Columbus McKinnon Corporation

Greetings and welcome to the Columbus McKinnon Corporation fourth quarter fiscal year 2022 financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Southard of Investor Relations. Thank you. Please go ahead.

Thank you, Donna. And good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are David Wilson, our president and CEO, and Greg Westowitz, our chief financial officer. You should have a copy of the fourth quarter fiscal 2022 financial results, which we released this morning before market. If not, you can access the release as well as the slides that will accompany our conversation today. at our website, www.columbusmckinnon.com. After our formal presentation, we will open the line for Q&A. Please limit yourself to one question with a follow-up and then return to the queue to allow for continuous flow and adequate time. If you'll turn to slide two in the deck, I'll 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 the 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 this 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. With that, please advance to slide three, and I'll turn the call over to David to begin. David?

Thank you, Sean, and good morning, everyone. We outperformed expectations with record sales in the quarter and for fiscal 2022, even while we were challenged with the inefficiencies created by supply chain constraints and inflation. Sales in the quarter were up 36% over last year's fourth quarter to a record level of $253 million. Organic growth was a very strong 17%. We're steadily advancing our transformation to be the global leader in intelligent motion solutions for material handling, and Columbus McKinnon is uniquely positioned to help solve many of the critical challenges the world is facing today. We are central to the investments being made in infrastructure, global efforts to localize and rebalance supply chains, the need for automation in the midst of shortages in labor availability, and the need for safe ergonomic material handling in a world of factory automation and direct to consumer delivery. As we executed to meet customer needs and growing demand for our products, gross margin was impacted in the quarter given rapid increases in freight and expediting costs associated with high inflation and the effect that the war in Ukraine and the shutdowns in China are having on the global supply chain. We also completed a large project where we did not recover the full impact of recent material cost increases given the rate at which cost inputs escalated and the strategic nature of that customer relationship. Our operating income was $24 million, and our adjusted operating income established a new record level in the quarter at nearly $29 million. EBITDA margin in the quarter was 15.4%. We are taking further actions to address the risks associated with this unusual operating environment and remain committed to realizing our longer-term financial targets. Fiscal 2022 was a year of significant progress and represents a step change in Columbus McKinnon's business model and mix as we execute on our strategic transformation. We began the year with the addition of a precision conveyance platform through the acquisition of Dorner. This platform expanded our offerings, provided increased access to attractive markets with strong secular tailwinds, and diversified our revenue stream with higher margin business. We later added the market-leading capabilities, high growth, and accretive margin profile of Garvey to this important strategic platform. We also accelerated organic growth through initiatives leveraging our core growth framework, looking outward to our customers and markets to clarify opportunities, while innovating with automation and rethinking our commercial strategy. We also benefited from further core market recovery and increasing demand across targeted secular growth markets. The food and beverage, life sciences, and e-commerce markets remained robust, and the entertainment market began to pick up nicely in the latter half of the year. We ended fiscal 22 with record quarterly orders of nearly $270 million and entered fiscal 23 with a backlog of over $309 million, also a new record. If you'll please turn to slide four, I'd like to highlight the significant progress we made over the past year as we reimagined our portfolio and improved our approach to the markets we serve to unlock Columbus McKinnon's potential. Given this transformative work, approximately 40% of our business is now tied to higher growth, higher margin markets. If you'll advance to slide five, I'll now turn the call over to Greg to review our financial performance in the quarter. Greg?

Thank you, David, and good morning, everyone. On slide five, net sales in the fourth quarter were $253.4 million, up 36% from the prior year period, and significantly ahead of the guidance we provided last quarter. While supply chain challenges continued, we had significant backlog that allowed us to prioritize shipments that exceed our guidance. As David mentioned, it has been a constant struggle to match up material availability with the timing of supplier shipments and customer requirements. This challenge resulted in an estimated $15 million of delayed shipments in the fourth quarter. Sequentially, sales were up 17% as we benefited from strong order rates, incremental pricing, and a full quarter of the Garvey acquisition. Overall, our precision conveyance platform added $40.5 million of revenue in the fourth quarter, which was up 11.3% from third quarter levels. Looking at our sales bridge, sales volume was a major driver of growth with volume up 23 million or 12.5%. We also saw pricing accelerate with year-over-year pricing improvement of 4.5%, which was higher than last quarter's 3.4%. Our pricing actions resulted in $8.4 million of year-over-year price, up from the $5.6 million of year-over-year price we reported last quarter. Foreign currency was a headwind and reduced sales by $5 million, or 2.7% of sales. Let me provide a little color on sales by region. For the fourth quarter, we saw continued strength in the U.S. with sales volumes up 15.9%. We also improved pricing 4.7% up 110 basis points from third quarter levels. Outside of the U.S., sales volume was up approximately 9% as volume increased approximately 40% in Latin America, 15% in Canada, and 12% in APAC. Volume also increased 5% in Europe. We saw improved pricing outside the U.S. of 4.3%, which was 120 basis point improvement over third quarter levels. With the current economic backdrop of significant material inflation and higher freight costs, we took more aggressive pricing actions in the fiscal fourth quarter, which is also our timeframe for implementing annual price increases. We will do what is necessary to protect and grow margins in this environment while balancing customer requirements and maintaining our leadership position. On slide six, gross margin was 33.7%, which included a $3.2 million negative impact from the recent Garvey acquisition for amortization of backlog acquired and inventory step-up expense. This completes the amortization of backlog-acquired and inventory step-up expense, which were both recognized over one inventory term. Normalizing for these items, our adjusted gross margin was 34.8%. This was up 20 basis points from the prior year. Gross margin was lower than what we were expecting as sequential gross margins declined 190 basis points. This was due to rapidly rising costs in the quarter, primarily freight costs, both inbound and outbound, as well as additional raw material inflation associated with ETL projects. In addition, we were also impacted by inefficiencies associated with juggling production schedules due to supply chain constraints. Overall, our precision conveyance acquisitions were 130 basis points accretive to our adjusted gross margin this quarter. Let me point out a few highlights on our gross profit bridge. Fourth quarter gross profit increased 21.4 million compared with the prior year and was driven by several factors. Our acquisitions provided 17.3 million of gross profit. Sales volume and mix added 7.6 million and pricing net of material inflation added three. Offsetting these items were acquisition-related amortization of backlog expense and inventory step-up expense, together representing $3.2 million, and lower productivity net of other cost changes of 1.3 million, which included the higher freight costs that I just discussed. Foreign currency translation reduced gross profit by 1.8 million. As shown on slide seven, RSG&A costs were well controlled, coming in at 54.8 million in the quarter, or 21.6% of sales. With record sales in the quarter, we leveraged our RSG&A costs as a percent of sales and demonstrated the power of scale. RSG&A costs were sequentially higher by 2.4%, which included 1.1 million of business realignment expense and a full quarter of Garvey RSG&A of 1.5 million, which was sequentially higher by $1 million. Compared with the prior year, RSG&A costs were higher by 8.1 million. This was largely due to additional costs from acquisitions. of $7.7 million, and business realignment costs of $1.1 million, partially offset by Dorner acquisition deal costs of $4 million incurred in the fourth quarter of fiscal year 21. In addition, with the U.S. dollar strengthening, foreign currency translation lowered our RSG&A costs by $1 million. For the fiscal first quarter, we expect RSG&A expense to range between $53 and $54 million. Turning to slide eight, Adjusted operating income was $28.6 million. Adjusted operating margin was 11.2% of sales, up 110 basis points from the prior year. This margin expansion included the impact from the accretive acquisitions completed this past fiscal year, which contributed 60 basis points. We also benefited from operating leverage on improved volume and strategic pricing. As you can see on slide nine, we recorded gap earnings per diluted share for the quarter of 41 cents. Adjusted earnings per diluted share of 79 cents was up substantially from 60 cents in the prior year period. As a reminder, we are adding back amortization expense on a tax-affected basis to our adjusted earnings per diluted share calculation. With the recent and significant increase in interest rates since January, interest expense is expected to be approximately 6.2 million in the first quarter. Weighted average diluted shares outstanding are anticipated to be about $29 million, and we will continue to use 22% as our pro forma tax rate when calculating non-GAAP adjusted earnings per share. On slide 10, our adjusted EBITDA margin for the full year was 15.4%. This was improved over the prior year by 350 basis points. Our recent acquisitions were accretive to our adjusted EBITDA margin by 190 basis points. Our return on invested capital also continues to improve and was 7.5%. We are executing plans that will drive margin expansion and are still targeting 19% EBITDA margins and double-digit ROIC, but the timing of achieving these goals is becoming less clear in the current macroeconomic environment. Nonetheless, the team is focused on executing our strategy and driving long-term shareholder value. Moving to slide 11, we generated approximately $22 million of free cash flow in the fourth quarter. For the full year, we generated $35.8 million. This includes cash outflows of $14 million related to acquisition deal costs. We also added approximately $40 million of inventory to meet rising demand and lessen supply chain impacts. Our working capital as a percent of sales was 15.5%, which was in line with what we were expecting. Capital expenditures were $13 million for the year. We expect capital expenditures of $25 to $30 million in fiscal 23 as we invest in our factories to enable the next leg of our margin expansion initiatives. Turning to slide 12, we refinanced the capital structure last April and May as a result of the Dorner acquisition, which included an equity offering and a new $450 million term loan B. We refinanced the Garvey acquisition, utilizing the accordion feature of our term loan B, and borrowed an additional $75 million. The current term loan B principal outstanding is $502.6 million, which carries an interest rate of LIBOR plus $275 with a 50 basis point LIBOR floor. The term loan B is 60% hedged with interest rate swaps that blend to a swap rate of approximately 2.08%. As of March 31st, on a pro forma basis, which includes Garvey's March LTM adjusted EBITDA, but excludes expected cost synergies, our net leverage ratio improved to 2.7 times. We expect to achieve our targeted leverage ratio of two times towards the end of fiscal 23, barring any additional acquisitions. Finally, our liquidity, which includes our cash on hand and revolver availability, is remained strong and was approximately 198 million at the end of March. Please advance to slide 13 and I will turn it back over to David.

Thanks, Greg. As you can see on slide 13, we had exceptionally strong orders in Q4 with an average daily order rate that was up 13% compared with the trailing third quarter. As I shared earlier, our Q4 orders were nearly $270 million, a new record, and accelerated throughout the quarter. As you may recall, we previously reported that order rates were up approximately 7% through the first three weeks of January. So February and especially March were quite strong. Even with record sales of $253 million in the quarter, order growth outpaced sales and our backlog grew to a new record level of $309 million. Long-term backlog, which is expected to shift beyond the first quarter, was about 44% of our total backlog. and our short-term backlog was $174 million. If you would please turn to slide 14, you'll see that we expect sales in the first quarter to be in the range of $220 million to $230 million. This range includes a $4 million sequential FX headwind versus Q4, and an $8 to $9 million year-over-year FX headwind. While our backlog and market demand remain robust, The cascading effects of the war in Ukraine and the pandemic-related shutdowns in China are expected to have further impacts on our supply chain and the availability of materials. We're also implementing our new ERP platform at Stahl in Germany. This is the last major building block of our European System Harmonization Initiative, which will enable us to realize further cost and productivity synergies through integration and shared services. This is, however, expected to have an impact on first quarter shipments as we complete training, go live, and execute through the transition. Even with these headwinds, our guidance range of $220 million to $230 million represents a mid-single-digit, year-over-year organic growth rate at the midpoint. We continue to see significant demand in all markets and are encouraged by the traction we're gaining with our organic growth initiatives. In fact, through mid-May, sequential order rates in our first quarter have been effectively in line with the record levels we saw in Q4. During this period of supply disruption, high inflation, and macroeconomic uncertainty, we remain laser-focused on execution. We're taking further action to deliver operational cost and price improvements while executing to address increasing customer demand. We're also very encouraged by our longer-term prospects and look forward to sharing details associated with our strategy and updated targets during our investor day on June 23rd. We are truly creating a better, more scalable, and more profitable business model for Columbus McKinnon as we evolve into the global leader in intelligent motion solutions for material handling. With that, Donna, we can open the call for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to register questions at this time. The first question is coming from Matt Somerville of DA Davidson. Please go ahead.

thanks a couple questions um obviously i would assume that you're going to have lower absorption in europe in q1 volume obviously going to be you know perhaps down all things considered on a sequential basis given your revenue guidance so how should we be thinking about kind of the go forward margin cadence and and i guess earning seasonality if you will as we move throughout the year and in particular How should we be thinking about incremental operating margins as we move beyond Q1?

Good morning, Matt. Fair questions and important ones for us to address in the call. We are expecting that we'll pick up some of the margin erosion that we had in Q1 and make advancements from there as we head through Q1. based on pricing and other actions that we've taken within the business, but we do acknowledge that there are the challenges you mentioned relating to absorption, particularly associated with lost time and training hours we're putting into our stall ERP implementation. And so we anticipate a step forward from what we saw in Q4, but acknowledge that they probably won't be at the rates that we would have normally been trending to, but for that implementation.

Yeah, and Matt, this is Greg. In addition to that, we've got backlog, record backlog at $309 million that to a large extent is priced at old pricing as we choose. We're not able to reprice the backlog given we've taken purchase orders already for the business. So that's another factor in this.

Yeah. We're really encouraged by the longer-term prospects for the business and the targets, however. And we remain on a similar trajectory, but for a bit of a seasonal impact or a project-related impact in this first Q1.

And then as a follow-up, how should we be thinking about incremental realized price in fiscal 23 relative to fiscal 22? And to the extent you're willing to talk about it, how much of a list price increase did you guys put through during the March timeframe for your normal annual sort of increase? Thank you.

Yeah, I think what we're anticipating is that we'll probably see, given what Greg just highlighted relative to the backlog we're carrying at a record level, the pricing actions we recently took, and the phasing of that cost-price mix as we work through that backlog and get new backlog at the incremental price, level is that we'll probably see a second half that has a better price-cost ratio. And I think that's probably the best way to be thinking about this year and price realization for the company. But we remain, as we were last year, very focused on making sure that we're taking actions to offset those cost inputs. And as you saw throughout last year, we were successful at outpacing cost inputs through Q2 and Q3. And then in Q4, we outpaced material cost increases, but were impacted by freight charges that came in very quickly and rapid increases in some particular material costs that came through. And so that's a timing element that we'll get out from under.

Yeah, and maybe to also add on to David's comments, in general, Matt, we've raised prices anywhere between 5% and 10%, probably on average towards the higher end of that range, different by region. And we're clearly going to remain steadfast in looking at our inflationary pressures and we'll look at other ways to realize our margins by additional price increases and or surcharges.

Understood. Thank you, guys. Thanks, Matt.

Thank you. The next question is coming from Chris Howe of Barrington Research. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I wanted to follow up on the last call that we had. You talked about the Garvey and Dorner synergies, revenue synergies. You picked up that order in the prior quarter. Can you talk about how they performed together in the quarter and the different dynamics you're seeing, whether it's pulling some of Dorner's customers into Garvey or the vice versa? What's your anticipation for their performance this fiscal year?

Sure. Yeah, the businesses are doing very well. We're really pleased with the acquisitions, continue to remain very bullish about our strategic intent and the direction that we're taking the business in. For the fourth quarter, sales and the acquisitions were about $40.5 million. And we continued to emphasize the synergistic opportunities across the business. We completed training, brought the teams together. really focused on making sure that the ability to cross-sell across the businesses was not only as it was when we got through the acquisition and realized a couple of quick wins, but it was enhanced. And both businesses continue to make good progress as it relates to representing the broader portfolio. So I think that we're just starting to chip away at the tip of the iceberg there.

Yeah, so a little more color as well. So we did recognize revenue synergies of $850,000 so far, including the $700,000 that we talked about last quarter. And we've got almost $2 million of current active quotes out there for Dorner and Garvey products. We're in the process. We've cross-trained the sales forces. We expect that this is just going to continue to ramp up exponentially. You know, performance-wise, you know, both businesses in the quarter delivered what we were anticipating. David talked about the revenue, low 40% gross margins, 25% EBITDA margins. So, you know, on track for what we were expecting. And, you know, the other point would be is that the one project that we recognize kind of below margin or below average margins was actually in that segment. So we've taken actions to address that going forward.

Okay, and then a follow-up question on the 19% adjusted EBITDA target, the double-digit ROIC. It's still a goal, but the timing is a little bit less clear. Can you put less clear into further context? Is that, you know, we have what happened in Q4. We still have a challenged environment here going into Q1. How does the duration of this challenged environment impact some of your comments about it being less clear? Is it just a quarter-by-quarter basis? We'll get a better picture on how the second half looks. Or any more color there would be helpful.

Sure. No, that's fair, Chris. And I would say it's probably, like you said, we're going to get better visibility as we progress quarter-by-quarter. We have a management plan that achieves that goal by the end of this year. we are executing in an environment that's not enabling us to execute to that plan, given macro factors, supply chain disruptions, higher inflation, and the impacts of the port shutdowns in China and so forth. And so we're seeing those effects playing out, but we're confident and really committed to making sure that we execute the plan that we have, self-help where we need to, control what we can control. And this is a business that if we don't achieve that outcome on the timeframe that we outlined previously, we'll achieve it as things stabilize and the business gets back to a bit of more normal footing. So nothing's really changed but for the economic environment relative to our pursuit of that goal. And we'll talk more about our goals beyond reaching that point when we get together during our investor day in June.

Okay. And I apologize if you mentioned it already, but the ERP implementation in Europe that's affecting Q1 with a more limited production schedule to facilitate the implementation, that is expected to be completed in Q1?

It is. In fact, we're going live now. We're working through all of the transition elements. The system is performing as expected. The impact on our operational areas is as we would expect. We've done 12 implementations of this type across the enterprise. And this is the last, as I said in my prepared remarks, the last major building block that really enables us to get more synergies across Europe. and drive better performance as we go forward. And so we expect this to be a Q1 impact and for us to be able to drive better performance as we go forward.

Yeah, and Chris, this is clearly our largest factory in the system, our most complex factory in the system. We went live May 1st. The system's working. We're probably at about 80% efficiencies this week. from a shipping perspective, and it's really just the learning curve. And it's not like we haven't done this before. We've had 12 of them, but none of them have been of this size. And so it's just part of the process, I guess, the pain of what you have to do to get the system implemented, but then you reap the benefits down the road.

All very positive, all very focused on what we're trying to achieve as an enterprise. Thank you. Thanks, Chris.

Thank you. The next question is coming from Greg Palm of Craig Hallam. Please go ahead.

Yeah, good morning. Thanks for taking the questions. I just want to go back to the revenue guidance. Even if you sort of add back or sort of normalize the cadence, given FX, given ERP, you know, it still suggests that revenue is going to be down quite a bit sequentially, which I don't think is normal seasonality. So just help us understand exactly, I mean, are you expecting that supply chain gets worse? Because it sounds like overall demand is still pretty strong.

Yeah, that's right. Demand is very strong, Greg. And as you can see, you can see that in the backlog, you can see that in the bookings rates, obviously very encouraging dynamics. But as we execute on our backlog and look at this quarter, We're facing sequential FX headwinds of about 4 million. And then we're facing the impact of that implementation that we mentioned in Europe. And so the combination of those elements and adjusted organically when you think about acquisition volume, period over period and so forth, we're in a position where this represents a 6% increase or a mid single digit increase over prior year first quarter. And typically, we do have a seasonality impact as we head into our Q1 from Q4. We didn't see that last year because we were recovering from the pandemic. And so if you look back a year, you'll see that that was not the case. But if you look back beyond that, you'll see that there is a historic pattern of Q1 that's lower than Q4. That's more of a seasonal effect for the business. Yeah, it's usually...

You know, in 2019, it was about a $4 to $5 million impact. But also with the SAP implementation, we pushed really hard to get production out of Kunzelslau so we wouldn't be disrupting our customers. So the fourth quarter had that impact. But having said that, I talked about the fact that we had about $15 million of revenue that was hung up with supply chains. I think the team... you know, is very nimble. We have such a large backlog and the fact that we made the right decision to order $40 million more inventory allowed us to kind of pivot and, you know, work on other orders and ship those orders. But, you know, so the Q4 number did have that, I would say, positive impact of, you know, working hard to push production and revenue out of the stall facility.

Got it. Okay. And, I mean, just since we're on that subject, how should we think about normal seasonality, you know, this year, just given the last, you know, couple years have been anything but that?

Yeah, so if you go back in history and, you know, with what we believe today, you know, the first half of the year versus the second half of the year is more or less a 50-50, 51-49 kind of a split. So, you know, historically, the fourth quarter, the quarter we just finished, is the seasonally strongest quarter as people buy in advance of price increases. They buy in advance of the summer entertainment season, construction, et cetera. And companies, 1231 companies, now have their new CapEx budgets, you know, and that are approved, and so they're moving forward. Our weakest quarter is always the December quarter. There's less shipping days and just a, You know, on the industrial side, the business does see a reduction in inventory as our channel partners manage their inventory for their year-end reporting. And so, you know, first half, second half look is it's going to be within a point of 50-50 one way or another.

Q2 up over Q1, Q3 down, and then Q4 our strongest.

Perfect. Okay, great. Thanks so much for the help. Thanks, Greg.

Thank you. The next question is coming from John Tanwin Tang of CJS Securities. Please go ahead.

Good morning. Thank you for taking my questions. I just wanted to get back to the 19% EBITDA target question. I assume you will talk about this more on your investor day, but I was wondering if you're expecting to get to the same profit dollars, if not the percentage at this point within the same time frame.

Yeah, so, you know, from a dollar perspective, you know, we talked about the way we've got to get there is essentially, you know, roughly 39% gross margins. RSG&A is the percent of sales of around 21%. And then we pick up a point and a half to two points by adding back depreciation. And so, you know, from a scale perspective, and we saw the benefit of scale this quarter on RSG&A costs, we're at a $253 million or a billion dollar kind of a run rate. you know, our RSG&A is at that level. So we've got to, you know, get to that billion dollar plus to get the RSG&A where we need to get it to. And then, you know, clearly with supply chain, we've got to, you know, get out in front of all of the inflationary pressures that we're seeing and we're working very hard to do so. So they're having, yeah, so I mean, clearly, you know, this quarter or this fiscal year, I think we did $908 million in revenue. And we need, you know, 100 million plus more.

Got it. Thank you. Could you also talk about the order trends in Q1 so far? Has the end demand been stronger or worse? And, you know, that's accounted for seasonality. And have the input prices, supply chain prices actually gotten worse or moderated as you've seen them so far?

Yeah, yeah. The supply The order rates have been more or less in line with the record levels we saw in Q4. And as I mentioned, Q4 progressed throughout February and March at faster rates of input. On a quarter-to-date basis, we're running with short cycle orders up about 7.5%, project orders down slightly north of 20%, and then our acquisition orders up near 30%. And so on a net basis, we're more or less in line with quarter rates relating to the fourth quarter. So feel really good about demand. We're seeing strong demand across really all of our end markets. That has continued into the first quarter. And we're obviously watching that closely, but very focused on execution. As a team in this period, we're laser focused, as I said in my prepared remarks, on our execution and meeting the commitments that we have, improving our customer experience, and driving the results that we're committed to getting to.

Yeah. And then John, on the inflation question. So in the quarter, if you look at our, our sales bridge and our gross margin bridge, you can see that, you know, price was up 8.4, but price net of material costs was 3 million. So 5.4 million was raw material inflation. You annualize that. And you're, I think you're at $21.6 million. We think that's going to get worse before it gets better. And we could be seeing inflation in the $24 to $26 million range on materials. And on top of that, we've clearly seen gas prices go up, which for trucking costs, our costs are up. Marine costs are up. There's issues in ports with congestion. There's issues in China with COVID shutdowns that are affecting things. And so logistics costs, they're actually double per container what they were at the start of our previous fiscal year. So that's another factor in the equation. So I think that answers your question.

Okay, great. It does. And then just to clarify, I think you said before that you still expected with all that to see a sequential pickup in gross margin, or did I hear that incorrectly?

Yeah, we think we're going to improve on where we are right now. I mean, clearly, you know, this was not where we wanted gross margins to be, and we will make improvement as we've got more pricing that we've announced in the quarter and that roughly high single-digit range that I mentioned on the call. And, you know, it's just a matter of, you know, what other shocks are we going to see to the system, right? Nobody in January when we had this last call, no one would have predicted where we are today.

Understood. Thank you, guys. Thanks, John.

Thank you. The next question is coming from Steve Ferrenzeri of Sedoti. Please go ahead.

Morning, David. Morning, Greg. You mentioned a couple of times that one larger project and the impact it had given the higher material costs. And obviously your revenue came in much higher than guidance. Can you offer any kind of way to quantify the impact either on revenue or margins on that one project?

Yeah.

Yeah, it was, you know, just under a million dollar impact from a margin perspective.

So 30 basis points. Okay.

And how are you thinking, you know, we've talked about this on the call before and the idea that Dorner and Garvey are perhaps more project oriented and how you would manage the costs related to those projects. Clearly, things are a lot more challenging right now than in normal times. But you said you were addressing it. How are you thinking about that? How are you addressing it?

Right.

Yeah, fair question, Steve. So what we've done is we've reduced the shelf life on our quotations, and so they're shorter cycle quotations, and they're tied to latest pricing. And then where we can negotiate, we're getting price escalators or tied to indices, so we're able to drive change orders more clearly in the conversations with customers. We've also made changes in our project execution team. And so we're advancing our Columbus-McKinnon business system, focusing on our Office of Program Management, Project Management, and we've made some resource adjustments there as well. So this is, I think, a unique case. And I think you're right as it relates to the dynamic nature of that business, and particularly in this kind of an environment. But we feel like we've got this, in a post-mortem assessment, this particular project very well understood. specifically outline where some of the issues were that resulted in that outcome, and we've taken corrective action not only in our systems and the way that we approach the processes that manage the projects, but also in the team and in the communications we've had with our customers.

Yeah, and the fortunate piece of it is there's really two main inputs. It's either going to be aluminum or stainless steel that has created the issue.

That's helpful. Thank you.

Just wanted to ask a question on capital structure, how you're thinking right now. You have $200 million in liquidity. We know interest rates are rising. It sounded like you are using some interest rate swaps. Can you talk about what you're doing with debt and how you're thinking about repayments, given not the expected increasing interest rate environment?

Yeah. So, I mean, I think the one thing we're going to do is manage our capital structure conservatively and appropriately. And that's why we entered into another interest rate swap this quarter. It was February 14th, and so we've locked up 60% of our interest rate risk at a swap rate of 2.08. And as we think about liquidity, we think we've got ample liquidity. We still have a programmatic M&A strategy, but we understand where things are right now with all the macro uncertainty, and we're going to be cautious with how we approach it. And in terms of debt repayment, our 10K is going to be filed this evening. And in there, we're estimating roughly $40 million of $41 million, I think, of principal payments annually. So roughly 10 a quarter, 10 to 11 a quarter. Great.

That's helpful. Thank you for that. And then just the last one, and you've addressed it, but I do want to ask it again. In terms of everyone's waiting to see some signs of a slowdown in demand, And it sounds like you're very clear on this, and we saw it in your bookings and your backlog. Are you seeing any kind of signs that you're seeing slowdown in any of your end markets?

Yeah, the only comment that I'd make that might add a little more color to the conversation so far, Steve, is a reference to project quotation conversion. So project quotation activity is very high. it's up. There's a lot of active dialogue, and it's encouraging. But the cycle at which those orders are converting on the project side is a little slower than it had been a quarter or two quarters ago.

Is it directed at any sort of end markets, or is that a broad kind of an answer?

Yeah, it's a broad answer. But it's Yeah, it's kind of the activity we're seeing. We're seeing some activities phasing adjust. As people are talking about a project that might be a $5 million project that delivers over six months, they might be saying, hey, look, I want to release the first $3 million of it, and I want it to run over nine months.

Okay.

Great. Thanks, David. Thanks, Greg. Appreciate it. I'll leave.

Okay, thanks, Steve.

Thank you. The next question is coming from Pat Bauman of JP Morgan. Please go ahead.

Oh, hey, good morning. Thanks for taking my question. Just a lot has been covered already. Maybe if you could help on the freight dynamics a little bit more. I guess I'm just wondering, Just a little bit more detail, what impacted the sequential gross margin related to freight, just like what exactly escalated so much versus your January expectations? I think you called this a timing element response to another question, but I'm just not clear what aspect of this is timing or why you refer to it that way.

Yeah, so what we're really talking about is freight costs sequentially went up close to $3 million, which is well over, what's that, 110 basis points? Of gross margin and it was really across the board. I mean clearly we've all you know seen what has happened with gas prices at the pump You know five to six dollars a gallon. Well that you know translates into higher Truckload costs for moving product domestically. We've seen significant increases in marine costs We've seen, you know, if, you know, there's certain parts that we need desperately and we have to air freight them, air freight costs are up. And you see that if you travel commercially, how expensive airline tickets have now gotten. So this is all within the core, you know, this increase. This isn't a year-over-year change. This is, you know, basically what happened in the December timeframe versus what we experienced yesterday. in March, and some of it probably due to the Ukraine situation that's going on over in Europe right now.

Yes, port disruptions in China. I think the timing element to this, Pat, is the realization that this was occurring as fast as it was, and our ability to get out from under it with our own actions and make sure that we're making adjustments in our pricing structure to accommodate those changes. And so that's where the timing element comes into play.

And you mentioned 24 to 26 million of, of, um, materials, I guess, uh, inflation expectation.

What is it? Yep. Yep.

Yep. But that, I don't think that includes freight, but in any event, what are you expecting? What are you expecting from a pricing perspective for the year based on actions you've taken?

Yeah. So what we've taken so far is, um, High single digits is where we should average. Now, having said that, once again, we've got record backlog that doesn't have current pricing, right? Because our pricing all went into effect either the second week in March or April 1st. And so to the extent we're working down backlog, we're not going to see the benefit of the current pricing. So there's this lag. And so we're working to look for other ways to help recover this.

Understood. And then the slides mentioned something about precision conveying backlog, you know, down on project timing. What end market was that in reference to in particular? Just curious if you could give some color on that.

Yeah, there were some, our project business is really focused on the food and beverage life science and e-commerce markets. And as we look at, remember I made some comments earlier about quotation activity and conversion to project activity, a lot of very engaged customers on exciting project opportunities that are just taking longer to get to the closure timeframe. So I think that's just the nature of the lumpiness of the business.

Understood. Okay, thanks.

Thanks, Pat.

Thank you. The next question is coming from Michael McGinn of Wells Fargo. Please go ahead.

Hey, thanks for the time. Just going back to the question regarding that large project and the charge that was associated with that, how many customers do you have that are like that? And then maybe also, how many projects do you currently have in place that are similar to that?

Yeah, so that was a, you know, top 1% from a size perspective. It was a big, big number, and that's why it had such a big gross margin impact.

Right. I mean, if you think about the split of business, roughly 50-50 in that business, projects versus short cycle, build-to-order type project activity, we probably have, you know, $20 million in any given quarter that is active relative to project-related business, and this business would have, you know, would have approximated 15% to 20% of that amount, and this would have been a large project. And so we don't have very many that are of that scope in the backlog. And, you know, like I said, from a process standpoint, from a timing perspective, complexity associated with some of the rapidly rising input costs and the strategic nature of the opportunity and follow-on opportunities and the aftermarket opportunities thereafter, you know, we weren't able to recover all. We recovered some.

We weren't able to recover all of the escalation in price. Great.

And then in terms of precision conveyance, I guess a simple question. What end market are you more bullish on for this year, e-commerce or food processing?

Well, we're encouraged by all the markets that we're pursuing, but I would say from a dynamics perspective, given the rate at which e-commerce grew over the last couple of years through the pandemic, I think the growth there is going to be attractive, but it's not going to be as explosive as it was over the last couple of years. And so we're seeing great traction in food and beverage and life sciences, in addition to the already great, you know, experiences we're having in e-commerce, and we're also expanding our customer base in e-commerce, which obviously gives us further threads to pursue.

Okay, maybe if I could just sneak one more in.

Kona Cranes consolidating their services and their products business into one, I believe. Are you expecting anything competitively to come out of that dynamic or just business as usual?

I think that they're obviously changing, shifting gears in the wake of the walk away from the cargo tech acquisition or merger. You know, I think they're going through a lot of adjustments. I don't think they've demonstrated anything historically that's lacked discipline in terms of their approach to the markets. And so we're not particularly concerned about that strategic shift.

Yeah, the one thing I would say is now they will, you know, be more directly competing with our channel. You know, they had a private or their R&M business was really sold into the channel, but now that they've combined the service with the equipment, they'll be, you know, much more, I think, visible and competing with our channel, which should help us.

Great. Appreciate the time. Thanks, Mike.

Thank you. The next question is coming from Walt Liptack of Seaport. Please go ahead.

Hi, thanks. Good morning, everyone. Hey, Walt.

Morning, Walt. Good call so far. A lot of detail. So I'll ask one about working capital. Yeah, I wonder how you're thinking about some of the working capital components in the first quarter. You know, for example, do you need to build some inventory? Again, how do you expect to end the year on some of these working capital accounts?

As I think about working capital, we ended the year at 15.5%. That 15% range is where we would expect working capital to be at the end of the year. There could be some temporary blips along the way. Clearly, we're going to have lower sales than we had in the first quarter versus the fourth quarter, which will impact our metrics on inventory turns, DSOs, and DPOs. But I think the right way to think about it is 15%.

I think we demonstrated last year an ability to flex in the experience of a need to make moves through the pandemic. We went down to below 10%. And as we were experiencing growth, we ramped back up into the mid-teens with the addition of the $40 million of revenue. We expect this year to be relatively stable at that level. But to Greg's point, there could be some period-to-period blips, but that's where we expect to end the year.

Okay. All right. Great. Thank you.

Once again, ladies and gentlemen, that is Star 1. If you would like to register a question at this time. The next question is a follow-up coming from John of CJS Securities. Please go ahead.

Hi, sorry.

I was just wondering if you could just give us a little more color on the, when you're implementing this ERP system and you're losing a little bit of revenue, are you planning to recover that in future quarters or does that push out the whole stack a bit, you know, further back?

No, we do expect to recover it in the year. This is just, you know, an impact in the period. And as we get more efficient coming out of this quarter, we expect to consume that backlog and ship those dollars in revenue.

Yeah, so another way to think about it, John, is orders are not being canceled. You know, we did accelerate shipments into the March timeframe, knowing that we had the ERP implementation upon us. So that benefited and maybe you could say outsized the Q4 revenue a little bit, but orders are not being canceled.

Understood. Thank you. Thanks, John.

Thank you. We're showing no additional questions in queue at this time. I would like to turn the floor back over to Mr. Wilson for closing comments.

Great. Thank you, Donna. Fiscal 22 was a year of significant progress and represents a step change for Columbus McKinnon as we advance our strategic transformation. We completed two transformative acquisitions and executed to deliver terrific results for the year, including 40% growth in revenue, 75% growth in operating income, and 81% growth in adjusted EBITDA. As I stated earlier, in this period of uncertainty, we remain laser focused on execution and improving our customers' experience. We're taking further actions to improve the business and our performance while executing to address increasing customer demand. We're truly creating a better, more scalable, and more profitable business model and mix for Columbus McKinnon as we evolve into the global leader in intelligent motion solutions for material handling. Finally, I want to emphasize how proud I am of our global team of talented Columbus McKinnon associates. They have remained resilient, agile, and focused on results and improvement through what has been a very challenging and dynamic period. As a result, Columbus McKinnon has not only persevered, we're emerging as a stronger and better company. We appreciate your time today and your increasing interest in Columbus McKinnon. Thank you and make it a great day.

Ladies and gentlemen thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.