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

Cascade Corporation (NYSE:CAE)

F1Q09 Earnings Call

June 5, 2008 5:00 pm ET

Executives

Robert C. Warren, Jr. – President, Chief Executive Officer & Director

Richard S. Anderson – Chief Operating Officer & Senior Vice President

Joseph G. Pointer – Chief Financial Officer & Vice President Finance

Analysts

Arnold Ursaner – CJS Securities

Joe Giamichael – Rodman & Renshaw, LLC

JB Groh – D.A. Davidson & Co.

[Tim Coffey] - Private Investor

Frank Magdlen – The Robins Group

Operator

Welcome to the Cascade Corporation first quarter fiscal year 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Robert Warren, President and CEO of Cascade Corporation.

Robert C. Warren, Jr.

Andy Anderson our Chief Operating Officer and Joe Pointe, our Chief Financial Officer 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 2,500 employees working in 29 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 lift truck to carry, position and deposit various types of loads. As smaller portion of our products are for construction vehicles such as excavators and wheel loaders. Approximately 55% of our products are sold through retail dealers. The remaining products are sold directly to global manufacturers named such as Hyster, Toyota, [Kion], Mitsubishi, Yale, Komatsu, [Huffay], Ingersoll Rand, Caterpillar and Nissan.

Joe will now give you and overview of the first quarter.

Joseph G. Pointer

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 results to differ materially. Additional information regarding these risks and uncertainties are described in our reports on Form 10K and 10Q and other filings with the Securities & Exchange Commission. We cannot provide any assurance that future results will meet expectations. In addition, historical information should not be considered an indicator of future performance. We disclaim any obligation to release updates to any comments made in this call or reflect any changes in business conditions.

I would now like to give a brief overview of our consolidated first quarter results. Net income for the first quarter was $10.9 million or $0.98 per share compared to $23.8 million or $1.90 per share in the prior note. I want to note that in the first quarter of the prior year we settled an insurance litigation matter which accounted for $16 million increase to operating income and a $10 million increase to net income. Excluding this insurance claim earnings per share in the prior year was $1.10. Consolidated net sales were $150 million in the first quarter, an increase of 11% compared to net sales of $136 million in the prior year. Adjusting for currency changes and an acquisition, net sales increased 4% primarily due to the strength of lift truck markets in China, Asia Pacific and Europe.

The gross profit percentage for the first quarter was 28% versus 32% a year ago. We experienced a decrease in gross profit percentage in most regions. I will discuss the causes for these decreases later in the call. SG&A expenses increased 5% excluding currency changes and an acquisitions due to costs to support our expanded Chinese operations and higher selling and personnel costs. As a percentage of total sales our SG&A costs were 16% in both the current and prior year. The 22% increase in net interest costs was the result of additional borrowings primarily related to our share repurchase program. At the beginning of the first quarter we completed this program which in total included the purchase of 2.4 million shares for $130 million over an 18 month period. Our effective tax rate of 35% was consistent with the first quarter of the prior year.

I’d now like to spend a few minutes discussing our operating results on a geographic basis. Sales in North America decreased 5% compared to the prior year excluding foreign currency changes and net sales related to an acquisition. The decrease was primarily due to the general slowdown in the US economy which was reflected in both the lift truck and construction markets. The gross profit percentage in North America decreased 4% in the current year due to higher material costs, lower sales volumes, changes in product mix and other costs increases. Bob will comment later on rising material costs which impacted all regions globally. SG&A costs in North America remain consistent with the prior year excluding foreign currency changes and an acquisition.

Turning to Europe, net sales excluding currency changes increased 5%. This increase is due to higher shipment volumes of certain products as a result of strong European lift truck market. Europe’s gross profit percentage decreased 3% in the current year primarily due to material pricing increase and operational inefficiencies which included higher labor costs and costs related to new product introductions. The gross margin was also affected by delays in the approval of Chinese made products by European OEMs. These delays required us to continue supplying OEMs with European made products at lower margins. We are continuing our efforts to obtain additional OEM approvals for these products.

Although our net sales in Europe have increased with the strength of the lift truck market, we have not yet realized the level of gross profit we had anticipated. Bob will discuss later the current status of our restructuring efforts in Europe. SG& costs in Europe increased 11% excluding currency changes due to higher personnel and other general costs. Included in our SG&A costs for the first quarter were $375,000 in severance costs related to the first steps in our European reorganization efforts.

In Asia Pacific region, net sales increased 29% excluding currency changes. All locations in Asia Pacific contributed to the sales increase as a result of higher shipment volumes and strong lift truck markets. Gross profit of 26% in the first quarter was consistent with the prior year. SG&A costs in the Asia Pacific region increased 11% excluding currency changes. The increase was due to additional selling and personnel costs. In China, our net sales increased 29% excluding currency changes. The increase is due to a very strong Chinese lift truck market and our capital expansion in China which is enabling us to produce a larger volume of products for distribution within China and to Europe and Asia Pacific. Gross profit in China was down 3% from the prior year. This decrease was due to higher material costs, changes in product mix and higher intercompany transfers which carry lower margins. SG&A in China increased 27% excluding currency changes due to additional costs to support or expanded Chinese operations.

On our balance sheet there were no significant changes in our cash and debt positions at April 30, 2008 from yearend. It is our intent going forward to use available cash to pay down long term debt. Capital expenditures and depreciation expense were both $4 million for the first quarter. We anticipate capital expenditures and depreciation expense for the remainder of 2009 to be approximately $15 million.

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

Robert C. Warren, Jr.

I’d first like to provide a brief overview of the lift truck market which is the only direct economic indicator that we have available for our markets. While this does not correlate exactly with our business levels since various end markets use products to differing degrees, it does give us some indication of short term future trends. North American lift truck shipments decreased 6% during the first quarter. This trend somewhat mirrors the general slowdown in the US economy. We expect this to continue and believe the North American lift truck market for the remainder of the year will be down in the range of 5% to 10% from the business levels experienced in the prior year. Lift truck industry shipments in the European market were up 16% in the first quarter. We anticipate continued growth but at a lower rate for the remainder of the year. Lift truck shipments in the Asia Pacific region were up 19% in the first quarter. We anticipate continued growth at lower levels in this market during the remainder of fiscal 2009. China’s lift truck market was up 30% in the first quarter. We expect that this market will continue with similar growth through the remainder of the year.

I would now like to spend a few minutes discussing a couple of additional topics. As we have mentioned in prior calls, our financial results in Europe continue to fall short of our expectations. We have been unable to capture the benefits of a strong European lift truck market in terms of both sales growth and operating income. From a sales perspective, we are devoting additional resources to fast growing markets in Eastern Europe. We anticipate increases in the application rates and attachments for these developing markets overtime. As Joe noted earlier, our operating income has fallen due to material costs increases and various operating inefficiencies. I will talk in a minute about the effect of material cost increases globally. Operationally we are continuing to work through various challenges to achieve acceptable levels of profitability. These include new product introductions, higher labor costs and completion of our plan to provide Europe with Chinese made products.

We previously announced at the beginning of a comprehensive reorganization of our entire European business including a rationalization of all production capacity. We have incurred $375,000 of initial costs related to the reorganization in the first quarter. The next step in this plan was a 30% reduction of our work force in all areas of the Netherlands. This occurred at the beginning of the second quarter. We estimate costs related to this reduction to be approximately $600,000. Additional steps have also been taken to transfer the production of certain products to Verona Italy and to move forward with component level sourcing from North America. The cost for this move were not material. We anticipate that operational and organizational changes under development will result in additional costs through the remainder of fiscal 2009.

A key component in our reorganization and one that is difficult to qualify and measure is the transition of our European factory to the Cascade model and the full implementation of lean principals throughout the organization. We have begun this transformation which will be a continuing process overtime. I would now like to discuss material prices which is clearly the factor having the most immediate impact on our current business. When I speak of material prices I am mainly referring to steel which makes up about 35% of our total product costs. There are other materials such as aluminum and rubber used in our products but these products make up a small percentage of total product costs. The current volatility in steel prices is unprecedented in comparison to what we have experienced in my previous 35 years with Cascade. During the latter half of last year and through the first quarter we have seen continuing increases. Year-over-year steel prices in some regions have increased up to 75%. These increases have obviously put significant pressure on our ability to maintain historical margins as is evidenced by our first quarter results.

Based on announced material price increases from suppliers in the coming months, we expect this pressure to continue through the remainder of the year. We continue to step up our efforts to improve internal processes which we believe will ultimately result in lower costs. This will fall short of enabling us to offset the effect of increasing material costs. In the past we have relied on our ability to shore steel from regions such as China where steel costs were lower than other parts of the world. Over the past year we have seen a continuing trend where steel costs in China have reached levels consistent with global prices. Our most viable option to maintain historical gross profit margins is through customer price increases. Our ultimate goal is for the impact of material costs increases after costs savings activities and sales price increases to be neutral. Already in the first quarter, the majority of our locations have implemented price increases of 3% to 11% with additional increases up to 8% planned in the next three months. In some extreme cases customer prices are increasing 10% to 30% in certain markets.

The impact of these increases will be phased in with new orders over time. Competitive forces in certain markets will also weigh in to the net increases that customers will accept. We have been making strategic purchases of steel at certain locations, primarily fort manufacturing locations to take advantage of lower material costs ahead of scheduled price increases. We expect to continue this going forward as long as we continue to be in a period of rising steel prices.

On the personnel side, we recently announced a number of executive officer changes to take full advantage of our management resources. Andy Anderson was appointed to the role of Chief Operating Office. Andy’s service in a number of key operational and financial management roles and his 36 years with Cascade has prepared him well for this current role. Joe Pointer has been named our Chief Financial Officer. Joe previously served as our Vice President of finance during his eight years with Cascade. The additional executive changes involve the appointment of Frank Altenhofen to the role of Vice President of Asia, Pete Drake as Vice President of the Americas and [Davida Roncary] to Vice President and Managing Director of Europe. Each of these individuals is well suited to helping us in each of the major regions in which we operate.

Finally, at the meeting this past Tuesday, our board authorized an 11% increase in our quarterly dividend to $0.20 per share. 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

(Operator Instructions) Our first question is from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

My first question relates to obviously you had a fair amount of inventory hopefully going in to the quarter, you’ve had massive steel increases. Can you give us a sense for the volume of steel that you have, the tonnage of steel you have in inventory now so we can get a sense perhaps how much you may have benefited from inventory gains in the quarter on your steel?

Robert C. Warren, Jr.

That’s a good question. I’m going to give you a non quantitative answer. Ernie, I think we benefited actually pretty significantly about it. We purchased, the build up that you’ve seen in this last quarter has been predominately in North America as we bought ahead of known price increases of about 10%. So, I would say that our current steel inventory in North America is at about 10% below market if we had to replace it today. What that does is we are unable to pass through price increases as rapidly to our customers as our suppliers pass them on to us so that actually helps us prevent a dip coming. Then in Asia, I think we’ve benefitted over the past couple of quarters from a significant build up as well in China. What that has done is it has softened the dip, you’re seeing a dip but the reason I say its softened is because when you look at the price of Chinese sourced steel, which we’ve always known was inappropriately or poorly priced on a world market, year-over-year steel in China is up about 75% and over a two year period it’s up 82% per ton for the basic steel we buy. So, that buildup you saw the last two or three quarters has cushioned us somewhat. I wouldn’t say it’s cushioned us completely but its cushioned us somewhat. Then in Europe, our ability again to pass pricing through is not perfect. The buildup in Europe has been more in finished goods in our Chinese produced forks than it has been in actual raw material.

I don’t know if that helps you but I guess in about a two or three sentence answer I would say in North America what it’s down is prevent a more significant dip than we would have seen if we hadn’t been purchasing a head. Clearly, it’s prevented us from seeing a more precipitous drop in our Chinese production than we would have seen.

Arnold Ursaner – CJS Securities

I think where I was trying to go and I know you don’t give guidance is, if I thought about Q2 margins versus Q1, Q1 really had two interplays. You had the benefit from inventory, lower cost inventory but also had lower plant utilization. If volume trends stay the same, you start narrowing the gap, my guess would be it would have a negative impact on margins when you finish up with the low cost fuel and inventory. That’s the question I was leading towards.

Robert C. Warren, Jr.

In answer to you, I think it’s such a mix because you have a different – we had more of the rolled bar section for fork increases coming through to us faster but the volume in those plants, so the absorption was being held up because many of our OEM customers, I still believe, are hedging on their orders prior to our increase and so actually the fork shipments in the first quarter were higher than the ITA truck shipments and really aren’t justified other than they’re trying to buy ahead of our increase. On the attachment side of the business I think in North America we haven’t actually seen in our gross profit as much of the effect of the material price increase of plate steel and the component steel in other castings and pumps and of the like. But, we have seen a stronger dip in the volume and therefore the absorption so it’s sort of a mixed bag between the full product mix.

Richard S. Anderson

At the risk of getting myself way, way ahead and having these guys turn the speaker off on me Ernie, this is not guidance okay, but I don’t think you’re going to see precipitous drops due to the fact that our steel purchases have gone up because our pricing increases are going to be coming in, in this quarter as well. Most of our price increases are going to be coming effective the second quarter as we work through our less expensive steel. So, the goal is for you not to see a precipitous drop due to that.

Arnold Ursaner – CJS Securities

If I can ask one more question and then jump back in queue, the European OEM delay of approvals, I know you’ve mentioned this before, can you give us a little better feel for perhaps what the issue is and when you hope or expect it to be resolved?

Robert C. Warren, Jr.

It is Ernie, very frustrating. I try not to scribe any certain regional prejudice on this because there’s such a vantage for the OEMs on the costing of this product that they really don’t want to miss it but we seem to have such a disconnect between what we test and what the customer’s testing. We’re now on the fourth time where we pass on what are pretty straightforward pencil and needle testing on the construction testing of these forks in a German lab which I can’t imagine is lax and then they fail in the French labs. So, you know, maybe once, twice, four times my creditability is being stretched.

Joseph G. Pointer

Ernie, I think one of the things I would like to convey from an operating standpoint is these forks, these products are absolutely fit for purposes meeting ISO standard forks. This is in to minutia of pencil and yield numbers that are within a couple of percentage points of who thinks what’s acceptable that have nothing to do with their functionality with their fit for purpose. This is really arcane stuff.

Arnold Ursaner – CJS Securities

So what do you need to do to get them approved?

Robert C. Warren, Jr.

Well, we believe with three of the OEMs we have already gotten approval with Nissan and with Linde-Fenwick and with two Italian manufacturers, NARCO is ready to approve them, they’ve just done the testing. The last major one is Toyota and we have our engineer going from Germany Monday and they’re going to go through step-by-step with the quality inspector from Toyota and the French lab and actually go through step-by-step what they’re doing so we can understand why there seems to be such a disconnect.

Operator

Your next question is from Joe Giamichael – Rodman & Renshaw, LLC

Joe Giamichael – Rodman & Renshaw, LLC

I wanted to just touch on the pricing initiatives again. Steel obviously continues to impact your margins and you’ve talked a lot about what that’s done to your working capital position and you’ve talked continually about sort of increasing your operating efficiencies to offset that for the past several quarters. Just the thing I’m trying to get a better understanding of is given your dominate market share, why haven’t we seen sort of almost like leading price increases? Are they not able to be pushed through?

Robert C. Warren, Jr.

I think in Asia and North America we have pricing control, it’s really a matter of timing in most cases. Right now we’re getting no notification from our steel sources and many of them are long relationships, we’re getting quoted on prices on the date of shipment to us. Our relationship with our customers, deals usually have to be price listed, they have to be printed, or in the case of our OED, the dealer orders. But, with the OEM there’s usually some form of negotiation, it can take up to 60 days to push these increases through and they’re not easy increases for our customers to accept. We’ve got a down market in North America so they’ve got a recessionary market they’re selling in to and their having inflationary pressures that we’re pushing on them for the costs. It’s really a matter of timing Joe. We get no notice but given our relationship with our customers that could take up to 60 days to get a price increase.

Joe Giamichael – Rodman & Renshaw, LLC

So you’re really not able to sort of anticipate the direction of the pricing and the input costs? I guess to follow that up, another industrial equipment manufacturer that I follow given that steel is a very large input they’ll only give a 30 day price guarantee to their distributors. Is there something where you can sort of change the terms? These are people that sort of half to understand how your margins are being impacted as well.

Joseph G. Pointer

They do Joe and it’s an issue of being mindful of our long term and very important relationships with our customers. On a very short term could we do? Of course we could do it but on a longer term partnering with our customers in a responsible way to ensure that these relationships that we’ve enjoyed and have been able to maintain the market share we have particularly in North America over time, we’re very mindful of our partnership. They’re short term optimization with long term really serious consequences and we want to be responsible to our shareholders first but we also very much believe in being responsible to our shareholders that involves good relationships with our customers over a long period of time.

Joe Giamichael – Rodman & Renshaw, LLC

Can you give us a better idea of where you stand from a capacity utilization basis in the Chinese facilities? Assuming that you did get approval to start shipping the Chinese produced goods in to Europe immediately, where are you in terms of existing capacity?

Robert C. Warren, Jr.

Because as you noticed last yard we ended up with two new fork plants in China, the one in Hebei, we’ve built a whole new plant and a new line which is primarily focused for the rapidly expanding Chinese lift truck market but also focused on the general Asian market with a high emphasis on Japan. We’re probably running between the two plants in Hebei, maybe 70% to 75% of the capacity of that current investment. As we gain more market share and the potential in Japan, maybe we have about half that market now so we’ve done a pretty good job of capturing a good share of the Japanese market but there’s still more we can get. And, if we were forced to look at capacity expansion, we have a reasonably low cost way of doing that because we built the new plant in Hebei with a whole second bay and so we can put a whole new line in for the Asian market. We did the same thing on the plant construction in Xiamen, that plant was constructed with the intent of exporting all of that product in to the European market and we built it similarly with another bay that’s set up and ready to go for another line should we need more capacity. With the full approvals that we’re anticipating for sourcing the OEM forks for Europe in Xiamen and our aftermarket needs, that would be I guess in Xiamen we’re looking at about 75%, 70% but also easily expanded at a fairly low investment base.

Joe Giamichael – Rodman & Renshaw, LLC

So from a cap ex standpoint the bulk of the dollars have been spent, it’s more of a matter of just expanding the existing facilities to create additional capacity, is that correct?

Robert C. Warren, Jr.

That’s correct.

Operator

Our next question is from the line of JB Groh – D.A. Davidson & Co.

JB Groh – D.A. Davidson & Co.

I was wondering price increases across the board and the differ in say the fork market versus the attachment market. I can’t remember if you quantified that or not?

Robert C. Warren, Jr.

Definitely, the majority of our fork sales, 70% to 75%, go to OEMs. That’s a much more sensitive price negotiation as it’s really a commodity component for the OEM. Our ability to price for the aftermarket fork which is mostly sold to the dealer organization and is more specialized we have easier price increase capability. Does that answer your question?

JB Groh – D.A. Davidson & Co.

But on the fork side I’m guessing the raw material price is much more important than on the attachment side where there’s a lot more engineering involved?

Robert C. Warren, Jr.

As a product cost, the material cost, it is a higher steel content for the forks, that’s about 50%. 50% to 60%, Andy is giving me the thumbs up, I always thought it was 50%.

JB Groh – D.A. Davidson & Co.

It’s going up I hear.

Richard S. Anderson

No, I’m telling him he’s doing a good job.

Robert C. Warren, Jr.

In our attachment product, steel is about 40%. So there is a different in the total fuel content but steel is steel, extremely important component in our total cost of goods.

JB Groh – D.A. Davidson & Co.

On a geographic basis, are you still going to plan these price increases for Europe as well? I guess in the past that’s been a little tough to get those to stick.

Robert C. Warren, Jr.

Absolutely. Absolutely. And this is a universal problem. Nobody’s got better steel costs, sources, than us. What we know, they’re under the same margin crunch.

JB Groh – D.A. Davidson & Co.

I think you said the total restructuring costs are going to be about $600,000. That’s your current estimate?

Robert C. Warren, Jr.

No, it’s really important to note that that’s the restructuring cost for the first step of Phase One. There are many steps of Phase One and then we move to Phase Two.

Richard S. Anderson

Yes, it’s just on Phase One we’ve incurred about $400,000 in the first quarter. As of what we know is about $600,000 in the second quarter so that will be about $1 million through the first half of the year and then you can talk on the rest.

Robert C. Warren, Jr.

Step Two we’re evaluating, we’re in late stage evaluation of a number of different options for Step Two. Some of these are more radical than others but to go to the more radical we’re looking at restructuring costs in the $3 million to $5 million range and then there are steps there too. Now I want to stress don’t build in $3 million to $5 million right now but it’s just to give you an early view of what potentially could be.

JB Groh – D.A. Davidson & Co.

So you gave us that last quarter, right?

Richard S. Anderson

$400,000 roughly in the first quarter and $600,000 in the second is our best estimate right now?

JB Groh – D.A. Davidson & Co.

But the total for the whole enchilada, step one through whatever and Phase One through whatever.

Robert C. Warren, Jr.

This second phase we’re looking at could be $3 million to $5 million and in the next 18 months we don’t get the results we want we’re going to continue restructuring until we get the results we want to see.

JB Groh – D.A. Davidson & Co.

Then we’ll start off Joe with an easy one since he’s new to the CFO position. How many shares did you buy back in the quarter, Joe?

Joseph G. Pointer

I don’t think any were bought back in the quarter.

JB Groh – D.A. Davidson & Co.

None in the quarter, okay. The public count went down a little bit.

Operator

Our next question is from Tim Coffey - Private Investor.

Tim Coffey – Private Investor

I want to move back to the inventory number because in the last call I think we had talked about that you had $85 million of inventory on the balance sheet at year end 08 and we were going to start seeing a draw down on that number for several issues and obviously in Q1 we’re now at roughly $91 million and maybe this question is best answered by Andy. Andy, when do you think we’re going to start seeing some draw down on that inventory?

Richard S. Anderson

I think we’re flattening out down I think probably one quarter down just to give you a little bit of color on that situation, Tim. We’re already seeing the draw down on all of the Asian operations, Xiamen. Xiamen is down 4%, Hebei is down 9%, Japan is down 5%, Korea is down 9%. We’re starting to draw down also in Europe from the buildup, our Italian and German operations are down each about 8%. Those draw downs are starting to take place. Certainly the big build up of the last two quarters, Tim, which I think we talked about as well was in Asia and that draw down is now starting in Asia and I think our build up in North America actually had two components to it and one of them may not draw down quite yet. The two components, one was we clearly were buying ahead of the price increases in our fork steel, but also I think Bob mentioned that our fork business is up a little bit compared to the [inaudible] business. Our attachment business is more mirroring the decline in lift truck business and in order to keep our factories and our people in place at least on the short term without having to go through any sorts of steps here we are actually building ahead which we don’t do very often. So we’ve had a finished goods inventory buildup in our US attachment plants as we’re building a little further ahead than we normally do. Presuming that the lift truck remains as we’re now predicting we’ll be working that off through the summer.

Joseph G. Pointer

Finish goods inventory is on product that’s already sold.

Robert C. Warren, Jr.

All that’s sold, right.

Richard S. Anderson

But, Tim, there is in part of that $91 million there is some systemic build up given the global sourcing of forks from Asia and component sourcing from North America over Europe. Going back to historical levels there is going to some permanent increase in that inventory level.

Tim Coffey – Private Investor

But when I take a look at where you were, and I hear you on that, but if I take a look at where you were at year end 06, from a top line perspective and where are you today from a top line perspective and then I take a look at the inventory numbers.

Robert C. Warren, Jr.

Exactly, there’s a couple of things on that. First off, I’m not dismissing your comment at all. We agree with you completely and we might just toss over DSO as well. We’re very much focusing on lowering the DSO, but one of the things on the buildup in steel just to give you a sense of the number of factors that’s going into this, if you take a look at our Hebei plant a year ago and you take a look at our Hebei plant today on a raw balance sheet converted to dollars numbers, it’s gone up 100%. When you look at the average price of that inventory a year ago and then the average price today and then adjust the FX out, it’s actually in tonnage only gone up about 14%. So we’ve got some factors going with the pricing relative to our cost of goods. I’m just trying to give you a little bit of flavor, it doesn’t diminish your point at all. Your point is very well taken and one that the three new Vice Presidents are going to be given some very tight operating guidelines on what their ultimate raw materials and finished goods bandwidth is.

Tim Coffey – Private Investor

How much inventory is held in Europe? I’m just trying to get a gauge that I were to isolate the net working capital of Europe, I don’t know what that number look like it and how disproportionate it is to other regions.

Robert C. Warren, Jr.

I can’t give you how disproportionate, I can assure you it is disproportionate because when you look at days outstanding for Europe just by the nature of the European market you’re talking 65 to 70 days in Europe and with the fork factory Chinese build up, Joe will get that in just a second. We’ll come back but it is disproportionate. Yes, no doubt.

Tim Coffey – Private Investor

Can you just ball park, Andy, the net working cap of Europe whether it’s using an historical number, it doesn’t have to be Q1 08 but can you just give me a feel for how big that number is?

Joseph G. Pointer

We’ll get back to you on that one, too.

Tim Coffey – Private Investor

Have you guys, and this question then would be for Bob, Bob have you guys ever been approached by a competitor in Europe to be, by your European operations for net working cap?

Robert C. Warren, Jr.

No. Remember, Tim our competitors in Europe even though our largest competitor does come from Italy and has consolidated two other, they’re still only about 25% of our total size.

Tim Coffey – Private Investor

But I’m just talking about assuming new from a net working cap perspective in Europe.

Robert C. Warren, Jr.

So far, no.

Tim Coffey – Private Investor

Has there been any conversation at the Board level from a management compensation perspective to tie more of your pay weighted to Europe and the performance in Europe?

Robert C. Warren, Jr.

Absolutely.

Operator

Our next question is from Frank Magdlen – The Robins Group.

Frank Magdlen – The Robins Group

Bob, you’ve thrown out a couple of numbers on the cost of steel as a percent of goods sold and have gone from 35% to 40% and overall I think the attachment was 40% and forks were closer to say 70%.

Robert C. Warren, Jr.

On a homogenized basis I think the 50% to 60% number is the right number.

Frank Magdlen – The Robins Group

50% to 60% on forks or on an average?

Robert C. Warren, Jr.

50% to 60% on forks and I think average is closer to 40%.

Frank Magdlen – The Robins Group

Average, all and everything you have?

Robert C. Warren, Jr.

Yes.

Frank Magdlen – The Robins Group

And then the price increases which I think J.B. was trying to get to, you threw out 3% to 11%. Can you give us a feel just on an average basis what that might look like?

Robert C. Warren, Jr.

This would take a weighted average of probably 70 to 80 different prices increase in 20 plus markets. We’d have to do a lot of calculation to get that on an average, it’s 7%, 8%.

Joseph G. Pointer

I’d say probably 7% is probably going to be as good an estimate as we could do at this point.

Frank Magdlen – The Robins Group

Now those were announced prices or effective in the quarter?

Robert C. Warren, Jr.

Those were announced.

Joseph G. Pointer

Most of them would be effective in the beginning of the year. All in all you’re not going to see the full benefit of those in the quarter yet because it takes up one month to six week lead time to get the orders on track.

Frank Magdlen – The Robins Group

Plus another eight to come, thereabouts.

Joseph G. Pointer

In the next three months roughly.

Frank Magdlen – The Robins Group

In Europe you mentioned a 30% headcount reduction for The Netherlands, is that in keeping with the last conference call where you said that Europe had a workforce of about 750 and will be reduced by about 7%? Is the same gross number about the same?

Joseph G. Pointer

Yes. That 30% was reflective of just that location.

Frank Magdlen – The Robins Group

Can you give us a little bit of update on the American Compaction and PSM acquisitions and how are they are doing?

Robert C. Warren, Jr.

Frank, obviously time means everything. As I said in the Shareholders Meeting clearly we bought PSM and American Compaction when the US construction market was still strong so they are substantially off in their revenue for first quarter.

Frank Magdlen – The Robins Group

Substantial off meaning they’re quite a bit lower than they were when you acquired them?

Robert C. Warren, Jr.

That’s correct. The market is very quiet on the West Coast. We have focused a lot of our attention in the last year since those acquisitions on improving the process on the shop floor particularly at PSM up in Washington and focusing on going after some of the business of our West Coast competitors, two of which are coming out of British Columbia and have some disadvantages in labor and in currency and have some historical relationships we would like to take advantage and disrupt right now. We are also looking at expanding some of our sales into the Intermountain region and the Midwest and putting some sales efforts in expanding further East.

Operator

We do have a follow up from Ernie Ursaner – CJS Securities.

Ernie Ursaner – CJS Securities

As a follow up directly to the last question, construction attachments was part of your longer term growth strategy, with prices down and with probably a lot softer environment and you having a very strong balance sheet, are you seeing changes in acquisition opportunities, more realistic pricing of people that might have things for sale?

Robert C. Warren, Jr.

As you know we talked about what areas we wanted to expand into, we did want to expand into the East Coast construction attachment market and we were either going to have to find a good acquisition or to Greenfield. Our efforts to find a suitable candidate when the market was good, nobody was interested in talking to us that we were interested. We have not seen that change yet but that’s not to say we’re not hopeful that given the compression I think on everybody that’s in the construction attachment business there could be some opportunities we’re focusing on that might come up.

Ernie Ursaner – CJS Securities

And looking out perhaps over two years, do you have a goal or a target of what you hope construction attachments will be as a percent of the total company revenue?

Robert C. Warren, Jr.

We have not forecasted that for the Board. They’ve been rather lenient in allowing us to try to do our growth plan without some hard targets as to what that will mean going in North America, I would say one of the things we did get in this last year and a half was that relationship with Caterpillar. PSM was a private label prior to Caterpillar under an alliance association with Catwork Tools and we have fulfilled according to Caterpillar their hopes of what the acquisition would do for them which was to dramatically improve the customer service, predictable service levels that they would want to expand the business further. That relationship we’re very hopeful we’re going to be able to leverage into our expansion in the Chinese market. Caterpillar has very large growth plans in China, they perceive a high need for quality attachment suppliers and we’re going to be leveraging that relationship in our initial market introduction in China.

Ernie Ursaner – CJS Securities

The final question I have is in North America forks themselves obviously are a greater percentage of total volume but much less critical to your profitability, can you give us a little better feel for how you’re seeing things currently? I’m assuming most of the attachments you make are almost made to order for a custom order versus a fork which is more, like you say, commodity like and considered a dealer shelf. As you sit there today managing your business what sort of backlog of proprietary attachments do you have and if in fact you’ve shipped a lot of the forks already to the dealers for inventory, have you seen it slow down in your case?

Robert C. Warren, Jr.

Let me go back to that statement about attachments being special, there is no backlog in effect for attachments. Andy’s and my career in the last 20 years we never have more than three, four weeks backlog of attachments because it’s all built to order. And everything we build is with a focus on throughput so 28 day backlog on attachments is about as much as we get. We do see on the commodity type forks, which are sold to OEMs they do give us a 90 day forecast. They really only lock it down in the last two weeks and they do milk run pickups from our commodity fork plant let’s say in North American in Findlay, Ohio. We’re building pretty much to their requirements two days from now on their final assembly requirement. It’s not like we have this big build up of finished goods inventory really anywhere in the world. I would say that I am suspicious of the OEMs order process in the first quarter because it’s not matching their own stated shipment numbers. So I think they’re hedging on their own fork volume which is not good because that means if they don’t get an increase in the second and third quarter on their own shipments, they’ll eventually when our price increases have settled they’ll cut back on those orders and we get whip sawed.

Richard S. Anderson

The order rate on our forks just at a general level, Ernie, does continue to run ahead of lift truck sales which is not logical.

Robert C. Warren, Jr.

Let’s take last year, Ernie. The market was off North America 10% and we were only down or flat in our attachment business and that was I believe driven more by the Fortune 500 company who really wasn’t idling production capacity and he was still rolling over his three and five year leases on his lift truck and attachment. This year I think we’re actually seeing more the effect of the continued down turn in shipment from the North American industrial truck shipments because I think there’s more uncertainty on the capital purchases of the major accounts.

Richard S. Anderson

Before we set up, Tim, the hipshot answer wouldn’t have been very far off, not that this is highly calculated here, but on about less than 35% of our revenue on a consolidated basis Europe is accounting for probably in the 45% to 50% of our net working capital number.

Joseph G. Pointer

So out of $90 million in inventory about $40 million is Europe and about $155 million working capital about $75 million is Europe.

Operator

We do have Mr. Coffey back in the queue. Your line is open, did you have any further questions?

[Tim Coffey] - Private Investor

I do have one more question and it’s with respect to the plant managers that you have in Europe and how they’re incentivized. Is it similar to how the guys in Fairview are incentivized? And by that I mean I think historically you guys have incentivized plant managers by using gross profitability units produced and then hours worked. Is that a similar arrangement to how guys in Europe are being incentivized?

Robert C. Warren, Jr.

It is, Tim, but not the leverage and certainly not to the success. In other words Terry and I used to feel that until some of our people got incentive pays that were over 15% it was really hard to capture a change in the way they worked. Because of the inability to really drive productivity changes in those plants, they really haven’t seen that incentive compensation. We got a start of it last year, let’s say in El Almere in the first five months last year, they actually started seeing some pretty good payouts and then summer hit that plant and they went into negative improvement numbers and they never recovered. Because of that you’ll see in the restructuring some pretty big changes in the management. With [Davida Roncary] taking over in Europe we’re going to be focusing more and more on how are they incentivized and do the people who are driving change in these plants really understand what can affect their numbers and how fast.

[Tim Coffey] - Private Investor

And how much time do you plan on having Andy over there?

Robert C. Warren, Jr.

Now that he’s given the CFO position to Joe, I guess I’m going to unchain from his desk and he’s going to be heading to Europe as much as the rest of us have been. I’ve already been over there four times this year. As you can imagine, Tim, the Board has got about as much patience with our previous European performance as you have and it’s our number one focus. You ask me what kind of leverage is on our executive performance compensation and it’s almost entirely leveraged on Europe’s performance.

[Tim Coffey] - Private Investor

That’s good news. I wish the Board was as impatient with respect to dividends as they are with Europe.

Robert C. Warren, Jr.

You can always hope. I would say that we did get a move on the dividend, not to probably what you would like to see, but it is still.

[Tim Coffey] - Private Investor

One last comment, Bob, on that note because I never like to have a conversation go by without it, and that is with respect to the short selling activity.

Robert C. Warren, Jr.

The short selling?

[Tim Coffey] - Private Investor

Because you have roughly 1.4 million shares short at this point.

Robert C. Warren, Jr.

I agree and emotionally, Tim, I don’t like it, but operationally I don’t know what it has to do with us.

[Tim Coffey] - Private Investor

I completely agree with you. Operationally it has absolutely nothing to do with you, but with your balance sheet and the fact that you do have folks out there which appears to be a retail short I’m trying to figure out the most obvious and easiest way to hang a short is to do something with your dividend. And again I continue to be confused that no retail short is going to remain a short when he knows that he’s got to pay out dividends.

Robert C. Warren, Jr.

I agree, it would punish the short. I’m just not too sure that as a long term policy of how to get return to shareholders I need to worry about whether I need to punish a short.

[Tim Coffey] - Private Investor

I think part of it goes to the fact that if you don’t necessarily make it a consistent dividend policy but you make it one of essentially non-recurring dividends and you match those dividends to the performance of the business. So by that I mean you more formally establish a payout on the EPS that you are going to dividend.

Robert C. Warren, Jr.

I don’t disagree and we look at certainly what our future prospects are and our cash flow, I think the Board was trying to indicate their confidence in that with the increase in the dividend but given the current what we see is highly inflationary cost pressures on us with recessionary sales.

[Tim Coffey] - Private Investor

There’s certain reticence to and I guess where I’m coming from Bob is again that’s why you make it non-recurring. So I think you have a certain base level of dividends that manifested in today’s dividend of $0.18 to $0.20 a share but you also the more formally establish whether or not you communicate that to the market is up to you guys. But what you do is you tie that dividend to EPS which may have some volatility in that non-recurring dividend but it nonetheless keeps away the pests.

Robert C. Warren, Jr.

We’ve actually looked at a variation of that. We had talked about that with the Board in the past. I think that as we begin paying down our debt again we will be once again looking at a number of options for returning cash to shareholders, Tim, and that’s not out of the realm of possibility at all.

Richard S. Anderson

And certainly it was looked at in the past.

[Tim Coffey] - Private Investor

Right, but the share buy backs just don’t work. They have historically never worked against shorts, not to the same effect that dividends do. You guys know where I stand on that.

Operator

Your next question is from Frank Magdlen – The Robins Group.

Frank Magdlen – The Robins Group

Bob, you had talked about North America or US being pretty cost competitive now. How cost competitive is it and you mentioned in the conversation a little bit more that North America or US could supply Europe?

Robert C. Warren, Jr.

I think it’s an issue both of currency and productivity. Our North American plants are still our most productive operating facilities and that’s mostly because of that operating model, that Cascade operating process model, lean principals that we have been driving here for 20 years. I would say that the currency right now clearly helps. I mean, for us to take component product in to, with shipping and any duties that we have in Europe, it’s still a very landing cost competitive in the Euro. I don’t know that we ever state how much.

Richard S. Anderson

I think the answer, there’s a two step answer to your question Frank. On a pure cost to cost basis even with freight, they’re very competitive, major double digit percentage points advantage when you look at it in isolation. The problem is time competitive. Time is the critical factor in serving a customers’ special needs and you’ve got three to three and a half weeks on the water and so what we’re trying to do, not what we’re trying actually what we are just starting to do is a couple of terms but we’re calling it a flat pack where we’re building part of it here, the least variable part or the very standardized parts and then putting them in place in Europe and allowing the European factories do the finishing part which is the highly variable pieces of it. So, we’re capturing some of the cost benefit and then on a certain product categories that do have a much more standardized component to them is we’re having any issues, we are actually working to ship some finished goods in to the European market as well. The thing that prevents us from doing that all out is the customer time response.

Operator

There are no more further question at this point.

Robert C. Warren, Jr.

Thanks so much for your time and participating today. We appreciate your interest in Cascade. Please don’t hesitate to call if we can be of any assistance.

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: Cascade Corporation F1Q09 (Quarter End 04/30/2008) Earnings Call Transcript
This Transcript
All Transcripts