The exchange impact was 76% of the increase. Europe is in the process of adding inventory for our multi-branding initiative, as well as new markets such as Italy. From a turn standpoint, CMCO improved from 4.6% last year for the quarter to 4.7% for this quarter. Year over year the increase in inventory has been $5.3 million and all of that has been a result of our inventory in CMCO Europe. Of that increase, 54% is due to the exchange rate. Beyond Europe, all our facilities are focusing on inventory reduction, via an increased focus on lean as I reported last quarter. We’re also improving our skills and our planning departments in the plants. We are not satisfied with our performance on inventory management. We are confident that performance will improve. Backlog remains constant in the plants and the products segment and is up nicely in the solution segment primarily, driven by several large orders from our shredder business. Now let me turn it over to Tim.

[Timothy T. Tevens:]

Thanks Derwin. Operator, we’re ready for questions.

[Operator:]

Our first question comes from Peter Lisnic from Robert Baird. Your line is open.

[Analyst for Analyst for Peter Lisnic:]

Good morning. It’s actually John on for Pete.

[Timothy T. Tevens:]

Hey John.

[Karen L. Howard:]

Hey John.

[Analyst for Peter Lisnic:]

First off, nice solid quarter here, kind of given up the potential macro economic uncertainty. It was nice to see but if you kind of look at your margin profile, should we continue to kind to think that as the gross margin continues to improve that most of it is going to be reinvested into selling resources? So, you’re going to stay kind of on the operating margin line or in the 12%, 13% range?

[Timothy T. Tevens:]

No. I would say that as the revenue grows and let’s say, for example, it’s at the current rate even a lower rate for that matter, we would expect to see operating leverage in the 20% to 30% area. So the operating margins should continue to expand as the revenue grows, even with the investments we’re making in new markets of new products.

[Analyst for Peter Lisnic:]

Okay, so, if I read into that, you are saying that implicitly, that the selling investments that you’re making are gaining traction pretty quickly.

[Timothy T. Tevens:]

They are doing quite nicely, yes.

[Analyst for Peter Lisnic:]

Okay, and then I guess as an unrelated follow up, we’ve heard a lot of rumblings kind of in the January timeframe about there were some unexpected steel pressure where it seems like steel prices are going up some more and it was just unanticipated from people. Are you guys seeing anything like that? I mean, I know you put through the price increase before but I mean are you seeing more pressure there?

[Timothy T. Tevens:]

We’re not. I don’t know what kind of steel you’re referring to. We, traditionally, buy forging bar or coil rod steel and you know, we did see increases. There’s no question last year, but we pretty much mitigated as much as we could in most of that and with the price increase we just had. So we’re not seeing anymore in January though. That one is not Columbus McKinnon’s view at this point.

[Derwin Gilbreath:]

That increase was late October and November when we saw it.

[Timothy T. Tevens:]

Yes.

[Derwin Gilbreath:]

But we took care of it price increases as you said.

[Analyst for Peter Lisnic:]

Okay and just a final one, on the backlog comments you had with kind of five weeks, I would assume the one area where the backlog probably just naturally runs a bit longer is the crane building kind of business that you had and that was just up pretty strongly year on year. I mean, what’s your visibility there into that because I imagined that’s a bit longer cycle just in terms of assembling the things and everything.

[Timothy T. Tevens:]

It is. It’s mostly tied to construction projects. Not all of the revenue. A lot of revenue is maintenance as well as parts and replacement business, but a portion of it certainly is tied to projects and we would have, you know, more like several months worth of visibility on a portion of their backlog which is only of small portion of our entire backlog.

[Analyst for Peter Lisnic:]

Okay and is that still trending favorably for you?

[Timothy T. Tevens:]

I think it is doing fine, yeah. We just shipped some very large orders to one our key costumers in the Midwest recently here which actually took the backlog down quite a bit in the quarter. But their booking activity seems to be pretty solid right now.

[Analyst for Peter Lisnic:]

Okay, thank you. I will get back in queue.

[Timothy T. Tevens:]

Thank you.

[Operator:]

Your next question comes from Amit Daryanani, RBC Capital Markets. Your line is open.

[Amit Daryanani:]

Thanks a lot. I just want to follow up on the selling expenses number that sort of increased. I didn’t realize you were making some investments there. How much of that is just in people versus investment in R&D for new products and is there an absolute dollar value that we’re targeting towards?

[Timothy T. Tevens:]

Yeah, most of the selling expenses are in new people and locations. So, for example, you heard Derwin talk about Italy. We just opened up an office in Italy this past summer/fall kind of timeframe. I think it was actually August timeframe. When we open up an office like that, we hire a country manager. We’ve been exporting to that market for a while. We have good distribution and we hire the country manager. He hits the ground and then builds the infrastructure around that. We put inventory in his location. He begins to hire a sales force to more deeply penetrate the market. It takes some a little while for that cost expense, for the revenue to catch up for with expense. So that’s the investment that we talked about. Eventually, it does. It varies country by country but let’s say on average about a year we begin to the traction on the revenue side.

[Amit Daryanani:]

All right and then just from a working capital perspective, you know, your AP days tend to run 20, 25 days shy of your AR days typically. Is there some plans on where we can either, you know, stretch our AP days or bring down the AR days?

[Timothy T. Tevens:]

We actually have a working capital team that’s looking at that. I think it’s fair to say that our trade receivables are probably on a very good point in the mid-50s. I’m not sure how much more can be done there. I think there is some work that can be done in payables but the biggest opportunity in my mind is still in inventory. The investments that Derwin mentioned that we’re making in terms of the new countries and a new product adds to inventory a bit but we operationally can improve what we do and that’s what he’s using the lean tool for is to really help us put flow systems in around the world. The other thing we need to do, is improve our base systems in Europe where the ERP systems, the back office systems, the inventory planning systems need to be integrated. They are not just that yet. And we have embarked on a project to help Europe do that so, we will be tying a network together to cover the European continent. And that needs to be done and it is going to take a little bit of time. Then I think they will have a better shot in improving their terms in a normal course of operating European business.

[Amit Daryanani:]

Got it. And just finally, when you look at the market environment, can you just talk a little bit about what just seem domestically and internationally? I realized your backlogs probably now the best indicated to look at, but you know, when you talk to people in that channel, your customers, are you seeing the time from initial call to the final sale getting stretched out a bit or things look pretty good?

[Timothy T. Tevens:]

Look pretty good. I would say that the same end markets that we have seen for a while now continue to be pretty strong, oil and gas and all the industries that support that seem to be pretty solid. The construction market as well. We make a lot of lifting tools and hand points that service that market. The power utility market is very good. Right now, there is a lot of grid work going on around the world which is helping us. Internationally speaking, I think it is two things. I think it is economically driven in the Eastern portion of Europe but it is fair to say that I think Western Europe is alive and well and doing quite nicely and we actually might be taking a little share on top of the economic growth. But, it is pretty much the same story. We have not really seen any changes in our end user markets or our distribution channels. The things that have been weak have been automotive and automotive related so there are some channels that support that have not been strong for a long, long time, by the way, as an example of something that is maybe not going as strong as we would like to see it go. But those things change as well.

[Amit Daryanani:]

All right. Thanks a lot.

[Operator:]

Next is Joe Giamichael of Rodman and Renshaw. Your line is open.

[Joe Giamichael:]

Thank you. Congratulations on the quarter.

[Timothy T. Tevens:]

Thank you, Joe.

[Karen L. Howard:]

Thank you.

[Joe Giamichael:]

You know, between the release of the introduction and the Q&A, I think most of my questions have been answered but do you have a sense for the traction in the market share you have been able to capture internationally and have you been able to quantify the addressable international market opportunity as a whole?

[Timothy T. Tevens:]

Wow, that is a big question, Joe.

[Karen L. Howard:]

Yes.

[Timothy T. Tevens:]

Let me take it in slices that I maybe can handle. Relative to the international market share, we do not have good reporting data like we have in the United States where we have trade associations that collect data in an objective way and report back to the member companies. So, in the states we are, you know, we can get pretty darn close to the actual market share numbers. When you talk about Europe, it does not happen that way so we actually measure it a little differently as a portion of the overall GDP and that we have seen that country by country our respective portion of the GDP is growing faster then the GDP is what leads us to conclude that we are gaining share. We continued to ask ourselves a question, you know, why, what is driving that? We keep coming back to the same issue is it innovative differentiated products that other competitors creditors may not, or do not have, as well as a very keen sense of customer service and quick deliveries and service and support to the market place which many of our competitors do, maybe not as good as we would. Those are the two issues that we see that might be driving the market share. And as I said, it is relatively gross. It is not as exact as we have here in the States. Are we covering the international market as well as we would like? Absolutely not. I think we are trending in a very positive way in Eastern and Western Europe where we are making investments in the Middle East that Derwin talked about. We export to that market today through other distribution channels but we do not have a presence there so that is an area of interest for us. And of course the big one, probably the biggest opportunity we have that we really do not have good coverage on just yet is China and quiet honestly the whole Asia Pacific region. It is a tiny slice of our revenue today. And we are making investments in that market. We just hired a business development manager this past summer. And he is on the ground and he is building a sales force. We are doing it organically today and things are moving albeit slowly. And that is a huge market to cover and we need a lot of skilled folks to help us do that. This is actually is an area where we are looking for some partners and maybe some acquisitions or joint ventures or alliances with people that already have presence in the market place there in China that can help us sell our product more directly to the indigenous industries that are present in China. So, that is a big opportunity for us.

[Joe Giamichael:]

Got it. And have you quantified as a whole what you feel the international market opportunity is?

[Timothy T. Tevens:]

Summarizing up from the details I know, the answer is no. But, I would say that, you know, we have huge opportunities probably bigger than United States is in terms of international markets. Those total markets that we do not anticipate in just probably larger than the U.S.

[Joe Giamichael:]

Okay, that is great. And just one last question. You have kind of touched upon it to a certain degree but, you know, given your conversion time, backlog is not a great long term indicator for this business. That being said, can you comment on sort of what visibility that you do have or what you are sort of seeing on a macro level that had you comfortable with the end market demand remaining robust?

[Timothy T. Tevens:]

Yes, you know what it is? It is mostly sales force touches to the various distribution channels partners as well as to the end-user communities. There is no question, there is concern floating around in those areas, but at this point in time, not many of our channel partners are seeing any slowing or recession kind of numbers. They may see maybe slowing from a growth standpoint. Also, the comps are getting a little more difficult as well. And many of the end users, of course, that we are talking to are looking for our kind of product and our kind of service and so there is activity in terms of they are trying to build something. I just happened to be in Las Vegas for a couple of entertainment meetings including I took our board to show them some of our hoists used in the entertainment market, and there is a huge demand in that part of the world for hoists for use in the construction market. And everybody I talked to, all of our sounds like rigging partners out there were very, very busy. So, it is more anecdotal I’d say and more of a feel with multiple touch points but it is the same comments we are hearing that we have been hearing for quite a while now that things are pretty good.

[Joe Giamichael:]

All right. Congratulations on the quarter and thank you very much.

[Timothy T. Tevens:]

Thank you.

[Operator:]

Next, Ted Kundtz at Needham, your line is open.

[Theodor Kundtz:]

Great, thank you. Hello everyone.

[Timothy T. Tevens:]

Hi Ted.

[Karen L. Howard:]

Hi Ted.

[Theodor Kundtz:]

A couple of questions for you. Timothy, any thoughts on the potential to increase gross margin from these levels? Do you have any target sets out there for yourselves?

[Timothy T. Tevens:]

We do not at this point in time. But I would think it is fair to say that the operating leverage that we talked about that drives the income from operations line is somewhat tied to gross margin as well. We should continue to see some level of expansion so that as the revenue grows to the similar leverage we have seen today.

[Theodor Kundtz:]

Okay so, that means you do expect to grow gross margins? I assume that is what you said? It was carefully crafted there.

[Timothy T. Tevens:]

Yes.

[Theodor Kundtz:]

Okay, but you have not set out any targets for yourself or for the industry yet?

[Timothy T. Tevens:]

No. At this point. We are doing an investor day on February 1st in the city which we will talk more details about some long-term objectives for our company.

[Theodor Kundtz:]

Okay, because at that point you were probably going to address me the operating leverage issues because you talked about potentially rethinking that. You still have your 20% to 30% guideline out there…

[Timothy T. Tevens:]

Right.

[Theodor Kundtz:]

But doing better than that.

[Timothy T. Tevens:]

We are, but we are talking about 20% or 30% over the long term.

[Theodor Kundtz:]

Right, yes, yes.

[Timothy T. Tevens:]

Quarter to quarter it is going to move a bit.

[Theodor Kundtz:]

Right, okay. Okay, looking at the international market for a minute, representing about 35%, 36% of your total revenue right now, where would you like to see that be in the next several years?

[Timothy T. Tevens:]

You keep going to the targets there, don’t you?

[Theodor Kundtz:]

Yes, obviously I think you probably expect international to keep growing faster, at a faster rate.

[Timothy T. Tevens:]

Yes, I mean, if you map it out and you say international’s growing at around 11% or so, and domestically it is maybe mid-single digits, you know, you kind of quickly get to the point that, in the not too distant future this company will look more like a more global company, more 50% international revenue and 50% U.S.

[Theodor Kundtz:]

Okay and you still see that as very doable.

[Timothy T. Tevens:]

I do. I would say that the acquisitions that we’re focused on are international as well. So, you know, again leading down that strategy market presence that will add to the international growth as well.

[Theodor Kundtz:]

Okay.

[Timothy T. Tevens:]

Of course, taking away Univeyor by the way is a negative against that, so.

[Theodor Kundtz:]

Right, right. Do you expect Univeyor will continue to improve over the next quarters assuming you still to have it in the portfolio by the summer? Do you expect to see a continuing improvement in their contribution?

[Timothy T. Tevens:]

Yeah. That model shift that we have been talking about for the last year or so is taking root and growing nicely. Talk about the [inaudible] machine and layer pickers which are more standard products. Actually, some additional revenue to report which is good news, which is higher margin business for us. So we would expect that business to continue on the trend line that they are on right now.

[Theodor Kundtz:]

Okay.

[Timothy T. Tevens:]

And be more profitable in the next several quarters.

[Theodor Kundtz:]

Right. Was it a breakeven level in this particular quarter? I know the group was profitable. Was Univeyor itself at a breakeven level?

[Timothy T. Tevens:]

No.

[Theodor Kundtz:]

Operating?

[Timothy T. Tevens:]

Slightly negative.

[Theodor Kundtz:]

Slightly negative okay. A very modest drag. Okay terrific, thanks very much.

[Timothy T. Tevens:]

Thanks.

[Theodor Kundtz:]

Very nice quarter.

[Timothy T. Tevens:]

Thank you.

[Operator:]

Your next question comes from the line of James Bank, Sidoti and Company. Your line is open.

[James Bank:]

Hi good morning everyone.

[Timothy T. Tevens:]

Hi James.

[Karen L. Howard:]

Hi James.

[James Bank:]

Tire shredder is going to come out of nowhere a little bit. Could you tell me what the percentage breakdown to the solution sales was?

[Timothy T. Tevens:]

Sure. While Karen is giving it out. Yes, tire shedder there is a lot of international activity for that business as the European Union and various Asian countries outlaw tire piles which forces them to process their tires into reusable material and our tire shredder business out of [Circo]; Florida has done a great job of marketing those products internationally. Actually hired multiple sales guys in Europe to cover the continent there and its going very nicely.

[James Bank:]

Yeah absolutely. So, I’m sorry, you will not disclose the percentage?

[Timothy T. Tevens:]

We do give the sales breakdown. We don’t talk about profitability by our different businesses but for this quarter, the tire shredder business was about 21% of the segment, which is still just about 2% of our consolidated revenue.

[James Bank:]

Okay, I’m sorry you don’t give the profitability of that?

[Timothy T. Tevens:]

No but it is nicely profitable.

[James Bank:]

Right. Univeyor, I guess the wording on press release is it’s leading me to ask these questions. I was kind of able to pick it apart in press releases. Can I assume that it is more or less a break even here or at the very least, by the end of this fiscal year can we assume it to be breakeven?

[Timothy T. Tevens:]

It will be as I said in this quarter, it was slightly negative.

[James Bank:]

Okay.

[Timothy T. Tevens:]

One could argue with it’s on a trend line to improve so, you know, I would assume by the fourth quarter it’s going to be much more positive looking.

[James Bank:]

Okay.

[Timothy T. Tevens:]

Not great and not at a level where anybody is happy just yet.

[James Bank:]

Right. Certainly much better from the first quarter. Selling and marketing, the strategic investments you are doing. Is this something that you know, I guess would continue into the fourth quarter this year, but then also the way we think about selling expense next year, are you going to carry through next year with a similar type of incremental gains?

[Timothy T. Tevens:]

Yes.

[James Bank:]

Okay. And then also with general administrative, similar question, kind of how we should think about it in the fourth quarter as well as next year?

[Timothy T. Tevens:]

Yes.

[James Bank:]

Okay. Great. Thank you. That’s all I have.

[Operator:]

Dori Koenig at Lehman Brothers, your line is open.

[Dori Koenig:]

Great, thank you. Just a comment around international sales being up 24% on a year over year basis. Half of that being driven by the foreign exchange. That would suggest that you are selling in non-US dollars. Is that, correct?

[Timothy T. Tevens:]

Yeah.

[Dori Koenig:]

Okay. Great. That’s all I had. Thank you.

[Timothy T. Tevens:]

For the most part, yes, that’s not 100% true, but generally speaking, it is.

[Dori Koenig:]

Right, generally speaking. Thank you.

[Operator:]

Holden Lewis of BB&T, your line is open.

[Holden Lewis:]

Good morning. Thank you.

[Timothy T. Tevens:]

Hi Holden.

[Holden Lewis:]

Hi. I know that you put in your price increases recently, and you know, looking at the gross margin and the products business, it’s ticked up a little bit but certainly not dramatically as the year has progressed, and then also kind of looking at the incremental margins of the product business, you know, you range it just like 20% to 30% and you’ve kind of been skirting around that 20% rate which, you know, I assume you sort of have you know, you can expect to do better than if you’re putting on a 20% to 30% type range. You know, are there some negatives, which is kind of compressing the gross margin, relative to our expectations of the incremental margins. It seemed like the pricing was expected to give us a little bit of a push and that push is not pretty modest, so I guess I’m curious if in the product’s gross margin, if there are some offsetting pressures in there that we should be aware of.

[Timothy T. Tevens:]

Well there certainly is, but do you think 20% is modest?

[Holden Lewis:]

Well, when you’re putting out 20% to 30%, right? Assuming 20% is the barely acceptable level from your perspective, plus I think in Q1 before you had the price increase it was 18%. So a good number, you know, it’s just it seems you’re expecting to do better and I guess we kind of thought the improvement would be a little bit greater given the pricing. That’s why I’m curious if there are any pressures which have been kicking in that were you know, maybe unexpected as well.

[Timothy T. Tevens:]

First of all, its 20% to 30% for the company, the total company, not the product segment, okay? And we’re above that. So that’s the number we put out, but we don’t necessarily talk about the segment but let me address your real question, okay? And that is are we seeing pressures? Well, certainly we’re seeing raw material pressures which the price increase by the way, is designed for all intents and purposes to mitigate. It may not do that entirely. We also have situations where we have some contracts with some larger distributors where the price does not hit immediately, it takes time because of printing of catalogs, or things of that nature, so that’s another tiny issue more than anything, and then the other one that comes to mind is you know, we’re still seeing, healthcare costs rise, high single digits which is another cost pressure as well.

[Holden Lewis:]

Okay. So those raw materials are certainly still a factor, I mean, net that’s still a drag as opposed to neutralized in the mix at this point.

[Timothy T. Tevens:]

Not a drag. We got 20% operating leverage in the products segment.

[Holden Lewis:]

Okay.

[Timothy T. Tevens:]

Plus on top of making significant investments outside the US, and actually inside the US in certain markets, though you know, Holden, I think the spin is you’re looking at it a little differently than what I am looking at it, and that is, I’m saying we’re making significant investments in our international market in certain market segments like energy here in the United States, and on top of that, we’re generating 20% more operating income.

[Holden Lewis:]

Yeah. Okay. And then you know, the increase in revenue in the solution to business sequentially, the tire shredder sounds like it’s a business you sort of ship out of, and say yes these big lumps of business but is the 14-7 you know, where did the sequential pop in the revenue come from?

[Timothy T. Tevens:]

I think it’s mostly Univeyor.

[Karen L. Howard:]

Yeah, Holden, Univeyor given the nature of that business, it does fluctuate with its projects and such, and they had nice backlogs coming in to the quarter so we did see a little bit of a pop there this quarter compared to the prior quarter.

[Holden Lewis:]

Okay. But this was not sort of clearing out. This was actually business that you booked under your more disciplined sort of approach and it is a very profitable business then?

[Timothy Tavern:]

Both older projects and new projects.

[Holden Lewis:]

Okay, thank you.

[Operator:]

At this time we’re showing no further questions so I would like to turn today’s conference back over to your speaker for closing remarks. Thank you. Go ahead please.

[Timothy T. Tevens:]

Thank you Candy and thanks everyone on the call. Just as a summary for you all, we’ve poised to grow profitably with a stronger balance sheet and very solid and growing markets, with a strong market position in North America and excellent cash flows. Our use of free cash flow continue to be reducing debt, but we’re also focusing our attention on products oriented [inaudible] acquisitions that can add market presence, where we have a small or no presence. And add to our product portfolio, where we can leverage our existing distribution channels and brand name strength. Combine this with our lean initiatives cost reduction activities, investments in new products and market and I think we’re positioned to continue and finish our fiscal ‘08 on a very positive note. I would like to thank all of our Columbus McKinnon associates around the world for their hard work and ultimate success in making this quarter a very good one. As always, we certainly appreciate your time today. Have a good day.