Columbus McKinnon Q1 2025 Earnings Call Transcript

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July 31, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to Columbus McKinnon First Quarter Fiscal 2025 Earnings Conference Call. My name is Renju, and I will be your conference operator today. As a reminder, this call is being recorded. I would now like to turn the conference over to Kristie Moser, Vice President of Investor Relations.

Speaker 1

Thank you. Good morning, and welcome, everyone, to Columbus McKinnon's Q1 fiscal 2025 earnings conference call. The earnings release and presentation are available for download on our Investor Relations website at investors. Cmcl.com. On the call with me today are David Wilson, our President and Chief Executive Officer and Greg Restewitz, our Chief Financial Officer.

Speaker 1

In a moment, David and Greg will walk you through our financial and operating performance for the quarter. Before we begin our remarks, please let me remind you that we have our Safe Harbor statement on Slide 2. During the course of this call, management may make forward looking statements in regards to our current plans, beliefs and expectations. These statements are not guarantees for future performance and are subject to a number of risks and uncertainties and other factors that can cause actual results and events to differ materially from the results and events contemplated by these forward looking statements. I'd also like to remind you that management will refer to certain non GAAP financial measures.

Speaker 1

You can find reconciliations of the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question and answer session. With that, I'll turn the call over to David.

Speaker 2

Thank you, Christy, and good morning, everyone. Columbus McKinnon delivered a solid quarter to start the fiscal year, achieving 2% sales growth, which was at the midpoint of our guidance range and adjusted EPS of $0.62 which was at the top end of our guidance range. Areas of strength included precision conveyance and lifting, which were up 10% and 3% respectively. Short cycle sales remained healthy and the project business was up mid single digits. Gross margin expanded by 110 basis points year over year to 38%, a record first quarter and the 2nd highest quarterly result in company history as we remain focused on performance improvement and eightytwenty.

Speaker 2

And we delivered adjusted EBITDA margin of 15.6 percent even as we absorbed $1,200,000 of unique costs related to launching regional strategic partner conferences in Europe and the Americas that are aligned with our commercial and customer experience initiatives. These results are underpinned by the hard work and continued execution by our 3,600 Columbus McKinnon team members as we navigate a dynamic macroeconomic environment and leverage commercial initiatives to advance in vertical markets that are experiencing secular growth and benefiting from mega trends. We are growing, generating cash with normal seasonality and accelerating debt repayment. These actions are adding capacity to reinvest in our growth framework. We have multiple levers to drive more scale and further enhance our position as a leader in intelligent motion solutions for material handling with a carefully curated offering for our customers.

Speaker 2

We believe that increasing scale will become a compounding advantage as we execute our strategy over time. Advancing to slide 4, we delivered mid single digit order growth across most areas of our business with the exception of our crane automation business, where we saw softness and are lapping a strong prior year comparable period. Precision conveyance orders were up 5% driven by new customer wins in the electrification space. For the remainder of our business, our order funnel remains healthy across both the short cycle categories and our project business. Short cycle orders were up 3% in the quarter driven by share gains resulting from our customer experience initiatives.

Speaker 2

In the project business, orders were down 5% in the quarter, driven by order timing and the softness in crane automation that I just referenced. Overall, our project funnel remains healthy, reflecting our customer centric focus, targeted end market growth initiatives, channel diversification efforts and recent new customer engagements. On a quarter to date basis through last week, orders were up double digits year over year driven by strength in precision conveyance particularly at Monteratech. While we are not immune to the impacts related to current macroeconomic conditions, including higher for longer interest rates or indecision related to the rapidly evolving political landscape and the upcoming U. S.

Speaker 2

Election, we continue to remain focused on what we can control, executing on our commercial, operational and financial initiatives. With this as our focus, the phasing of our long term backlog and the addition of new project wins. While not in a straight line, we continue to expect backlog to further normalize from current levels over time as we improve lead times and customers adjust their ordering behaviors. On Slide 5, you can see that our priorities remain consistent as we execute on the most important initiatives that will enable us to achieve our growth performance objectives. Specifically, we remain focused on enhancing customer experience and further differentiating our value proposition, driving operational excellence through the business and executing on footprint simplification plans that facilitate meaningful gross margin expansion.

Speaker 2

In fact, earlier this week, we announced that we are consolidating our North American linear motion facility into our manufacturing center of excellence in Monterrey, Mexico. This 146,000 square foot facility is expected to cease operations at the end of the second quarter and completely wind down by the end of the third quarter. Through lean manufacturing techniques and the use of improved manufacturing technologies, we expect to have utilized just 50% to 60% of our Monterey facilities 165000 Square Feet following this action as we ramp production. This is an important next step along our eightytwenty footprint simplification path to deliver 200 basis points of gross margin improvement by fiscal year 20 27. These strategic initiatives in combination with our commercial priorities enable us to deliver profitable growth focused on strategically advantaged end markets.

Speaker 2

In addition to positioning ourselves to benefit from megatrends such as near shoring, increasing defense spending and growth in e commerce, we are investing to become a leader in targeted vertical markets. 2 particular areas of focus and recent success include electrification or battery production, which is a market growing at a CAGR that is north of 30% and is expected to hit $550,000,000,000 in 2,030. In fact, over 200 battery factories are planned to be constructed in the next 6 years to support mobility, electrical capacity storage and more. We are establishing a leadership position in the space by providing fit for purpose advantage solutions for battery producers. Most recently, we won a $9,000,000 order for Montratech's asynchronous conveyance solutions from Volkswagen backed PowerCo as they invest in factory automation solutions for their Gigafactory production needs.

Speaker 2

We see a long and attractive runway of solutions that we can deliver for this customer and others over time as our precision conveyance team is quickly building a reputation as a leader in intelligent solutions for the electrification and battery production markets. Another area of focus is the life sciences vertical. Here we have had great success enabling pharmaceutical manufacturers to quickly ramp production and meet rapidly growing demand. This was done most notably during the pandemic as global pharmaceutical companies launched COVID-nineteen vaccines. Looking ahead, there are several rapidly growing demand areas, including weight loss injectables and related products that are struggling to keep up with rapidly growing demand and we are well positioned to participate in this growth.

Speaker 2

Overall, we're encouraged by the progress we're making and the potential of our business as we advance our strategy and execute on our prioritized initiatives. We are delivering impactful improvements across the business and remain in the early innings in terms of the value these initiatives will deliver over time. Powered by our strategy and our position as a market leading provider of intelligent motion solutions for material handling, we are delivering attractive outcomes and improving financial performance. We remain confident in our ability to increase scale, compound growth and deliver shareholder value over time. With that, I'll turn the call over to Greg to take us through the financial results.

Speaker 3

Thank you, David. Good morning, everyone. Turning to slide 6, we delivered 1st quarter net sales of $239,700,000 up 2% from the prior year period. This was in line with the guidance we provided last quarter of low single digit growth. We delivered $2,100,000 of organic growth or 0.9 percent with realized pricing gains more than offsetting a slight volume decline.

Speaker 3

Montertec revenue in April May contributed $2,700,000 to sales or 1.1 percent of the increase. As the acquisition date was May 31, beginning in June, the results are no longer included as acquired revenue. As a reminder, Montertec revenue has variability from period to period given the project nature of the business. Foreign currency translation was unfavorable this quarter by $600,000 or 0.2%. Sales growth in the quarter was largely driven by Precision Conveyance, which was up 10% from the prior year.

Speaker 3

As David discussed, we are encouraged with our pipeline of opportunities for this platform as we have significant opportunities on the horizon with both our U. S. Precision conveyance business as well as Montra Tech. Our project business also contributed to sales growth in the quarter as it was up 4% driven by strength in our STAHL branded product with sales into the oil and gas vertical. Offsetting this growth was our short cycle business, which was down 2%, although I would point out that short cycle orders were up 3% in the quarter as we advance customer experience initiatives and capture market share.

Speaker 3

In the U. S, sales were up slightly in the quarter with price offsetting lower volume as we benefited in the prior year from backlog reduction. Outside of the U. S, sales increased by 5% on a constant currency basis. This was primarily the result of Montertec acquired revenue and organic growth, which contributed 3% and 2% of sales growth, respectively.

Speaker 3

On slide 7, gross profit increased $2,400,000 or 2.7% versus the prior year driven primarily by pricing, favorable sales mix and Montertec acquired gross profit even as we absorbed $1,800,000 of Monterrey Mexico start up costs and business realignment costs. We recorded a gross margin of 37.1% in the 1st quarter, up 30 basis points versus the prior year. On an adjusted basis, gross margin was 38%, up 110 basis points year over year. Moving to Slide 8, our SG and A expense in the quarter increased 2,100,000 to $60,400,000 This was driven primarily by the acquisition, which added $1,700,000 of acquired costs in the quarter. Our SG and A expense also included $1,900,000 of Monterrey Mexico factory start up costs and $500,000 of business realignment costs.

Speaker 3

We also incurred $1,200,000 of costs related to our strategic partner conferences in both the U. S. And Europe, which were not held in the prior year. Turning to Slide 9, we generated operating income of $21,100,000 in the quarter, down 1% to the prior year, impacted by the factory start up costs, business realignment costs and the strategic partner conference costs that I just mentioned. Adjusted operating income was $25,700,000 roughly flat to the prior year.

Speaker 3

On slide 10, we recorded GAAP earnings per diluted share for the quarter of $0.30 down $0.02 versus the prior year. Impacting GAAP EPS were the previously mentioned new factory start up costs in Monterrey, Mexico and business realignment costs. Together, these items impacted GAAP EPS by $0.11 per share. Adjusted earnings per diluted share of $0.62 was flat to the prior year with a higher amortization expense add back and lower interest expense offsetting other below the line items. On slide 11, our adjusted EBITDA increased 2% year over year in the Q1 and adjusted EBITDA margin of 15.6% was in line with the prior year.

Speaker 3

This included the impact of the strategic partner conferences which impacted our EBITDA margin by 50 basis points. Moving to Slide 12, free cash flow improved $7,100,000 from the prior year. Negative free cash flow of $15,400,000 in the Q1 reflected normal working capital seasonality in our business. CapEx in the quarter was approximately $5,000,000 comparable with the prior year. Free cash flow conversion for the quarter on a trailing 12 month basis was a strong 108%.

Speaker 3

Turning to slide 13, our total debt was down 4% from March 31 levels. We paid down $20,000,000 of debt in the quarter and are increasing our expected debt repayment in fiscal 2025 from $50,000,000 to $60,000,000 Our net leverage ratio was 2.6 times on a financial covenant basis, down 0.3 times year over year and we expect our net leverage ratio to end the current fiscal year approximately 2 times. As a reminder, we repriced our Term Loan B in March, lowering our cost of debt. We expect this to generate approximately $2,500,000 of interest expense savings in fiscal year 2025. Slide 14 provides our guidance for fiscal year 2025 and the second quarter.

Speaker 3

Our guidance considers the improvements we are driving throughout the business, our visibility into the funnel and our solid performance in the Q1 despite a softer macroeconomic backdrop. We have also built into our forecast for the Q2 the expected impact of consolidating our North American linear motion production into our center of excellence in Monterrey, Mexico. With that in mind, we are issuing the following guidance. In the Q2, we expect sales growth to be down low to mid single digits from the prior year and adjusted EPS growth to be down mid single digits year over year. We are also anticipating several one time costs related to the factory closure including $2,000,000 to $4,000,000 of expected cash restructuring costs and $4,000,000 to $5,000,000 of non cash asset impairment costs related to the consolidation.

Speaker 3

This is an important step on our eightytwenty journey with our overall footprint simplification plan expected to deliver 200 basis points of gross margin improvement by fiscal 20 27. For the full year, we are reaffirming our fiscal 2025 guidance of low single digit sales growth year over year, mid to high single digit growth in adjusted EPS, CapEx in a range of $20,000,000 to $30,000,000 which includes 8 $1,000,000 related to our footprint simplification initiative and we expect our net leverage ratio to end fiscal 2025 at approximately 2 times. Operator, we are now ready to take questions.

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of James Kirby with JPMorgan Chase. Please go ahead.

Speaker 4

Hey, good morning guys. Just wanted to start with the Q2 guidance in the context of the full year guidance. Is it safe to say that the same quarter will be the lowest point of the year? Or is it too early to tell kind of what the back half holds?

Speaker 3

No, that's what we expect, James.

Speaker 4

Got it. And I guess off the same question, you mentioned the moderating benefit from pricing. What is embedded in the second half of the year? I assume we take another step down maybe next quarter in 2Q. But is there anything in the back half of the year gives you confidence that pricing might return to strength?

Speaker 2

I would say, James, that we have a position of strength as it relates to pricing typically and that we do outpace inflationary costs with our price adjustments. And so I don't believe we're in a position of weakness relative to pricing. I just think that the point that we're making is the pricing has moderated in terms of the impact relative to the lower inflationary environment that we're in. And so while I don't expect pricing to have a material impact on the second half of the year, we do believe that it will be outpacing the impact of any inflationary pressures that we would see.

Speaker 3

And James, I would just add that in our North American lifting business, our price increases took effect in the month of June. And so there's backlog still priced at old pricing. So we do expect pricing as we alluded to at the end of the Q4 to moderate as inflation has come down, but we would expect it to be in that 1% to 2% range for the year. So we would see it modestly higher going forward as the price increases take effect.

Speaker 4

Got it. That makes sense. I appreciate it, Greg, David. Thanks.

Operator

Thank you. Next question comes from the line

Speaker 4

of

Operator

Matt Summerville with D. A. Davidson. Please go ahead. Yes.

Speaker 5

A couple of questions. So, I guess, first, with the 2nd quarter dynamic, I guess, maybe you weren't sure when which quarter this is going to happen 90 days ago. But I guess, why not kind of get out in front and articulate that the Q2 was going to be a little bit of an air pocket on the move? And then similarly, that implies a pretty big and uncharacteristically big second half of the year. So help us get comfortable that the full year guide on the bottom line is still achievable.

Speaker 2

Yes, absolutely, Matt. Fair enough. And in terms of the timing, we're managing the business. We have employees that we need to be sensitive to. Obviously, we can't get out ahead of that with that communication and articulate that detail until we're ready to do it.

Speaker 2

It has implications on notifications that we need to make relative to the WARN Act and other related filings. So, we communicate that when we're ready to do so. We've been very clear about the fact that we're marching towards a multi action plan that results in 200 basis points of expansion. And so the second half of the year now obviously has a ramp relative to the first half, but it's well within the range of what we think is achievable. It's a 6% growth with a modest gross margin expansion.

Speaker 2

And we have, as we indicated in our previous discussions, an elevated backlog and order rates that we think will support that outcome. And so as we expect backlog to moderate or normalize over the balance of the year and the order rates that we referenced in our prepared remarks earlier, we think that we'll be positioned to execute on that plan for the rest of the year.

Speaker 3

And Matt just to add on from an EPS perspective, we will benefit from interest expense savings as we've repriced our term loan B back in March and we've been very aggressive in paying down debt. We would also expect incremental gross margin expansion. We do expect that by the Q4 we should start to benefit from the facility consolidation that we announced today. And all so we feel very confident with our guidance overall.

Speaker 5

As I think about the Q2, can you maybe articulate what the top and bottom line impact, the stuff you can't non GAAP out associated with this move. Can you is there a way to parse out the financial impact on the P and L in the quarter from this, I'm just going to generically call it sort of disruption if you will?

Speaker 3

Yes. So it's really a top line issue for us Matt. From a duplicate cost, from a moving cost, restructuring cost, all of those cost asset impairments and we've laid out a number of those in the 8 ks that was filed this morning. Those will all get adjusted out and it's really the top line impact. As with just disruption from a facility where people were notified very recently that their jobs are going to end here.

Speaker 3

And so that's going to have an impact potentially on productivity and on our ability to maintain our typical delivery performance. And we're obviously going to try to do better on that, But it's just we would expect and I guess we're being prudent with the idea that there is going to be some amount of disruption.

Speaker 5

Got it. Thanks, Greg.

Operator

Thank you. Next question comes from the line of Steve Farazani with Sidoti and Company. Please go ahead.

Speaker 6

Hey, good morning, everyone. This is Kyle May on for Steve. Just wondering if you could talk about any updates on cross selling of new acquisitions, and if you found traction for the Monitrack outside of its previous core markets?

Speaker 2

Yes, absolutely. So Kyle, good morning. We've had good success at training our workforce around the world to represent the broader precision conveyance portfolio and we've been building a nice pipeline of opportunities beyond geographies that that business has serviced as well as we expect to as we go forward. And so we've got a funnel of opportunities that are quoted and active that is around $5,000,000 in the U. S.

Speaker 2

Right now for that product line. We did close an opportunity with a prescription fulfillment service provider that we communicated last quarter. That was a nice large order and it's one of several that could come that are not included in the number that I just gave you, that could come over time. And so we're broadening their reach into areas from a footprint perspective and market perspective that go beyond where they've been able to play. And most recently, what we're really excited about is that we've really begun to demonstrate our specific application advantages related to the battery production market with Montertec.

Speaker 2

And so that led to the PowerCo order that we referenced in the prepared remarks. And there's a nice runway of opportunity for those expansion investments that they'll be making over time as well as others related to that very attractive end market.

Speaker 6

Got it. That's helpful. And my next question, cash conversions topped 100% for the last 4 quarters. Is that something that you can maintain at or above 100%?

Speaker 3

We think we can Kyle and it's because we are a CapEx light company and we just with the cash generation capability of the company, we should be 100% and north of 100%.

Speaker 6

Okay, great. Thanks for the time.

Speaker 3

Thanks, Scott.

Operator

Thank you. Next question comes from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Speaker 7

Hi, good morning. Thank you for taking my questions. Greg, I was wondering if you could give a little bit more specificity as to the revenue impact from the move in Q2. Also, were there any pull ins into Q1 to the extent you anticipated the move? And how much do you think is pushing out to Q3 and beyond?

Speaker 7

I guess what I'm trying to get at is what the normalized run rate is expected to be assuming things go as planned?

Speaker 3

Yes. So John, we would expect that there will be some disruption. We've put a lot of effort into planning for this. But nonetheless, we do think there is going to be some impact. It's in the order of magnitude of probably a couple of $1,000,000 we would expect.

Speaker 7

Okay. And do you expect that pent up demand I guess to be served in Q3 pretty quickly or does that customer go away I guess to a different provider if they can get it?

Speaker 2

No, John, this is David. We'd expect that to be made up for in Q3 or at worst case in Q4 and come back in the year. And we obviously are maintaining a close proximity to our customers and communicating with them related to these changes and ensuring that we have the right service levels with all the pre planning work that we've done both in Mexico and at our existing facility. This is prudent as we plan and think about the impact that could come from these moves. We're confident in the plan that we're executing, but obviously we have to be sensitive to the fact that there could be some disruption in the period.

Speaker 2

And then there's a level of backlog phasing that impacts the revenue profile of the second on the order rates and the timing of orders that came in, in the Q1. And so our project backlog phasing has an impact on the top line in the second quarter as well as we're advancing through this quarter.

Speaker 7

Got it. That's helpful. My second question, just I think you had previously talked about your book to bill likely to be below 1 for the year just as you burned off backlog. It was above 1 this quarter. It looks like it's going to be above 1 in Q2 with the revenue down and the orders to date being better.

Speaker 7

Just wondering how you're thinking about the rest of the year beyond that, if there's anything that's different from what you expected?

Speaker 2

We remain really encouraged with the funnel of activity that we're managing and the opportunities that we think are realistic for us to close on. We're obviously maintaining a focus as I said in my prepared remarks on what we can control. So we're executing on our commercial initiatives and our customer experience initiatives. We feel like that is resulting in some attractive opportunities. And thus far, we've had a level of success with that.

Speaker 2

We remain encouraged, but we're maintaining the guidance that we said at the beginning of the year. And as I said earlier, we remain cautiously optimistic our ability to achieve those.

Speaker 7

Okay, great. Thank you, guys.

Speaker 2

Thanks, John.

Operator

Thank you. Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Mr. Wilson for closing comments.

Speaker 2

Thank you everyone for joining us today. Our team continues to execute our strategic plan, improve our customers' experience and make significant progress on our simplification initiatives. I'd like to extend my personal thanks to our entire team for their dedication and the relentless execution that enabled us to begin fiscal 2025 with strong results. In our Q1, we delivered year over year sales growth, expanded gross margin, secured new customer wins, increased backlog with a book to bill ratio in excess of 1 and accelerated debt repayment. We also announced the continuation of our footprint simplification plan and the consolidation of our North American linear motion facility into our Monterrey, Mexico manufacturing center of excellence.

Speaker 2

This is an important next step along our journey to deliver 200 basis points of gross margin expansion by fiscal year 20 27. Finally, our team remains focused on the prioritized initiatives that will enable us to achieve our growth and financial performance objectives. We're encouraged by the pipeline of opportunities we see in our funnel, continue to be optimistic about our prospects and are reiterating our full year guidance. Thanks for investing your time with us today. As always, please reach out to Christy if you have any questions.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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