Columbus McKinnon Corporation

Greetings. Welcome to the Columbus McKinnon Corporation fourth quarter fiscal year 2021 financial results call. At this time, all participants are in a listen-only mode. If we have a question and answer session, we'll follow the formal presentation. If anyone should require our assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Deborah Palowski of Investor Relations. Ms. Palowski, you may now begin.

Thanks, Rob, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are David Wilson, our president CEO, and Greg Rustwitz, our chief financial officer. You should have a copy of our fourth 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 at our website, columbusmckinnon.com. David and Greg will be reviewing the results of the quarter, our strategy, and outlook. Then after the formal presentation, we will open the line for Q&A. We kindly ask that you ask only one question with a follow-up question, and then please get back in the queue to allow for a continuous flow and adequate time. If you'll return to slide two in the deck, I will first review the Safe Harbor Statement. You should be aware that you 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 by the company 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. With that, if you'll turn to slide three, I will turn it over to David to begin. David?

Thanks, Deb, and good morning, everyone. Fiscal 2021 was an unprecedented year, and we were happy to end on a high note. We believe the excellent execution of our strategy by the team and the development and deployment of our enhanced Columbus McKinnon Business System, or CMBS, were crucial to our success. As markets have been recovering, we have responded with agility to increasing customer demand. As a result, sales grew 12% sequentially to $186 million, which was at the higher end of our updated guidance. Our team worked hard to drive efficiencies against headwinds as well. Fourth quarter adjusted operating margin was 10.1% compared with 10.7% last year. Our 80-20 tools continue to contribute to our earnings power. 80-20 provided approximately 2.9 million in operating income in the quarter to help offset the headwinds that both COVID and the supply chain presented. Despite the pandemic, we were able to achieve 11.8 million in contribution to operating income during fiscal 2021. While not as visible in the year because it offset the operational headwinds associated with volume declines, we expect our efforts to be rewarded as volume returns. We generated $27 million of cash from operations during the quarter and nearly $21 million in free cash flow. By year end, we had dropped our leverage ratio to nearly 0.6. In the wake of our recently successful debt refinancing, which Greg will address in a moment, our net debt leverage ratio is about 3.4. We expect to get that back down to our target ratio of two times within two years, excluding any additional acquisitions. A strong sequential increase in quarterly order flow drove backlog up 13% over the trailing fiscal third quarter and up 31% year over year. As you look at slide four, our focus on 2.0 led us to identify and pursue the acquisition of Dorner Manufacturing, which we completed just following the end of the fiscal year. This acquisition created an additional platform from which we can expand our intelligent motion solutions in higher growth and markets. Specialty high precision conveying puts us at the center of the industrial automation equation. Backlog for Dorner at the end of April more than doubled over the same time last year to nearly $40 million. This is slightly ahead of our expectations when we closed the acquisition at the beginning of the month. Our organic efforts were successful as well and accelerated in contribution throughout the year. Despite the pandemic, new product revenue, or N-3 revenue, which is revenue from products introduced in the recent three years, was up 22%. This is the second year in a row we have exceeded 20% growth with our vitality index. I should point out that new product innovation is also key to Dorner's growth. We are prioritizing efforts to bring their ingenuity and precision conveying to a broader customer base while continuing to introduce new conveying solutions to the market. With that, let me turn it over to Greg for a review of our financials.

Greg? Thank you, David. Good morning, everyone. On slide five, net sales in the fourth quarter were $186.2 million, down 1.7% from a year ago. As David noted, this sales level was at the upper end of our updated guidance for fourth quarter revenue of approximately $184 million to $187 million. We continue to see demand improve sequentially and are closing the gap to pre-COVID revenue levels. This fourth quarter felt more like a normal fourth quarter as we saw stocking orders begin to return in our short cycle businesses. Looking at our sales bridge, sales volume was down only 11 million or 5.8%. We did realize positive pricing as we saw year-over-year pricing improvement by 1%. Foreign currency remains a tailwind and increased sales by 3.1% or $6 million. Let me provide a little color on sales by region. For the fourth quarter, we saw sales volume decline in the U.S. by approximately 10%. This was partially offset by price increases of 80 basis points. Non-U.S. sales volume was down approximately 1%, which was more than offset by price increases of 1.2% and favorable foreign currency translation of 6.9%. By region, sales volume was down 16% in Canada and down 19% in Latin America, But EMEA was down less than 1 percent, and APAC saw volumes increase 19 percent, albeit off of a small base. We did push through normal price increases to start the fiscal year, and we announced a second price increase last week to help offset inflationary pressures in commodities and labor costs. The second price increase will be effective at the end of June and will help preserve margins next quarter. We will continue to monitor inflationary pressures going forward, and we'll take further actions if necessary. On slide six, we saw our gross margin improve sequentially to 34.4%, which compares with 34.9% last year. Sales volume is still below last year by 11 million, which affects our fixed cost absorption in our factories. We also faced supply chain and logistics challenges, which led to inefficiencies in our factories. We are still benefiting from our 80-20 process, which contributed approximately $2.9 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions, and factory closures. We are doubling down on product line simplification this year and are making good progress with SKU and component reductions. Unfortunately, this part of the process takes longer. As you have to phase out existing products and utilize existing inventory to avoid write-offs, this effort will pay dividends over a longer horizon. Let's now review this quarter's gross profit bridge. Fourth quarter gross profit of $64.1 million was down $2.1 million compared with the prior year. This was driven by two factors. First, we saw a $3.6 million reduction in gross profit due to lower sales volumes compared to a year ago. We also experienced negative productivity net of other cost changes of 4.5 million, largely due to supply chain issues and COVID-related labor inefficiencies. In addition, freight carriers have also been impacted as we see higher costs and longer transit times. We did see gross profit expansion from pricing net of material cost inflation of 1.7 million, which includes about 200,000 of material cost inflation in the quarter. Foreign currency translation increased gross profit by $2.1 million. Factory closure costs and business realignment costs together were lower this quarter by $1.8 million. As shown on slide 7, RSG&A costs were $46.7 million in the quarter or 25.1% of sales. Included in this total were $4 million of donor acquisition deal costs, which we have included as a pro forma item in our adjusted operating income adjusted EBITDA, and adjusted EPS calculations. Excluding these costs, RSG&A costs were actually 3.5 million lower than the previous year, despite 2.3 million of higher annual incentive costs and stock comp costs compared with the fourth quarter a year ago. This improved level of RSG&A was due to several factors. We had lower selling costs of 1.4 million, resulting from cost-saving measures, including lower headcount and limited travel. G&A costs were down $2.9 million compared with the prior year, if you exclude the donor acquisition deal costs of $4 million that I just covered. We also continued to invest in R&D to drive organic growth, so those costs were actually up $800,000. FX Translation also added approximately $1.2 million to our RS G&A costs, which also makes this year over year performance that much more impressive. As we move into the new fiscal year, we are increasing our Q1 estimate for RSG&A to approximately $50 million, which includes the impact of the donor acquisition. Donor adds about $7 million quarterly to our legacy RSG&A base costs. As sales increase throughout the year, variable sales costs will increase. In addition, we plan to continue making investments in R&D and will implement merit increases in July to reward our employees. As a result, we would expect our SG&A costs to increase modestly throughout the remainder of the fiscal year. Turning to slide eight, adjusted operating income was $18.9 million. Adjusted operating margin was 10.1% of sales, only down 60 basis points from the prior year. We are close to returning to pre-COVID margin levels as we see volumes return. We have also made structural changes to the business in the past year to improve profitability, which are beginning to show up. Decremental adjusted operating leverage for the year was 30.5%, which is significantly better than what we saw during the Great Recession of 2009 when we experienced decremental operating leverage of 38%. I would like to point out that while we are still finalizing the purchase accounting for the Dorner acquisition, we expect total amortization expense to increase to $6.5 million per quarter, as Dorner will approximately double the historical level of amortization expense we have had post the stall acquisition. As you can see on slide nine, we recorded GAAP income per diluted share for the quarter of 39 cents. Adjusted earnings per diluted share were 50 cents, which were up substantially on a sequential basis, but down 8 cents per share from a year ago. We still believe that Dorner will be accretive to FY22 earnings per share by 5 to 10 cents. We are still working through the impact of the FY22 GAAP effective tax rate, given the complexities of the Dorner acquisition, and we'll provide our estimated tax rate in July when we report our Q1 earnings. In the meantime, we continue to use 22 percent as our normalized tax rate for computing adjusted earnings per share. In addition, there have been substantial changes to the capital structure of the company, and I want to be sure that we are transparent with the impact that this will have on Q1. With the initial $650 million bridge financing outstanding for half a quarter, the debt pay down from the equity offering and the permanent $450 million term loan B financing outstanding for half a quarter, we expect interest expense in Q1 to be approximately $7.5 million. With the additional shares from the equity offering, our share count for average diluted shares outstanding in Q1 is expected to be 27.2 million shares. On slide 10, our adjusted EBITDA margin for fiscal year 21 declined to 11.9% because of COVID-19. Our return on invested capital of 6.6% was similarly impacted. We continue to target 19% EBITDA margins and expect our ROIC to be greater than our WAC in fiscal year 23. Dorner will help us achieve our 19% EBITDA margin one year earlier than we would have otherwise done. We remain highly confident that our strategy will enable us to drive profitable growth and achieve these objectives. Moving to slide 11, We generated $20.5 million of free cash flow this quarter and an impressive $86.6 million in fiscal year 21 despite the pandemic. We took rapid actions to preserve and generate cash and utilized our strategy deployment process, which is part of our business system, to focus on working capital reductions. Our working capital as a percent of sales improved to 9.3%, which was a significant contributor to our free cash flow improvement. We drove our days sale outstanding or DSO performance down to 51.5 days and improved our days payable outstanding to 58.7 days. Inventory turns also improved to 4.4 turns. We expect CapEx of 20 to 25 million in fiscal year 22. This includes CapEx for Dorner of approximately 3 to 4 million. Turning to slide 12, We have been very busy refinancing the capital structure post-Dorner acquisition, and I am pleased to report that we even exceeded our own internal expectations. We utilized the $650 million bridge loan to acquire Dorner, paid down our previously existing term loan fee, and paid various fees and expenses associated with the acquisition. We then issued $207 million of stock in an upsized equity offering in which the underwriter also exercised the green shoe provision. This equity was issued at a price of $48 per share and resulted in net proceeds of $198.7 million, all of which was utilized to pay down the initial bridge loan. Right after the equity priced, we refinanced the remaining initial bridge loan with a $450 million term loan B at LIBOR plus 2.75% with a 50 basis point LIBOR floor in 99.75 price. This was on the tight end of the price talk, and gives us a low-cost, flexible capital structure that will serve us well for the coming years. With the completion of the equity offering and debt refinancing, we estimate that as of March 31st, on a pro forma basis and excluding cost synergies, we would have been at a 3.4 times net leverage ratio using both ours and Dorner's 331 LTM adjusted EBITDA. Finally, Our liquidity remains strong, which includes our cash on hand and revolver availability, and was approximately $155 million at the end of April. Please advance to slide 13, and I will turn it back over to David. Thanks, Greg.

As you can see on slide 13, orders continued to improve sequentially in Q4, and were up 24% versus Q3. We have seen improvements continuing in many markets. Projects that were previously on hold are now being released, and new projects are being quoted. This is all very encouraging. We also saw the beginnings of inventory restocking in our distribution channels for the first time in two years. I should point out that there is a degree of seasonality in our orders. We typically have stronger demand in the fiscal fourth quarter, whereas orders in the fiscal first quarter tend to decline sequentially. This reflects distributor purchasing behavior in advance of annual price increases. We know that year-over-year comparisons for the first quarter in fiscal 22 will be favorable, considering what was happening at this time last year. In fact, through last week, the average daily order rate for our lifting business was up over 50 percent compared with last year. Book-to-bill for the fiscal fourth quarter was greater than 1.1 to 1. Demand was strong in defense and government with a variety of projects, including shipbuilding and material handling automation at supply depots, among other projects. Demand from energy markets globally was encouraging. Utilities were stocking up for summer grid work in advance of the hurricane season. We also had requests for solutions in nuclear and thermal power generation facilities. Demand for our fixed venue entertainment products has been improving. Inquiries in this market in general are picking up. We would expect to continue to see this trend improve and to start seeing this convert to orders for touring shows as we progress through the year. Both short- and long-term backlog were up sequentially. Short-term, which is expected to shift within the first quarter, grew nearly 15% to 104 million, while long-term backlog was up nearly 10%. This does not include approximately $40 million of additional backlog from Dorner. We are entering fiscal 22 in a solid position with the expansion of the markets we serve, our strong competitive position, and the tailwinds of recovery. Please turn to slide 14. For the first quarter of fiscal 22, we expect net sales to range between $212 and $217 million. This, of course, includes the Dorner acquisition. The addition of the specialty conveying solutions platform diversified our markets into those with enduring tailwinds. We are seeing strong demand from e-commerce, life sciences, and food processing industries. With this platform, we are accelerating our pivot to growth and improving our margin profile. As to the supply chain, we are actively addressing inflation shortages, and logistics constraints. We began implementing additional price increases this month and are working closely with our suppliers to get better purchasing and delivery performance. We have historically been able to cover material cost inflation and believe we are positioned to continue to do so. Looking beyond the next quarter, there is a lot that makes us excited about where we are headed. We are driving progress with our strategy and employing new business tools to drive scalability. We expect to deliver growth through targeted organic initiatives, including opportunities within our specialty conveying solutions platform. And while de-levering our balance sheet and integrating Dorner are high priorities, we will continue to actively develop our M&A pipeline. Turning to slide 15, I'd like to remind you of our Blueprint for Growth 2.0 strategy. CMBS provides the foundation and our core growth framework defines the potential that we have in front of us. We truly believe there is a lot to look forward to here at Columbus McKinnon. With that, Rob, we can open up the line for questions.

Thank you. We'll now be conducting the question and answer session. To ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question today comes from the line of Mike Schliske with Collier Securities. Please receive your questions.

Hey, good morning. I want to ask quickly first about the backlog at Dorner. You mentioned it had more than doubled year over year, I think, in the quarter. Can you remind us, last March, to your knowledge, was there a very large dip at the very end of the quarter last year, kind of like what you saw? Or is it very apples to apples, really pre-pandemic for them comparison?

Yeah, I think the pandemic might be a good question, of course. I mean, as we look at the quarter ending March for them in the prior year, The pandemic was early in its cycle. I think their backlog was around $17 million at that time. And they saw the first quarter of our period last year. So our first quarter, their second, I'm sorry, their third quarter in their annual cycle was their worst, if you will, from the pandemic. So remember, they have a year end in September. And so that would have been their fiscal third quarter, which is equivalent to our first fiscal quarter of 21. And that was the period when they were impacted the most by COVID. But their March ending balance, or what we refer to as their April ending balance at $40 million, is up about, you know, it's more than double. I think it was $17 million at the time that we're referring back to. Okay.

Okay. And then my follow-up, you had mentioned in the slide that you're still looking at 19% down margins in fiscal 2023. Do you anticipate that being a full-year type of scenario or just kind of scratching by the end of the year as an exit rate? Kind of some sense as to what does that 19% target mean to you for next fiscal year?

Yeah, hey, Mike, it's Greg. We're looking at that as being the average for the full year.

Average, okay. Wow, guys, well, that's great. That's great color. I appreciate it, and I'll pass it along.

Thank you. Our next question is from the line of Michael McGinn with Wells Fargo. Let's just use their question.

Hey, good morning, everybody. Hey, Mike, good morning. Morning. So you walked through some SG&A numbers, and I think the SG&A ramp you said was $7 million from with Dorner. and then amortization on top of that. Does that $7 million include – is that fully burdened with R&D and everything?

Yeah, so just to be clear, amortization is not included in RSG&A costs. Legacy is $43 million. Dorner is $7, and that gets to the $50 million of RSG&A. And as I mentioned, we do expect to ramp our spend for new product development, which falls into R&D.

But that 50 includes the R&D and we're going to continue to make select and targeted investments in growth throughout the year.

Got it. You also alluded to some pricing, the second pricing increase, and that your backlog is filling up a little quicker with the shorter cycle distribution products. Can you walk us through what the expectations are for price increases on the front end, shorter cycle products being delivered in the front half and then maybe projects picking up the back half, what your incremental margin estimates or assumptions would kind of be in a scenario like that?

Yeah. So, Mike, we're working to make sure that we're out ahead of the inflationary pressures that are out there in the market. And so our second price increase is really targeted at ensuring that we stay positive as it relates to net price versus inflationary pressures. So we're not seeing this as an action that expands margins specifically in the second price increase. It's more of a movement to make sure that we're out ahead of inflation and The back half, as it relates to longer cycle projects, you know, we obviously price them as an engineered-to-order project off of, you know, an understanding of the market value of the project, the competitive landscape, and then, you know, the pricing pressures on the cost base. And so we'll be making sure that we have the appropriate adjustments in there, you know, to ensure that we're maintaining, if not expanding, margins.

And just to add on to that, Mike, so with engineered-to-order product, Because it's a unique SKU, we don't count that as price. And so our price calculations are year-over-year by SKU what the change in price is. So with engineered order, every time you quote, you have the opportunity to adjust your input costs in our quoting software. So when we talk price, it's really just on standard short cycle product that was sold in the previous year. which is about half of the business. So when we talk about 1% price realized in the quarter, you might think of it as really it's 2% on what we're actually raising prices on standard product, but there's also pricing embedded in engineered to order products based on how we're quoting it and how long and adjusting the input costs for that.

Got it. And if I could sneak one more in on the CapEx number, is this sort of a catch-up plus integration, or is this the run rate to use going forward for the combined business?

Yeah, I'll take that. So, in general, this is probably a more normal level of CapEx at the 20 to 25 million. We spent 12.3 million this past year. In other years, we've been as high as $20 to $22 million on just the legacy Columbus-McKinnon. Dorner is typically in that $3 to $4 million range, and that should be plenty on a go-forward basis. So I would think that this would be a good number going forward. Got it. Appreciate the time.

Thanks, Mike.

The next question is coming from the line of Chris Howell with Barrington. Please proceed with your questions.

Hey, Chris. Good morning, everyone. Thanks for taking my questions. As far as the guidance that we've kind of discussed for the first fiscal quarter, can you talk in more detail as to how this may look for a Dorner sales expectation? And in the context of this fiscal year, can you remind me again about Dorner seasonality and its comparisons over, let's say, your last fiscal year? And that's a lot of too many questions on there, but the previous Dorner expectations laid out for their year ending September 30th, are those still in line?

Yeah, Chris, let me jump in and then I'll ask Greg to help out. So, Dorner's performance is tracking consistent with our expectations at the acquisition timeframe. And as I mentioned in my opening comments, you know, even slightly ahead of those expectations, and so we feel really good about where the business is. Their order development has been really promising. From a cyclicality standpoint on their build to order business, which is their base business, it's relatively, I'd say, stable. The Q3 Columbus-McKinnon period tends to be their highest period. at the calendar year end, and then that goes into the Q4 period at a slightly lower level. But Q1 and Q2, if there is any seasonality, would tend to be a little bit lower on the build to order in a general cycle, if you will. But that's exclusive of, you know, more macro drivers, which includes a lot of activity in the life sciences and e-commerce sectors. And so we're seeing terrific development in terms of order pipeline there. On a year-over-year basis, their orders are up on a quarter-to-date basis materially. You know, we had, again, first quarter last year was their worst quarter. When I say first quarter, I'm referring to Columbus-McKinnon's quarter. So, yeah, really good developments there. And, Greg, I don't know if you have anything you want to add to that.

Yeah, so just to add on, you know, from a seasonality perspective, we don't really see seasonality in the business other than the number of working days. So when David talks about our December legacy quarter being less for them, it's really a function of the, you know, Thanksgiving holidays, Christmas holidays. But there isn't really that cycle. And given the growth trajectory that they've been on, you know, they've been kind of blowing through, you know, any kind of concept of seasonality. Now, you know, we did give a couple of markers on revenue as part of the S-1 filings and 8K-8 filings where, and when we announced the donor acquisition, I think through December, the revenue was about 98 and change, 98 million and change.

September period, I think.

Yeah. And then we said for their September, It was about 124.7 is the number that I recall, which says that there's been, you know, there's a tremendous amount of growth that's happening in the second half of the year, and that is just continuing. So, you know, we're very pleased with, you know, the first month and a couple of weeks that we've owned Dorner. It's a very profitable, high-margin business with a really great double-digit growth trajectory. Yeah, and a fantastic team.

So we really, really feel good about where we are, and we're excited about how things are coming together right now and working really hard on all the things that we've committed to do to make sure that we exceed or we achieve and exceed our targets.

That's great. And if I may squeeze another question, it won't be a series of questions, but as it relates to Dorner and some of your comments in the press release, David, you said strategic opportunities in a fragmented market. Can you perhaps expand on this, on this thought, and perhaps how it may relate to the different opportunities that you're seeing in your inorganic pipeline?

Sure. So the market that Dorner serves is a global market that approximates $5 billion. They're obviously at the rate that Greg was just referring to, a small piece of that total market. But there are two other major global players in addition to Dorner, and then we see a long tail of fragmentation. And Dorner today has a very large percentage of their business. Approximately 85% of their business is in the U.S. and the balance overseas. And so as we look at the competitive landscape and we look at the the market, there are a number of nice niche technology opportunities. There are also opportunities that enable more global scale. And there's just a tremendous runway and a nice pipeline of opportunities that exist. And obviously, we're very focused on what's right in front of us and making sure that we execute to the plans that we've committed to. But the pipeline of opportunities are really nicely concentrated in areas that we think will be very attractive for Dorna.

Very helpful. Thanks for taking my questions. I'll hop back in the queue.

Great. Thanks, Mike. Our next question is from the line of Greg Palm with Craig Callum Capital. Please proceed with your questions.

This is Danny Agerich on for Greg today. Thanks for taking the questions. Hey Danny, morning. Hey, I appreciate the color on, it sounds like Dorner growth rates have been accelerating recently. I'm wondering if you could kind of dig into the drivers behind that at all. Certainly with the labor constraints, a lot of companies are putting more emphasis on warehouse automation. Just anything you're seeing from that perspective?

Danny, I'm sorry, you broke up just a little bit there in the front end of the question. So you're asking about order rates in Dorner, just to confirm?

Yep, yep. So, I mean, just it seems like order rates have been accelerating recently. I was just kind of wondering what the drivers were behind that. I know with the labor constraints, it seems like companies are putting more of an emphasis on warehouse automation in their distribution centers. So just wondering what you're seeing there.

Sure, we're certainly seeing that as well. The two primary markets that we're seeing most of the significant activity, and although all across the board markets are pretty favorable, but it would be life sciences, and that's primarily concentrated around pharmaceutical automation, if you will, pharmaceutical distribution automation in the life sciences space, and then e-commerce growth. and that's, you know, in terms of warehousing and order fulfillment activities. So, yes, a lot of demand generation coming from those areas, and the order pipeline, you know, continues to develop positively, and, you know, we're starting to receive more and more commitments from customers for orders that will come in the future relative to that opportunity, and we're pretty encouraged.

Got it. That's good. And just piggybacking off one of the last questions on I think you were mentioning inorganic growth opportunities on a worldwide basis. What is the opportunity organically for Dorner for geographic expansion?

Dorner has historically grown on a year-over-year basis organically at about 13% over the last five, seven years on a CAGR basis. And so in a really attractive organic performance profile, clearly the work we're doing together is focused on driving incremental growth beyond that. We've got a nice set of opportunities that exist from a channel synergy standpoint and from a geographic expansion perspective, particularly as we look beyond the US into Europe. And so we've got reach that they don't necessarily have, legal entities and, you know, the opportunity to plug resources in to help them scale. And then as it relates to Columbus McKinnon product that hasn't had access to some of the channel partners that Dorner enjoys, we have the opportunity to bring some of our actuation and other overhead workstation crane products through their channels for growth. So there's some really interesting opportunities that are organic and synergistic in both directions on top of the already terrific performance that they've been delivering. And remember, they've been owned and operated under a private equity structure for the last seven years. They've been somewhat capital constrained, and we're working with them to expand capacity and make sure that they can scale to accommodate the growth opportunities that are in front of them. So I think the organic growth opportunities will be material in addition to the acquisitive opportunities.

All right. That's really helpful. I'll leave it there. Thanks. Great. Thanks, Danny.

Our next question is from the line of Matt Somerville with DA Davidson. Pleased to see you with your question.

Thanks. A couple questions. First, I was wondering if you could comment on where you think we are with respect to distributor inventory levels currently versus prior up cycles and maybe what inning we're in with the restock process.

Good morning, Matt. I guess I haven't lived through those historic cycles, but I'm trying to get as smart as I can on it. I'll let Greg comment a little further after I highlight, but we saw Channel partners lean in in Q4 and start to place orders for the first time in a couple of years and lean in positively towards where the market was going. And since then, we've seen that lean become more forward-leaning, if you will. become accelerated. And so we see our customers beginning to open up. I'd say we're in, you know, what we're reporting here in Q4 is the beginnings of that. On a quarter-to-date basis, we're up about 70% short cycle through in comparison to the prior year. So, you know, that's kind of May through the first three weeks of May. And our project business is up about 30% year over year in that same cycle. So when I commented that through the first three weeks in May, we see orders up year over year, approximately 50%. That's the split. And what the short cycle demand increase would indicate is that, you know, our channel partners are leaning in a little bit further on inventory and, you know, being bullish about it. But I'd say we're in the early to mid-innings in terms of restocking.

Yeah, I just to add on that I would, you know, having been here for a while, this is substantially less than what we would typically see. And the stocking always would take place in or the orders would come in the March timeframe with delivery, either in March or in the first quarter of the next fiscal year. So while we did see stocking orders still significantly below what we would normally see.

And then I apologize if I missed it to a prior question. Given the moving pieces associated with how raw material costs are rolling through, how your pricing schematic is going to play out this year, how should we be thinking about core incremental margins in the base business X norm this year?

Yeah, so with the pricing that we've implemented, we want to be sure we stay ahead of the inflationary pressures that we're going to see. We have inflationary pressures in raw materials and freight and labor costs. Not that that's unusual, but in the past year, we really did not provide increases to our associates. So there's going to be a bit of a catch up here starting in July. But I think all in, we will You know, expect that we'll cover inflation and maybe have a little bit of upside to it like we always do. But this is really meant to cover the inflationary pressures that we are expecting.

Yeah, so I think the net comment is we don't expect any erosion and we're anticipating that we'll be able to lean in a little bit more.

Yeah. Got it. Thank you, guys.

Thanks, Matt.

Thank you. Our next question is from the line of John. Ten Wing with CGS Securities. Please receive your questions.

Hey, good morning, guys. Thank you for taking my questions. Maybe just to drill down on the previous question a little bit further for the first quarter. Do you expect any gross margin deterioration just in that quarter because the price increases don't take place until June and then maybe end up the year up as those roll through? Or is it more of you're still able to stay ahead based on the price increases that you already did?

Yeah, we would expect that we'll still be able to stay ahead, John. I mean, because if you recall, we implemented our normal round of price increases that took effect some in January, some April 1st, some in the U.S. the third week of March. And so those are all in place. And we should not expect any erosion of margins as a result of inflation in the first quarter. But we're once again, we're trying to get ahead of what we anticipate coming down the road.

Okay, great. And then since you've announced your next price increase, are you seeing another spike in demand from people who are trying to stock up ahead of that rolling through, kind of counter season before you usually see?

No, nothing material yet at this point. As Greg indicated, we announced last week we've had a lot of positive discussions with our channel partners and customers. They understand, they're expecting it, and it's not a challenge as it relates to implementation at this stage, and we haven't seen a lot of movement in terms of order rates in the short term that we've been talking about it.

Okay, great. And then, Greg, just, you know, great job on the cash flow once again. You know, do you see that reversing out as you grow this year and maybe building inventory like some of your customers may have been, and it seems like everybody in supply chain is trying to if they can?

Yeah, no, that's exactly what we would expect to happen. You know, as we look at free cash flow going forward, we're going to have higher interest expense as a result of the refinancing that we've done. We're going to have higher CapEx. Working capital is going to be significantly higher. We did benefit in our accrued liabilities. Our working capital's percent of sales was, I think, 9.3%, but that benefited from a derivative that was classified as current. And so our more normal working capital's percent of sales is going to be in the 14 to 15 percent area. So we would expect, you know, free cash flow isn't going to be as rich as it was this past year. And, you know, the bulk of it really coming from an increase in working capital as we expect revenue to improve. And then on top of that, we also have transaction costs and that refinancing fees that are going to get paid in the month of April or have been paid in the month of April, May. So for all those reasons, we will benefit from Dorner's free cash flow, but net-net, we're going to have less free cash flow in the coming year than this past year.

Okay, great. Thanks. Last small question. Did you have a break as to what Dorner was expected to contribute in the first quarter within your guidance?

We did not. I mean, the revenue number that we've guided to includes both Legacy, Columbus, McKinnon, and Dorner. We broke out the Dorner SG&A at $7 million. We talked about Dorner being roughly $3.2, $3.3 million of additional amortization because we said it's approximately double what we had historically for amortization expense.

Yeah, so we didn't break it out explicitly, you know, in the full P&L. We had a few guides that we provided relative to Dorner performance.

Okay, fair enough. Thank you, guys.

Thanks, John. Our next question is from the line of Steve Farazani with Sedoti. Please receive your questions.

Morning, Steve. To follow up on my last question, I know even if you're not breaking out Dorner, we can sort of which would say that, and I know you're coming off of typically your strongest quarter seasonally, but it seems like maybe there isn't in, you know, pre-Dorn or Columbus McKinnon, maybe you're not looking at much sequential growth, certainly at the low end of your guidance. I'm just trying to figure out if the chip shortage in the automotive business is slowing sales to certain end markets like automotive, or if there are any labor issues, anything that's hampering growth in Q1 that goes away.

Yeah, I don't think there's anything specific from a market perspective that we see as negative as it relates to the sequential activity in the markets. It's more simply sequential performance in the core business based on the cycle in the market. So we see a lot of demand that gets placed, as we talked about, given our year-end price increases, et cetera, being placed in the last fiscal quarter of the year. that's not necessarily market development driven. It's more just, you know, get out ahead of price increases, behavior in the channel. And then as we head into Q1, you know, we're anticipating a typical cyclical decline in the core business. But, you know, certainly with, you know, a tendency towards acceleration as we head into the second quarter.

Yeah, the only thing I'd add is, you know, one of the movers to our revenue line is our rail business, which can have some larger projects. And we had a very strong quarter in the fourth quarter from a rail business. And really, just due to the timing of projects in our Q1, there's probably about a $5 million delta in revenue. Yeah, revenue timing, sure.

Good point, Greg.

And then In terms of leverage, and certainly it's easy for us to model out how you get net leverage under two times within two years, given your strong cash flow. But you may have touched on this. What are you thinking about and what are you allowed to do in terms of actual debt repayments and just in general how you're thinking about cash?

Yeah, so from a debt repayment perspective, the term loan B requires – an annual principal payment of 1% per year, which would be $4.5 million, and divide that by four, so $1,250,000 a quarter starting in the next quarter. And then there are what's called an excess cash flow sweep, which is 50% of, in essence, your free cash flow that's due based on your annual free cash flow at the end of March. And it depends on your leverage ratio. I think once we're below three times, that steps down to 25%, and then it steps down again. But that's, we filed our credit agreement, so that's publicly out there. So, you know, we can chat about that later. And, you know, in terms of other cash requirements, you know, pension contributions would be one that we would anticipate that pension contributions will be similar this year. compared to, when I say this year, this new fiscal year versus what we did last year in probably the neighborhood of around $7 million. Okay. Oh, and there are no prepayment penalties on debt. So what we have typically done in the past is we will use any excess cash we have to pay down debt, save the interest expense, and, you know, de-lever quickly. Even though it's a net leverage ratio, we will use excess cash to pay down debt.

Mm-hmm.

So there's no prepayment penalties. And the financial covenant, for those not familiar with the term Loan B, only kick in if we draw down off of the revolver. And if we don't draw off the revolver, the covenant isn't tested. And we typically don't need our revolver for intra-period cash requirements, given our strong cash flow profile.

Dave, are you there? Rob?

Thank you. At this time, we've reached the end of our question and answer session. I'll hand the call over to David Wilson for closing remarks.

Great. Thank you, Rob, and to everyone for joining us today. I'd like to take a moment to thank all of my Columbus McKinnon associates for their resilience and adaptability this last fiscal year. We truly appreciate your dedication to the company and to our customers. We're looking forward to working together to create the bright future that we believe lies ahead for Columbus McKinnon. Appreciate everyone's attention. Hope everyone has a great day. Thank you for your time today, and goodbye. Thank you.

This will conclude today's conference.

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