Columbus McKinnon Corporation

Hello, and welcome to the Columbus McKinnon Corporation first quarter fiscal year 2024 financial results conference call. All participants will be in the Sonali mode. Should you need assistance, please send to our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you can press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I now would like to turn the comments over to Deborah Horowski, Head of Investor Relations for Columbus McKinnon. Please go ahead, ma'am.

Thank you, Keith, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here for our financial results conference call are David Wilson, President and CEO, and Greg Rustowitz, Chief Financial Officer. You should have a copy of the first quarter of fiscal year 2024 financial results, which we released earlier this morning. We have slides as well that will accompany our conversation today. Both the slides and release are available on our website at investors.cmco.com. David and Greg are going to provide their formal remarks, after which we will open the line for questions. But right now, if you will just 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 discussion, 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. You can find these 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 tables that accompany today's release and slides. So with that, please advance to slide three, and I will turn the call over to David to begin.

Thank you, Deb. And good morning, everyone. We started fiscal 24 off on a strong note. Sales increased 7% with organic growth of nearly 6%. And at the upper end of our expected low to mid single digit growth rate for the year. Montratech, the latest addition to our precision conveyance platform, contributed 2.7 million in the quarter for the one month that we own them. We are really thrilled to have them as part of this important platform for Columbus McKinnon. They bring highly advanced automation technology with modular asynchronous transport systems that we expect to serve as a growth accelerator for this business. Gross margin expanded 100 basis points sequentially to 36.9% on an adjusted basis. This is in line with our plan to expand gross margin by 50 to 100 basis points for the year, and we will discuss this further on the next slide. We recorded another strong bookings quarter with orders up 5% sequentially resulting in a book-to-bill ratio of 1.1 times and our precision conveyance platform achieved 28% sequential order growth in the period. The customer experience is central to all that we are doing and we are making important strides in this area and there is more opportunity ahead. We believe improvements here will lead to more business earned and market share gains. In addition, our transformation efforts have provided Columbus McKinnon with a greater opportunity set in vertical markets that are less cyclical and benefit from favorable megatrends. A significant tailwind impacting current demand is the investment that is underway in factory automation across several verticals. In fact, manufacturing capacity capital spending in the U.S. is at an all-time high, which is amplified by investments being made to support reshoring efforts. intelligent and automated material handling solutions are at the heart of factory automation, where Columbus McKinnon solutions are being applied to address global labor shortages and productivity improvements. We successfully refinanced our debt in the quarter. Greg will cover this in more detail, but the end result was a reduction in the cost of debt and the elimination of financial covenant testing. We expect to be under 2.5 times with our net leverage ratio by the end of the fiscal year. Shifting to slide four, I'd like to keep in front of all of us the progress that we are making and, more importantly, the ground we have yet to cover with respect to gross margin expansion. Our start to fiscal 24 is in line with our expectations to deliver 50 to 100 basis points of improvement in gross margin for the year. This performance is consistent with our expectation to deliver 21% EBITDA margin in fiscal 2027. Our plan for the remainder of the year includes additional progress with 80-20 initiatives focused on product line, process, and factory simplification. We're also advancing our transformation to a higher margin business. Our precision conveyance platform commands higher margins, and in fact, Mantra Tech, our most recent addition, has annualized gross margins approximating 50%. With that, let me turn the call over to Greg to cover the details of our financial results. Thank you, David. Good morning, everyone. Turning to slide five, we delivered sales in the first quarter of $235.5 million, up 6.7% from the prior year on a constant currency basis, which was within the guidance we provided last quarter. The sequential decline in sales in Q1 is consistent with what we expect after our seasonally strongest quarter. Looking at our sales bridge, we realized pricing gains of $8.5 million or 3.9%, which was in line with what we were anticipating. Volume increased by $3.7 million or 1.7%. The Montrotech acquisition added $2.7 million of revenue for the month of June, which represented one month of ownership. foreign currency translation was a small benefit this quarter. Let me provide a little color on sales by region. For the first quarter, we saw sales decline in the U.S. of 1.9% compared with the prior year. While pricing was up 5.1%, sales volume was down 7.1%. This was due to weaker volumes in our precision conveyance business due to the canceled orders with a large e-commerce customer we discussed last quarter as well as the phasing of our backlog. Outside of the US, pricing improved by 1.7%, and sales volume increased a strong 16.5%. In addition, the Montrotech acquisition added 3.2% of growth outside the US. We saw volume increases in all regions. We recorded volume gains of approximately 7% in Latin America, 12% in EMEA, 24% in Canada, and 47% in Asia Pacific. EMEA, our largest region, benefited from volume gains in our lifting solutions business as productivity continues to advance in our largest global manufacturing plant in Germany, which implemented a new ERP system last year. Within APAC, we benefited from strong sales in several verticals, including general manufacturing, construction and infrastructure, utilities, and transportation. On slide six, we expanded gross margin sequentially by 90 basis points to 36.8%. On an adjusted basis, gross margin was sequentially higher by 100 basis points. Last year's first quarter benefited from a one-time inventory revaluation, which was part of the German ERP implementation. That added approximately $2 million to gross profit in the prior year for about 100 basis points. Normalized for this one-time inventory revaluation, adjusted gross margin year-over-year would have expanded about 40 basis points. Let me also remind you that the second quarter last year also benefited from this inventory revaluation by about 50 basis points. First quarter gross profit increased $4.1 million versus the prior year, driven by several factors, which you can see in the table. By seeing that, a material inflation added $6.5 million of gross profit. We are seeing material inflation decelerate from last year, which is a good trend as we progress into the second quarter. The Montrotech acquisition contributed $800,000 to gross profit. We have conformed their financials to U.S. GAAP, and we expect that for the full year, the business will generate gross margins of approximately 50%. The business is largely project-based, which can be lumpy, and we will see some variability in margins quarter to quarter. June's margin of 30% was not typical and was impacted by disruptions that occur in the first month of an acquisition. Offsetting these items was an unfavorable sales mix, which reduced gross profit by $1.1 million, as well as unfavorable productivity and other cost changes of $2 million. With our sequential gross margin performance and expected margin contribution from Montrotech, we believe we are on track to expand gross margins this year by 50 to 100 basis points. Moving to slide seven, RSG&A expense was $58.3 million in the quarter, or 24.8% of sales. This included $4.1 million of pro forma adjustments for the acquisition, headquarters relocation, a warehouse consolidation, and business realignment costs. Excluding these pro forma adjustments, RSG&A as a percent of sales was 23%. Results also include $800,000 of RSG&A costs for Montrotech. Compared with the prior year, RSG&A costs were higher by $5.1 million. Most of the increase was in G&A, which was elevated by the pro forma items and higher stock compensation expense. Helping to offset these expenses was a reduction in selling expense. This was driven by our restructuring efforts as we lowered our selling costs by 5%, even with a 7% increase in revenue. We also increased our investment in R&D by $800,000. For the second quarter, we expect our SG&A expense to be comparable to this quarter at approximately $58 million. Turning to slide eight, we generated operating income of $21.4 million in the quarter for 9.1% of sales. Compared with the prior year, GAAP operating income was impacted by net non-operating adjustments of $2.6 million, as outlined on the slide. Adjusted operating income was $25.8 million, or 10.9% of sales. On an adjusted basis, operating income grew 1.2 million, or 5%. As you can see on slide nine, we recorded GAAP earnings per diluted share for the quarter of 32 cents, up three cents versus the prior year. Our tax rate on a GAAP basis was 27%. Our tax rate was unfavorably impacted by a small discrete item for equity compensation that affected the tax rate by two percentage points this quarter. For the year, we expect our tax rate to be between 24 and 26%. Adjusted earnings per diluted share of $0.62 was down $0.07 from the prior year due to higher interest expense and the increased tax rate. As we increase volume and execute on our 80-20 initiatives, the resulting operating leverage is expected to offset these headwinds. For modeling purposes, even though we are 65% hedged to interest rate exposure, Interest expense is expected to increase to $10 million in the second quarter, with the incremental interest expense from the Montrotech acquisition. On slide 10, our trailing 12-month adjusted EBITDA was $149.4 million, which resulted in an adjusted EBITDA margin of 15.7%. Our return on invested capital at the end of Q1 was 6.6%. ROIC for all periods shown reflects the impact to after-tax earnings of an increase in our effective tax rate from 22 to 25%. We expect to achieve double-digit ROIC over time as we transform the business and execute an 80-20 initiatives. Moving to slide 11, quarterly free cash flow was negative 22 and a half million. This includes cash consumed from operating activities of 17.2 million and CapEx of 5.3 million. First quarter cash generation was affected by increases in working capital namely higher accounts receivable related to the timing of shipments at the end of the quarter, and an increase in inventory levels to support our strong order growth and resulting record backlog. We anticipate that CapEx will range between $30 to $40 million in fiscal year 24, as we are making investments at a lower cost, center of excellence, to simplify our factory footprint, as well as increase capacity, productivity, and throughput. For fiscal 2024, we expect free cash flow conversion will range between 90% and 100%. Turning to slide 12, we completed our financing activities that we discussed on the May earnings call. We increased our term loan fee by $75 million and added an accounts receivable securitization program from which we borrowed $45 million. Proceeds were used to fully pay off the revolver used to fund the Montrotech acquisition. With no revolver borrowings at quarter end and our covenant-like credit agreement, our financial covenant is not tested. We also executed another interest rate swap and are now 65% hedged at a swap rate of approximately 2.8% against three months so far, as we move towards the upper end of our policy range to take advantage of the inverted yield curve. Our net debt leverage ratio was 2.9 times on our financial covenant basis. We paid down $10 million of debt in the quarter and expect to pay down a total of $40 million of debt in fiscal 2024. We expect our net leverage ratio to drop to less than 2.5 times by the end of fiscal 2024. Please advance to slide 13, and I will turn it back over to David. Thanks, Greg. As I mentioned earlier, our book-to-bill ratio for the quarter was 1.1 times and was driven by strong sequential order demand in North America. Industrial automation wins are coming in across several verticals where our intelligent motion solutions for material handling are enabling benefits in a variety of industries, from food inspection technology to metals and grain processing, printing, package handling, automotive assembly, battery production, and even rail system upgrades. Our aerospace and defense markets are also quite busy. Our team remains highly encouraged by the quality of our pipeline and the potential for further growth within our business. In the quarter, we grew orders 5% sequentially, a notable difference from the seasonal slowdown the business historically experienced when transitioning from Q4 to Q1. Precision conveyance orders excluding Montrotech grew 28% sequentially. Year over year, orders were down modestly as last year's Q1 benefited from increased distributor demand in advance of a significant preannounced price increase last June. Orders excluding Montrotech over the last six months were in excess of $500 million and are aligned with our plan to achieve revenue of over $1 billion this year. Backlog achieved a new record at $355 million, including the benefit of $23 million contributed from Montrotech. Our short-term backlog was up nearly 7% sequentially and provides approximately 70% coverage for our expected sales in the second quarter. Long-term backlog, which is more indicative of major projects, improved 25% sequentially driven by the Montrotech additions and new project orders. We had mentioned previously that while our pipeline remained strong, decisions to release projects had slowed. Over the quarter, we saw improvements in customer confidence, and this is beginning to show in our long-term backlog expansion. Please turn to slide 14 and we will discuss our outlook for the second quarter. We are expecting between $250 million and $260 million in revenue for the second quarter, including Montrotech's contribution. This represents approximately 10% growth year over year at the midpoint of this guidance. As Greg indicated, the Montrotech business can be lumpy, given the project nature of the business, and as such, quarter to quarter results can vary. We expect that the December quarter will likely be Montrotech's strongest in the year, given our current visibility to customer delivery requirements. Along with customer experience, our 80-20 initiatives are front and center. We're making great headway with product line simplification for both our electric chain and wire row posts. This effort is not only simplifying the portfolio, our supply chain, and our manufacturing processes, it will expand our SAM for both products because we are simultaneously solving for better suited solutions at the right prices for both the mid-tier and premium markets. We expect the new lines to launch in the latter half of fiscal 25 with additional phases for the WIRO-POIS portfolio to follow. We continue to invest in new product development, including enhancements to targeted offerings that better serve our customers and provide improved market positioning. Fiscal 24 remains all about execution and the progress we expect to make with our transformation strategy. We are encouraged by the runway that exists for continued 80-20 improvement, and we're thrilled with the addition of Mantra Tech to our growing precision conveyance platform. We remain on track to deliver our fiscal 27 strategic objectives, and we expect to demonstrate steady progress along that path this year. Keith, we can now open the line for questions.