Columbus McKinnon Corporation

Greetings. Welcome to the Columbus McKinnon Corporation third quarter fiscal year 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Deborah Pawlowski, Investor Relations for Columbus McKinnon. You may begin.

Thanks, Shamali, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me on the call are David Wilson, our president and CEO, and Greg Rustowitz, our chief financial officer. You should have a copy of the third quarter fiscal 2021 financial results, which we released this morning before the market. If not, you can access the release, as well as the slides that will accompany our conversation today, on our website at www.columbusmckinnon.com. After our formal presentation, we will be opening the line for Q&A. We kindly ask that you ask one question with a follow-up question and then get back in queue to allow for continuous flow and adequate time. If you'll turn to slide two in the deck, I will review the safe harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed with Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information. So with that, if you will turn it to slide three, I will turn it over to David to begin. David?

Great. Thank you, Deb. And good morning, everyone. These are certainly interesting times, and I'm very proud of the way the Columbus McKinnon team continues to rise to the challenges presented by the pandemic. We have continued to lead with health and safety at the forefront through these dynamic times. Even as global infection rates accelerated in the December quarter, we were able to exceed our revenue targets, grow our daily order rates, and meet our customers' requirements. Through all of this, we have been evolving our Blueprint for Growth strategy to Blueprint for Growth 2.0. Our Columbus McKinnon Business System, or CMBS, is developing to provide the underpinnings for the discipline, processes, and core competencies necessary to scale our business. We believe that core elements of CMBS are enabling us to drive results today as we address challenges such as labor availability, supply chain shortages, and delayed freight schedules. I'll talk more about our strategy and CMBS in a moment, but let's hit on the highlights of the quarter first. Sales of $166.5 million surpassed our expectations, even as we dealt with the staffing, supply chain, and logistics challenges associated with rising rates of COVID-19 infections. In fact, We are ahead of plan for our organic growth initiatives involving new product and solutions development, geographic expansion, and advancing COMPAS, our online CPQ or configure price quote tool that speeds up our channel partners' ability to design and quote our equipment. We are forecasting new product revenue defined as revenue from products introduced within the last three years to be up 24% year over year in fiscal 2021. As a percentage of sales, our new product revenue has grown nearly 200 basis points. Gross margin was 33.2%, which we were pleased with given the typical impacts of underabsorption in the December quarter and the incremental costs associated with labor availability and supply chain expediting fees. Our suppliers similarly faced staffing impacts associated with the pandemic. In addition, we had to overcome increased freight costs due to capacity constraints in our global shipping channels. Despite all of this, adjusted operating income was $11.2 million and gap earnings were 27 cents per share or 26 cents per share when normalized for the tax rate in our fiscal third quarter. As Greg likes to say, a hallmark of Columbus McKinnon is our ability to generate cash through all cycles. I believe this is true, and we are also getting better at it. As we drive operational excellence through CMBS, I expect that we will advance this capability even further. We generated approximately $22 million in free cash in the quarter and have more than sufficient financial flexibility to put our capital to work for growth, both organically and through acquisitions. Notably, our backlog is up 4% sequentially, continuing an encouraging trend of recovery. If you will now turn to slide four, I would like to introduce more about the evolution of our Blueprint for Growth strategy to version 2.0. To execute this strategy, we are building the Columbus McKinnon Business System, or as I said previously, CMBS. CMBS leverages the foundational elements of EPAS and expands upon them with a broader set of core competencies, key processes and tools that establish a stronger enterprise foundation and a Columbus-McKinnon way for enabling growth and creating scalability. This provides the infrastructure that enables the core growth framework of our Blueprint for Growth 2.0 strategy. The key principles of CMBS are rooted in being market-led, customer-centric, and operationally excellent with our people and values at the center of all that we do. This requires somewhat of a shift from where we have been as a company. We are altering our orientation and perspective to be more outside-in focused. Being market-led and customer-centric means we must establish a deeper and more institutionalized understanding of the markets we serve, the competitive landscape we engage in, and the opportunities that strategic adjacencies provide. This perspective sharpens our insight into what drives our customers' behaviors, why they buy, what they buy, and how they buy. We are improving our knowledge of how we are perceived, enabling us to align internally to improve our customers' experience. With CMBS as the foundation, we can execute the core growth framework of our Blueprint for Growth 2.0 strategy. The framework defines four parallel paths for Columbus McKinnon's growth and provides clear organic and strategic initiatives focused on strengthening our core, growing our core, expanding our core, and reimagining our core. This is how we will pivot to growth, both organic and acquisitive. Strengthening the core is a foundational path focused on initiatives that will strengthen competencies and improve our competitive position within our existing share of the SAM, or Serviceable Addressable Market. Initiatives include further developing commercial and product management competencies and improving our digital front end. Growing the core is a path that is focused on taking greater market share, both organically and through acquisitions, Within the markets we currently serve, or again, our SAM, we are making progress on this path with product localization, new product development, and advancements in automation and aftermarket support for our distributors. Expanding the core is a path that is focused on improved channel access and geographic expansion. Here we are talking about expanding beyond our SAM into the broader total addressable market, or TAM. This will involve building out our presence both geographically and in new verticals. A current example is the hygienic markets we are targeting with evolved products and solutions. This will also be achieved through organic and acquisitive growth. Reimagining the core is a more transformational path that rethinks our current TAM and targets strategic growth Beyond that, as we think more broadly about material handling and increasing trends in intelligent motion, not just lifting, but solutions for how materials move throughout customer environments, there are some compelling ideas that emerge. This growth can be achieved organically through innovative approaches in the application of Columbus McKinnon technologies in markets that extend beyond today's TAM, as well as through strategic development. We have detailed plans underpinning each of the paths of our core growth framework. We look forward to discussing these in greater detail when we host a strategy briefing in our first quarter of fiscal 2022. Please turn to slide five, and I'll speak to the current success of one of our key Columbus McKinnon business system tools, the 80-20 process. While the results of this process are volume dependent, we are nonetheless reaping incremental benefits. even during the recession created by the pandemic. Year to date, we have generated $9 million in contributions to operating income resulting from strategic pricing initiatives, the consolidation of facilities, and customer simplification. In addition to our continued focus in these areas, a primary area of emphasis going forward is on product line simplification. If you would now turn to slide six, you will see that we are continuing to recover from the low point in the first quarter of fiscal 2021. Both our short cycle and project businesses demonstrated growth over the second quarter. As we have noted previously, the third quarter is typically our weakest quarter due to seasonality and fewer workdays. We are certainly encouraged that the landscape appears to be improving overall. I will now turn the call over to Greg to discuss our Q3 performance in further detail. Greg? Thank you, David.

Good morning, everyone. On slide seven, net sales in the third quarter were $166.5 million, down 16.5% from a year ago. As David noted, the sales level exceeded the upper end of our prior guidance for third quarter revenue of approximately $150 to $160 million. Demand was impacted by the COVID-19-induced recession compared with the prior year, but encouragingly, the gap continues to improve sequentially compared with the trailing quarters as markets recover. Looking at our sales bridge, sales volume was down approximately $38 million, or 19%. However, we did realize positive pricing as we saw year-over-year pricing improve by 1%, of which about 60% was related to our 80-20 process. Foreign currency remains a tailwind. It increased sales by 1.5% or $3 million. Let me provide a little color on sales by region. For the third quarter, we saw sales volume decline in the U.S. by approximately 20%. This was partially offset by price improvement of 80 basis points. Outside of the U.S., sales volume was down approximately 18%, which was partially offset by price increases of 1.1% and favorable foreign currency translation of 3.3 percent. By region, sales volume was down 11 percent in Canada and APAC and down 20 percent in Latin America and EMEA. On slide eight, given our seasonality and fewer production days in the quarter, our gross margin was 33.2 percent, which compares with 34 percent last year. We feel that this is good performance given the 16.5 percent reduction in revenue we experienced as well as COVID-19 pandemic challenges with staffing, supply chain, and freight. We have improved our mix of businesses and have benefited from our 80-20 process and operational excellence initiatives. The 80-20 process contributed approximately $3.5 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions, and factory closures. Let's now review the quarter's gross profit bridge. Third quarter gross profit of 55 million was down 12.6 million compared with the prior year. This was driven by a 12.8 million reduction in gross profit due to lower sales volumes. We did see gross profit expansion from pricing, and we experienced no material cost inflation in the quarter. Foreign currency translation increased gross profit by 1.1 million. Tariffs were lower than the prior year as we imported less Chinese product. Factory closure costs were lower this quarter by $400,000. We experienced negative productivity net of other cost changes of $3.1 million, largely due to COVID-related labor inefficiencies and incremental costs associated with the consolidation of product lines in our factories during the pandemic. COVID presented challenges in the quarter as we dealt with labor availability issues in our factories, caused by shortages of personnel due to positive cases or close contact tracing, which required quarantine. Our supply chain also struggled with this challenge, and to meet customer demand, we experienced more expediting fees. In addition, freight carriers have also been impacted, and we are seeing higher costs and longer transit times. As shown on slide nine, RSG&A costs were $41.7 million in the quarter, or 25.1% of sales. RSG&A costs were $2 million lower than the previous year. I would like to point out that the prior year benefited from a $2 million adjustment to stock compensation resulting from the resignation of our former CEO. Adjusting for this one-time benefit in the previous year, the reduction year over year was $4 million. This improved level of RS G&A was due to several factors. We had lower selling costs of $4.3 million, resulting from cost-saving measures, including lower headcount and limited travel. G&A costs were flat with the prior year, if you exclude the stock compensation adjustment that I just covered. Also included in G&A for this quarter was approximately $2 million of costs associated with advancing our growth strategy, as we discussed on our last earnings call. We also continued to invest in R&D to drive organic growth, so those costs were up $400,000. FX Translation added approximately $600,000 to our RSG&A costs. As we discussed last quarter, our RSG&A costs increased sequentially by $4.7 million. This was due to the addition of second-half incentive compensation accruals, growth investments, and the costs related to returning to work, including bringing back certain employees from short work weeks in Europe and additional travel. These costs will continue and slightly increase as volumes improve. As a result, we are keeping our Q4 FY21 RSG&A cost guidance at $43 million, which is $2 million per quarter below our fiscal 20 run rate of $45 million. Turning to slide 10, adjusted operating income was $11.2 million. Adjusted operating margin was 6.7% of sales, a 490 basis point decline from the prior year. The driver of this decline was the impact that COVID-19 had on our sales volume. Decremental adjusted operating leverage year-to-date was 30.3%, which is significantly better than what we saw during the Great Recession of 2009 when we experienced decremental operating leverage of 38%. Our Blueprint for Growth 2.0 strategy, and specifically our 80-20 tools and operational excellence initiatives, have improved our business model and better enabled us to execute at higher levels of performance in all economic scenarios. As you can see on slide 11, we recorded GAAP income per diluted share for the quarter of 27 cents. We expect FY21's full-year tax rate to be a benefit of approximately 2 to 4 percent which is resulting from the pension settlement expense related to the termination of one of our U.S. pension plans, which created a pre-tax loss in the U.S. On slide 12, our adjusted EBITDA margin on a trailing 12-month basis declined to 12% because of COVID-19. Our return on invested capital of 6.6% was similarly impacted. We continue to target 19% EBITDA margins in ROIC in the mid-teens but the timing for the achievement of these objectives has been delayed by the pandemic. We do remain highly confident that our strategy will enable us to drive profitable growth and achieve these objectives. Moving to slide 13, we generated $21.9 million of pre-cash flow this quarter and an impressive $66 million year to date. We took rapid actions to preserve and generate cash and utilized our business system to focus on working capital reductions. Our working capital as a percent of sales improved to 13.3%, which was a significant contributor to our free cash flow improvement. We drove our day sales outstanding, or DSO performance, down to 51.5 days and improved our days payable outstanding to 40.6 days. Inventory turns also improved to 3.9 turns. We expect CapEx of $4 to $6 million in the fiscal fourth quarter, and this would result in CapEx of approximately $10 to $12 million for the full year. Turning to slide 14, our total debt at the end of the quarter was approximately $250 million, and our net debt was approximately $62 million. Our net debt and net total capitalization is now approximately 11%. We have made excellent progress de-levering and have achieved and have achieved a net debt to adjusted EBITDA leverage ratio of less than 0.8 times, which provides us financial flexibility to weather the current pandemic and invest in growth initiatives. We have a flexible capital structure, which is covenant-like. This means our financial covenant is only tested if we have outstanding borrowings against our revolver. In October, we repaid the $25 million of outstanding borrowings on our revolver that we initially drew in April So the covenant was not tested at December 31st. We also extended the maturity date of our revolver to August of 2023, which gives us a stable capital structure for almost the next three years. Finally, our liquidity, which includes our cash on hand and revolver availability, remains strong and has increased to approximately $271 million. We expect to use our capital for growth, both organic and through acquisitions. Please turn to slide 15, and I will turn it back over to David. Thanks, Greg.

Orders were $169 million in the quarter, down slightly from the trailing second quarter due to seasonality and three fewer working days. On an orders-per-day basis, rates actually increased sequentially by 2.5 percent. During the quarter, we had some interesting project wins that drive sustainability. These included clean energy applications in both wind and hydropower, as well as supporting a manufacturer of infrastructure systems for sustainable water flow management. We had several wins in the transportation industry as we are supporting the significant global efforts to develop new production lines for electric vehicles. We are also seeing new demand driven by shifts to new technologies, such as electric and hydrogen-powered public transit systems. Other highlights include the energy market, where we were selected to provide crane systems for an LNG project in Mozambique, as well as a natural gas power plant in Thailand. Another area of growth benefiting from the pandemic is packaging, where we have won a number of smaller projects to provide lifting equipment to manufacturers of foil used in the food industry. The defense industry is strong across all of our businesses. For example, We received an initial order for automated linear actuators used in a missile launch system in the quarter. We expect this to lead to further opportunities over the next several years. Finally, through the first 15 days of January, our daily order rates are up 8.5% versus the average in Q3. And, as I noted earlier, our backlog remains above pre-COVID levels. These trends are encouraging. Please turn to page 16, and I will discuss our outlook for the fourth quarter and our perspective as we advance into the new calendar year. Our backlog, order trends, and customer inputs provide confidence as we enter the final quarter of our fiscal year. We expect revenue in the fourth quarter to be in the range of $175 million to $180 million, and we have approximately 50% of this level available in our backlog now. We remain cautious, nonetheless, as infection rates remain elevated. While we only have direct visibility into the current quarter, our strategy is focused on the longer term. Our financial goals are unchanged. We are working toward 19% EBITDA margin and mid-teen ROIC targets. But first, we need to get back to pre-COVID sales levels. Given our organic growth initiatives and economic forecasts, we expect to be back to pre-COVID quarterly sales levels by this time next year. With the Columbus McKinnon business system, we are building an organization and competencies that can scale as we pivot our efforts to growth. We have also been actively developing our acquisition pipeline and anticipate that we will demonstrate progress in fiscal 2022. Importantly, We are making great strides as we establish the metrics and performance targets relevant to Columbus McKinnon's sustainability efforts. We are driving the path forward and developing our first corporate social responsibility report, which we expect to publish in fiscal 2022. This is an important journey for us. You can stay abreast of our progress via our website under About Us. With that, operator, we'll open the lines for questions.

And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. All participants are only limited to one question and one follow-up question. One moment, please, while we poll for questions. And our first question is from Mike Schliske with Colliers. Please proceed with your question.

Hello, good morning. Hi, Mike, good morning. Good morning. I guess I want to start off, you had mentioned there have been some issues with the freight markets or freight conditions, freight supply, as well as your supply chain in general. Have any of those begun to improve at all here in the first calendar quarter of the year?

I guess what I'd say is we're seeing rising rates of infections globally, and we've had some impacts in terms of the expediting that's been required to make sure that we're moving materials the way that we've needed to, and we were able to overcome them and exceed targets in Q3, as we just reported. As we're entering Q4, I'd say that things remain in the same state. We're working very successfully with our strategic partners and the supply chain. And I think we're in a position where we're not anticipating significant changes as we progress through the fourth quarter from what we saw in the third quarter.

Okay, great. Thanks for the color there. And maybe secondly, I am curious, sorry, yeah, I am curious, you know, your comments that you're still on track eventually to get to that 19% even down margin level is certainly encouraging, but you've also, it seems like you've expanded or matured what the program that originally got you to kind of set these goals, and it seems like it's gotten a lot more aggressive or a lot more expansive since the original blueprint for growth came out. So I'm kind of curious, you know, is there any room to go past 19% if what you're doing ends up being successful over a period of time? Or is kind of 19 the core to expect even with all these new goals and kind of new strategies here?

Well, I guess the way I'd answer that, Mike, is that, and we've talked about this in the past, we're, you know, we're very focused on that target and making sure that we achieve that target. But we are working very hard on a number of initiatives that are making Columbus McKinnon a better and stronger business and anticipate that over time as we scale that we can move beyond those targets. And so that's not where we would stop, but that's certainly the target that we have right in front of us.

Okay. That makes sense. I'll pass it along. Thanks.

Great. Thank you, Mike.

And our next question is from Greg Palm with Craig Howland, Capital Group. Please proceed with your question.

Yeah, thanks. Morning, everyone. It certainly feels like the recovery has strengthened a little bit more than kind of how we were all expecting a few months back. I mean, you gave some good color on end market conditions and certain verticals where you're seeing some success. I'm just curious, is it Do you feel like it's being led more by short cycle or projects? And what are inventory levels like in the channel at this point? I mean, how much of this is sort of real demand versus restocking of the channel?

Right, right. I would say, to start with the last question, inventory in the channel remains at a very low level. So I don't believe that what we're seeing here is representative of an increase in stocking levels. But in the third quarter, we saw short cycle and project orders increase in terms of our sales delivery on the order of 5.5% apiece, so 5.5% and 5.6% respectively. And that was pretty consistent across the board. I guess as we think about order rates in the quarter, our short cycle order rates were, just checking a note here, Short cycle was down about 2%, and projects were down about 3% in absolute terms from an order's perspective. So, again, no real material difference as it relates to those two types of business. But we are seeing order inquiries. and engagement relating to project activity increasing quite a bit. We're having very active discussions with our customers related to projects that are gaining more traction and activity that had previously – some of them have been on hold, and others are new activities that are coming forward.

Okay, that's helpful commentary. And then as it relates to gross margins, you know, didn't hear any commentary on input costs. And I'm just curious, you know, whether the rise of increase in steel lately, if that's, you know, expected to have some sort of impact. How should we think about gross margins in the near term?

Yeah.

You want me to take that, David? Yeah, Greg, would you take that?

Yeah. Sure. So in terms of the fourth quarter, we're anticipating inflation, raw material inflation to remain muted. We don't expect there to be a significant increase. And really, to date, our raw material inflation has been close to zero. We do, however, think that as we move into our next fiscal year, that inflation is definitely going to become more of a headwind. You know, we certainly have seen some very modest steel prices So far, a lot of our contracts are locked in, so it's not as much of an issue for us here in the short term. But, you know, clearly there's going to be pressure, we think, as we head into our fiscal 22 on raw material inflation.

Okay. So just to clarify, it's just more of a byproduct of timing, so the fixed contracts may need to get, I guess, renegotiated based on this level of steel at some point. Is that the way to think about it?

Yeah, we would expect there to be some additional inflation coming here. You know, you have to be determined. But we also have, you know, some strategies that we will implement and have been implementing to offset it. But the delay increases, you know, we force our suppliers to, you know, kind of give us the details on kind of what their prices should cost versus just kind of accepting across the board increases. You know, we look to add different suppliers and change sources if necessary. And we also have a big focus on material productivity and VAV cost savings projects. So there's a number of things we're doing and expect to do to offset any inflation we would see in fiscal 22. But clearly, you know, what we're all seeing and reading about is going to be real.

Yep. Okay. Makes sense.

All right.

Thanks for the color. Good luck going forward. Thanks, Greg.

And our next question is from Matt Somerville with DA Davidson. Please proceed with your question.

Hi, David, Greg, and Deb. This is Austin Bender on for Matt. I have two quick questions. First, if you could speak to the actionability with respect to your M&A pipeline and how the funnel of activity has developed there.

Sure, sure. So I think the M&A markets are becoming active again. We're clearly focused on refining our criteria and making sure that we're focused on As we've talked about in the past, a future that's more focused on intelligent motion solutions. So we're building out an M&A process as part of CMBS. We have an active and developing pipeline. And as you'd imagine, we're evaluating opportunities, and those opportunities are varying stages in terms of their actionability. But as I mentioned, you know, we anticipate and our plan would be to be active in the fiscal 22 period. Mm-hmm.

And I'll just add on, Austin, that clearly from a balance sheet perspective, we've got lots of dry powder available.

Yeah, definitely. Thank you for the color there. Second question, just real quick. You touched on the highlights you're seeing across some of the end markets, the positives. I was wondering if maybe you could elaborate on the areas where you're still seeing challenges.

Sure. Yeah, well, clearly the entertainment market is the one that stands out, right? Entertainment is a market that, given the inability to gather, it's having an impact on live shows, and those are basically non-existent at this time, or touring shows. There are some live shows with fixed venue locations, but our entertainment business has been impacted the most We're seeing some green shoots start to emerge as people have been doing renovations on locations and gearing up for a recovery, but it's still at a very low level. We're also seeing that the oil and gas and chemical markets are down compared to last year.

Okay, thank you.

And our next question is from Chris. How are we guaranteeing research? Please proceed with your question.

Good morning, David and Greg. Good morning, Chris. Good morning. I wanted to follow up on some of your comments in regard to order rates. You had mentioned some of the positives in Q3 as it relates to clean energy, electric vehicle production, etc. With the incoming administration with President Biden and potential things on the horizon, any potential upside that we could potentially see impacting some areas of the business, first and foremost, perhaps electric vehicle production and some of the other areas?

Sure. As I mentioned, there continues to be investment in that area, and we're benefiting from that investment as we provide solutions that assist in establishing those production lines. for global electronic vehicle or electric vehicle production. I'd also anticipate that with a push towards more of an energy transition to clean energy, the work that we're doing in support of wind and hydropower and other sustainability areas could see benefits from stimulus or incentives that might exist to help support that. Those would be my initial thoughts as it relates to potential investments.

Yeah, and just to add on, I would also expect that there will be a stimulus package on infrastructure spend, and that certainly help us going forward.

Great. And just a follow-up question. Perhaps you can talk more about automation solutions and driving the growth engine as we get to a run rate normal at this point. next year and kind of what your expectations are for that piece of the business as it develops. And I'm sure as it develops, there will be a good incremental impact on the margin line.

Sure, yeah. As the world shifts more towards a focus on increasing safety, uptime, and productivity through automation technologies that are now available through the solutions that we provide, as well as in a defensive posture trying to position their own enterprises against the risks of a second wave of a pandemic or the needs for social distancing. I think we're well situated to grow along with that trend to more automation in place. Clearly, customers want to make sure that they are limiting risks as well as improving productivity, and we think that those solutions continue to expand in importance as customers deploy their capital. That coupled with reshoring, with, you know, growth in terms of order fulfillment requirements, I think we're going to see a trend that will help us further as we advance. And clearly those are higher value solutions for our customers.

Thanks for taking my questions.

Thanks, Chris.

Our next question is from John. Tanwen Tang with TGS Securities. Please proceed with your questions.

Good morning, gentlemen. Thanks for taking my questions and a nice quarter. I just wanted a little bit more clarity on the recovery commentary you made a year out from here. You did $215 million-ish in revenue both Q3 and Q4 2019. Is that the bogey that we're looking at? And maybe to follow up on that, You know, what kind of EBITDA margins do you expect at that level, given all the continuous improvements you've made in cost and efficiency and all that in the past year or so?

Yeah, I mean, I think that when we talk about a level of orders that is kind of a normal run rate, we think in the order of maybe 200 to 210 million is the way that we think about a normal run rate for the business. And, you know, we're anticipating based on our own internal forecast, as well as the economic recoveries that are being forecasted, that we would be at that rate as we head into the same quarter next year. And so, obviously, you know, there's some forecasting going on there, but that's what we're anticipating at this stage. And clearly, with the work that we've been doing with the business to make the company stronger, to address our RSG&A costs, as well as to continue to improve our cost of goods sold position, we anticipate that we would have EBITDA margins that would be improved from the rates that we were experiencing when we were last at those run rates. Greg, is there anything that you want to add to that? Yeah, thanks.

So, you know, just to level set everyone on the call, so we were about 15.7% adjusted EBITDA margin in fiscal 20. I'd expect that, you know, we're at least, you know, 100, 150 basis points north of that with all of the improvements that we've made. So clearly, you know, progressing towards the 19% EBITDA margin, but, you know, certainly this upcoming fiscal year is still going to be a year of recovery for us.

Got it. That's really great, Collin. Thank you. And then just, Greg, one more thing I heard you mention in the gross profit bridge. You said that there is some – I think there was a headwind associated with the product simplification. Could you talk about that a little bit? Was it just the ramp-up process, or is there something else going on in the hood that we should think about?

No, it wasn't with product line simplifications. It was with the consolidation. So, you know, the consolidation of the factory in Ohio, you know, certainly had some challenges as trying to do that in the midst of a pandemic. And so that's really what I was referring to.

Got it. So was it a little bit over cost or a little behind schedule, maybe a little both? I'm just trying to figure out what that was.

Yeah, I would say, you know, with some of the challenges we've had, not only, you know, I would say implicit to Columbus McKinnon, but certainly with the supply chain for some of the components in the product that was transferred over, we've had challenges. We incurred, you know, expediting fees to get product components into our facility that took over the bulk of the product line that got moved. Got it. Understood. Thank you.

Thanks, John.

And our next question is from Walter Littag with Seaport Global. Please proceed with your question.

All right. Thanks. Good morning, everybody. Good morning, Walt. I wanted to do a couple of follow-ups. One, on the last question that you talked about with the 200 to 210 million of orders, and I just want to make sure I understand this, that you're thinking that when you get back to that level of orders, you should get about 150 basis points of margin.

Is that right?

Yes.

Yeah, probably, you know, somewhere between 100, 150. Okay.

And then, you know, you guys are doing 80-20, so I would imagine that on top of that, there's going to be some benefits from 80-20, or is that leverage and 80-20 projects?

Yeah, that's already included. You know, it's really everything we've done to date, you know, that's gotten us to where we've gotten to, plus what we, you know, have planned going forward.

Okay. Okay. And last quarter? Up through that recovery period. So just up through the point at which we get to those run rates again. And so that's the point. But those – then, you know, in the years that follow, there's additional opportunity. Okay.

Right, you guys talked about doing product line simplification, PLS, in the future. I wonder, have you started on that, and is that in that 100 to 150 basis points of margin?

Yes, our progress through to that point is included in that number, and then there's work that continues beyond that.

And that's why I think we've talked about this in the past. So product line simplification is really the one tool in our 80-20 that, you know, we think has a lot of room yet to advance. And, you know, Columbus McKinnon is a relatively complex company. We have a lot of different SKUs, and we think that there will be a big advantage to simplifying our product line in our portfolio. But that one will take time. But, you know, we utilize a strategy deployment process as well, and that is one of the the top two items that were pushing this over the next year to 18 months. Okay, got it.

Okay, thank you for that. And I wanted to ask about the incoming order rates. I think you said that the daily order rates were up to catch that rate 15% for the last 15 days?

No, 8.5% versus Q3. Oh, okay, wishful thinking. Yeah, no, okay.

The first 15 business days of January.

So, you know, 8% over the first 15 days, Kevin. Yeah. Okay. Is that because of project work that's beginning to come through, do you think, or are you seeing it in the channel as well?

Yeah, it's actually split, you know, probably about 55-45 in terms of run rate versus project. So projects represent a portion in and quarterly run rate is a portion. And actually, I was looking at the wrong number here. Apologies. It's about 13% project-driven and about 4% quarterly-driven. The one was pretty hidden there, so I was quoting the wrong number. It's 4% quarterly run rate and 13% project, averaging the 8.5.

Okay. So the project work is significant. I wonder if you took all those different things, all those different projects that you're working on in clean energy and EVs and defense and LNG and things, and what size of an opportunity is that?

Yeah, I mean, it's something that obviously there are big drivers around the demand there, and things are moving in a way that is increasing our activities. And so our typical rail or transit project, as there's a shift to more public transportation driven by electric vehicles or hydrogen-powered vehicles, is on the order of a million to three million, let's say, in terms of range, and those are for roof working platforms for high-speed train maintenance or bus station maintenance work. And then as we think about orders that might be more in line with the typical, you know, automotive vehicle-related activities, we're seeing orders that are in the million, million and a half year range on a year-to-date basis. So, you know, I think there's You know, there's an acceleration of that, but it's not enormous, if you will. Okay. Okay, good quarter, guys. Thank you. Thank you. Thanks, Walt.

And again, as a reminder, if you have any questions, you may press star 1 to enter the queue. Our next question is from Christopher Keller with Loomis Sales. Please proceed with your question.

Good morning. Thanks for taking the question. Regarding your future M&A decisions, do you have any debt leverage ratio policy that you would be seeking to abide by?

We do, and I'll let Greg take that one first.

Sure.

So maybe the best thing is to look at, you know, kind of history, and when we bought Stahl, You know, temporarily we flexed our leverage ratio up to about 3.7 times leverage, but we had a pretty clear line of sight on being able to deliver quickly, which we clearly did, you know, in a very short period of time where most people would say we're under levered today. Our overall target in general is to be about two times levered. We would flex up if need be, you know, maybe to a stall sort of a level, but, you know, clearly with the understanding that, you know, we have the ability and would be able to very quickly deliver.

Okay, great. Thanks. And then last question is regarding your sustainability initiatives. Thank you very much for proactively addressing that on your slide deck. I was wondering if you could give us some sense of what you think the material risk factors are for the environmental, social and governance pillars or your general sustainability risk factors? Nothing detailed. I know I recognize you're going to come out with something on that later. I'm just trying to understand what you think the key risks are and how you can go about addressing them. Thank you.

Sure. Thanks, Chris. And as we focus on sustainability and our overall approach there, We've been really working to drive opportunities that are both quick hit opportunities and then more longer term, you know, strategic opportunities that we're addressing. And we've brought on board a full time resource who's helped us to organize around that. And we've got a tremendous amount of enterprise engagement around our approach. We've been able to get some information out. about the company and about our policies and about our approach that I think have helped us to drive some improvements in our assessments as it relates to the social and governance scores associated with ESG. And as you look at our environmental scores, we haven't seen as much of a progression there in terms of the outside agencies' assessments and ratings. But we have been very focused on driving improvements in those areas, and I think have a pretty good story to tell. It's just a matter of telling it. And so we're working to make sure that we have that material available. We've established our baseline measurements and targets for improvement, and we're driving a lot of work around site green team initiatives that drive improvements across the overall organization. I feel like we're making great progress. I'd say that's our most material area of opportunity. And, you know, overall, I think we're in a pretty good position. It's more a matter of getting the information communicated and being in a position to leverage the momentum that we've built up and the engagement we have across the whole enterprise to drive those improvements.

Okay. Thanks very much. That's all for me.

Terrific.

Thank you.

And we have reached the end of the question and answer session, and I'll now turn the call over to David Wilson for closing remarks.

Great. Thank you, Shamali, and thank you, everyone, for joining us today. Our agile management team and the tools of CMBS are driving solid operating results in a difficult environment. We're realizing sequential growth, generating cash, and delivering better than we have historically in downturns. The improving landscape is encouraging. And importantly, we are making the pivot to growth with the evolution of our strategy to Blueprint for Growth 2.0. We are looking forward to talking with you soon about our progress. Stay well and have a great day. Thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.