Columbus McKinnon Corporation
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Welcome to the Magnetek Quarter One Fiscal Year 2015 Earnings Call. My name is Neela, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and please note that this conference is being recorded. I'll now turn the call over to Lynn Bostrom, Director of Communications. Lynn, you may begin.

[Lynn Bostrom:]

Good morning. Thank you for joining us today for Magnetek's first quarter 2015 earnings conference call. As the operator said, this conference call is being recorded today, May 7, 2015, and is being webcast live on Magnetek's website at magnetek.com. During the call, we may refer to slides, which are available on our website as well. The webcast will be available for replay on our website for one year. The results of our 2015 first fiscal quarter were released this morning, and the press release and charts have been posted to Magnetek's website. Please note that reconciliations to non-GAAP measures may be discussed and are included in the press release, charts and slides. Speaking on the call today are Magnetek's President and Chief Executive Officer, Peter McCormick; and our Vice President and Chief Financial Officer, Marty Schwenner. Before turning the call over to Pete, I'd like to remind you that, as reflected on Slide 2, statements made during this conference call maybe forward-looking in nature. 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. And now, I will turn the call over to Pete to provide the opening remarks.

[Peter McCormick:]

Thanks Lynn, and good morning. Coming off a very strong a fiscal 2014, our business remained healthy in our fiscal 2015 first quarter with a double-digit increase in revenue year-over-year. Sales were up across all product lines, particularly in our material handling and elevator businesses. While the first quarter started out slowly with the typical seasonal softness in material handling markets, our order and sales activity increased significantly towards the end of the quarter. In fact, we booked nearly 50% of our first quarter orders during the month of March, including a number of large-scale bundled material handling projects. We were able to gain market share in several areas during the first quarter as well. So despite the slow start and the impact of the West Coast port shutdown, we executed well during the quarter and also benefited from reduced pension expense. We posted healthy first quarter gross margins and operating profit, and significantly improved our earnings per share year-over-year. Given our strong first quarter incoming order rates we moved into the second quarter cautiously optimistic that we can continue the momentum during the quarter and the remainder of the year. I will turn it over to Marty to provide the financial report and then I will review our strategy and objectives going forward.

[Marty Schwenner:]

Thanks Pete, and good morning. Today I would like to cover our first quarter results, spend a bit of time on our balance sheet and cash position, and then finish up with a brief discussion of our outlook. Turning to the slide titled Q1 results, continuing operations, while we started the fiscal year slowly we gained momentum as the quarter progressed and posted a 10% year-over-year gain in sales, finishing the quarter at $26.6 million. It is interesting to note the phasing of our sales during the quarter as January sales were just over $6.5 million, while sales in March increased to nearly $12 million. A slow start to the year, followed by the rapid increase in sales within the quarter clearly had an impact on our first quarter efficiency. Sales into material handling markets grew 8% over last year and our sales mix included some larger projects as well as a 14% increase in radio sales over last year. Pulling through to the gross profit line was also strong at more than $1.2 million, or nearly 50% of the incremental $2.5 million of sales. Gross margin as a percentage of sales expanded over last year by 150 basis points despite the uneven demand and the west coast port slowdown, which resulted in higher incoming freight cost during the quarter, and also impacted our efficiency and our inventory balances. So our sourcing, engineering and operations people were faced with some unique challenges during the quarter and really did a great job for us. Operating expenses were up about $200,000 over last year due to development costs related to a high horsepower elevator regen drive, as well as spending increases in the IT area, and higher professional fees. Some of this increase was offset as expected by lower pension expense, which is running at a rate of about $2 million per year. Despite the higher spending, our operating income increased 74% to $2.5 million, and our diluted earnings per share were up 91% over last year to $0.67 per share. Overall we are really pleased with our operating results as we posted our best first quarter figures since 2012, when we had a fair amount of renewable energy and mining revenue. Moving to the balance sheet, our cash balances decreased by more than $2.5 million due to higher working capital requirements. The sales pacing skewed towards March, resulted in a temporary jump in our receivable days to about 60 years. We would clearly expect this to revert back to the historical mean somewhere in the low to mid 50 day range in the second quarter. The West Coast port issues lowered our inventory turnover rate somewhat. I mean certain parts are sourced mainly from Asia, we really had no option but to air freight in additional inventory to meet customer promised dates. On the liability side, we did not hold [AP] payments as aggressively as we did at year-end and we also paid incentive compensation amounts, which improved as of year-end during the first quarter. In summary, frankly not a great quarter for us in terms of cash generation, but not completely unexpected. Historically our first quarter has been weak in terms of cash generation. Looking forward the port issues now appear to be behind us and we have recently seen a far more level flat load, so we fully expect we can close the second quarter with close to $12 million in cash. Briefly turning to our outlook, similar to our sales level, our incoming order rate accelerated significantly later in the first quarter, and that also carried over into the second quarter to date. We are also expecting better efficiency in the second quarter, so we are projecting an increase in sales and expanding profit margins in the second quarter as compared to the first quarter. We should also report nice gains on a year-over-year basis in the second quarter as compared to last year. At this point I will turn it back over to Pete for some closing remarks.

[Peter McCormick:]

Thanks Marty. Obviously a strong quarter, and as I said earlier, we remain cautiously optimistic that we can continue the momentum in the second quarter and beyond. I would like to take a moment to review our objectives and strategies. If you follow Magnetek, that our strategy for some time now has been to increase the value of the company through organic sales growth, consistent cash generation and reduction in our pension obligation. We are now seeing years of significant contributions to our pension plan convert into higher value for the company. Over the past several quarters we have realized considerable organic growth. We believe this has been a function of our ability to gain market share combined in part with the growing willingness by customers in our end markets to invest in larger projects. One large high-profile project we have mentioned before is the modernization of the Hoover Dam power plant crane. During our first quarter, we commissioned two of the cranes and shipped the final control panels to the bureau of reclamation, operator of the Hoover Dam. The Hoover Dam is undergoing modernization on several fronts and we plan to pursue future projects with the bureau as they arise. Our board in fact took the opportunity recently to hold the meeting in Nevada in order to see Magnetek’s products at work at the Hoover Dam and gain a better understanding of future opportunities in ongoing dam modernizations. Other large orders of note during the quarter include the controls for a major new steel mill, and automation of an engine assembly crane system. Our strategy continues to focus on targeted investment in R&D to bring new product innovations and enhanced features to the markets we serve, as well as to new markets. We are also continuing our efforts to enter new geographies, in some cases partnering with our customers as their business expands abroad. Our stated goal for some time has been to achieve gross margins of 35% of sales, and operating profit of 10% or more to that end, we intend to continue our focus on effective cost and pricing management while growing our business. Effective asset management to maximize our cash flow will also continue to be a focus allowing us to fund future growth, meet our obligations and reduce our pension through contributions. We believe we have a proven strategy that will allow us to grow our sales and profitability over time. Thank you for your attention and now we would be happy to take your questions.

[Operator:]

[Operator Instructions] And our first question comes from Steve McManus from Sidoti & Company. Please go ahead.

[Steve McManus:]

Hi, guys, how are you doing?

[Peter McCormick:]

Hi, Steve.

[Marty Schwenner:]

Hi, Steve.

[Steve McManus:]

A couple of quick ones, you guys mentioned the port shutdown, do you have – can you give us an idea of the impact or the cost related to that shutdown during the quarter?

[Marty Schwenner:]

Yes, sure Steve. This is Marty. The real issue for us was there was a lot of inventory that we sourced from Asia trapped in the ports on the west coast. So what we had to do in order to meet the customer promise dates was airfreight in some inventories. From a cost impact in the quarter that was probably close to $100,000 over what we normally would have expected. And also due to the part shortages caused us to reshuffle a lot of things on the shop floor, which is what we alluded to in the prepared remarks, where we said our operating people really did a great job because part shortages really created a ripple in the plant there. So as a result of that rescheduling things, we end up with a bit more over time than we would have expected, and I would say that was probably along the same magnitude as the freight, nearly $100,000 over what we would have expected. So we were happy with the results, but if we wouldn’t have had those issues, we could have done more at the gross margin line. So hopefully that is behind us now, and we will look for margin expansion here in Q2.

[Steve McManus:]

Okay, and then you mentioned obviously you guys have benefited from I guess the higher frequency of larger orders in comparison to the past, where have you been seeing these, I guess a little color there would help?

[Peter McCormick:]

Sure Steve, this is Pete. We have seen quite a few orders coming from some of our customers in the steel industry. One customer in particular, we have seen we probably have over half a dozen projects with that one customer alone. We have seen the interest being up since working on the Hoover Dam project, we have actually now have probably three or more other dam projects that we’re now receiving project work from. Well, also – a lot of those are – we are also seeing like an automation, an increase in the automation jobs. We are seeing some of the automotives who are investing quite a bit. So we have some large projects with them. I think I mentioned in our shareholder meeting some projects from the aerospace industry that we are working on. So, yes, we have seen a very healthy increase in this large project work going across a variety of different industries.

[Steve McManus:]

Okay, then the last one from me, R&D jumped up a bit sequentially as well as year-over-year, how should we look at that going forward, is that kind of a fair run rate or some thoughts there?

[Peter McCormick:]

I think we did see that spike up a little bit that was mainly related to one specific project in the elevator market for us. We are working on developing a high horsepower [Quattro] product primarily targeting Asian retrofit, so that is part of the geographic expansion that we are looking at. And we spent quite a bit of money on that in the first quarter and brought in a lot of material. So I would expect that the run rate probably gets closer to the 0.8 million as opposed to 0.9 million going forward.

[Steve McManus:]

Okay, great. Thanks a lot guys. I appreciate it.

[Peter McCormick:]

Thanks Steve.

[Operator:]

[Operator Instructions] And we have no further questions at this time. I'll now turn the call back over to Peter McCormick for closing remarks.

[Peter McCormick:]

Well, thanks for joining us today. I want to thank all of our shareholders for your continuing support and we look forward to your participation on our next quarterly call.

[Operator:]

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