Cascade Corporation F4Q08 (Qtr End 01/31/08) Earnings Transcript

Apr. 3.08 | About: Cascade Corporation (CASC-OLD)

Cascade Corporation (NYSE:CAE)

F4Q08 Earnings Call

April 3, 2008 5:00 pm ET

Executives

Robert Warren – President, Chief Executive Officer

Richard Anderson – Senior Vice President, Chief Financial Officer

Joseph Pointer – Vice President, Finance

Analysts

Arnold Ursaner - CJS Securities

Joe Giamichael - Rodman & Renshaw

Alan Robinson - RBC Capital Markets

Frank Magdlen - The Robinson Group

[Tim Coffee] - Private Investor

James [Denk] - Sidoti and Co

Operator

Ladies and gentlemen thank you for standing by. The Cascade Corporation’s fourth quarter fiscal year 2008 earnings call will begin momentarily. Once again thank you for standing by. Please do not disconnect.

Good afternoon ladies and gentlemen and welcome to the Cascade Corporation’s fourth quarter fiscal year 2008 earnings call. At this time all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question-and-answer session. If anyone should need assistance at any time during the conference please press the * followed by the 0.

As a reminder this call is being recorded on Thursday, April 3, 2008.

I would now like to turn the conference over to Robert Warren, President and CEO of Cascade Corporation. Please go ahead, Sir.

Robert Warren

Thank you. Good afternoon everyone and welcome to today’s call. Andy Anderson, our Chief Financial Officer and Joe Pointer, our Vice President of Finance are here with me.

For those of you who are unfamiliar with Cascade I’d like to give you a brief overview. We operate globally with about 2,400 employees working in 28 facilities in 16 countries. We manufacture devices primarily for industrial trucks, most commonly called lift trucks or forklifts. These products, which are used in nearly every industry worldwide that uses lift trucks, allow the truck to carry position and deposit various types of loads.

A smaller portion of our products are for construction vehicles such as tool carriers and skid steer loaders.

Approximately 55% of our products are sold through retail dealers. The remaining products are sold directly to global manufacturers; names such as Heister, Toyota, [Keyon], Mitsubishi, Yale, Komatsu, [Affay], Ingersoll Rand, Catepillar and Nissan.

Andy will now give you an overview of the fourth quarter.

Andy Anderson

Thank you, Bob. I’d like to remind everyone that during the course of this call we may make forward-looking statements. Participants are cautioned that these forward-looking statements including statements about our anticipated revenue, costs, earnings and cash flows are subject to a number of risks and uncertainties that could cause our actual future results to differ materially. Additional information regarding these risks and uncertainties are described in our reports on forms 10K and 10Q and other filings with the Securities and Exchange Commission. We cannot provide any assurance that future results will meet expectations. In addition, historical information should not be considered an indication of future performance. We disclaim any obligation to release any updates to any comments made in this call or reflect any changes in business conditions.

One final note of explanation, our fiscal year ends on January 31, so when we refer to fiscal year 2008 we are actual referring to the year ended January 31, 2008. We just completed the fourth quarter of fiscal 2008.

Before I discuss the fourth quarter I would like to provide some overview comments on the results for the fiscal year just completed.

Fiscal 2008 was a record year for Cascade in terms of both net sales and net income. Net sales exceeded $558 million and were up 17% over fiscal 2007. Excluding the effects of an insurance litigation recovery in fiscal 2008, our net income was 10% higher than the prior year. These gains are the result of the strong growth in the global lift truck market and the continued global expansion of our business.

I’d now like to turn to the fourth quarter results.

Net income for the fourth quarter of fiscal 2008 was $8.8 million, or $0.74 per share compared to $10.2 million or $0.80 per share for the fourth quarter of fiscal 2007. The decrease in net income and earnings per share was largely driven by higher interest expense and foreign currency losses.

Consolidated net sales were $136 million in the fourth quarter, an increase of 15% compared to net sales of $119 million in the prior year. Adjusting for currency changes, net sales increased 10% primarily due to higher levels of business activity in China, Asia Pacific and Europe.

The gross profit percentage for the fourth quarter of fiscal 2008 was 28% versus 30% a year ago. We experienced a decrease in gross profit percentage in every geographic region. I will discuss the causes later in this call.

SG&A expenses increased 4% excluding currency changes and acquisitions due to higher selling, personnel, share based compensation and other general costs. Consolidated SG&A costs during the fourth quarter of fiscal 2008 were $23.6 million compared with $21.1 million in 2007. As a percent of total net sales, our SG&A costs were 17%, which is consistent with the prior year.

Our increase in net interest cost is the result of additional borrowings primarily related to the completion of our share repurchase program, which I will discuss a bit later.

Our effective tax rate of 315% increased from 29% in the fourth quarter of the prior year. The increase is primarily attributable to additional valuation allowances related to foreign net operating losses offset in part by benefits from foreign operations and foreign tax credits.

I’d now like to spend a few minutes discussing our operating results on a geographic basis.

Sales in North America were up 5% over the prior year excluding foreign currency changes and net sales related to our acquisition of the assets of PSM and American compaction. The increase was primarily due to price increases and to a lesser extent higher shipping volumes.

The gross profit percentage in North America was down slightly from 34% to 33% due to currency changes, higher materials costs and changes in product mix. SG&A costs in North America were up 8% excluding foreign currency changes due primarily to our acquisitions and higher personnel and share based compensation costs.

Net sales in Europe for the fourth quarter were up 18%. Excluding currency changes, net sales increased 11%. The increase in sales in Europe can be attributed primarily to higher shipment volumes as the result of a strong European lift truck market. The gross profit percentage in Europe was 12% in the current year compared to 15% in the previous year. The lower gross profit percentage was the result of increased materials cost, manufacturing inefficiencies and increased personnel and [trade] expenses. Although our net sales have increased with the strength of the lift truck market, we have not realized the level of gross profit we had anticipated. Bob will discuss later the restructuring steps we are currently taking in Europe.

SG&A costs in Europe increased 5% excluding currency changes due to higher personnel and selling costs associated with our increased sales volume.

In the Asia Pacific region net sales increased 18% excluding currency changes. All locations in the Asia Pacific contributed to the sales increase as a result of higher shipment volumes. Gross profit of 25% in the fourth quarter was down from 26% in the prior year. The decrease is due to a change in product mix which was partially offset by sourcing of lower cost products in China.

SG&A costs in the Asia Pacific region increased 3% excluding currency changes. The increase was due to selling and general cost increases in the current year.

In China our net sales increased 31% excluding currency changes. The increase is due to a very strong Chinese lift truck market, general economic conditions in China and our capital expansion in China which enabled us to produce a larger volume of products. Gross profit in the fourth quarter of 32% was down from 34% in the prior year. This decrease was due to higher materials costs and changes in products mix.

SG&A in China increased 7% excluding currency changes due to additional costs to support our expanded Chinese operations.

Our balance sheet cash total $21 million as of January 31, 2008 compared to $37 million in the prior year. Our debt and notes payable to banks increased to $111 million at January 31, 2008 from $51 million in the prior year. The changes in our cash and debt balances are the result of our share repurchase program, the American Compaction acquisition, our China expansion program and scheduled debt repayments.

These uses of cash were partially offset by our cash flow from operations. In early February 2008 we completed the share repurchase program approved by our board. This program had commenced in September 2006. In total, we repurchased approximately 2.4 million shares of our common stock for $130 million. At the present time we have no plans to extend this program. The full effect of this program will be reflected in our average of outstanding shares at the end of the third quarter.

Capital expenditures were $23 million for fiscal 2008 and $9 million for the fourth quarter. Depreciation expense was $14 million for fiscal 2008 and $4 million for the fourth quarter. We anticipate depreciation and amortization expense for fiscal 2009 to be $17.3 million.

I would now like to turn the call over to Bob for a discussion on the lift truck market and some other general comments.

Robert Warren

Thank you, Andy. I’d like to start with a brief overview of the lift truck market. Currently the lift truck market is the only direct economic or industrial indicator we have available for our market. While this does not correlate exactly with our business levels since various end-use markets use our products to varying degrees it does give us some indication of short-term future trends.

North American lift truck shipments decreased 9% during both the fourth quarter and the full year of fiscal 2008. We expect this trend will continue and believe the North American lift truck market in 2009 will be down 5-10% from the business levels experienced in fiscal 2008.

Lift truck shipments in the European market were up over 20% in the fourth quarter and for the year. We anticipate continued growth at a lower rate for fiscal 2009.

Lift truck shipments in the Asia Pacific region were up 9% in the fourth quarter and 7% for the year. We anticipate continued growth at moderate levels in this market during fiscal 2009.

China’s lift truck market was up 43% in the fourth quarter and 26% for the year. We expect this market to continue strong growth but at a more moderate level for fiscal 2009.

I would now like to spend a few minutes on a couple of additional topics. Our financial results in Europe have improved marginally over the prior year but still fell short of our expectations. A robust European lift truck market enabled us to post strong sales growth over the prior year. However, we were unable to capture the benefits of expanded sales volume at the operating income level. As Andy noted, this is due to various operational difficulties. We have begun a process to rationalize a European production capacity due to poor operational performance of several facilities and in light of our global sourcing initiatives.

The first step in this process involves a work force reduction of approximately 7%. It also includes the transfer of certain product lines between facilities and the expansion of global sourcing of materials and products from both Asia and the United States. We expect the financial impact of these changes will begin to occur in the first quarter and will extend throughout the coming year.

The expansion of our Chinese manufacturing operations in fiscal 2008 has provided us with the opportunity to begin importing Chinese made products into Europe for sale to OEM’s and the secondary fork market. We are still working to obtain final approval of the Chinese made products from certain European OEM’s and expect to complete this process by the second quarter of fiscal 2009.

Currently we are distributing these products to the secondary markets. While these delays have impacted the overall timing of our plan we still believe this strategy will benefit us in the long-term in Europe.

With regard to the cost of steel and steel based components we have seen increases throughout the world. We are continuing to mitigate the increases through various means. We continue to monitor worldwide steel costs very closely and are actively managing our steel supply chain to ensure we are receiving the most competitive prices available in the world market.

We have also stepped up our efforts to improve internal processes, both manufacturing and administrative, to create internal efficiencies which we believe will ultimately result in lower costs.

As those of you who have worked with us in the past remember we have a long-standing policy of not making forward financial projections. This concludes our prepared remarks and we are now ready to open the call to your questions.

Question-And-Answer Session

Operator

Thank you, Sir. Ladies and gentlemen at this time I would like to begin our question-and-answer session. If you have a question please press the * followed by 1 on your touchtone phone. If you would like to decline from the polling process press the * followed by the 2. You will hear a three tone prompt acknowledging your selections. Your questions will be pulled in the order they are received.

As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers.

One moment for our first question.

Our first question is from Arnold Ursaner with CJS Securities. Please go ahead.

Arnold Ursaner - CJS Securities

Hi, good afternoon. First question I have is can you comment briefly on whether the trends you are seeing in your core business are any different than the ones you are seeing on either PSM or on American Compactors in terms of profitability?

Robert Warren

Certainly we have not hit our projections of what we would have enjoyed had the housing market not collapsed in North America, Arnie. So there is a different trend of what profitability is in North America for our lift truck business as opposed to our construction attachment business. This has given us some opportunity at PSM to reorganize the production process on the shop floor for the just in times offering of value package we believe will give us an advantage as that market returns.

Arnold Ursaner - CJS Securities

A very quick question for you, Andy, I know you gave us this but I didn’t catch it when you made your presentation. When did you complete your share repurchase and I know you have an average share count for the quarter, but do you have an end of quarter share count?

Andy Anderson

The end of quarter share count I think is 10,830,000 shares. Joe is looking to see if my memory is correct. You are talking about end of quarter…

Arnold Ursaner - CJS Securities

End of quarter, Q4.

Andy Anderson

End of quarter would be 10.8.

Joseph Pointer

Standard or weighted average?

Arnold Ursaner - CJS Securities

Weighted average – no outstanding at the end of the quarter.

Andy Anderson

It is 10.8.

Arnold Ursaner - CJS Securities

Okay. And when did you complete the repurchase?

Andy Anderson

Fundamentally we completed it at the end of January. I think there were a few thousand shares that flopped over into February so that actual share count at end might be 10,750,000 or something but 10.7 or 10.8 is the number.

Arnold Ursaner - CJS Securities

Sure. You gave us capEx and G&A. You gave us your G&A guidance for the upcoming year. Can you give us your capEx guidance for the upcoming year?

Andy Anderson

I think we’re looking at somewhere in the $18-19 million range.

Arnold Ursaner - CJS Securities

My final question…you gave us a lot of new information regarding actions you are taking in Europe. A couple of questions on the manufacturing efficiencies. Could you perhaps better explain some of those issues? And you mentioned you had a customer I guess who had not fully accepted some deliveries. I’m assuming that will hit the Q1 period? And you indicated it might not be fully resolved until Q2 so I’m trying to get a feel for how some of these expenses might impact the quarter we are in.

Robert Warren

That was a two-part question. The first part again….

Arnold Ursaner - CJS Securities

In Q4 you had manufacturing efficiencies which you highlighted in roughly the $2 million operating loss how much of that may be attributable to manufacturing inefficiencies that either have or may have been fixed in the near term?

Robert Warren

I don’t think…if we look at near term in the next three quarters, what we are embarking on is a very, very significant amount of work in virtually every factory we have in the European market. I can’t…

Andy Anderson

I believe what we are going to see because we do have in this plan with the 7% reduction we do have some redundancy costs. Moving products we have one one-time capital costs. We have some timing as these initiatives that we are having individually coming into the quarter. I know we had planned to be accretive for the year but the main benefit we’re not going to probably see until next year in the full plan and this is only the first stage of what is going to be eventually a much broader plan. I think the main message I’d like to impart about what this is as we have talked about restructuring Europe in the past…we’ve talked about gaining market share or what we were going to try to get in pricing. This restructuring is really based on an entirely different viewpoint in that we are going to change our fundamental cost structure to match what we currently have and then try to grow from there again.

Trying to look externally for a solution to our problems has not worked and we’re going to be looking at extensive changes in how we produce products in Europe.

Arnold Ursaner - CJS Securities

A real quick final question if I may. Are you seeing any particular changes within different industries that you service? For example the paper industry or some others that might be worth an additional comment?

Robert Warren

We certainly have seen a tremendous move of paper making to China that is one of our primary products in the China market. There has been globally a huge shift of paper production towards China certainly out of North America and not as much out of northern Europe yet but certainly out of North America we have seen a fair amount.

Arnold Ursaner - CJS Securities

Thank you very much.

Andy Anderson

Arnie the answer to your second question on that OEM situation as Bob made reference to is that is going to be a two-step process before we get the full benefit. The first step will be to get the supply chain at full speed which we are quite confident we’ll have in the second quarter coming from China. Then the second step which you’ll see some evidence of one way or the other in the second or third quarter is then you have to rationalize out the redundancy you have created by moving it to China. We’re serving those customers today. It’s not like new customers. We’re going to start serving them with lower cost products and then we’ll rationalize some of that out.

Arnold Ursaner - CJS Securities

Thank you very much.

Operator

Thank you. The next question comes from the line of Joe Giamichael with Rodman & Renshaw. Please go ahead.

Joe Giamichael - Rodman & Renshaw

Good afternoon gentlemen. A couple of questions for you. Gross margins are down pretty much across the board. You are clearly being impacted by materials costs most of which you said is steel. Can you just tell us if there is any other materials impacting you or if you are beginning to see any bottlenecks in the supply chain? Then, if you could just discuss what, if any, price leverage you think you may have to protect your margins in the near term?

Robert Warren

Steel…as you know is our main component for our fabrication on our components. We do see pretty much across the board of any other materials such as aluminum or rubber are being impacted by costs. We see inflationary pressure in pretty much every input we have. We’re not seeing that constrain anything that we have as our primary products or the supply chain. It is just the cost is driving up. Our ability to recoup this in most markets is one continued efficiency improvements, which we have multiple campaigns to constantly drive lower costs and process, and clearly with pricing. We have been able to, as to pricing, where we felt we could maintain the customer relations and market share we have a duty obviously to be very sensitive to that and to offset as much as possible these increases with efficiency gains in cost reduction activity which includes a global supply effort that is ongoing to constantly look for the lowest possible costs we can come up with. But the only place we have a limited ability to add it back in price has been Europe and that is the reason all of our restructuring efforts are based on costs we can control.

Joe Giamichael - Rodman & Renshaw

Thanks Bob. Just to touch on working capital, your working capital dollars are up pretty significantly. Should we be reading anything into the increasing accounts receivable and inventory? Is this more preparation for the European rationalization or is this something working counter to your lean initiatives?

Robert Warren

I think on the working capital side with the accounts receivable I think that was just really more from the basis of our business. The inventories really did go up and that was the basis of some of the back up of the forks out of China. Because of the increased steel costs coming at us many operations saw an opportunity to try to stockpile material at lower costs, which should work in the next quarter or two. I think more than anything it had to do with some increases in Europe and China around this new supply.

Joe Giamichael - Rodman & Renshaw

Okay. Thank you. Just one last question. The current share repurchase is completed as I understand it. Do you have any intention to approach the board for additional authorization? Other than that how do you foresee the potential uses of free cash excluding the dividend?

Robert Warren

Right now we do not have any plan to ask the board. The board’s temperament about the current level of debt and some potential future opportunities we might have in the construction initiative we have tempered their interest in doing a share repurchase at this time. Clearly if I don’t have better usage for the cash going forward and we pay down debt that is an area that we would certainly consider taking to the board.

Joe Giamichael - Rodman & Renshaw

Okay I lied. Just one more question. Related to the PSM business you are obviously disappointed with where trends have gone given what we have seen in the housing market. Is there opportunity there for potential acquisition now that the industry as a whole is being hobbled? Is there other potential opportunities for you to grow this in a down market?

Robert Warren

Could be. We haven’t seen an opportunity in the U.S. right now. Some of our conversations with some large OEM’s in Asia point to some opportunities and we are currently actually in capital expansion of a facility in China to eventually produce our equipment in that market.

Joe Giamichael - Rodman & Renshaw

Great. Thank you very much.

Operator

Thank you. Our next question is from Alan Robinson from RBC Capital Markets. Please go ahead.

Alan Robinson - RBC Capital Markets

Good afternoon. If you look at the lift truck sale in each of the geographical segments as a proxy for lift attachment sales you could almost come to the conclusion that you are gaining market share significantly in the U.S. and possibly losing shares in China. Is that a fair conclusion to come to? Perhaps you could give us some color as to what is underlying those changes?

Robert Warren

I think it is in the North American market the trend is exactly what we would expect to see. When the market is going up very strongly we don’t go up nearly as fast. When it is coming down we don’t either because most of our sales for the material handling product in North America is really from Fortune 500 companies. They are on 3-5 year leases. They are turning those trucks as long as they are not ending up with excess capacity, shutting plants or they will move stock around.

So in this last year as the market went down our sales remained flat. That was really because our customer base was still ordering on a major account level. In China we have seen a slight mix change that I think some of the…we’re not seeing as robust of a roll plant market. That could be because their buying pattern the last few years they have got interest slowed down compared to the rest of the market that is heating up that don’t use as many assessments. We know that we have competitors primarily European in the Chinese market but it tends to be still at a very low level.

Some of the Chinese domestic OEMs that we are prime suppliers to also may come with their own attachments so we are always in competition against domestic source as well.

Alan Robinson - RBC Capital Markets

Okay. And then to your point about perhaps your North American customers being more conservative and perhaps leading the more defensive edge to your business, given that you see lift trucks in general declining this year can we assume that perhaps your North American sales will not decline by as much or might perhaps might even grow as they did in the fourth quarter?

Robert Warren

I think we saw…it remains flat from the year before primarily because of the main customer base. This market is now projecting another 5-10% potential decline from last year’s numbers I would expect that we are going to have a harder time maintaining a flat output and that would hold for what we have seen in the first few months.

Alan Robinson - RBC Capital Markets

Interesting. Then on to China. The transfer that you had out of China were significantly higher than you had before obviously with the China outsourcing that is working to your advantage. The $5.6 million that you saw in transfers out of China in the fourth quarter, is this representative of long-term levels of inter-company sales? I appreciate now most of that goes to Asia, but can you give us flavor for perhaps what you might expect going to Europe from China?

Robert Warren

The main product we are talking about going into Europe from China is the output of the Xiamen fork plant and that is was built entirely with the idea of being the OEM European source for forks. That output, Andy, is expected to be at oh…

Andy Anderson

We actually don’t give guidance…

Robert Warren

You’re right.

Andy Anderson

In a more general sense I think you can expect to see the transfers out of China continue at or above current rates.

Alan Robinson - RBC Capital Markets

Okay so given that perhaps it wouldn’t be too much of us to expect your gross profit out of China to increase in a similar manner?

Robert Warren

As a percent you will see it drop because it is an inter-company transfer price. As we have seen in the fork business in China it does have a depressive effect on the gross profit. Obviously the total margin, operating margin of the unit is going up but that is being transferred off to either Korea, Japan, Australia or Southeast Asia right now.

Alan Robinson - RBC Capital Markets

Okay. Finally there have been some reports of gasoline shortages in China. Have you been impacted by that at all in your manufacturing process?

Robert Warren

So far we have not been impacted either in gas or electricity or in shortages. We are also in our facility up North reasonably close to Beijing. We haven’t seen the impact of their concern about the environment for the games impact us.

Alan Robinson - RBC Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question is from Frank Magdlen with The Robinson Group. Please go ahead.

Frank Magdlen - The Robinson Group

Good afternoon. A couple of questions, the headcount in Europe can you quantify it or what is the approximately employee count through Europe?

Robert Warren

It is between 50 and 60 we’re looking at right now but as I say we are about 750 in total in Europe.

Frank Magdlen - The Robinson Group

Okay. Then Andy, what is your cost of debt? The interest cost of the bank debt?

Andy Anderson

We are at 75 basis points above Libor.

Frank Magdlen - The Robinson Group

That is quoting resets every so often?

Andy Anderson

That resets every 30 days.

Frank Magdlen - The Robinson Group

Okay. Then can I get help with the tax rate going forward for next year?

Andy Anderson

There are so many moving parts to that I think I would continue in the 33-34% range and Joe do you want to take a….

Joseph Pointer

I don’t think it varies from our historical rate of where we have been. Probably safe to say 33-35%.

Frank Magdlen - The Robinson Group

Okay. Then on the fully diluted shares add about 350,000 to the year end count of common outstanding?

Andy Anderson

You mean going forward?

Frank Magdlen - The Robinson Group

Yes.

Robert Warren

We use the Treasury method and it depends entirely on what our share price does. It is the number of shares it takes to fill the delta but based on today’s price that would be a reasonable number.

Frank Magdlen - The Robinson Group

Okay. Back to restructuring in Europe, can we expect some one-time charges as the year evolves?

Robert Warren

Yes.

Frank Magdlen - The Robinson Group

Significant?

Robert Warren

Yes.

Frank Magdlen - The Robinson Group

I guess what is significant?

Robert Warren

Anything right now. You may expect charges…the development of this plan is a stepped process that will move through the next 3-4 quarters. I think you would expect to see charges in the not too distant future of $1 million plus and it is hard to say too much beyond. We don’t want to speculate too much beyond that.

Frank Magdlen - The Robinson Group

Will that be per quarter?

Joseph Pointer

I think we are pretty early in the process of developing this and we will definitely see a price quarter-by-quarter, but it is probably a little premature to give you an estimates.

Frank Magdlen - The Robinson Group

Okay. One area, when you look at your pricing increases for this last year about what percentage increase was that over the prior year?

Robert Warren

That one, trying to do that cumulative because 45% of our business that is done on a customer by customer, contract by contract basis…it is kind of spread around.

Andy Anderson

You know, Frank, it is 3-5%. We’re not really in our market able to with competitive pressures go much beyond that. In most cases it is a highly competitive commodity product maybe it wasn’t that much. But in most cases this year for our main markets we were able to with both efficiency and with price increases to cover our material increases.

Frank Magdlen - The Robinson Group

Alright. Thank you very much.

Operator

Thank you. Our next question is from [Tim Coffee] a private investor. Please go ahead.

[Tim Coffee] - Private Investor

Can you give me capEx by region?

Andy Anderson

Yes, just a second. Joe will grab that.

Joseph Pointer

For the year we just finished or for the year going forward?

[Tim Coffee] - Private Investor

Both.

Joseph Pointer

Yes. Give me a minute.

Robert Warren

We don’t have it in the room here, Tim, for the year going forward.

[Tim Coffee] - Private Investor

What is the year up number?

Joseph Pointer

The year we just finished was about $23 million. $8 million was North America, $4.4 million was Europe, $5.3 million was Asia and $5 million was China.

[Tim Coffee] - Private Investor

And what was Europe the year before?

Andy Anderson

I think what you; probably…just a second here…we’ll grab it. $2.4 and unless it involves restructuring I don’t think you’ll see 2.4 this coming year.

[Tim Coffee] - Private Investor

Then getting back to the working cap issue, you are abruptly $30 million of an inventory run up. Where exactly is that coming from? Is that in China?

Andy Anderson

It is in China. It is in Europe in the fork business and there is also some in the attachment business.

Robert Warren

Some of that is temporary run up and we’re going to work very hard to make that permanent run down. A little bit of it…I can’t quantify it for you Tim, but a little bit of it will be relatively permanent from the standpoint in North America and Europe we buy our steel for our fork business on a just in time day to day basis. The mills will make the runs every three or four months but they only bill us when they deliver on a daily basis. The mills in China haven’t gotten that customer friendly yet. We have to sometimes make a deposit before they make the run. They’ll make the runs so we are buying sometimes 3-4 months in advance and we need to pay for it when they run it.

[Tim Coffee] - Private Investor

I hear you. But when I think of those two reasons, one reason is the provision that you have had continued problems that have been going on for a long time – that is in Europe. China maybe because you may have a little bit more commodity I do understand the run up but generally speaking this type of inventory run up for what is essentially a mass customized application specific job shop business that is a huge number. So something is not right.

Robert Warren

I won’t disagree that part of that definitely…there was, Tim, an attempt to drive the Chinese steel price up to international standards within two quarters so there were huge increases coming through and some of our facilities saw an opportunity to buy long on some of the material so that will be coming down fairly shortly. And actually based on the increases they had to sustain subsequent to current pricing it looks like it was a good buy it was just an unnecessary run up, we agree.

[Tim Coffee] - Private Investor

And just related to the stock repurchase program, can you philosophically walk me through what you guys define as success under that repurchase program?

Robert Warren

Philosophically what was the purpose of it?

[Tim Coffee] - Private Investor

What you define as success, not the purpose of it but what you guys define as success.

Robert Warren

As a way of returning shareholder equity on a selective basis rather than as a dividend we spent $130 million and bought back 2.3 million and we believe on a fully diluted basis once we account for all the shares that will going forward be a great return for our shareholders.

[Tim Coffee] - Private Investor

And the average cost of that share buyback, the 2.3 was what?

Joseph Pointer

$2.4 million…$54.

[Tim Coffee] - Private Investor

$54 dollars a share? And today’s closing price was $47?

Robert Warren

Well, Tim I can always pick a day.

[Tim Coffee] - Private Investor

Well it has been trading between $47 and $50 for the last couple of months. Fair enough?

Andy Anderson

Fair enough.

[Tim Coffee] - Private Investor

So if I take that $130 million that you have spent on shares and I divide it by 12 million shares I come up with roughly $11 a share. If you did that in the form of a dividend on today’s share price my cost basis would be $36 per share. And you bought back shares at $54. So explain to me again how you define success.

Andy Anderson

For the benefit of everyone listening, Tim has brought this over to our board on numerous occasions and the board points out it is in the prerogative of the board to make these determinations and Tim we are never going to win this argument with you so I don’t know what the benefit of continuing it is.

[Tim Coffee] - Private Investor

It’s not about winning or losing. It is defining what is right or wrong.

Andy Anderson

There is a return to shareholders.

[Tim Coffee] - Private Investor

And it hasn’t existed, Andy. Are you saying essentially the exercise of share options to management? That is what it has been used for.

Andy Anderson

For exercising the share options for management.

Robert Warren

That is correct. A sustainable share price.

[Tim Coffee] - Private Investor

That’s not right.

Andy Anderson

Again, Tim, that is your interpretation and we respect that.

Robert Warren

Other questions, Tim?

[Tim Coffee] - Private Investor

None.

Operator

Thank you, our next question comes from James [Denk] with Sidoti and Co. Please go ahead.

James [Denk] - Sidoti and Co

Hi. Good evening. The question on rationalizing Europe. Can you tell me how long this is going to take – your best estimate?

Robert Warren

We’ll probably be at this for a minimum of a year or two years, maybe a year and a half.

James [Denk] - Sidoti and Co

And the 7% reduction of workforce, are these executives or are these union employees?

Robert Warren

It is across the board. A lot of it is temporary labor right now. There are some permanent and some are on the shop floor.

James [Denk] - Sidoti and Co

Okay. And is this initial move in one facility? Or I guess what I should just ask is there going to be any anticipation of severance expense?

Robert Warren

There are going to be severance expenses. It will be in the restructuring charge.

James [Denk] - Sidoti and Co

And then I know you didn’t want to give an exact number but I’m trying to get an idea of how much, I think you have $1 million before the call here, but how much can we assume is going to be capitalized and how much is not?

Andy Anderson

It will be expensed.

James [Denk] - Sidoti and Co

Okay. Expensed in terms of we’ll look at this in a non-GAAP fashion?

Joseph Pointer

What do you mean by the word capitalized?

James [Denk] - Sidoti and Co

I mean will we or will we not be able to add this charge back? Essentially it is almost a one-off item, which will be capitalized and which wont?

Joseph Pointer

Right. I don’t really kind of call the add back. The majority of the costs will be hitting the PNL in the future.

James [Denk] - Sidoti and Co

I’m sorry what was that?

Joseph Pointer

The majority of the costs will be expensed. When we capitalize we equate that to putting it on the balance sheet, but I don’t think that is how you are defining it, right?

James [Denk] - Sidoti and Co

Well I guess the way I’m defining it is what I would consider to be a non-GAAP adjustment, what essentially we will be adding back to the bottom line and what we can’t be adding back.

Joseph Pointer

I guess that is pretty much your judgment, not ours.

Robert Warren

I don’t understand the non-GAAP

Joseph Pointer

His question is what would be recurring ongoing operations opposed to maybe one-off types.

Andy Anderson

Clearly these moves are based to lower our costs and I believe that even though we won’t see a great deal of it this year based on some of those one-off times and the redundancy costs, they are a reduction of our overall costs and we will be seeing the benefit of those going forward assuming similar price.

James [Denk] - Sidoti and Co

And in regard to Xiamen, is there any concern at all with the wand performing very well and maybe some inflation in [Xian] I’m just wondering if at some point that’s not the best region to outsource from anymore. Is there any concern on that at all?

Robert Warren

As this is a fairly new effort and our costs that we have right now in China for forks and some [size apertures] which are the primary product for exporting in China, Japan, Korea and Southeast Asia and Australia which is what we report as Asia, it is still very competitive price to what we have as our source currently there or anywhere else in the world. So the [Huan] actual well within slow appreciation to some of those currencies hasn’t impacted us that much and I don’t think it is going to disturb our sourcing on our own product out of Xiamen or Hebei. We do always look at our global sourcing such steel components like castings which have come for a number of years from China, will then eventually cause us to look – which we are currently doing at some alternative sources like India or elsewhere, we are constantly looking at the best cost for getting it anywhere in the world.

James [Denk] - Sidoti and Co

Okay. That’s very helpful. I’m sorry; I just wanted to go back to your rationalization in Europe. I guess maybe if I ask it this way, in terms of the margin that I see in the fourth quarter here, is that maybe a good run rate going forth this year in Europe?

Robert Warren

We’d like to say that we believe our restructuring plans will help those margins, but I won’t go any further on giving guidance.

James [Denk] - Sidoti and Co

Okay. Fair enough. Thank you all.

Operator

Thank you. Ladies and gentlemen if you have any additional questions please press the * followed by the 1. As a reminder if you are using a speakerphone today you will need to lift the handset before making your selection.

We do have a follow-up question from Arnie Ursaner with CJS Securities. Please go ahead.

Arnold Ursaner - CJS Securities

Three follow-up questions to the last three. Question one is there a specific factor or reason why …… [inaudible] expenses or costs will you identify them and is there a scenario where you can see yourself just exiting Europe, where you tried these things and they just don’t accomplish your goal and you just say we’ve tried everything, let’s just not be in Europe.

Robert Warren

Can I take that in reverse? I’d like to take your last question first and I think that is where as I’m sure everybody who has ever listened to us talk about Europe and get tired of us talking about our new restructuring plan you are probably a little less tired than we are. This time I think we took for a basis that there was some external way we could fix the problem there and the obvious one to look at as your last question was we do a great job in North America and Asia, why don’t we just get out of Europe? It seems to be a very tough profitable area. We have a lot of assets there, a lot of people with a lot of tenure. Maybe it’s best if we just got out. We have to look at what we would have to do should we ever have decided to do that we have to get it into a profitable state for you to sell it easily. If you just ran from it and tried to sell off at some less than book value just the assets you basically the only people who would be interested in picking them up would be the primary competitors we have in Europe which would be giving them a hell of a cost basis I believe to come after our margins in Asia and North America. So we are really assisting a down the road problem that I really have a hard time seeing reasonably doing for our shareholders.

I believe two things. One that Europe represents the largest [investral truck] in the world for our types of products. More attachments are sold in Europe than they are anywhere else. So although it has been traditional for a decade a problem for us, I believe this will hit the problem is not trying to assume we could find an external fix for this business. I believe we have to fix the problem internally and then we can drive our value proposition that we believe once it is up and operating properly that we can get a preference in price and an increase in market share. I guess it is just that it has taken us awhile, Arnie, maybe too long to fix our own problem before we tried to find ways externally to get it fixed in Europe.

Arnold Ursaner - CJS Securities

Again, you will separate out the expected costs, severance and otherwise as best you can?

Robert Warren

We will definitely bring it out in our discussions in this and try to help you see what it is that is one time.

Arnold Ursaner - CJS Securities

And again there is no specific identifiable catalyst as to why now? I know it has been an ongoing question, but you seem to be taking much more aggressive action and in [inaudible] is there any other reason as to why now?

Robert Warren

I think all of our management is just desperate to find a solution to this. We really don’t want to talk about it any more. I know that our board really has zero patience with it anymore and I think everybody is looking for a solution and right now we’re going to go to the ones that we feel we can have control of because the ones we’ve tried to do which is market share, or affecting the price through a better product which we spent a lot of time on developing product for that market, just isn’t giving us the result that we’d like to see. I think an internal focus is going to be absolutely required for us to get there. I think we see that we are holding assets that just had too many people and too many assets in places that aren’t being productive and the only way to address this is head on. As you know in Europe this is a very difficult thing to achieve in Europe. There are very formal steps you have to make with work councils and we’re going about this in a very, I believe, sensitive but a reasonably accelerated intent.

Arnold Ursaner - CJS Securities

Excellent.

Operator

Our next question comes from Frank Magdlen with The Robinson Group. Please go ahead.

Frank Magdlen - The Robinson Group

Yes as a follow-up, should we expect any impairment – asset impairment charges?

Robert Warren

At this moment I don’t see any, Frank, but it is not out of the realm of possibility. But at this moment I don’t see it.

Frank Magdlen - The Robinson Group

Thank you.

Operator

Thank you. Mr. Warren I’m showing that there are no more questions at this time.

Robert Warren

Thank you very much. Thank you everybody for joining us today. We appreciate your interest in Cascade and we would love to answer any of your questions. Please don’t hesitate to call us.

Operator

Thank you. Ladies and gentlemen this concludes the Cascade Corporation’s fourth quarter fiscal 2008 earnings conference call. If you would like to listen to a replay of today’s conference call you may dial (800) 4-502236 and enter the access number 11110027# in North America. International callers please dial (303) 590-3000 and enter the same access code. This concludes today’s call. You may now disconnect.

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!