Greetings, and welcome to the Columbus McKinnon Corporation Second Quarter Fiscal Year 2021 Financial Results. Operator provided instructions regarding the conference. 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.

Thanks, Darryl, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the second 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. After our formal presentation, we will be opening the line for Q&A. We kindly ask that you ask one question with a follow-up question and then get back in queue to allow for continuous flow and adequate time. If you'll turn to Slide 2 in the deck, I will first 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 additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information. So with that, if you will turn to Slide 3, I will turn it over to David to begin. David?

Thanks, Deb, and good morning, everyone. We built momentum on many fronts in the quarter. Sales came in at about $158 million, which was at the upper end of our expected range. Sequentially, we had a strong adjusted gross margin of 34.4%, which expanded 60 basis points; and adjusted operating margin of 8.9%, which expanded 530 basis points. While the noncash pension settlement charge of approximately $16 million impacted our GAAP earnings, on an adjusted basis, we had earnings per share of $0.34. Most notably, we had free cash flow of $36 million in the quarter. And we have reduced our net debt leverage ratio below 1x trailing 12-month adjusted EBITDA. Importantly, we ended the quarter with substantial liquidity of approximately $245 million. We believe that our ability to deliver these improved results was driven by our improving organizational agility and performance-focused culture. We are making excellent progress identifying areas in which we can strengthen our business system, and we are developing plans that will evolve our strategy to the next level. On Slide 4, you can see the results of the quarter compared with the trailing first quarter of fiscal 2021. Sales grew 13.5% sequentially, driven by a recovery in our short-cycle business, which was up 22%. As you will likely recall, our short-cycle business, which comprises about 50% of our total revenue, was severely impacted in our first quarter as governments globally responded to contain the COVID-19 virus. Our project business saw sales increase 5.5% sequentially. This growth rate was dampened by the timing related to project acceptance in our rail business due to travel restrictions. Also, you will remember that from a comparative perspective, project activity was not as heavily impacted in the first quarter of this year as our short-cycle business was. We had very strong adjusted operating leverage of 48% sequentially on higher sales volume and our 80/20 tools continue to create value for CMCO, contributing $1.3 million of operating income in the period. Adjusted EBITDA margin expanded 470 basis points sequentially, achieving 13.4% adjusted EBITDA margin on this level of sales, reflecting the decisive actions we took to reduce our cost structure during these unprecedented times and validating the strengthening Columbus McKinnon business system. With that, let me turn it over to Greg.

Thank you, David. Good morning, everyone. On Slide 5, net sales in the second quarter were $157.8 million or down 24% from a year ago. As David noted, this sales level was at the upper end of our prior guidance for second quarter fiscal 2021 revenue of approximately $150 million to $160 million. Demand was impacted by the COVID-19-induced recession and sales volume declined measurably compared with the previous year. Looking at our sales bridge. Sales volume was impacted by approximately $54 million or 26.2%. While volume was down, we did realize positive pricing as we saw year-over-year pricing improved by 1.1% as a result of price increases instituted earlier in the year, about 40% of which was 80/20 related. Foreign currency became a tailwind and increased sales by 1.1% or $2.2 million. Let me provide a little color on sales by region. For the second quarter, we saw sales volume decline in the U.S. by 26.4%. This was partially offset by price increases of 1.1%. Outside of the U.S., sales volume was down 25.8%, which was partially offset by price increases of 1.2% and favorable foreign currency translation of 2.3%. By region, sales volume was down 28% in Canada, 31% in Latin America, 28% in APAC and 24% in EMEA. On Slide 6, given market conditions, our gross margin was a notable 35.5% in the quarter. On an adjusted basis, eliminating the effects of a gain on the sale of a building in China and factory closure costs, we achieved an adjusted gross margin for the quarter of 34.4%. We believe that this is a significant gross margin level when compared with the prior year, especially given the 24% reduction in revenue we experienced. We have clearly improved our mix of businesses and have benefited from our 80/20 Process and operational excellence initiatives. The 80/20 Process contributed approximately $3.4 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions and factory closures. Let's now review the quarter's gross profit bridge. Second quarter gross profit of $56 million was down $17.5 million compared with the prior year. This was driven by a $19.4 million reduction in gross profit due to lower sales volumes. We did see gross profit expansion from pricing as previously mentioned, and we experienced no material cost inflation in the quarter. Included in gross profit is a $2.2 million gain on the sale of a building in China. Foreign currency translation increased gross profit by $800,000, tariffs were lower than the prior year as we imported less Chinese product. We incurred $300,000 of incremental onetime cost for factory closures. Productivity, net of other cost changes, was negative $3.8 million, largely due to unabsorbed fixed costs in our factories. As shown on Slide 7, RSG&A costs were $37 million in the quarter or 23.5% of sales. RSG&A costs were $8 million lower than the previous year. The reduction in RSG&A was due to several factors. We lowered our RSG&A cost by $7.2 million as a result of cost-saving measures, including lower head count, limited travel and no incentive compensation bonus accruals. We also recorded $900,000 less bad debt expense this quarter compared with a year ago when we had a large customer go bankrupt in Europe. Foreign currency translation added approximately $500,000 to our RSG&A costs. With the current COVID-19 pandemic, we took quick and decisive actions to reduce our RSG&A costs as evidenced again this quarter. With demand improving, we will be increasing our RSG&A level in the second half of the year due to second half incentive compensation accruals, growth investments in R&D and our digital experience and the costs related to returning to work, including bringing back certain employees from short workweeks in Europe and additional travel. Taking all of this into account, including the structural cost changes implemented in the first half of the fiscal year, we are estimating Q3 fiscal '21 RSG&A costs of approximately $43 million. Turning to Slide 8. Adjusted operating income was $14 million. Adjusted operating margin was 8.9% of sales, a 380 basis point decline from the prior year. The driver of this decline was the impact that COVID-19 had on our sales volume. Decremental adjusted operating leverage in the quarter was 25%, which is significantly better than what we saw during the Great Recession of 2009 when we experienced decremental operating leverage of 38%. Our Blueprint for Growth strategy and specifically our 80/20 tools and operational excellence initiatives have improved our business model and better enable us to execute at higher levels of performance in all economic scenarios. As you can see on Slide 9, we recorded a GAAP loss per diluted share for the quarter of $0.17. This was the result of a $16.3 million pension settlement expense related to the termination of one of our U.S. pension plans, which we spoke about on last quarter's call. GAAP earnings per share was also impacted by the gain on the sale of the factory in China of $2.6 million and factory closure costs and insurance recovery legal costs that together totaled $800,000. Adjusted earnings per diluted share were $0.34 compared with $0.74 in the previous year, a decrease of $0.40 per share. We expect fiscal '21's full year tax rate to be approximately 10% to 12%, which is lower than the previous guidance, primarily due to the pension settlement expense related to the termination of one of our U.S. pension plans, which created a pretax loss in the U.S. On Slide 10, our adjusted EBITDA margin on a trailing 12-month basis declined to 13.3% as a result of COVID-19. Our return on invested capital also declined to 7.1%. We are continuing to target 19% EBITDA margins and ROIC in the mid-teens, but the timing for the achievement of these objectives has been negatively impacted by COVID-19. Moving to Slide 11. We generated $35.7 million of free cash flow for the quarter and $44.2 million year-to-date. We took rapid actions to preserve and generate cash and utilized our business system to focus on working capital reductions. Our working capital as a percent of sales improved to 14.1%, which was a significant contributor to our free cash flow improvement. We achieved our first half inventory targets and overdelivered on our days sales outstanding, or DSO, performance. CapEx spend will ramp in the second half of the year as we have several projects underway to improve productivity in our factories. We expect CapEx of approximately $14 million to $15 million for the full year. Turning to Slide 12. Our total debt at the end of the quarter was approximately $275 million, and our net debt was approximately $89 million. Our net debt to net total capitalization is now approximately 16%. We repaid the minimum required principal payments on our term loan in Q2 of $1.1 million and plan to pay the same amount quarterly for the remainder of fiscal '21. We have made excellent progress delevering and have achieved a net debt to adjusted EBITDA leverage ratio of less than 1x, which provides us sufficient financial flexibility to weather the current pandemic. We have a flexible capital structure which is covenant light. This means our financial covenant is only tested if we have outstanding borrowings against our revolver. After quarter end, we repaid the $25 million of outstanding borrowings on our revolver that we initially drew in April. So the covenant won't be tested at December 31, assuming no borrowings are outstanding. We also extended the maturity date of our revolver to August of 2023, which gives us a stable capital structure for almost the next three years. Finally, our liquidity, which includes our cash on hand and revolver availability, remained strong and had increased to approximately $245 million. Please turn to Slide 13, and I will turn it back over to David.

Thanks, Greg. If you would turn to Slide 13, you'll see our trend in order rates and backlog. Overall, we saw order rates improve approximately 26% compared with the fiscal first quarter. The most significant sequential increase came in July. And thereafter, orders held at about the same level through August and September. Our short-cycle business, which primarily sells through distribution, saw order rates increased throughout the quarter and finished up 41% following the low levels in the trailing first quarter. In our short-cycle business, our government, which includes defense, utility, chemical processing and infrastructure markets, remain active. Entertainment is off its low, but it is still very slow. Our project business, which has a longer sales cycle and a lumpy order pattern, had a strong July and then softened in August and September. While COVID continues to present unknown market risks, channel partners are increasingly more optimistic for improved project activity in 2021. In fact, some delayed projects are coming back to life and are being planned for early 2021. Our recent quote activity reflects this. We did have a number of encouraging project wins during the quarter. This included an order to supply actuation technology for a customer that is providing material handling systems to Amazon. We also had a win to provide an actuator stabilizing system for a truck manufacturer in Israel. We had solid bookings in rail with a total of $5 million in orders in the quarter and current quote activity for rail remains strong. We are winning in the defense industry as well with an order to provide the complete control system for shipyard cranes used in the construction of the Columbia class submarine. Our short-cycle business also had a win in defense with a large order that will ship over the next six to nine months to support the U.S. Coast Guard. Backlog was up 2% year-over-year and improved 12% or $16 million sequentially. At about $147 million, total backlog is back to pre-COVID levels. Short-term backlog increased by $8 million, ending at approximately $86 million. Long-term backlog increased $8 million as well to approximately $61 million, including some project wins that will not ship until fiscal year '22. As you look at Slide 14, we had a number of configurator upgrades and product launches in the quarter. Tandem hoists are now available on our Compass configurator, closing a competitive gap for Columbus McKinnon. While we have always supplied tandem hoists, the ease of configuration and instant quote generation for tandem hoists in Compass is powerful for our crane builder customers. Tandem hoists safely lift larger, more complex or lengthy loads. With tandem hoists, our customers can move these loads much more efficiently while protecting both the load and their people. We've improved and simplified the configuration process for this very complex crane system and now provide detailed drawings of tandem hoists and crane components so you can see the product as it's being designed. We also added the Intelli-Lift auto detection capability to our Intelli series of crane solutions in the quarter. The controls for this product will alert the operator to a misaligned or imbalanced load or a snag condition. Using sensors and a status control enclosure, the system activates lights and an optional warning horn if a side pull or an off-center pick is detected. It can then be corrected manually or if preferred, can be automatically adjusted with the automated system option. Finally, we're setting the competition on their heels with the advanced engineering design of our utility lever hoists. This includes the YaleERGO 360 used in Europe and the improved Little Mule hot stick lever hoist for the U.S. market. These tools have advanced safety features and improved ergonomics. Importantly, the incorporation of the hot stick for the upgraded Little Mule is a feature frequently required by utilities in the U.S. for the safety of alignment. Our new product development priorities are focused on improving our customers' experience and helping end users of our products to increase safety in their operations and enhance productivity. If you'll turn to Slide 15. Looking forward, we're encouraged with the improved stability in our markets while recognizing that there is still risk associated with increasing infection rates during the winter months. It's also worth noting that our fiscal third quarter has approximately three fewer shipping days than our second quarter. Given these factors, we are expecting that sales in the fiscal third quarter will be at similar levels that we had in the second quarter. At the midpoint of our range, this implies about a 3% increase in average sales per shipping day over what we had in the second quarter. Typically, our third quarter declines sequentially versus the second quarter and is our weakest quarter of the year. From a longer-term perspective, our leadership team invested heavily over the last quarter to evolve our Blueprint for Growth strategy. This resulted in clarity that we will strengthen and expand our business system with a broader set of core competencies that will establish a stronger foundation and develop a Columbus McKinnon way for enabling growth and creating scalability. The strategic framework for CMBS, which you will see on this slide, is underpinned by the key principles of being market-led, customer-centric and operationally excellent with people and values at its center. Another outcome of our strategic planning process is our emerging core growth framework, which defines parallel paths for growth and clear organic and strategic initiatives focused on strengthening our core, growing our core, expanding our core and reimagining our core. The foundation of CMBS in combination with our developing core growth framework will enable Columbus McKinnon to realize attractive, organic and acquisitive growth. Given our strong cash generation, we expect to put our capital to work efficiently with the advancement of our strategy. We consistently prioritize organic growth while expecting to evolve to a more programmatic acquisition process. We plan to inform you more fully with details of the advancement of our strategy during our fiscal fourth quarter. As we maneuver through these still unprecedented times, we know that our people are at the core of our success and their health and safety are our priorities. We are excited about our future and expect a stronger Columbus McKinnon to emerge. Darryl, we can now open the line for questions.

Operator provided instructions for the question-and-answer session. Our first questions come from the line of Greg Palm with Craig-Hallum.

Maybe I missed it, but just a little bit more color on the cadence of orders or overall demand activity, maybe kind of what you're seeing in October as well? And then any maybe end markets that surprised you to the upside or even downside?

Thanks for the question. We saw order rates improve in the quarter, as highlighted in the prepared remarks. They increased 26%. They were up materially in July and then leveled off in August and September. Compared to the first quarter, we saw a material increase. Order rates improved sequentially 41% in our short-cycle business and 12% in our project business. Through Friday, October 23, orders were down 2.3% through those first 17 days compared with the September levels, so that's an overall level of down 2.3%. The project business is up 1.3%, but our short-cycle business is down about 5%.

Okay. I was trying to reconcile the guidance for the December quarter versus the order commentary, the backlog levels in September. So is it maybe more of a function of what you're seeing in October and maybe some assumptions around what happens in the next two months versus what you saw on the backlog levels that you ended with from the September quarter per se?

Yes. I think it all ties together. As we exited the quarter, our backlog was up $16 million. But $8 million of that was long term, which means it shifts beyond the quarter, and $8 million of that was short cycle. So we entered the quarter up $8 million in backlog. We have three fewer shipping days in the period, which is about 5% fewer shipping days. That equates to about the same level of sales impact in terms of our ability to turn backlog into sales. Coupled with the rates we saw in the first few weeks of October, this led us to guide as we did. Historically, from Q2 to Q3 we typically see a decrease in sales. It's a cyclicality in the business. We're seeing improvements over our legacy performance, and we're seeing Q2 to Q3 stability. We're guiding to consistent levels with Q2. To achieve the targets for Q3, we need to ship about 3% more per day due to the three fewer shipping days. We feel good about this, given backlog and current trends, and expect to deliver performance consistent with Q2 levels in the $150 million to $160 million range.

And to add on, our fiscal third quarter is historically our weakest. But we're probably about 55% booked for the quarter, so we still have a significant book-and-bill set of orders that need to come in during the quarter. The 55% at the midpoint is actually a pretty good level for us.

Our next questions come from the line of Jon Tanwanteng of CJS Securities.

David, congrats on a first full quarter out of the gate, too. My first one, is there any reason to think gross margins might go down in Q3 at all? Or should you continue improving them sequentially, given all the initiatives you have going on under the hood?

Typically, in the third quarter we do see lower gross margins, largely because of fewer shipping days, our factories operating less, and customers tending to shut down for longer periods. Fixed cost absorption is at its lowest level in the December quarter. That said, we've made tremendous improvements in driving gross margin. We have positive pricing that we expect to continue, and with the factory consolidations and the 80/20 Process, we feel good about the gross margin levels we're at. However, we would typically expect a small degradation in gross margins in the third quarter versus the second quarter.

Do you expect a degradation from Q2 at this point, a small one?

That would be historically what we would see. Especially given the current situation with COVID in Europe, fixed cost absorption is still going to be a challenge for us in the fiscal third quarter.

Understood. And also a similar question on cash flow. You did a great job on the working capital improvement. Do those hold? Or do you expect to give some back at some point?

As volume returns, we would expect our working capital needs to increase. We did a fantastic job managing our DSOs and we'll continue to work hard to maintain current levels. On inventory, as volume improves in the second half of the year, we would expect to make incremental investments in inventory.

Understood. And then finally, the OpEx step-up I get in Q3, does that come back down in Q4 as accruals renormalize? Is that the expectation at this point?

We would expect Q4 to be similar to Q3, as people return to work, and we will have the management incentive accrual for the entire second half as well as continued growth investments.

Our next questions come from the line of Mike Shlisky of Colliers Securities.

Maybe I will start off with just a quick follow-up on the last question. Can you quantify for us if you have higher RSG&A this coming quarter? Can you give any sense as to how much of that increase is going to be from growth investments and how much is from some of the more mundane RSG&A coming back from people coming back to work?

In broad strokes, Mike, it's about $2 million for incentive compensation, $2 million for growth investments, and $2 million related to return to work.

So it's really in three buckets, and it's about those numbers.

Okay. Great. And then secondly, I want to get a little more clarity on one of the orders that you had noted in the quarter here, and that was the Amazon-related order. Could you maybe give us a little bit more color or maybe explain that order again? And I'm curious, when you work with Amazon, when you send one item to Amazon, sometimes there's a very large order that comes after that when you have they say, we need this for another 55, 85 locations around the world. Is there any possibility of getting a large order after this first order from Amazon?

Yes, we do feel good about that order. It's being sold through a customer that is providing the solution to Amazon. We have visibility into further demand for that solution and feel like we're in a good position as that demand evolves. It's exciting to be participating in that supply chain to Amazon, and it is a noteworthy order that gives us confidence we could do more. Our team is actively working on those opportunities.

Can you just maybe explain a little further like what it was that was ordered?

These are actuators that we're selling to the partner that are being configured into the solutions for Amazon's warehousing solutions.

Okay. So it's being put into Amazon warehouses, not Amazon's customer's warehouses? It's not for sale on Amazon. It's things that the company, Amazon, is using for their own operation?

Correct.

Our next question comes from the line of Chris Howe with Barrington Research.

So net debt turns is about 0.97x. This environment seems to change as we turn on the news each day. But can you talk about capital allocation priorities as we move forward through this uncertain environment, understanding that there may be opportunities in the backlog of Phase 3? But if there were to be something to happen to the downside, those would obviously be pushed out. And does this in any way change your acceleration of the growth engine, providing a time to pause and invest in some of these product development opportunities that you've mentioned in the slide deck?

Let me start and ask Greg to pick up where I leave off. Our capital allocation methodology is a defined framework and we're not deviating from it. We expect to maintain a consistent set of priorities as we advance. We have liquidity and the ability to invest in growth initiatives, and we are investing in organic initiatives and plan to invest in strategic growth options. The improvements in operating performance have positioned us to make investments we want to make as we go forward. We have a capital allocation methodology that will allow for that. I'll let Greg comment further.

Chris, our leverage ratio is below our target of 2x, sitting under 1x, which is a strong position in a pandemic. We have ample dry powder and flexibility with our capital structure to fund growth initiatives, whether in new product development or productivity CapEx. Another part of our capital allocation strategy is returning cash to shareholders. We look at our dividend every March and aim for a consistent, growing dividend. In March, we'll assess where we expect the fiscal year to end and make adjustments if required. We're in a strong position with over $245 million of liquidity, and we're well-positioned for inorganic growth as well.

Great. And one follow-up question. We talked about the trends that we're seeing in October, how that combined with some other factors like the shipping days, leads us conservatively to $150 million to $160 million for the upcoming quarter. But perhaps in line with some of David's initial comments about this quarter relating to 80/20 and also some of the pricing improvements, what sort of opportunities or pockets that are in place to exceed your expectations, knowing that gross margins will come down slightly, but just some opportunities that you're working on that could come to fruition or could potentially push into the following quarter?

As we look out, we assess risks and opportunities. We have a healthy backlog up $16 million; $8 million of that is anticipated to contribute to the quarter in short-cycle areas. That amount above historic levels that shifts beyond the quarter is an area where there might be opportunities to drive a higher level of execution. If order rates improve, that could help us execute at a higher level. We're constantly looking for opportunities to improve the business. The team is performance-oriented and increasingly agile. We've clarified strategic focus areas and the team is executing to position us for long-term growth. Opportunities would primarily be volume-oriented.

Our next questions come from the line of Matt Summerville with D.A. Davidson. This caller is represented by Austin on behalf of Matt.

I had a few questions; the first being could you comment or elaborate a bit on trends you're seeing in input costs?

Trends in input costs and raw materials: we've had a good performance in our supply chain, both in delivery and in getting vendor prioritization in this environment. We've been able to achieve the supply chain savings we targeted. Input costs have remained consistent with how we've been modeling the business. We've seen no material interruptions in supply so far. The trend overall has been consistent and is driving an improvement in cost performance. We continue to monitor the impact of COVID on supply chains, but to date we haven't seen adverse impacts.

Year-over-year, we've seen essentially zero inflation from a raw material perspective on a net basis, and that's reflected in our gross margin bridge.

Okay. And just a quick follow-up. You talked about 80/20 savings and I was curious if you could provide maybe an update on your SKU rationalization process and how that's playing out. Is there any regional dynamic to that given recent developments in light of COVID, etc.?

This is a big priority and part of our strategic deployment. We're in the early innings of rationalization and product line simplification. Early work is around developing appropriate product line roadmaps, understanding customers and needs, our product portfolio and future development opportunities to rationalize and re-platform products. We've developed initial product line roadmaps and are preparing to accelerate these efforts to drive improvement. We see this as a lever for future 80/20 savings, cost improvement, and better product offerings. From a regional perspective, a challenge is limited travel due to COVID, which affects getting resources into factories to help drive improvements. However, the product line simplification work is not materially impacted by travel limitations at this point. We're coordinating with teams around the world, identifying next steps, and moving in the early innings of implementing change. We expect to see benefits over time.

There are no further questions at this time. I would like to turn the floor back over to David for closing comments.

Great. Thank you, Darryl. Thanks for joining us today. We're pleased with our performance in the quarter, reporting strong sequential improvements in orders, sales, margin and cash, resulting in a strengthened financial position and improved liquidity. More importantly, we're gaining momentum as an organization. I hope you're as excited as I am about the future potential of Columbus McKinnon, as we execute on our plan to drive growth with strengthened earnings power. Have a nice day.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.