Columbus McKinnon Corporation

Greetings and welcome to the Columbus McKinnon Corporation fourth quarter fiscal year 2023 financial results. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Columbus McKinnon. Thank you. You may begin.

Thank you, LaTanya, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here for the quarterly conference call are David Wilson, our president and CEO, and Greg Rustowitz, our chief financial officer. You should have a copy of the third quarter, fourth quarter fiscal 23 financial results, which we released earlier this morning, as well as the slides that will accompany our conversation today. If not, they are available on our website at investors.columbusmckinnon.com. David and Greg will provide their formal remarks, after which we will open a line for questions. If you will turn to slide two in the deck, I will review the Safe Harbor Statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings relief, as well as with other documents filed by the company with Securities and Exchange Commission. You can find those documents 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. However, 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 table that accompanies today's release and slides. So with that, please advance to slide three, and I will turn the call over to David to begin. David?

Thanks, Deb, and good morning, everyone. We ended fiscal 23 on a strong note, setting annual records for sales, gross margin, operating income, and adjusted EPS. On a constant currency basis, we grew the business by 7% and greater than 4% organically in fiscal 23. Our strong results reflect the effort of our Columbus McKinnon team as they execute to improve the customer's experience, drive greater productivity, and advance our strategy. We capped off the year delivering better than expected fourth quarter revenue and a new quarterly revenue record of $254 million. In addition to growing operating income by 14%, we generated a record level of cash from operations in the quarter of $67 million. Our strong cash flow enabled us to pay down over 40 million of debt in the year, and we ended Q4 with a 2.2 times net debt leverage ratio on a bank covenant basis. This position of financial strength exemplifies the strong cash generation capabilities of our business and our commitment to quickly de-lever following acquisitions. It also supports further investment in organic and inorganic growth initiatives. Let's review a few initiatives that illustrate how we are unlocking the potential of our business and building a significantly upgraded, less cyclical, and more powerful Columbus McKinnon. If you'll turn to slide four, I'll update you on our digital enablement strategy. This strategy is critical to improving customer experience, enabling growth, increasing productivity, and increasing returns. We are streamlining processes, applying technology, expanding analytics, and enabling scale and productivity. These digital tools make it easier for our customers to interact and do business with us. They also capture intelligence that leads to better identification of opportunities, enhanced communication and customer engagement, and service level improvements. We are attacking this from one end of our business processes to the other, including everything from lead generation to our enterprise operating systems, and all the way through to our points of delivery. As you can see on this slide, we've made substantial progress over the past year, and we will advance this work to further unlock the potential of our business over the next several years. Turning to slide five, I'd like to highlight the next level progress we're making with product line simplification, a key pillar of the 80-20 process. This has been a priority for Columbus McKinnon over the last couple of years given the fragmentation and complexity of our legacy portfolio resulting from a decades-long history of acquiring products and brands with limited rationalization. As you can see from the chart here, we have made quite a bit of progress, and we still have important opportunities to capture. Our work to advance digital enablement, customer experience, and 80-20 are critical elements of our self-help approach to driving stronger earnings power. Please turn to slide six, and I'll now touch on our Montrotech acquisition briefly. As you know, profitable growth through M&A is an important part of our transformation strategy. Our work in this area will reduce cyclicality and create meaningful scale in intelligent motion solutions for material handling. The Montrotech acquisition, which we expect to close by the end of this month, is an excellent demonstration of this effort. Strategically, we are building on the capabilities we have established at the heart of process automation and manufacturing. Although it is a relatively small bolt-on acquisition, Montrotech is an ideal complement to our precision conveyance platform, adding asynchronous technology for material transport solutions. Montrotech has a high-growth, high-margin profile in very attractive end markets with strong secular tailwinds and we welcome the addition of the team and their technology. Please turn to slide seven. We continue to make progress with our gross margin expansion. As we have noted previously, to achieve our fiscal 27 EBITDA margin goal, we need to improve our gross margin to approximately 40 percent. This will provide the operating leverage expected over an efficiently deployed RSG&A spend. We believe the actions we are taking to address productivity enhancements, digital enablement, and 80-20, along with strategic initiatives, will drive a steady 50 to 100 basis point improvement in gross margin annually. Our success to date, our opportunity landscape, and our targeted plans for further simplification reinforce our confidence in achieving this outcome. I'll now turn the call over to Greg to review the financials. Greg? Thank you, David. Good morning, everyone. Turning to slide eight, we delivered record sales in the fourth quarter of $253.8 million, up 1.8% from the prior year period on a constant currency basis, and above the high end of the guidance we provided last quarter. We are working hard to improve our customer experience, and we are pleased that we were able to reduce past due backlog by 25% for $10 million from last quarter's level. Looking at our sales bridge, pricing gains of 14.5 million, or 5.7%, accelerated as we converted orders to revenue at more current prices. This was up 20 basis points from our Q3 level. Volume decreased by 9.9 million, or 3.9%, and foreign currency translation reduced sales by 4.2 million, or 1.7% of sales. Let me provide a little color on sales by region. For the fourth quarter, We saw modest growth of 0.3% in the U.S., which was driven by a 6.3% improvement in pricing. Sales volume was down 6%. This was largely due to a decision we made to forego year-end promotions so we could focus on reducing our past due backlog. Outside of the U.S., sales grew 4.1% on a constant currency basis. Pricing improved by 4.9% and sales volume decreased modestly by 0.8%. We were encouraged with the volume increases we saw in certain regions outside of Europe, the Middle East, and Africa. We recorded volume gains of approximately 16% in Canada, 12% in Asia, and 9% in Latin America. Volumes declined 7% in EMEA. Our short cycle business in EMEA saw volume gains, but this was more than offset by slowing in our project business, with the exception of our rail business, which had certain projects shift from Q3 to Q4, which we mentioned last quarter. Quoting activity remains strong, but there has been a hesitancy by customers to convert quotes to orders given the economic uncertainty that continues to exist in Europe. On slide nine, gross margin of 35.9% was up 220 basis points from the prior year. On an adjusted basis, gross margin was higher by 110 basis points. Year over year, fourth quarter gross profit increased $5.7 million and was driven by several factors, which you can see in the table. Let me comment on a few highlights on our gross profit bridge. Pricing net of material inflation added $9.2 million of gross profit as we more than offset $5.3 million of material inflation in the quarter. We are seeing material inflation decelerate, which is a good trend as we enter fiscal year 24. We are also seeing freight costs start to abate. We had two purchase accounting items in the prior year, which did not repeat related to the Garvey acquisition amounting to 3.2 million. Offsetting these items were foreign currency translation, which reduced gross profit by 1.3 million. Lower sales volume and mix reduced gross profit by 5.4 million. As David noted earlier, we expect gross margins to expand on the order of 50 to 100 basis points annually. Moving to slide 10, RSG&A expense was $57.2 million in the quarter or 22.5% of sales. This included $1.7 million of pro forma adjustments for business realignment and acquisition integration costs, as well as our headquarters relocation to Charlotte. Besides these items, the sequential increase in RSG&A included $700,000 of incremental R&D spending, as well as an adjustment to our annual incentive plan accruals of $2.8 million offset by $1.2 million of acquisition contingent consideration booked last quarter. Compared with the prior year, our SG&A costs were higher by $2.4 million, which includes $2.9 million of higher incentive and stock compensation costs and $700,000 for our headquarters relocation. Offsetting these increases were foreign currency translation, which reduced our costs by $800,000. For the fiscal 24 first quarter, we expect RSG&A expense to be approximately $56 million. This includes the addition of Montrotech in our financials for the month of June. Let me remind you that we are committed to driving RSG&A as a percent of sales to 21% by fiscal year 27 through a combination of cost control actions and scale. Turning to slide 11, we achieved record operating income of $27.5 million in the quarter, representing an increase of 14%. Operating margin expanded 130 basis points due to gross margin expansion resulting from our previous pricing actions. We also achieved record adjusted operating income of $29.2 million for 11.5% of sales, which was a 30 basis point increase over the prior year. As you can see on slide 12, we recorded GAAP earnings per diluted share for the quarter of $0.48 of $0.07 versus the prior year. Adjusted earnings per diluted share of $0.80 was up a penny from the prior year. Our tax rate on a GAAP basis was 35% for both the quarter and year. The tax rate was unfavorably impacted by three percentage points due to the settlement of income tax assessments related to tax periods prior to the company's acquisition of Stahl, which we discussed in the first quarter. The company received full reimbursement from Stahl's prior owner, which was recorded as a gain and other income and expense on the financial statements. The tax rate also reflects an unfavorable impact at two percentage points due to the recording of a U.S. state tax valuation allowance. Valuation allowance primarily relates to changes in the company's expectations regarding its ability to more likely than not utilize certain state net operating losses prior to their expiration. Additionally, the tax rate was also unfavorably affected by non-deductible compensation expense and U.S. taxes on foreign earnings. These items increase the tax rate by two percentage points each. For modeling purposes, even though we are 60% hedged to interest rate exposure, interest expense is expected to increase to $9 million in the first quarter, with the incremental interest expense from the Montrotech acquisition for one month and the Fed's recent rate increases. Weighted average diluted shares outstanding will approximately $29 million, and we are increasing our pro forma tax rate to 25%, for calculating non-GAAP adjusted earnings per share. This change largely reflects a shift in the mix of our earnings to higher income tax jurisdictions, namely Germany. On slide 13, we delivered record adjusted EBITDA of $147.8 million, which resulted in an adjusted EBITDA margin of 15.8%. We are making steady progress towards our target of $1.5 billion in revenue with a 21% EBITDA margin in fiscal 27. In addition, our return on invested capital ended the fiscal year at 7%. ROIC is a key metric in our long-term incentive plan, and we expect to see this improve over time as we advance our efforts to drive growth, reduce costs, improve productivity, and simplify both our product lines and factories. We are focused on these key metrics as we drive profitable growth and transform the business. Moving to slide 14, we had very strong cash generation in the fourth quarter as we delivered record quarterly free cash flow of 63.6 million. This includes cash from operating activities of 66.7 million offset by CapEx of 3.1. We made measurable improvement in working capital in the quarter as we drove working capital as a percent of sales down to 17.3 percent from 22.1 percent at December. Our free cash flow conversion was a best in class 147%. We anticipate that CapEx will be increasing in fiscal 24 to 30 to 40 million as we are making investments in a lower cost center of excellence to simplify our factory footprint as well as increase capacity, productivity, and throughput. Turning to slide 15, we made significant strides de-levering and ended the fiscal year with a net debt leverage ratio of 2.2 times on a financial covenant basis. With the Montrotech acquisition, we estimate that pro forma leverage will increase to 2.7 times at closing. With our strong cash generation and plans to pay down another $40 million of debt in fiscal 24, our net leverage is expected to drop to approximately 2.5 times by the end of fiscal 24. Last week, we closed on an amendment to our current credit facility. which increased the size of our revolver to $175 million from $100 million. We will utilize this borrowing capacity to initially fund the Montrotech acquisition. We are also nearly complete with an accounts receivable securitization that we discussed on the call announcing the deal. We will use all of the proceeds from that financing to partially pay down outstanding borrowings under the revolver. We will next look to term out the remainder of the revolver borrowings with an incremental term loan B when market conditions are favorable. Once complete, this will bring us back to a covenant-like capital structure as the financial covenant is only tested when the revolver is drawn. We will also file a new shelf registration by the end of June as our previous shelf registration expired. While not tied to the Montrotech financing, this will provide financial flexibility down the road. Please advance to slide 16, and I will turn it back over to David. Thanks, Greg. Turning out orders, which increased 14% sequentially in Q4, as demand remained solid across several end markets, we saw strength in the quarter, which came from oil and gas, transportation, metals processing, and entertainment. Excluding the impact of FX, orders for the quarter were 250.6 million. We remain encouraged by the activity in our pipeline, And while there is still a level of caution with respect to customers releasing large orders, there's a lot of excitement regarding the opportunities within our targeted end markets. We believe that last year's slightly elevated order levels reflected an element of demand that was associated with the post-pandemic recovery and was influenced by supply chain constraints and longer lead times. Backlog remains strong, and as supply chain constraints are easing, past due backlog is down to just under 10% of total backlog. Short-term backlog, which is backlog expected to ship in the next quarter, represents 70% of our expected fiscal 24 first quarter revenue. In the quarter, we also settled a $10 million order cancellation request with a large e-commerce customer, which resulted in an $8 million cash settlement. This had no impact on our fiscal 23 income statement. We are working closely with this customer as they manage through shifting priorities and we remain very encouraged by the innovative work that is underway and the many opportunities that are ahead of us as we continue to collaborate with this customer. If you'll turn to slide 17, I'll wrap up my prepared remarks before we open the line for questions. As I noted earlier, we are executing to achieve our strategic plan outcomes and expect to deliver one and a half billion in revenue and greater than 21% adjusted EBITDA margins in fiscal 27. We are encouraged by the opportunity landscape, which, given the macro backdrop, we are all operating within. We expect first quarter fiscal 24 sales of about $235 to $240 million. Montrotech is included in this range, but is expected to have a nominal contribution in the quarter. For fiscal 24, we're planning for sales growth in the low to mid-single digits as we address steady demand across our end markets. execute our commercial initiatives, and secure key wins. To drive organic growth, we've been advancing our customer experience and investing in new product development. NPD N-3 revenue for fiscal 23 was $47.4 million, or 5.1% of revenue, and this represented a year-over-year growth of 17% for this metric. We're focused on earning greater market share, identifying new opportunities for our technologies, and investing in innovation. Looking further ahead, we expect to make measurable, steady progress toward our strategic plan objectives over the next several years as we unlock our potential to transform Columbus McKinnon into a top-tier intelligent motion solutions enterprise. LaTanya, we're now ready to open the line for questions.