Columbus McKinnon Corporation Fiscal 2013 Third Quarter Teleconference and Webcast January 25, 2012

Transcription

1 Operator: Welcome and thank you for standing by. At this time, participants will be in a listen only mode until the question and answer portion. At that time, if you would like to ask a question, press star 1. Today s conference also is being recorded. If you have any objections, please disconnect at this time. And now I d like to turn the call over to your host today, Mr. Tim Tevens. Sir, you may begin. Tim Tevens: Thank you, Melissa. Good morning everyone and welcome to the Columbus McKinnon conference call to review our results of the third quarter of fiscal year With me here today is Greg Rustowicz, our Vice President of Finance and Chief Financial Officer. Please note that we have included summary slides of the quarter for your review and they can be found at our website, Hopefully, you have them in front of you as well, because we will be referring to them as we go through. We do want to remind you that this press release and company slide and conference call may contain some forward looking statements within the meaning of the Private Litigation Reform Act of These statements contain known and unknown risks and other factors that could cause the actual results to vary. You should, in fact, read the periodic reports that we publish with the SEC to make sure you understand these risks. If you can get to slide 3, that would be great. I just want to remind you of our long term objectives of growing to be a billion dollar business with about a third of our revenue in developing markets in two-thirds in developed markets, along with $200 to $300 million in acquisitions that we d like to do, with very strong operating margins in the 12% to 14% area, a very nice working capital level and a solid balance sheet. And we continue to focus our resources and energy on acquiring companies that will strategically add presence and product breadth to help us grow around the world and achieve these results. Slide 4 provides some highlights of the third quarter for fiscal year 13. Our revenue was up 7.3%, but was negative affected by foreign currency translation and a divestiture that impacted the quarter. Otherwise it was up, if you remove those two, 10.6%. The U.S. revenue continues to grow nicely, up 5.4% or up 10.9% excluding the divestiture that occurred in the second quarter of this fiscal year. Sales outside of the United States were up 9.7% or 12.9% excluding the effects of the foreign currency translation. We did ship some fairly large projects from our engineered products group in Europe and continue to see some very positive results from our emerging markets investments, which you know we ve been doing for a while now, where our revenue increased about 42% on a very small base, but a growing small base. Also, we have been seeing a slowing global market with Q3 flat with last year net of currency translation. We did have some bright spots, such as general industrial distribution, material handling specialists and the entertainment industry. Our specialty hoists also seem to be doing well. These are highly engineered products that normally go into oil and gas. Europe is still growing excluding the effects of currency but at a slow rate. Asia Pacific and Latin America are small and continue to grow rapidly, driven by our strategic investments for the market. You might know that we re not economically linked at this point in our life in those parts of the world. Page 1 of 11

2 Our gross margin improved 160 basis points over last year, up to 28.6%. And our operating margin improved to 9.3%, up 90 basis points. Our operating leverage in the quarter was 34.9% and that excludes a one-time gain on the sale of a closed facility that happened last year. Earnings per share for the quarter was 49 cents, up from 44 cents last year. And we generated a very nice $18.7 million in cash from operations for the first three quarters of the year. Please flip to slide 5, if you would, where we summarize our sales for the third quarter. And you can see that volume, two additional shipping days in the quarter, and price were up 10.6%. Our U.S. sales increased to $83.1 million, or up 10.9%, again, excluding that previously mentioned divestiture. Sales outside the United States were up 10.8% excluding an acquisition that we had in that part of the world as well as the effects of currency. At this time, let me turn it over to Greg, who will provide us with more details for the quarter. Greg Rustowicz: Thank you Tim and good morning everyone. Turning to slide 6, our third quarter consolidated gross profit dollars increased by $5.2 million or 13.5% and our gross profit margin improved 160 basis points to 28.6%. Our gross profit increase was driven by pricing gains of $3.8 million as well as volume and mix of $2.6 million. The South African acquisition completed in December of last year added $600,000 of gross profits to this quarter. We also had lower product liability costs of $600,000 compared with a year ago. Material inflation reduced gross profit by $1.5 million and productivity was slightly negative due to our December shutdowns and a favorable inventory adjustment that happened last year. Additionally, foreign currency translation had a $600,000 negative impact on gross profit this quarter. On slide 7, selling expense increased 2.6% from the prior year in dollar terms and represented 10.7% of sales this year compared with 11.2% last year. The increase in selling cost is primarily related to the new sales offices that we have established in Turkey, North Africa and the United Arab Emirates as well as the incremental selling costs from the South African acquisition. In addition, foreign currency translation had a favorable impact on selling expense of $400,000 this quarter. G&A expense increased $1.1 million compared with the prior year, representing 8.3% of sales versus 8.1% in the prior year. About $600,000 of the increase was related to a favorable pension adjustment in last year s third quarter, which did not occur again this year. Other increases were due to investments for growth in the Asia Pacific region as well as general inflationary increases. We expect our SG&A run rate to be approximately $30 million per quarter going forward. Turning to slide 8, operating income increased by 18.2% to $14.2 million, or 9.3% of sales, compared with 8.4% of sales in the previous year. The improvement in operating income is being driven by the net pricing gains over materials inflation as well as higher sales volume and mix, more than offsetting SG&A increases previously discussed. Excluding the gain on the sale of a closed facility that happened in the prior year, operating income expanded 34.7%. As you can see on slide 9, income per diluted share for the third quarter of fiscal 2013 was 49 cents, reflecting a 5 cent increase from the prior-year period where we reported earnings of 44 cents per share. Page 2 of 11

3 The effective tax rate in the quarter was 11.1% versus 16.4% in the prior-year period due to the mix of earnings in the U.S. versus our foreign affiliates and the fact that we have a valuation allowance against our deferred tax assets in the U.S. On a pro forma basis, using a 38% tax rate, earnings per share in the third quarter of fiscal 2013 were 34 cents per share versus 32 cents a share in the third quarter of fiscal Our effective tax rate for fiscal 2013 is expected to be between 13% and 17% based on the geographic mix of earnings that we anticipate. On slide 10, we have compared our year to date performance for several key metrics. Year to date revenue is up 4.7%, largely driven by volume and price increases, offset by $16.3 million of unfavorable foreign currency translation. Excluding the impact of foreign currency translation, revenue was up 8.5%. Gross profit is up 14.6% and gross profit margin has expanded 250 basis points to 28.7%. Higher volumes and net pricing over material inflation, along with manufacturing efficiencies, drove the margin expansion. Year to date operating income is up 26.5% as a result of the additional gross margin. Operating leverage for the first nine months of the year is 41.1%. Finally, year to date earnings per share are $1.34 versus $0.92 in the previous year. Turning to slide 11, our working capital as a percent of sales decreased to 17.5% in the current quarter from 17.6% at March 31, More importantly, our working capital as a percent of sales declined from 19.4% in our fiscal second quarter. The decline from the fiscal second quarter is due to improved accounts receivables management and better inventory performance. DSOs dropped to 46.7 days in the most recently completed quarter from 51.5 days in the fiscal second quarter. Inventory turns improved to 4.3 times compared with 3.7 times in the fiscal second quarter. The improvement in inventory turns was due to inventory management initiatives that had been ongoing as well as lowered inventory levels associated with projects that shift this quarter. On slide 12, you can see we generated $19.1 million of operating free cash flow in the nine months ended December 31, Capital expenditures were $7.1 million versus $10.5 million in the previous year. We expect capital expenditures for fiscal 2013 to be in the $12 to $15 million range. Finally, on slide 13, you can see that, as of December 31, 2012, net debt was $40.4 million and total gross debt was $152.3 million. Net debt to debt total capitalization was 17.6%. In addition to having $111.9 million of cash on our balance sheet at December 31, we have an additional $88.5 million available under our new $100 million senior secured credit facility, net of $11.5 million of outstanding letters of credit. This new facility, along with our healthy cash balance, provides significant liquidity to support our strategic growth plans. With that, I will turn it back over to Tim to cover the fiscal fourth quarter outlook. Tim Tevens: Thanks Greg. Okay, let s spend a moment and talk about our outlook on slide 14 of the deck. Overall, we re expecting slow growth. I think it s still growing, but it s certainly tentative. But emerging markets are growing strong as our investments are working well for us. In the U.S., we re seeing a generally tentative market with some exceptions. There s still strong activity in oil and gas and in our entertainment sectors. Capacity utilization was at 78.1% in Page 3 of 11

4 December, up slightly from September. We need to remind you that in Q4 of fiscal 13, we ll only have 62 available shipping days as compared with 65 in last years Q4. And those fewer shipping days represent around $7 to $10 million of additional revenue. So this Q4 will be certainly down as a result of that. We re seeing Europe being very fragile and our bookings in hoist and rigging business are flat with last year and we re declining in our engineered products business right now. Currency translation will remain a headwind, although a smaller headwind, for a bit longer. Capacity utilization is down to 76.8% at the end of December in Europe. Our backlog remains very good, about $95 million. It was negatively affected by the divestiture that we announced in July by about $6 million and by many projects that we actually were able to ship in the quarter. Our European business shipped about $3.7 million. Our crane business shipped about $5.1 million and we had a shredder shipment of $2.4 million. So it actually came down by about $11 million. It was offset by growth in backlog in our other businesses in hoist and rigging around the world. Two-thirds of our backlog is scheduled to ship in the fourth quarter. We continue to execute our strategic plan and make investments in emerging markets around the world like China, the eastern block of Europe, Africa and Latin America. And we re certainly also looking for key acquisitions to help accelerate our growth in these and other regions of the world. And at this time, Melissa, let s open it up to questions if you would. Operator: Yes sir. Thank you. At this time, if you would like to ask a question, please press star 1. Once again, to ask a question, press star 1. And your first question comes from Jason Ursaner. Your line is open. Jason Ursaner: Good morning. Tim Tevens: Hi Jason. How are you? Jason Ursaner: Great quarter. You mentioned in the commentary that you shipped several large engineered orders in the quarter. And Tim, at the end there, I think you said a few of them in a little bit more detail. So just a couple of questions Could you repeat what you said there at the end and what was the total impact on revenue verse a more normalized quarter? Tim Tevens: Yes. So we look at these large projects. As you know, most of our business is not large projects. It is hoist and rigging products that get consumed and shipped every day regularly. But we do have a couple businesses that are more engineered in nature. In Europe, it s the Columbus McKinnon engineer products division and these are large rail and road actuator systems that we ship around the world. They were actually able to ship two in the quarter, one to Taiwan and Greg Rustowicz: The other one went to Taiwan as well. Tim Tevens: Both Taiwan. And these were projects that are actually tied to construction cycles, so as the construction projects get completed, or delayed as the case may be, our equipment gets delayed as well. And then finally, we just shipped these in the quarter, which was positive for us. Page 4 of 11

5 And then, we also had some large crane orders that we shipped out of our crane business located in Peoria, Illinois or outside of Peoria, Illinois. That was about $5 million of pretty good shipments. The backlog came down in that regard. And these were large, heavy OEM equipment manufacturers and we serviced them around the world, so that came out of backlog. You might recall, Jason, we have a small tire shredder business that makes pieces of equipment that actually shred whole tires. That was able to ship a fair amount in the quarter as well, which reduced their backlog. So if you total these three project-oriented businesses up, you get about $11 million. Jason Ursaner: Okay and was that tire shredder shipped in the U.S.? Tim Tevens: I don t recall what part of the world it went to. We can look that up for you. Jason Ursaner: Okay. And directionally, the impact of larger projects on margin, on gross margin, bolted to the consumables or replacements? Tim Tevens: The same, flat. Greg Rustowicz: In the 30% range. Jason Ursaner: Okay, and then in terms of the outlook for order growth moderating, can you talk a little bit about the progression you ve seen month to month? You ve been discussing an expected moderation growth for a couple of quarters, so is this in-line with that, or is this maybe moderate faster or to a greater magnitude than what you ve previously been expecting? Tim Tevens: I think, Jason, it s pretty much following what we expected. The moderation is predominately coming from the Euro-zone. We re still growing, although it s growing slower. The project business seems to be a little more tentative than our normal hoist and rigging component business, which seems to be doing okay - more flattish. The larger projects seem to be delayed, put off, or the people are pushing out the projects in a bigger way, so call it flattish in that part of the world. I think that s fair to say. We did expect the emerging markets to continue to grow at a rapid pace. They have, which is good. The U.S. is doing fine. It s just not growing as rapidly as we d like. It s up quite a bit. But I think our bookings were challenged in December. We seem to be spending more time talking about things like fiscal cliff and with our channel partners and other concerns that people weren t really focused on the business at hand. I think in January, we ve seen some bright spots come back, which was positive, but I still think it s a tentative market out there. Jason Ursaner: Okay. And you continue to generate very strong cash flow and you ve naturally gotten to the point now where you re undercapitalized relative to your published target. I know you talked about it before, Tim, but can you just give an update on the M&A environment and how that priority for cash compares with returning cash to shareholders through a dividend or a more aggressive share repurchase? Tim Tevens: Yes, so our management team and our board has been spending quite a bit of time, I d say, really focused on our available cash, and the strategic uses of that cash going forward. It s our intent to apply that cash in areas where we can outperform our cost of capital and put it in projects where it gives us a pretty good return. Certainly acquisitions are on that list, Jason, and I would argue that probably would be at the top of that list. We have a fair number of them in the hopper today that we re evaluating and some that look to be very nice bolt-on acquisitions that would use some of that cash. Page 5 of 11

6 There s the potential for some larger ones that we are looking at and studying very closely and having conversations with folks in those regards as well. However, if those things don t come to fruition, we certainly would look and continue to look at all uses of that cash, including dividends or stock repurchases. But the number one thing we really want to do is to deploy it in a way that really adds long-term sustainable value to the company and I think that it s important for us to continue to spend a lot of our strategic energy around how to do that, and how to do that globally, to position us to continue to grow. Jason Ursaner: Okay great. Appreciate the commentary. I ll jump back in the queue. Thanks. Tim Tevens: Okay, thank you. Operator: Thank you. The next question comes from Schon Williams. You re line is open. Schon Williams: Hi. Good morning. Tim Tevens: Hi Schon. Greg Rustowicz: Hi Schon. Schon Williams: Congratulations on the quarter here. I wanted to talk about Q4 coming up here. Generally that s a seasonally strong quarter for you. Obviously you had very good performance this quarter. Should we still see seasonal trends, where we could actually see Q4 outperforming Q3, or does that need to be moderated a bit in light of the project shipments that went out the door? Tim Tevens: Yes, I think you need to moderate it just from the standpoint of the shipping days that I spoke of, Schon. Three days is 4.5% of our total available capacity, and that s going to be $7 to $10 million minimally off of last year. Last year was a very strong quarter for us as well. We need to have bookings in the quarter to actually come close to making the run rate that we hit last year. So we need to have business activity be strong in the fourth quarter, and there are areas that aren t necessarily strong. We have to be cautious in that regard as well. The potential s there, as normally our seasonality pattern the fourth quarter always is stronger. Coming off a very strong Q3, it may not be as strong as what you typically would see coming from Columbus McKinnon. Schon Williams: All right, thanks. That s helpful. Can you talk about where we are in terms of the ERP rollout and some goals for inventory reduction for the whole year here? Do you feel comfortable with where you are in terms of working capital and inventory? How is the ERP rollout going to affect us? Tim Tevens: Sure. We feel good about the work that has been done this past quarter on the working capital side and you saw that inventory did perform quite well and got to a level that we actually were targeting. We would expect that trend to continue a little more positively throughout the fiscal year. We d like to see inventory turns actually a bit higher at the end of the year. The ERP rollout is well under way. We finished one business here in the States, installing it, and we re doing our second business in Germany right now that s scheduled to go live towards the end of the fourth quarter, beginning of the first quarter timeframe. We need to get all of Europe installed on the same ERP system before we can make some really meaningful improvements in the inventory turns in that part of the world. They ve done a Page 6 of 11

7 great job with the systems that they have in place, but they re not interconnected today so sharing inventory information and matching customer demand patterns is difficult for them. It s actually somewhat cumbersome. We re still working on that and preparing the base business to be able to flow the inventory much better and it ll be even better when we get one ERP system across Europe. Greg Rustowicz: Schon, this is Greg. We do have further plans to reduce our inventory levels below where we ended this current quarter. We were quite pleased with the progress we made, and we would hope to end with under $100 million of inventory by the end of the year. Schon Williams: All right, thank you, one last final question here. I wondered, the commentary you gave in the slides around SG&A run rates kind of being consistent with Q3 around that $30 million range, does that mean that you re backing off in terms of your overseas investment in marketing and sales or are we seeing a shift in dollars from where you re actually still doing investments but the dollars aren t really moving? Tim Tevens: Yes, the back half of your question is the right answer. We re continuing to do the investments in the emerging markets. It s pretty important for us to continue to do that. But I would say that we re just taking it from other portions of the business, if you will, and moving it around. But the $30 million number is probably pretty reasonable on a go-forward. Schon Williams: All right, thanks. I ll get back in the queue. Tim Tevens: Thank you. Operator: Thank you. The next question is from Lance James. Your line is open. Lance James: Tim, congratulations to you and your team on a super quarter. I had a quick question. As you look at your growth in the emerging markets, there ve been some suggestions that, whereas your brand names and your high quality products have good market positions in the more mature economies - the U.S., Europe - in the emerging markets, there s more of an emphasis on price of goods, not necessarily on quality or brand name. Just wondering what you re seeing in those markets? Obviously, you had good growth there and it s still a relatively small portion of your total sales, but do you see the high quality and the brand names of your product having the same cache in those markets and potential to gain market share? Tim Tevens: So far, as we walk down this emerging market growth road that we ve been on, our target has really been the more premiere companies, the Western companies that are investing in those markets that do indeed recognize the brand, do, indeed, recognize the quality and are willing to pay up for it because they recognize that productivity and safety are two trends that they need to pay attention to globally. So as we make sales, it s primarily to those levels of companies. As we look to the future now, however, we need to get deeper into those economies and sell to more indigenous manufacturers and industries that are there. One of the strategies that we have in place is to manufacture more product in those local economies that brings the cost down a bit, does not degrade the quality, does not degrade the productivity or the safety aspects of our equipment, because it s the same design, Lance, of product. Basically, reduce the cost by a fair amount that allows us to compete more directly with the local manufacturers. That doesn t necessarily mean that our product will be as inexpensive from a sales price standpoint. In fact, it will be higher. It ll be a premium to it. But we do believe, and we tested this Page 7 of 11

8 to some degree, that people are willing to pay up for that if they can get uptime on the equipment and not have it go down. That s our strategy going forward. So far, we ve been leaning on our brands and our product quality with a foreign investment in those markets where people who already know us around the world are making those investments. Lance James: Thanks very much and, again, congratulations on a great quarter. Tim Tevens: Thanks Lance. Operator: The next question we have comes from Joe Mondillo. Your line is open. Joe Mondillo: Hi. Good morning guys. Tim Tevens: Hi Joe. Greg Rustowicz: Good morning Joe. Joe Mondillo: I just wanted to touch on the project work that you were talking about, the $11 million. I was just wondering if you could give some perspective on what that looks like compared with your past quarters before that. Is that close to a zero number or is $11 million up from a $5 million or $6 million level in past quarters? Or just give us a sense of how lumpy that business is. Tim Tevens: Yes, it is lumpy. You re absolutely right. It will vary quarter to quarter, up and down. I don t have last quarter s numbers in front of me right now, Joe, but I would suspect, looking at what we were able to ship this quarter, we had a couple things happen. We had two of our actuator projects go out of Europe into Taiwan. That s atypical; maybe it s one normally, so that one probably should be cut in half on average. And then we had a couple major shipments going to some heavy OEM customers out of our crane business. That, arguably, should be cut in half as well. And our shredder business bounces all over the map from zero to several million dollars a quarter. So, if you take that logic and apply it, maybe on average you cut it in half or thereabouts - to be honest with you, I m really just estimating that at this point. Joe Mondillo: Okay, not a problem. Also, so if that $11 million s about 7.5% of the sales of a year ago, and your volume growth this quarter was about 4.5%, could I assume ex-these large products, that your volume was down year over year? Greg Rustowicz: No. I think what Tim said, Joe, was that, in a normal quarter, project business is maybe about half of what we had. I think you were excluding all of the project business. Joe Mondillo: Okay, so it may be flattish then if I take out half? Tim Tevens: I would think it would be, especially in the United States. I shouldn t generalize, because you asked a very specific question and I don t have a specific answer. It would take us a little bit of time to get that specific answer. We don t track it that way. One thing I just noted was our backlog came down quite a bit quarter over quarter and I wanted to know why. A lot of it was driven by some pretty good shipments. I don t know how that compares to prior quarters. Joe Mondillo: Okay, not a problem. What about the backlog three-plus months from now? How does that usually trend as a percent of backlog? You said it is 35% right now. Is that closer to a 15%, 20% normally? Or I guess it s probably usually much less. Page 8 of 11

9 Tim Tevens: It s always about the same. Greg Rustowicz: It s about 30%, yes. If you look back, it s been reported in all the last press releases. Tim Tevens: Yes, it s consistently somewhere around two-thirds of our backlog, is shippable in the quarter that we re in and about a third beyond that. Joe Mondillo: Okay, and then just looking at your international sales, I think you mentioned that emerging market sales were up 16%, but that s a small portion of it, so does that insinuate that Europe s essentially up high single digits? It would have to be, if your volume on non-u.s. is up 13%, ex-acquisitions and FX - right? Greg Rustowicz: Let me try and take that one, Joe. The emerging markets, which we re defining as Latin America and our Asia Pacific region, in the quarter were actually up 42%, but once again, it s coming off of a small base. On a year-to-date basis, it s more in the normal range of 16.5%. Joe Mondillo: Okay. I confused that then. So they re up 42%. What are the growth rates that you re seeing in Europe? I guess I was trying to back into that. Greg Rustowicz: In the quarter, if you exclude currency, we re in the 8.5% range. Joe Mondillo: Eight and a half. And that s and acceleration from past quarters, where you were seeing low single digits - right? Is that partially due to project work? Tim Tevens: Yes, that would be partially due to the project work that we were in. Joe Mondillo: Okay, and then lastly, we don t talk a ton about this, but if you could just talk, either quantitatively or qualitatively, how your OE sales, new equipment sales, is doing versus all the aftermarket sales that you do? I know that s a huge part of your business, the aftermarket, so I was wondering if you could just talk about the difference that those are trending lightly. Tim Tevens: There are multiple answers to that, so let me see if I can break it into pieces that we can communicate effectively. We sell spare parts for hoists predominately - and that s reasonably flat. I m just going to take a moment here and pull out one of my sheets to give me a sense of how our parts business is doing. Yes, parts is growing at the same rates as hoists. Actually, a little flatter, which tells me that our hoist business, from a unit perspective, which you would consider to be like OEM kind of perspective, is growing faster than the parts business, which makes sense in most recoveries that we ve seen over the years. When we re in a recession mode, in developed markets, we see parts grow faster than actually unit sales, but the reverse is true today. So that s logical, right? I mean, especially in America and Europe. I would remind you that a lot of our hoists are sold as replacement business, especially in markets where we have a pretty strong position, like in America and Western Europe to begin with, so you have this overall theme of I need to replace my hoists so I ll buy a new one, as opposed to repair it. And that, you could arguably say, is an MRO or more of a maintenance expense kind of replacement as opposed to true growth of a new facility going up. Page 9 of 11

10 Joe Mondillo: Okay. Thanks guys. Tim Tevens: Thanks Joe. Operator: Thank you. The next question is from Gary Farber. Your line is open. Gary Farber: Yes, good morning. Tim Tevens: Hi Gary. Gary Farber: Just a couple of questions. I know capacity utilization is a statistic that stands out to be something that tracks demand. I m just wondering, PMI data (purchasing manager index data), do you think that has any relevance whatsoever? Do you look at it much? Tim Tevens: We do. We track a number of metrics and the PMI data is really futuristic for us. It s way out in the future. It makes a lot more sense and will drive us eventually, but capacity utilization is a little bit closer, as you know, a couple quarters out. Gary Farber: Okay, yes. I m just pointing it out, because I don t know if you saw yesterday, but PMI data for the flash for January actually was pointing up in a lot of the territories. I was wondering if what you re seeing now is a lag to what you might see based on that. Tim Tevens: Well, I would say that eventually that hits us. The real question is when, and it might be multiple quarters out into the future, maybe even years. Gary Farber: Okay, just because you need the usage of the equipment to replace. Tim Tevens: Right. I don t know what the construction number was, I didn t see that. We do sell into the construction market which, as you know Gary, is pretty poor right now. We re hoping that commercial construction and infrastructure build outs start to come back - and I suspect that they will at some point. We re just not seeing any demand from that to any great degree right now. Gary Farber: Right, those have been pointing up but that s, again, a forward indicator which could be, nine months out. Tim Tevens: Correct. Gary Farber: So, would you say that, if those kinds of things kept point up for the next two or three months, the PMI, the American Institute of Architects Study, you would start to feel it potentially in December of 2013 or the fourth quarter calendar year? Tim Tevens: That s very hard for me to say, because we don t correlate PMI directly as well as we do capacity utilization, but certainly, conceptually, yes, three to four quarters out we would begin to see some of that demand. Now if some big projects came out and people needed manual hoists or retro level hoists on the jobsite, we d feel that immediately, but generally speaking, that economic indicator is much more futuristic for us. Gary Farber: Right. Okay, and in all the storm damage and everything, is that much of an opportunity whatsoever? Tim Tevens: No, that s an opportunity. Our industrial distributors - like Granger, Fastenal, MSC and those folks - certainly are moving product to support that rebuild and we would certainly feel that, but it s, obviously, very regional. Page 10 of 11

11 Gary Farber: Right. Tim Tevens: It s not global and it s not even across America. Gary Farber: Okay and then just one last one, I don t know if you touched on it. Regarding the raw material environment, how was it in the quarter and how do you see it going forward? Tim Tevens: Actually, it was down slightly from an input cost standpoint, which was positive. If the economies continue to be flat, I suspect that ll be flat. If things start to pick up, of course I think that would react, which isn t bad for our company, as you know, Gary, because generally speaking, we pass on those increases in the form of our own price increase to offset that material cost increase. Gary Farber: Okay. All right, thanks again for your time. Tim Tevens: Thank you, Gary. Operator: Once again, if you would like to ask a question, please press star 1. Our next question comes from Jason Ursaner. Your line is open. Jason Ursaner: Just a real quick follow up for Greg. You made a comment earlier on the expected tax rate. I was just wondering if you could repeat that and give an update on the expected timeline for when the reversal of the tax allowance will happen. Greg Rustowicz: Yes, the commentary was that the expected tax rate for the year is in the range of 13% to 17%. As you know, we continue to evaluate the valuation allowance that we have on our deferred tax assets and I would say that we are getting very close to having the positive evidence we need to perhaps reverse that valuation allowance. Jason Ursaner: Okay, appreciate it. Thanks. Operator: And with that, sir, I m showing no further questions. Tim Tevens: Great. Thank you, Melissa. Well, thanks everyone. We certainly continue to expect the rest of fiscal 13 to be in this slow growth mode that we ve been experiencing, but certainly, our operating leverage should remain positive. Our investments in emerging markets continue to bear fruit and we expect the U.S. to continue to grow, albeit slowly. Europe will be in very slow growth mode and we see some negative growth in our engineer products business, as I mentioned. We do remain positioned to continue to execute our strategic growth plans to profitably grow our business as we have about $112 million in cash now and a new $100 million revolver to help execute those plans. We continue to have multiple discussions with businesses that can add strategic value to our company. Our targeting process does, indeed, take time as these businesses are generally not for sale, so introductions and in depth discussions need to take place before any agreement can be reached. And, of course, this takes some time. We also continue to make strategic investments into selling in emerging markets, such as China, Latin America and the EMEA region, as well as invest in our new products and services. Once again, I d like to thank all of our people around the world for their dedication to excellence in making our company a stronger, well-positioned organization. And, as always, we appreciate your time today. Thanks and have a good day. Operator: Thank you. This does conclude today s conference. All parties may disconnect. Page 11 of 11