Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Columbus McKinnon (NASDAQ:CMCO)

Q3 2014 Earnings Call

January 23, 2014 10:00 am ET

Executives

Deborah Pawlowski

Timothy T. Tevens - Chief Executive Officer, President and Director

Gregory P. Rustowicz - Chief Financial Officer and Vice President of Finance

Analysts

Jason Ursaner - CJS Securities, Inc.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Joseph Mondillo - Sidoti & Company, LLC

Gary Farber - CL King & Associates, Inc., Research Division

John Butler Walthausen - Walthausen & Co., LLC

Peter Van Roden

Operator

Welcome and thank you, all, for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect.

I'd now like to turn the call over to Deb Pawlowski, Investor Relations for Columbus McKinnon. Thank you, you may now begin.

Deborah Pawlowski

Thank you, Jane and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. On the call, we have Tim Tevens, President and CEO; and Greg Rustowicz, Vice President and CFO. Tim and Greg will review the results of the third quarter and give an update on the company's outlook and strategic progress. You should have a copy of the financial results that were released this morning before the market and if not, you can access that at the company's website, www.cmworks.com. Also at the website, in the Investor section, you will find a slide that will accompany the discussion that Tim and Greg will be having today. If you turn in the slide deck to Slide 2, 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 Q&A. 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 from what was stated in today's call. These risks and uncertainties and other factors are provided in our earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. The documents can be found on the company's website or at sec.gov.

So with that, let me turn it over to Tim to begin. Tim?

Timothy T. Tevens

Thanks, Deb. Let me move you to Page 3, if I could, to remind you for our long-term objectives including 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 a $200 million to $300 million of acquisitions, 12% to 14% operating margins and a strong working capital level and overall strong balance sheet. We continue to focus our resources and energy on acquiring companies that strategically add market presence and product breadth and help us grow around the world to achieve these results.

Page 4 provides the highlights of our third quarter in fiscal '14. Our gross margins continue to expand up nicely 100 basis points to 29.6%, compared to last year's third quarter. Year-to-date, that margin is 30.9% despite a lower revenue amount. Our revenue in the quarter was negatively impacted by lower volumes and a large heavy OEM manufacturer, larger rail and road projects that did not repeat this year that occurred last year, offset by an Austrian acquisition that we made last quarter. Having said that, our average sales per day did improve sequentially. Operating income was negatively affected by a $1.4 million, atypical acquisition expense that was recognized in the quarter, and the income was negatively affected by lower volume as well. We generated $16.2 million in cash from operations and we have begun to see stronger order levels this past quarter.

Let me just touch on sequentially -- speaking about gross margins sequentially, there's one thing that I'd like you all to realize is first of all, our third quarter is a meaningful weaker quarter generally speaking. That quarter -- the third quarter activity is impacted by typically holidays and in fact, we shut down some of our facilities over this holiday time period. In fact, we shut down, for a couple of weeks, many of our facilities, especially in the United States. When we shut down, we actually were able to ship from inventory, but we're not able to absorb costs in the third quarter that cost -- the fixed cost that are resonant in our manufacturing operations and that's why the gross margin, although the highest we have seen in the last 10 years or so, this gross margin in the third quarter -- the highest third quarter gross margin we've seen in the last 10 years. It still is lower than the second quarter because of the number of operating days -- production days, that we're unable to absorb in the quarter.

Let me move you to Page -- let me see here, 5. We remain focused on profitable growth and making investments in our business to accomplish this goal. We continue to develop new and enhanced products like the one shown on Page 5, which adds spark resistant capabilities to one of -- a lot of our hoists. This is specifically for the oil & gas industry, as well we've added variable speed drives that are for many applications in many industries.

We are on track with our Chinese manufacturing facility expansion, which increases our manufacturing capabilities and adds about 40% more operating space to allow us to manufacture more products for sale into the Asia-Pacific market. We have implemented a new program this past summer, the in-stock guarantee program, which we've talked to you about in the past. This allows us to ship key items to our customers in 3 days or less. We continue to expand this program and now have over 221 SKUs, that's up 63% from our original launch. And we are seeing the highest level of on-time deliveries to our customers into the 95% area. This is a very high level of service and our channel partners really appreciate this.

Third quarter revenues decreased $8.2 million, driven by lower volumes, as shown on Page 6. As previously mentioned, customers who produce heavy OEM products in the U.S. was the main contributors to this decrease and outside the United States, we had 2 rail and road projects totaling $6.5 million, which did not repeat this year. Our emerging markets grew at 8.6% in the quarter and the average sales per day for the company improved sequentially to $2.4 million. Our bookings in the quarter were the highest we've seen year-to-date, as compared to Q1 and Q2.

And now, I'll turn it over to Greg to provide more details on the quarter.

Gregory P. Rustowicz

Thank you, Tim, and good morning, everyone. On Slide 7, our third quarter gross profit margin increased 100 basis points to 29.6% from 28.6% in the prior year. However, gross profit dollars decreased $800,000 or 1.8%. Pricing improved 1.4% versus the prior year and added $2.1 million to gross profit. Productivity gains contributed $800,000 to gross profit. Offsetting these positive factors were the impact of lower sales volume and inflation. The earnings impact of lower sales volumes negatively impacted gross profit dollars by $3.1 million. Inflation on raw material cost also negatively impacted gross profit dollars by $700,000.

On a sequential basis, gross profit margin was down from the previous quarter, however, as Tim mentioned in his earlier comments, the fiscal third quarter is typically our weakest quarter from a gross profit margin perspective, due to less shipping days and reduced activity in our manufacturing plants, as a result of holiday shutdowns.

As shown on Slide 8, selling expense declined 1.2% from the prior year and represented 11.2% of sales this quarter, compared to 10.7% in the prior year. The decrease in selling cost was primarily related to lower selling cost in Europe, as a result of lower sales offset by slightly higher selling cost in the emerging markets.

G&A expense increased 19.7% from the prior year and represented 10.5% of sales this quarter, compared to 8.3% in the prior year. The current quarter included approximately $1.4 million of atypical M&A expense related to a large acquisition that was not consummated. In addition, G&A expense was impacted by $300,000 for the new ERP system being installed in Europe. Foreign currency translation had a $100,000 unfavorable impact on G&A cost this quarter.

Turning to Slide 9, operating income decreased by 21.8% to $11.1 million or 7.7% of sales compared to 9.3% of sales in the previous year. Excluding the atypical M&A expense, operating margin would have been 8.6%. Operating income was impacted by the earnings impact of the sales volume decline amounting to $3.1 million in the higher G&A expense driven by the atypical M&A expense mentioned previously. Improved pricing of $2.1 million, partially offset these negative factors.

As you can see on Slide 10, income per diluted share for the third quarter of fiscal 2014 was $0.33 per share, reflecting a $0.16 decrease from the prior-year period, where we reported earnings per share of $0.49.

The effective tax rate in the quarter was unusually low at 11.6%, due to the reversal of a reserve on an uncertain tax position. This compares to an 11.1% effective tax rate in the prior year quarter, which was also unusually low, due to a valuation allowance on deferred tax assets primarily in the U.S. Adjusted for atypical M&A expenses at a pro forma tax rate of 30%, earnings per share in the third quarter of fiscal 2014 were $0.31 per share compared to $0.38 per share in the third quarter of fiscal 2013. Our effective tax rate for fiscal 2014 is expected to be between 25% and 30%.

Turning to Slide 11, our working capital as a percent of sales was 19.9% compared to 18.3% at March 31, 2013. The increase is largely attributable to an increase in inventory for project-type orders, as well as additional inventory being carried for our in-stock guaranteed program. While inventory turns improved from 3.6x in the second fiscal quarter to 3.9x, in the fiscal third quarter, it is still below the 4.3x achieved in fiscal 2013. We do expect better turns to improve from their current level by the end of the fiscal year as over $5.5 million of project-related inventory on hand at December 31, 2013, will be shipped in the fiscal fourth quarter.

On Slide 12, you can see that we generated $16.2 million of cash provided by operating activities in the quarter and $18 million on a year-to-date basis. Income taxes paid year-to-date were $6 million higher than in the previous year as we are no longer in a net operating loss position in the U.S. Capital expenditures year-to-date were $13.5 million versus $7.1 million in the previous year. Capital expenditures are higher than the previous year due to our Chinese plant expansion where we have spent $2.6 million to-date, as well as our ERP systems implementation.

We ended the quarter with $123.9 million of cash, which is net of the $5.8 million of cash used for the Austrian acquisition, which closed in June of 2013. We expect capital expenditures for fiscal 2014 to be in the $20 million to $25 million range due to the remaining spend on the $6.8 million manufacturing plant expansion in China, as well as capital projects that are expected to generate further productivity improvements.

On Slide 13, you can see that as of December 31, 2013, net debt was $27.9 million and total gross debt was $151.8 million. Net debt to net total capitalization was below 10% at 9.4%. In addition to having $123.9 million of cash on our balance sheet at December 31, we have an additional in $93.1 million available under our $100 million senior credit facility, net of $6.9 million of outstanding letters of credit. This facility, along with our healthy cash balance, provides significant liquidity to support our strategic growth plan.

With that, I will turn it over to Tim, to cover the fiscal 2014 outlook.

Timothy T. Tevens

Great. Thanks, Greg. Let me spend a moment and take a look at our outlook on Page 14. We have had strong orders in the third quarter. In fact, the strongest so far this fiscal year, as I mentioned. And as many of you know, our fourth quarter is generally the highest revenue quarter and we do expect that trend to continue. We also expect to have our gross margin north of 30% in that quarter as well, as it is in fact, our strongest quarter. Emerging markets of Asia-Pacific, Latin America and Eastern part of Europe should continue to grow nicely throughout the rest of the year. Oil & Gas remains a good market for us, but we do not see heavy OEM returning to normal levels for the foreseeable future.

Of note is the improved capacity utilization in the U.S. now up to 77.9% and we are seeing an improved business climate in the Eurozone. We do expect modest growth from that market in the calendar year in 2014. Our backlog grew nicely up to 98.4% and this is predominantly normal hoist and rigging growth not large project growth. We will continue to invest in our business with new and enhanced products, great customer service levels and customer-oriented in-stock guarantee programs, as well as, and continue to invest in our Chinese manufacturing and localization business.

We'll continue to target strategic acquisitions that adds breadth to our product offering, as well as enhance outstanding and interesting global markets. Productivity improvements we would expect to continue, as we focus on the Columbus McKinnon lean business system to improve our processes and ultimately, reduce our cost.

And with that, Jane, I'll open it up to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Ursaner.

Jason Ursaner - CJS Securities, Inc.

Just first on the gross margin, sales were up $6 million sequentially and inventory only declined $1 million from last quarter. So, I guess, maybe if you could give a little more detail on the commentary that seasonality impacted absorption? I guess I'm just not understanding why absorption wouldn't have improved with better production on fewer days?

Timothy T. Tevens

Well, there in lies the dilemma. There wasn't a better production on fewer days because we actually shutdown facilities for the holiday season. In particular, we shut down a couple of our manufacturing plants in the States for weeks. So of course, as you know, the third quarter, because of the holidays, typically is our weakest, typically we have lower revenue, typically we have lower margins, but in this case, because we did have some bookings, we did suck some inventory out and reduced the inventory, but we still had some unabsorbed cost. In particular, these 2 facilities that we shut down for a couple of weeks. And therefore, that's why the margin was impacted. But I will tell you, Jason, if you look back over the years, over the last half dozen years or so, this is the highest third quarter gross margin that we've seen since fiscal '08. And fiscal '08 third quarter, we had $10 million more of revenue.

Jason Ursaner - CJS Securities, Inc.

Got it. The gross margin is very good, I'm just -- I'm not seeing it in the inventory. So were you, maybe, adding to raw materials during the quarter?

Timothy T. Tevens

Sure. Of course, we'd have production. We did add to inventory during that time period as well. But most of the sales came out of inventory as opposed to came out of production, because we did -- at least in these 2 facilities that I'm referencing, we didn't -- we actually shut down for a couple of weeks. Over $1 million of additional on absorption in those 2 facilities.

Jason Ursaner - CJS Securities, Inc.

Okay, and then just a question on volume trends. Excluding the rail and road projects and the heavy OEM in the U.S., what did you see in core volume trends across the U.S., Europe or Asia, in the quarter?

Timothy T. Tevens

Yes, actually that's the one I mentioned, Jason, as pretty positive. Excluding -- well we don't have any orders coming in for rail and road, and we don't have any large heavy OEM orders coming in. This is the third quarter we booked the highest number out of the whole year, if you compare it to Q1 and Q2. And I'm -- and I actually was over last year's Q3 by about 2.5% to 3% greater. So this is -- think of this booking rate in this quarter as the highest we've seen in the last year or so. Plus, it's mostly normal -- think of it as hoist and rigging bookings, and that's a global phenomenon. It's not just the states. It's also Europe is up. It's also America, Asia and Latin America as well. Actually Latin America is flat, but the other 3 were up.

Operator

Our next question comes from Schon Williams.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Schon Williams with BB&T. I wanted to maybe dig in a little bit more on the China expansion. Could you -- I don't know, I'm wondering if you're maybe willing to quantify a little bit more about what the revenue opportunity you think is there, maybe what the margin opportunity is there, as you start to export some of that material? And then I wanted to talk a little bit about -- I understand that we're going to be I guess down with the facilities as of the end of fiscal '14 both -- when does it really start to impact the P&L? Do we need a couple of quarters of ramp-up? Or are we going to be kind of at 100% run rate when those factories kind of come online in the March timeframe. I'm just trying to get a sense of what are the lead times there that we need to be thinking about?

Timothy T. Tevens

Yes, good question. So let me give you an overview of the projects and then I can dive into some of those specifics, Schon. We started raising some of our buildings and putting in and building up new structures on that land about a year ago, actually more than a year ago. And had the designs done. It's about $6.8 million of real property that we're adding there. The primary purpose -- and by the way, we'd add about 40% more square footage in China, in those Chinese locations, those 2 locations. The primary purpose is to migrate more hoist products. We make some hoist products there that we sell into the market and also that the export back into the states and back into Europe but the primary reason for this expansion is to be able to make more products that we currently export from America and Germany and sell into China. We want to make those products in China. That gives us about 30% arbitrage cost reduction if we produce them in China in our facility there and sell them into China. So actually, the thinking is and the strategy is, to expand our market opportunity, the available market for us. So we had success in our sales team there, selling into the Chinese market, product made in America, product made in Germany. It's kind of mind-boggling actually that they've been able to do that because the cost structure is so much higher here and in Europe, that we're going to give them a better fighting chance and be able to sell more product into the Chinese and the rest of the Asian market by making a lot more product there. And when I say a lot more product, I may like doubling the number of SKUs. So it's a substantial increase. I would say that, to answer your question about timing, the one facility is done and we're occupying it and moving machinery in now. The other one will be done at the end of March and of our fiscal year and we will begin to move equipment in there after. So it will ramp-up. It will take some time to be able to migrate all of the product in there. The sales force is already ready and has been selling it, but I would think you'll see a nice ramp throughout the course of fiscal '15. You won't see it immediately in Q1, but I think we'd begin to see in Q2 and Q3.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Okay, that is helpful. And then, maybe turning to the headwinds on the heavy OE side, I'm just wondering, as I look at it at some of the different end markets, I mean what should I be looking for in order to try to get an idea of maybe when some of those heavy OE headwinds start to abate? I mean is this mostly a problem relating to mining equipment demand? Is this primarily a problem related to construction equipment, I don't know. Is there any kind of 1 or 2 things that I should be keeping an eye on for when those markets should start to turn?

Timothy T. Tevens

I would start with mining. I think that most of this is the mining play, but there is certainly some construction-related activity there as well. But mining would be the primary one that I would look at if I were you.

Operator

Our next question comes from Joe Mondillo.

Joseph Mondillo - Sidoti & Company, LLC

Joe Mondillo from Sidoti & Company. So just to jump on top of the last question regarding the China expansion, just wondering if you can -- very good information regarding the capacity and all the benefits that you're going to get from that, how is the actual demand that you're seeing in China? Do you think you can ramp-up to 90% utilization given the demand? Or just give us an idea what kind of demand you're actually seeing over there.

Timothy T. Tevens

Yes, it's actually very, very positive today. It's mostly related to foreign-owned enterprises. So Western companies investing in the Chinese market and it's all-around safety and productivity. So think of Oil & Gas, think of heavy OEM, think of Western companies that are building and expanding there that need our kind of product. Today, that's the bulk of the business we do. When we start to manufacture these Western design high-quality hoisting products in that market, we now will be able to dip down into the not just the foreign-owned enterprises, but the Chinese domestic-owned enterprises that care deeply about productivity and safety. And by the way, that's not all of them. But that's the large ones and the ones that act more globally. And we think that the Chinese market for us is, today, very small and one that we think should be eventually over lots of time, be producing 20% to 25% of our revenue in the years to come. So it is a meaningful market that as we plant these seeds today, we will be reaping in the future.

Gregory P. Rustowicz

And Joe, this is Greg. Just to add on, earlier -- last year we talked about our China business being break-even. This year, we talked about how it had turned the corner was making profit and had a very strong third quarter and is approaching over our corporate margins, getting very close.

Joseph Mondillo - Sidoti & Company, LLC

Okay, good to know. So do you anticipate utilization at this plant sort of gradually rising over a course of several years once the plants are up and running? Or do you anticipate, because of just such high demand that over a course of just a few quarters, you could get up to very high utilization rates? Just trying to get a better idea of how much demand really is flowing through there.

Timothy T. Tevens

Yes, so I think today, you would see that our -- I should say the older facilities that are no longer there, they probably ran 2 shifts. So think about 65%, 70% utilization. The new shifts -- the new plants that we are starting up -- we'll start with one shift and ramp up slowly over time and I would suspect that in -- by the end of fiscal '15. So let's say around a year-plus from now that we would be operating at 2 shifts there in a much bigger footprint, many more products, much more revenue at that time.

Joseph Mondillo - Sidoti & Company, LLC

Okay, and max amount of shifts are what, 2 or 3?

Timothy T. Tevens

No, I think we could easily, like many facilities around the world, we easily run 2 shifts and then flex over time into the third shift. So you're running probably 80% or 85% utilization. I think in certain operations, we will run 3 shifts 24 hours a day, 7 days a week and treat and paint and other applications. But assembly typically is -- doesn't need that many hours so it's a little less utilized.

Gregory P. Rustowicz

And they can also flex into the weekends.

Joseph Mondillo - Sidoti & Company, LLC

Okay, great. My second sort of question -- I know that was a few questions. But my second question has to do with the gross margin. I'm still a little unclear on what's going on there. If you could talk about, one, seasonality. And two, I guess the question that I have is, if the 4 -- December quarter is seasonally the weakest, I usually think of it as it's seasonally weakest, you're closing down plants, so you're operating a little less efficient, so you're not sending out as many products, so your sales are down and so, on the cost basis that you're running at, your gross margin would decline on a smaller sales base. However, we're seeing total sales and sales per day increase sequentially to the highest rate that we saw this year. So I'm a little unclear on why your gross margins would actually decline. I would think they would actually increase on a higher sales space.

Timothy T. Tevens

Sure. Let me see if I can give a stab at it and then I'll ask Greg to comment as well. So, yes, first of all, seasonality. Our third quarter is not always, but generally speaking, our weakest quarter and it's because the general industrial activity is down broadly speaking. One of the things that we did in the second quarter is actually produce some product and put them in stock. Specifically, as it relates to, you hear me talk about this in-stock guarantee program, but we actually feed our warehouse system, our logistics network with finished goods inventory, stocking them up. And we did that throughout the whole summer in anticipation of getting demand. Well the demand came through in the third quarter, the December quarter and we shift from that inventory. Now in the meantime of course, we keep producing in the first quarter, second quarter and to a degree, in the third quarter, but not in the third quarter as much less production activity in particular the rigging products where we actually stocked up earlier on in the year. So we actually shut down our rigging plants for a couple of weeks and that shutdown doesn't absorb -- we don't absorb hours because we're not producing, we're not actually manufacturing hours during -- in that time period and that's why we see some of the cost come through, but not some of the absorption come through and that offsets the margin basically. Greg, you want to add anything to that? Oh we did have -- just another weird thing that happened, we bought Austria rigging company back last quarter and we had a bit of a reclass of cost going on where we move some costs from selling expense over to G&A -- over to cost of sales. So about almost $1 million of cost did migrate from -- when we bought this company to make them out of the same system as the rest of our companies. It migrated from selling expense into cost of sales. So we had that thing going on as well. But that was just to clean them up -- I shouldn't say that. That was to make them consistent with the rest of the Columbus McKinnon.

Gregory P. Rustowicz

Yes, I think, Tim, Joe hit the 2 points that I would have hit as well. First of all, there is a negative productivity impact sequentially due to the fact that despite what sales were, our plants were running less product through, especially in the 2 U.S. plants that Tim referenced, and then the cost reclass as we look to put our acquisition on the same consistent cost basis resulted sequentially and about a $900,000 shift out of selling cost and that's part of the reason we were $1.1 million favorable in selling sequentially into cost of goods sold and then the only other little piece to point to is inflation was up a little bit more in the third quarter compared to the second quarter.

Joseph Mondillo - Sidoti & Company, LLC

Okay, I guess the only thing that I would say or just to respond, when you record less overhead expenses, if you're producing less labor expenses, less overhead expenses, so your expenses actually will be down and your sales are actually up, so I'm still -- I mean -- or we can take it off-line. But I'm still a little unclear why the gross margins are declining sequentially.

Gregory P. Rustowicz

Sure we can talk about it off-line and we can -- in further detail. But from a cost perspective, there's a certain amount of fixed cost that you have from having a factory the utilities, your salaried workforce. They're still getting paid whether you're making 1 hoist or 100 hoists a day.

Timothy T. Tevens

And so is the hourly because we paid them vacation during that time period. They didn't produce anything.

Gregory P. Rustowicz

Yes.

Timothy T. Tevens

You still have the cost, you just don't have it...

Gregory P. Rustowicz

You don't have it going into inventory [indiscernible] cost.

Timothy T. Tevens

And you're not absorbing that overhead cost.

Gregory P. Rustowicz

So we can talk further, Joe, on our call later.

Operator

Our next question comes from Gary Farber.

Gary Farber - CL King & Associates, Inc., Research Division

Just a question on market share sort of competitive landscape, it sounds like in China, as you scale up to maybe opportunities to take market share and you sort of referenced the Eurozone you expect sort of modest growth potentially and I think calendar year this year you were saying. Can you just provide an update on the competitive landscape? Has really much changed lately and do you see opportunities and that kind of recovery we're expanding internationally some of your markets are getting better to take any degree sort of market share?

Timothy T. Tevens

Yes, I think, Gary, the biggest opportunity we have to take market share is in those emerging markets, where there's no clear leader just yet, and places like China, Brazil, Mexico, Eastern block of Europe, South Africa, Russia where we have a presence, we have great product and we're actually growing faster than the economic growth is giving us. So clearly, there's some market shift going on there. But also, I would add, that generally speaking, there's a lot of investment going in, in those parts of the world. In China, there still continues to be lots of new facilities going up and we just are winning more than our fair share of those as we sell hoist into those businesses. That's the biggest opportunity. If you think about the developed markets, and you think about Japan and Western Europe, America, not a lot of shift going on there. I think that some of our competitors who build mostly cranes, big heavy, good capital equipment like our crane business is challenged today. There's not a lot of spending coming on in that. The competitors that are more like us that sell rigging tools and hoist are doing okay, like we are. Certainly not growing to the degree we want to, but we're not hurt as much as some of those competitors that just build heavy-duty cranes in the market. So that's a little dynamic that's going on, but at the end of the day, Gary, there's not a lot of shift occurring in the Western markets.

Operator

[Operator Instructions] We have another question from John Walthausen.

John Butler Walthausen - Walthausen & Co., LLC

Quick question on -- you said that you increased your inventory. It sounds like reasonably substantially in order to get better service levels. Can you talk about what benefits you're receiving in terms of better sales or something else for doing that? And is there any program underway to see if you can maintain those service levels and bring the inventory back down again?

Timothy T. Tevens

Yes, great question. Q1 and Q2 was when we dramatically increased our inventory, John, to -- in response to getting our market share back specifically on these rigging tools forged attachments and chain, et cetera, and it's working. Our service levels are at all-time high. I think that it's very important to service our channel partners and have product availability. These are the kinds of products you might recall. If someone needs them, they need them today. They don't need them tomorrow, they need them today. So we have to have availability into our warehouse system that's scattered around the world to have them on the shelf ready to be shipped, or actually, in some cases, picked up believe it or not, at a moment's notice. So, I'm happy to say that the logistics side of that is working. It's -- we're stocked up. We feel good about it, we're expanding the program up to 221 SKUs now and I'm happy to say too that our market shrink that we had over the -- let's say last several years has bottomed and is now returning and actually growing. We're seeing the beginning signs of it growing back up. So it's beginning to work. Now having said all of that, inventory that's sitting idle is waste, as you know, and our moving inventory is actually adding value. So we do have programs underway to do a better job of monitoring and forecasting demand. So we can stock only what we need, and I think over time, you'll see the inventory become more in line with history and still keep the service levels to a high degree that we're seeing today without having to make the investment in finished goods.

John Butler Walthausen - Walthausen & Co., LLC

And do you expect that the -- basically the competitive advantage of being able to have those high levels of service is something that's going to increase over time or have you actually seen the benefit in terms of better sales?

Timothy T. Tevens

No, I would -- we've begun to see the benefit of better sales. I would expect us to see even more better sales in the future, because of the availability.

John Butler Walthausen - Walthausen & Co., LLC

Okay, good. The other question I had is you talked about how the level of sort of day-to-day business was good in the December quarter. Did that translate into the early weeks of January, or was some of this the effect of anomalies in the tax structure. Or are there things -- or sort of artificial things that might have induced customers to pre-buy?

Timothy T. Tevens

Well, we do have, as you know, we always run some kind of programs to help entice people. One of the programs that we run is if people buy all of the products from us, we give them incentives and some additional discounts on volume related activity. We saw some of that buying occur in the quarter, but I didn't see any tax driven incentives at all that would have affected that. We did see the bookings continue through -- this holiday season was a little weird because we had holidays in the middle of the week. But compared to last year, we're running about the same level, as we did last year, in the beginning of January. So, a lot of the orders that came in, you notice our bookings went up, about $8 million or $9 million or so, that's a lot of that bookings that occurred in the third quarter that we'll see turn into revenues here in January and February.

Operator

We have a question from Joe Mondillo.

Joseph Mondillo - Sidoti & Company, LLC

Just a couple of follow-up questions, if you will. The improvement in sales per day, just wondering where you're seeing that, I guess, geographically?

Timothy T. Tevens

Sure. Well we're certainly seeing it in Asia-Pacific. We're actually slight -- beginning to see it ever so slightly in Europe, like a couple of points increase. And America is up about 3 points. So it's fairly broad. Latin America was flat.

Joseph Mondillo - Sidoti & Company, LLC

Okay, and your Asia-Pac demand, is that fairly broad or is there a specific region in that region?

Timothy T. Tevens

Mostly China.

Joseph Mondillo - Sidoti & Company, LLC

Sorry?

Timothy T. Tevens

It's mostly China.

Joseph Mondillo - Sidoti & Company, LLC

Mostly China. Okay. So you're seeing still quite strong demand in China?

Timothy T. Tevens

We are, but we still -- we sell broadly into the market, but the numbers that I'm looking at are -- the bulk of them would be Chinese revenue.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then, just, I was wondering if you could just address pricing. The year-over-year growth in terms of pricing was a lot lower than it's been, could you just talk about that and remind us when you're -- I guess, normal annual price increases are?

Gregory P. Rustowicz

Joe, it's Greg. So, the reason why the price percentage has dropped about 1 point is because, typically, in Europe, we have a price increase in the October timeframe and that did not take place given the weakness in those economies. So that's yet to be determined when we will be raising price and how much we will be raising price in Europe. In North America, and specifically the U.S., price increases are typically the middle of March and we have plans to move forward with a price increase in the middle of March this year.

Joseph Mondillo - Sidoti & Company, LLC

Okay, and could you, potentially, at any given moment, just given an increase in demand choose to increase prices in Europe? Or would it be normally always usually around the October time period?

Gregory P. Rustowicz

No, I don't think we would have to wait until October. There certainly would be some notice periods and communication programs to roll it out. But it wouldn't -- that's weeks.

Timothy T. Tevens

Joe, we normally give our channel partners 30 days notice. So think of it as a month lag, but it doesn't have to be October. It could be anytime, midsummer, spring, whenever. That's typically when to do it.

Joseph Mondillo - Sidoti & Company, LLC

Okay, and then also the M&A one-time spend, is that your total M&A spend? Or was that sort of the amount of M&A spend that was sort of one-time? Because I know you probably usually have a quarterly amount that's related to M&A, just given that you're consistently always looking for acquisitions and doing your due diligence and related stuff. So is that total or one-time-type stuff?

Timothy T. Tevens

No, that's just the one-time large acquisition we looked at in the quarter. It doesn't include the normal activities.

Gregory P. Rustowicz

There was a little bit of cost actually in the second quarter as well. There's a couple of hundred thousand dollars related to the large potential acquisition target in Q2.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then just lastly, Greg, I was wondering if you have shipping days for fiscal '15 on a quarterly basis?

Gregory P. Rustowicz

That we do. I don't have them handy right now, but I can certainly get them and let you know prior to our call.

Operator

We have a question from Peter Van Roden.

Peter Van Roden

Just one quick question to start. When does the comparison for the heavy OEM work get better or easier?

Timothy T. Tevens

Right now. It started about a year ago. Yes. So I would say the fourth quarter would be an easier comp, if you will.

Peter Van Roden

Okay. And if you had just sort of pull out your crystal ball and think about how your core business will grow next year, how are you starting to plan for that?

Timothy T. Tevens

So I do think that we'll continue to see double-digit-ish growth in the emerging markets. So lots of activity, lots of investment to support that. I do think Europe will stabilize and actually begin to grow again. So next year, as I look to the future. I think America will be decent. It's not going to be robust or off the charts, but I think we'll have a decent year. But of course, most of our growth activities will come in those markets where we have the biggest opportunity to grow, which is places like Latin America, China, eastern block of Europe, South Africa, things of that nature.

Operator

[Operator Instructions] I'm showing no further questions from the phone lines at this time.

Timothy T. Tevens

Thank you. Let me summarize by saying we do expect our fourth quarter to be very strong with some momentum in bookings and some increased market activities. As you know, our fourth quarter is generally the best quarter of our fiscal year and we do expect this quarter, fourth quarter, to be good as well. Our gross margin should be north of 30% as we look to the fourth quarter and I think everybody will be happy with that, especially as we continue to expand our lean business system to drive productivity improvements. We don't expect inflation to be rampant and we do have reasonable pricing should be also positive contributors.

Our investments in emerging markets that we've spoken about continue to be successful. And we do think that a European recovery looks to be gaining some momentum, which would be helpful for us. We are positioned well and continue to execute our strategic plans to profitably grow our business, as we have about $124 million in cash and about $100 million revolver. We continue to have acquisition discussions with many businesses that can add strategic value to our company.

We also continue to make strategic investments in selling and emerging markets, as well as investing in products and services and productivity enhancing equipment in our facilities. I'd like to take this time to thank all of our associates around the world for their dedication, the excellence in making our company stronger, market-leading organization.

As always, we appreciated your time today. Thanks, and have a good day.

Operator

That does conclude today's conference. Thank you for participating. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Columbus McKinnon Management Discusses Q3 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts