Columbus McKinnon Corporation
Q2 2013 Earnings Call Transcript

Published: 13 Aug 2013

[Operator:]

Welcome to the Magnetek Second Quarter Fiscal Year 2013 Earnings Call. My name is Chris, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Lynn Bostrom, Director of Communications. Lynn Bostrom, you may begin.

[Lynn Bostrom:]

Good morning. Thank you for joining us today. I trust everyone has received Magnetek's second quarter fiscal year 2013 results. This information is available under Financial News in the Investor Relations section of our website at magnetek.com. As the operator said, this conference call is being recorded today, August 13, 2013, and is being webcast live on Magnetek's website. Throughout the call, we'll refer to slides, which are available on our website as well. Listeners are encouraged to view these materials in conjunction with the call. The webcast will be available for replay on our website following the call for at least 3 months or as long as the content remains timely. As stated on Slide 2, statements made during this conference call are intended to come within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and may be forward-looking and subject to risks. Factors that could cause actual events to differ materially from these statements are discussed in the company's press releases and periodic filings with the SEC, including our Form 10-K. We have Magnetek's President and Chief Executive Officer, Peter McCormick; and our Vice President and Chief Financial Officer, Marty Schwenner, on the call. Mr. McCormick will provide the opening comments.

[Peter M. McCormick:]

Thanks, Lynn, and good morning. Our second quarter results reflect ongoing sluggishness in the overall economy, as well as mixed signals and uncertainty for the second half outlook. While our sales and profits were down year-over-year, this was mainly due to the continuing challenges in our served mining market, as well as the impact of our decision to no longer actively market renewable energy products. On the positive side, sales into our largest served market, material handling, rebounded from the first quarter and achieved moderate year-over-year growth despite relatively stagnant manufacturing activity. Radio control continued to be a bright spot as well, with sales of wireless controls for both material handling and mobile hydraulic applications increasing year-over-year. Finally, sales of elevator drives also increased and combined with higher material handling volume, helped us achieve healthy second quarter gross margins. So despite the slow growth environment, I'm pleased we were able to post solid profitability, achieving adjusted EBITDA of nearly 13% of sales. While near-term business conditions remain mixed, mid to long term, we believe our prospects for growth and increased shareholder value are favorable. I'll address this a little after Marty covers the details of the quarter.

[Marty J. Schwenner:]

Thanks, Pete, and good morning. I'd like to briefly cover our second quarter results, our third quarter outlook and then close today with a brief pension update focusing on developments over the past several months. Looking at the slide titled Q2 Results of Continuing Operations. While total company sales were down year-over-year in the second quarter of fiscal 2013, the decline was due to our withdrawal from renewable energy markets and lower sales into mining markets as conditions in underground coal remain quite challenging. Second quarter sales into material handling and elevator markets, our 2 largest served markets, actually increased year-over-year by 7% and 11%, respectively. On a sequential basis, sales were up about 8%, mainly due to higher sales into material handling markets. Current year gross margin was 34.6% of sales, down slightly from 35% last year due mainly to the volume decline. However, gross margin improved by more than 200 basis points sequentially from the first quarter due to higher material handling volume and resolution of some issues that negatively impacted Q1 margins. Second quarter operating expenses increased year-over-year due mainly to volume-related selling expenses in material handling and higher discretionary spending. Our continuing operations generated nearly $1.5 million of operating income with diluted earnings per share of $0.36, while second quarter adjusted EBITDA was $3.4 million or nearly 13% of sales. We managed our working capital quite a bit better in the second quarter, primarily in the inventory area. Our turnover rate increased to 5 turns, very near our historical average from 4.3 turns during the first quarter of 2013. We contributed about $4.5 million to our pension plan assets during the second quarter and still managed to close the quarter with nearly $25 million in cash, so our liquidity remains strong. Regarding our third quarter outlook, we're currently expecting our results to be a bit below our results for the recently completed second quarter due mainly to seasonality in material handling markets. In addition, we have to contribute nearly $8 million to our pension plan during the third quarter as we have to make our final contribution for the 2012 plan year in addition to the regular quarterly contribution for 2013. So we are projecting our cash balances to dip to the $19 million to $20 million range at the end of the third quarter. We're also looking for orders to rebound somewhat in the third quarter as we expect our order mix to improve in the second half of the year. I'll close my comments today with a brief update on our pension as we've had some fairly good developments over the past several months. We've stated for some time now that the major driver of our pension obligation is the low-interest rate environment. As interest rates decline, pension liabilities increase. As a reminder, every 100-basis-point change in interest rates impacts our pension liability by about $20 million. We've also stated we are not relying on interest rate increases to resolve our pension issue, but rather, we're committed to funding the plan over time. So while we have not been counting on increasing interest rates, we certainly have seen some benefit from the recent rate increases. In fact, we believe this was the beginning of the long-expected rate reversal and that rates will likely continue to increase moving forward. Interest rates at the end of June were up about 75 basis points from December, which reduces our pension liability by approximately $15 million. At the same time, these rate increases haven't had a lasting negative impact on equity markets, and our pension assets, as of the end of June, are up about $10 million since December. So the combination of higher rates and better-than-expected asset returns has reduced our pension obligation by about $25 million in the first 6 months of 2013. We also saw this trend continue to play out into July, with rates continuing to move higher along with the equity markets. These are very encouraging developments that are not yet reflected in our balance sheet, but we believe this has resulted in somewhat of a shift in our enterprise value from the pension obligation to our market cap during the first half of 2013. Going forward, a best-case macro environment for us would be a continuation of the first half of 2013; interest rates continuing to edge higher without derailing either the economy or the equity market. We've still got fairly large contributions to make to our pension over the next couple of years, but we've got cash on hand and cash-generating business. So we would expect that as we continue to make progress in reducing our pension, more of our enterprise value will continue to shift to equity. At this point, I'll turn it back over to Pete for some closing remarks.

[Peter M. McCormick:]

Thanks, Marty. So as we've mentioned, business conditions are expected to remain mixed for the remainder of 2013. While we are expecting an uptick in revenue in the second half of the year, it likely won't be at the same rate as last year. Quotation levels remain high in our largest served market, material handling, but we're not booking as many large projects as we have seen last year. Sales of our radio control and elevator drive products are expected to remain fairly strong during the third quarter. With regards to mining, the coal market has likely turned the corner and is expected to improve during the second half, although we may not see the impact of any uptick until 2014. So overall, while economic growth in our served markets is expected to be slow for the remainder of 2013, there are some long-term trends in these markets that point to positive prospects for us going forward. First, the desire for energy efficiency and savings is an important growth driver for us. Our products have focused on energy savings for some time, and we're using our expertise to bring energy regeneration to a growing number of products. For example, just last month, we added another product to our new line of AC Regenerative crane control systems. These systems take surplus energy from the motor and return it to the AC power source, reducing total energy consumption and improving energy efficiency. Of course, our Quattro regenerating elevator drives have been at the forefront of energy savings in high-rise buildings all over the world for several years now. Speaking of energy, we believe that coal will continue to play a significant role in the global economy as global energy demands will likely continue to increase. As a leader in mining control, Magnetek offers a variety of AC and DC mining control products and has a reputation for proven technology, quality and reliability. Another important trend is the expanding use of radio control into new industries and applications. Wireless control allows operators in a variety of industries from agriculture, construction, mining, off-highway and others to more safely and efficiently operate their equipment. We're pioneering the adoption of wireless control in new industries where older hardware control has been the norm. Demand for communications and diagnostic features is also growing, even in some of the industrial markets we serve. Our new Flex VUE wireless control is a great example of a product that meets this demand. This handheld transmitter offers 2-way communication technology, giving operators wireless control with on-screen diagnostic information right at their fingertips. Magnetek's ability to provide this value-added functionality offers us significant growth opportunities going forward. Finally, the modernization and upgrade of outdated equipment in both buildings and in factories and the desire for improved safety and for the increased operational efficiency are all trends for which Magnetek is uniquely positioned to offer customers state-of-the-art integrated solutions. We've been partnering with blue-chip customers in our core markets for, in many cases, over 30 years. We are confident we can leverage our expertise in these industries and in advanced power and motion control technology to take advantage of these macro trends and grow our business long term. Given these growth drivers, our sustainable competitive advantages and ability to generate cash, we believe we have the fundamentals in place to achieve our objectives of consistent revenue growth, gross margin of 35% and operating profit of 10% of sales or more. In summary, we expect to grow our business profitably, generate healthy levels of cash and reduce our pension for future contributions, ultimately enhancing our value to our shareholders. Thank you for your attention, and now we'd be glad to take your questions.

[Operator:]

[Operator Instructions] And our first question comes from Justin Putnam [ph].

[Unknown Analyst:]

I just want to -- first of all, I just want to make sure I'm clear on what you're saying about the rest of the year. Despite the sequential decline you expect in Q3, you do still expect second half to be an improvement over the first half, both top and bottom line, correct?

[Peter M. McCormick:]

Yes. I think we're looking for a little bit of a better performance in the second half. Part of that's going to depend, of course, on what we can book in the second half in terms of some of the larger projects that we have quoted that have not yet been converted into orders. And then some of the book-to-bill business that we typically see over the course of the quarter where we receive an order and ship it in the same period. Seasonality in material handling impacts the September quarter and then December is typically stronger. So I think we're looking for a little bit of an incremental improvement in the top line in the second half and also, in terms of operating income, I think particularly, if you look at the first quarter, operating income was a bit lower than what we've seen. So we've taken some actions here in the second quarter to get our margin back to historical levels, which we expect to continue into the second half.

[Unknown Analyst:]

Okay. Do you expect the momentum from the second half to carry over into 2014? Do you expect...

[Peter M. McCormick:]

That's a long ways out for us. I think it depends what happens in the markets we're in. The mining market's been very low. We think it's bottomed out. So hopefully, we'll see signs of that growing. That would be very helpful for us if that were to occur. Material handling, the market seems to pretty stable. It seems to have leveled off a little but at a good level. So if that can improve, that'd be great. And the elevator business has been pretty stable for us as well. So I think that's quite a ways out for us to really be able to try and predict anything.

[Unknown Analyst:]

Okay. And then in the material handling business, and excluding some of the newer products like the radio control business, what's your sense of your market share in those products? I guess, for example, is there any business that you're not really getting now that you used to? Or even vice versa?

[Peter M. McCormick:]

Well, I guess if -- we look at our material handling business as providing a solution, not necessarily a product. Because as you know, we sell a variety of products into that market as a solution, whether it's drives, motors, radio controls, electrification. And so it's hard to put a market share on the bundle. So yes, we do look at market share by these product categories and drive's probably be the biggest piece of that. We have a very significant market share position from the drive point of view. Do I think there's areas for us to continue to grow? I do. I think it will come in, in us providing the complete solution for larger projects. That's why I think we're going to see growth.

[Unknown Analyst:]

Okay. In these solutions, have you had to take any more aggressive pricing action to maintain – to get some of these projects? Or is that pretty consistent with what you've seen in the past?

[Peter M. McCormick:]

No, I don't think we've seen any price pressure there so I don't -- I haven't seen that.

[Unknown Analyst:]

Okay. And I've got one more question and that deals with your expenses. Looked like in the second quarter, SG&A was up, what, 10%. And your sales were down a little bit year-over-year. You mentioned some special items, but how do we expect that -- how should we expect that to play out over the year? Is that kind of a reasonable percentage of sales that you'd expect going forward or is there anything different going forward?

[Marty J. Schwenner:]

I think if you look at the second quarter SG&A, we were up in marketing expenses. We had a little bit higher advertising and trade show type of expenses. We've been traveling a bit more. Variable selling expenses were also higher in the quarter because our material handling sales and our elevators sales did grow year-over-year, so -- or material handling, in particular. G&A was up a little bit. Some of that's normal inflation. Some of it a little bit of professional fees and then some of it is, frankly, headcount additions that were probably made in the second half of last year that are now in the Q2 run rate this year that weren't in the run rate last year. So I think if you probably took our year-to-date SG&A number and kind of annualized it, that gives you a pretty good idea of what the annual run rate would be. There's always going to be a couple of timing things here and there, in terms of some quarters are heavier in activities and discretionary spending than others.

[Operator:]

It seems as though we have no further questions. At this time, I would like to turn the call back over to Lynn Bostrom.

[Lynn Bostrom:]

Thank you, and we look forward to you joining us for our next quarterly call.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participating. You may now disconnect.