Columbus Mckinnon Corp Q4 FY2021 Earnings Call

Greetings. Welcome to the Columbus McKinnon Corporation Fourth Quarter Fiscal Year 2021 Financial Results Call. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Deborah Pawlowski, Investor Relations. Ms. Pawlowski, you may now begin.

Thanks, Rob, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer.

Thanks, Deb, and good morning, everyone. Fiscal 2021 was an unprecedented year and we were happy to end on a high note. We believe the excellent execution of our strategy by the team and the development and deployment of our enhanced Columbus McKinnon Business System, or CMBS, were crucial to our success. As markets have been recovering, we have responded with agility to increasing customer demand. As a result, sales grew 12% sequentially to $186 million, which was at the higher end of our updated guidance. Our team worked hard to drive efficiencies against headwinds as well. Fourth quarter adjusted operating margin was 10.1% compared with 10.7% last year. Our 80/20 tools continue to contribute to our earnings power. 80/20 provided approximately $2.9 million in operating income in the quarter to help offset the headwinds that both COVID and the supply chain presented.

Thank you, David. Good morning, everyone. On slide 5, net sales in the fourth quarter were $186.2 million, down 1.7% from a year ago. As David noted, this sales level was at the upper end of our updated guidance for fourth quarter revenue of approximately $184 million to $187 million. We continue to see demand improve sequentially and are closing the gap to pre-COVID revenue levels. This fourth quarter felt more like a normal fourth quarter as we saw stocking orders begin to return in our short-cycle businesses.

Thanks, Greg. As you can see on slide 13, orders continued to improve sequentially in Q4 and were up 24% versus Q3. We have seen improvements continuing in many markets. Projects that were previously on hold are now being released and new projects are being quoted. This is all very encouraging. We also saw the beginnings of inventory restocking in our distribution channels for the first time in two years. I should point out that there is a degree of seasonality in our orders. We typically have stronger demand in the fiscal fourth quarter whereas orders in the fiscal first quarter tend to decline sequentially. This reflects distributor purchasing behavior in advance of annual price increases. We know that year-over-year comparisons for the first quarter in fiscal 2022 will be favorable considering what was happening at this time last year. In fact, through last week, the average daily order rate for our lifting business was up over 50% compared with last year. Book-to-bill for the fiscal fourth quarter was greater than 1.1 to 1. Demand was strong in defense and government with a variety of projects, including shipbuilding and material handling automation at supply depots among other projects. Demand from energy markets globally was encouraging. Utilities were stocking up for summer work in advance of the hurricane season. We also had requests for solutions in nuclear and thermal power generation facilities. Demand for our fixed venue entertainment products has been improving. Inquiries in this market in general are picking up. We would expect to continue to see this trend improve and to start seeing this convert to orders for touring shows as we progress through the year. Both short and long-term backlog were up sequentially. Short-term, which is expected to ship within the first quarter, grew nearly 15% to $104 million, while long-term backlog was up nearly 10%. This does not include approximately $40 million of additional backlog from Dorner. We are entering fiscal 2022 in a solid position with the expansion of the markets we serve, our strong competitive position and the tailwinds of recovery. Please turn to slide 14. For the first quarter of fiscal 2022, we expect net sales to range between $212 million and $217 million. This, of course, includes the Dorner acquisition. The addition of the Specialty Conveying Solutions platform diversified our markets into those with enduring tailwinds. We are seeing strong demand from e-commerce, life sciences and food processing industries. With this platform, we are accelerating our pivot to growth and improving our margin profile. As to the supply chain, we are actively addressing inflation, shortages and logistics constraints. We began implementing additional price increases this month and are working closely with our suppliers to get better purchasing and delivery performance. We have historically been able to cover material cost inflation and believe we are positioned to continue to do so. Looking beyond the next quarter, there is a lot that makes us excited about where we are headed. We are driving progress with our strategy and employing new business tools to drive scalability. We expect to deliver growth through targeted organic initiatives including opportunities within our Specialty Conveying Solutions platform. And while delevering our balance sheet and integrating Dorner are high priorities, we will continue to actively develop our M&A pipeline. Turning to slide 15. I'd like to remind you of our Blueprint for Growth 2.0 strategy. CMBS provides the foundation and our Core Growth Framework defines the potential that we have in front of us. We truly believe there is a lot to look forward to here at Columbus McKinnon. With that Rob, we can open up the line for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question today comes from the line of Mike Shlisky with Colliers Securities. Please proceed with your question.

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

Yes. I think the pandemic, Mike, good question. As we look at the quarter ending March for them in the prior year, the pandemic was early in its cycle. I think their backlog was around $17 million at that time and they saw the first quarter of our period last year. Their third quarter in their annual cycle was the worst from the pandemic. Remember they have a year-end in September, so that would have been their fiscal third quarter, which is equivalent to our first fiscal quarter of 2021. And that was the period when they were impacted the most by COVID. But their March ending balance, or what we refer to as their April pending balance, at $40 million is more than double; I think it was $17 million at the time that we're referring back to.

Okay. And then my follow-up. You had mentioned on the slide that you're still looking at 19% EBITDA margins in fiscal 2023. Do you anticipate that being a full year type of scenario, or just kind of an exit-rate scenario as to what that 19% target means to you for next fiscal year?

Hey, Mike. It's Greg. We're looking at that as being the average for the full year.

Average? Okay. That's great color. I appreciate it. And I’ll pass it on.

Thanks, Mike.

Thank you. Our next question is from the line of Michael McGinn with Wells Fargo. Please proceed with your question.

Hi. Good morning, everybody.

Hey, Mike. Good morning.

Good morning.

So you walked through some SG&A numbers, and I think the SG&A ramp you said was $7 million related to Dorner, with amortization on top of that. Does that $7 million include all costs, meaning is it fully burdened with R&D and everything?

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

That $50 million includes the R&D. And we're going to continue to make selected and targeted investments in growth throughout the year.

Got it. You also mentioned the second pricing increase and that your backlog is filling up a little quicker with shorter-cycle distribution products. Can you walk us through expectations for price increases on the front-end shorter-cycle products being delivered in the front half? And then, if projects pick up in the back half, what would your incremental margin estimates or assumptions be in that scenario?

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

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

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

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

Got it. Appreciate the time.

Thanks Mike.

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

Good morning everyone. Thanks for taking my questions. Regarding the guidance we've discussed for the first fiscal quarter, can you provide more detail on how this might look for Dorner, specifically what your sales expectation for Dorner is? And in the context of this fiscal year, can you remind me about Dorner's seasonality and how it compares to last fiscal year? Sorry for so many questions, but are the prior Dorner expectations for the year ending September 30 still in line?

Yes. Chris, let me jump in and then I'll ask Greg to help out. So, Dorner's performance is tracking consistent with our expectations at the acquisition timeframe. Even slightly ahead of those expectations and so we feel really good about where the business is. Their order development has been really promising. From a cyclicality standpoint, on their build-to-order business, which is their base business, it's relatively stable. Their Q3 Columbus McKinnon period tends to be their highest period at calendar year-end and then that goes into the Q4 period at a slightly lower level. But Q1 and Q2, if there is any seasonality would tend to be a little bit lower on the build-to-order in a general cycle. But that's exclusive of more macro drivers, which includes a lot of activity in the life sciences and e-commerce sectors. And so, we're seeing terrific development in terms of order pipeline there. On a year-over-year basis, their orders are up on a quarter-to-date basis materially. First quarter last year was their worst quarter when I refer to Columbus McKinnon's quarter. So really good development there.

Yeah. So just to add on, from a seasonality perspective, we don't really see seasonality in the business other than the number of working days. So when David talks about our December legacy quarter being less for them, it's really a function of the Thanksgiving holidays, Christmas holidays, but there isn't really that cycle. And given the growth trajectory that they've been on, they've been kind of blowing through any kind of concept of seasonality. Now we did give a couple of markers on revenue as part of the S-1 filings and 8-K filings when we announced the Dorner acquisition. I think through December the revenue was about $98 million and change, and for their September timeframe, it was about $124.7 million is the number that I recall. That says that there's been a tremendous amount of growth that's happening in the second half of the year and that is just continuing. So we're very pleased with the first month and a couple of weeks that we've owned Dorner. It's a very profitable high-margin business with a really great double-digit growth trajectory.

Yeah and a fantastic team.

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

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

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

Great. Thanks, Howe.

Our next question is from the line of Greg Palm with Craig-Hallum Capital. Please proceed with your question.

Hi. This is Danny Eggerichs on for Greg today. Thanks for taking the questions.

Good morning, Danny.

Good morning.

Hey, I appreciate the color on that. It sounds like Dorner growth rates have been accelerating recently. Could you dig into the drivers behind that? I know with the labor constraints many companies are putting more emphasis on warehouse automation. Anything you're seeing from that perspective?

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

Yeah, I mean it seems like order rates have been accelerating recently. I was just kind of wondering what the drivers were behind that.

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

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

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

All right. That’s really helpful. I’ll leave it there. Thanks.

Great. Thanks, Dan.

Our next question is from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

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

Good morning, Matt. I'll let Greg comment a little further after I highlight, but we saw channel partners lean in in Q4 and start to place orders for the first time in a couple of years and lean in positively towards where the market was going. Since then we've seen that lean become more forward leaning and become accelerated. We see our customers beginning to open up. I'd say we're in — what we're reporting here in Q4 is the beginnings of that. On a quarter-to-date basis, we're up about 70% short-cycle in comparison to the prior year for the first three weeks of May. Our project business is up about 30% year-over-year in that same cycle. So when I commented that through the first three weeks of May, we see orders up year-over-year approximately 50%, that's the split. The short-cycle demand increase indicates that our channel partners are leaning in a little bit further on inventory and being bullish about it, but I'd say, we're in the early to mid innings in terms of restocking.

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

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

So with the pricing that we've implemented, we want to be sure we stay ahead of the inflationary pressures that we're going to see. We have inflationary pressures in raw materials, freight, and labor costs. In the past year, we really did not provide increases to our associates. So there is going to be a bit of a catch-up here starting in July. But I think all in, we will expect that will cover inflation and maybe have a little bit of upside. This is really meant to cover the inflationary pressures that we are expecting.

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

Got it. Thank you, guys.

Thanks, Matt.

Thank you. Our next question is from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

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

We would expect that we'll still be able to stay ahead, Jon. If you recall, we implemented our normal round of price increases that took effect, some in January, some April 1, some in the U.S. the third week of March. Those are all in place. We should not expect any erosion to margins as a result of inflation in the first quarter. Once again, we're trying to get ahead of what we anticipate coming down the road.

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

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

Okay, great. And then, Greg just a great job on cash flow once again. Do you see that reversing out as you grow this year? And maybe building inventory like, some of your customers? And then it seems like, everybody's supply chain is trying to if they can.

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

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

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

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

Okay. Fair enough. Thank you, guys.

Thanks, Jon.

Our next question is from the line of Steve Ferazani with Sidoti. Please proceed with your question.

Good morning, Steve.

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

I don't think there is anything specific from a market perspective that we see as negative as it relates to the sequential activity in the market. It's more simply sequential performance in the core business based on the cycle in the market. We see a lot of demand that gets placed given our year-end price increases, behavior in the channel. As we head into Q1, we're anticipating a typical cyclical decline in the core business, but certainly with a tendency towards acceleration as we head into the second quarter.

The only thing I'd add is one of the movers to our revenue line is our rail business, which can have some larger projects. We had a very strong order in the fourth quarter from our rail business, and due to timing of projects in Q1, there is probably about a $5 million delta in revenue timing.

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

From a debt repayment perspective, the Term Loan B requires an annual principal payment of 1% per year, which would be $4.5 million and divide that by $4 million, so $1.25 million a quarter starting in the next quarter. There is an excess cash flow suite, which is 50% of your free cash flow that's due based on your annual free cash flow at the end of March, and it depends on your leverage ratio. Once we're below three times that steps down to 25% and then it steps down again. We filed our credit agreement so that's publicly out there. In terms of other cash requirements, pension contributions would be one that we would anticipate similar this year versus last year and probably in the neighborhood of around $7 million. There are no prepayment penalties on debt. What we have typically done in the past is use any excess cash we have to pay down debt, save the interest expense and delever quickly. The financial covenant for those not familiar with the Term Loan B only kick in if we draw down off the revolver. If we don't draw off the revolver, the covenant isn't tested and we typically don't need our revolver for intra-period cash requirements given our strong cash flow profile.

Steve, are you there? Rob?

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

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

Thank you. This will conclude today's conference. You may disconnect your lines at this time and we thank you for your participation.