Greetings, and welcome to the Columbus McKinnon Corporation Second Quarter Fiscal Year 2021 Financial Results. [Operator Instructions] 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, reflects the decisive actions we took to reduce our cost structure during these unprecedented times and validates 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…

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 6…

[Operator Instructions] 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. So we saw order rates improve in the quarter, obviously, we highlighted that in the prepared remarks. We saw them increase 26%. They were up in July materially and then leveled off in August and September. And obviously, compared to the first quarter, we saw a pretty material increase. Order rates improved sequentially 41% in our short-cycle business and 12% in our project business. And then really, through Friday, October 23, orders are down 2.3% through those first 17 days compared with the September levels. So that's an overall level of 2.3%. And project business is up 1.3%, but our short-cycle business is down about 5%.

Okay. So -- I mean I just -- I was going to try 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 2 months versus sort of what you saw on the backlog levels that you ended with from the September quarter per se?

Yes. I think it all ties together. So 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 then $8 million of that was short cycle. So we entered the quarter up $8 million in backlog. But we have 3 lower -- 3 less shipping days in the period. And so that, as a percentage, is about 5% less shipping days. And that ends up with about the equivalent level of sales impact, if you will, in terms of our ability to turn that around. That, coupled with the rates that we see running through the first few weeks in October, really lead us to a point where we feel like the guide is consistent with what we should expect. But in reality, if you look at our history, sequentially, from Q2 to Q3, we typically see a decrease in sales. We've seen it over the last several years. It's a cyclicality in the business. And so what we're saying is that we're really seeing improvements over our legacy performance. We're seeing quarter 2 to quarter 3 stability, and we're guiding to a consistent level with Q2. And so we really have to ship about 3% more per day in the average rates going from Q2 to Q3, given the 3 less shipping days to be able to achieve the targets that we've given you for Q3. So I think we feel good about this. We think that the markets, we expect them to be stable as we continue through Q3. But we feel like with what we entered the quarter with in terms of backlog and how we see things progressing at the moment, we're in a position to deliver a performance that's consistent with our Q2 levels in the $150 million to $160 million range and then execute at those levels, which would be an improvement over prior year trends.

And Greg, just to add on -- so as David said, our fiscal third quarter is historically our weakest. But what we feel really good about is we're probably about 55% booked for the quarter. So we still have a significant book and bill set of orders that do need to come in, in the quarter and -- but 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?

So Jon, typically, what we see in the third quarter is we do see lower gross margins, largely because of less shipping days, our factories operating less, but also our customers tend to shut down for longer periods of time. So our fixed cost absorption is at its lowest level in the December quarter. But having said that, we've made tremendous improvement in driving gross margin. We've got positive price. We would expect that to continue. And we've -- with the factory consolidations and the 80/20 Process, we feel good about the gross margin levels that we're currently at. But having said that, we would typically expect a small degradation in gross margins in the third quarter for the Q2 level.

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

That would be historically what we would see.

Okay. But with the improvements, you may not?

I would say, Jon, that especially given the current situation with COVID in Europe, that it's going to -- fixed cost absorption is still going to be a challenge for us in the fiscal third quarter.

Okay. 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 go up. We did a fantastic job managing our DSOs or days sales outstanding. We're going to continue to work hard to maintain levels current to where they are. On the inventory front, as volume improves in the second half of the year, we would expect that we're going to have to make incremental investments in inventory.

Understood. And then finally, just one quick one, if I could. 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 that the Q3 level is going to -- our Q4 level is going to be similar with the Q3 level, as people return to work, and we will have the management incentive accrual in for the entire second half as well as the growth investments will continue.

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 here? 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?

Sure. So in broad strokes, Mike, it's about $2 million for incentive comp. It's $2 million for growth investments, and it's $2 million related to return to work.

So it's really in 3 buckets, and it's about those numbers. Yes.

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?

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

Can you just maybe -- just maybe explain a little further like what it was that was ordered? Or is that...

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?

Yes. Thanks, Chris. Let me start and ask Greg to pick up where I leave off. And what I would say is that our capital allocation methodology, we have a nice framework for capital allocation that we've defined and we're not deviating from. And so Greg can talk a little bit more about the specifics of that framework, but we expect to maintain a consistent set of priorities as we advance. Clearly, we have liquidity and we have the ability to invest in growth initiatives, and we are investing in organic and we plan to be investing in strategic growth options. And so we're excited about the position that we're in. We feel like the improvements in operating performance the team has delivered have positioned us to be able to make investments that we'd like to make as we go forward. And we have a capital allocation methodology that will allow for that. So we feel good about it, and I'll let Greg comment a little further.

Yes. I think, Chris, what you're also asking is about the fact that we are -- our leverage ratio is below our target of 2x, sitting at under 1. So in a pandemic, that's actually a pretty good place to be relative to the alternative. And we do think that we have ample dry powder and lots of flexibility with our capital structure to fund our growth initiatives, whether it's in new product development, whether it's in productivity CapEx and another part of our capital allocation strategy is returning cash to shareholders. And with our dividend, we look at it every March, and our policy is to have a consistent ever-growing dividend. So in March, we'll kind of get a sense of where we expect the next fiscal year to end and make any adjustments as required. But we're in a really good spot with over $245 million of liquidity. And as we look at inorganic growth, we're in, once again, a great position to move forward.

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?

Yes. Thanks, Chris. Good question. And as we look out into the quarter, we obviously always have an assessment of risks and opportunities. And I would say that we have a healthy backlog. As we mentioned, that backlog is up $16 million. $8 million of that is anticipated to contribute to the quarter in the short-cycle areas. That amount that is above historic levels that is pushed out into the period beyond the quarter is an area we're looking at where there might be opportunities to potentially drive a higher level of execution. So we're looking at that healthy backlog. Also, if order rates do improve, that could certainly help us to execute at a higher level. We're constantly looking at opportunities to improve the business. The team is very performance-oriented and moving with a level of agility that I think has improved over past levels. And so we're coordinated. We're looking for opportunities. We've clarified our strategic focus areas as we go forward. And the team is really working on making sure that we're executing well in this period to tee us up over the long term. And so we're making some investments, as you heard, as it relates to some SG&A spend. And we're making sure that we're positioning ourselves to get out and get the growth that we're targeting, but we feel good about where we are. And we think that opportunities would primarily be volume-oriented.

[Operator Instructions] Our next questions come from the line of Matt Summerville with D.A. Davidson.

This is [ Austin ] on for Matt. I had a few questions, the first being could you comment or elaborate a bit on trends you're seeing in input costs?

Sorry, we missed the last part, trends in what?

Input costs.

Input costs, raw materials. Yes. I guess what I would say is that we've had a pretty good performance in our supply chain, both in terms of delivery and making sure that we're getting the kind of prioritization that we require in this environment from our vendors. And so we've been able to have relatively stable performance, no material interruptions in supply. And we've been able to execute in a way that has driven the supply chain savings that we've been targeting. And so consistent with our -- the operating excellence focus that we have as a company and the emphasis on supply chain improvements that outpace supply chain inflation and/or material inflation in the supply chain, we've been performing at a level that has been achieving our targets. And so we've seen input costs remain consistent with the way that we've been modeling the business, which has really been to drive and deliver a year-over-year improvement that nets to our bottom line. In recent times, we were obviously seeing an increased rate of infection in certain parts of the world, but we haven't seen any impacts on our supply chain from yet and don't know how that's going to evolve. But at this point, I'd say input costs remain consistent with what we'd be expecting. And the trend overall is driving an improvement in those input costs.

Yes. And so year-over-year, cost in -- we have seen 0 inflation from a raw material perspective on a net basis. And that's in our gross margin bridge.

Okay. And just a quick follow-up. If you could elaborate on -- 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, et cetera?

Sure. That's a good question, [ Austin ]. So we -- this is a big priority for us. It's a part of our strategic deployment process and something we're heavily focused on as an organization. We're, I'd say, in the very early innings of the rationalization and product line simplification initiative. We've highlighted this as an opportunity for the company. And the early work is really around developing the appropriate product line road maps for the product offerings, making sure that we're looking at this from a comprehensive lens or through a comprehensive lens of understanding our customers, their needs, our product portfolio, how it meets those needs and the future development opportunities that we're pursuing to rationalize and kind of re-platform products. But we've done the early work around the product line road maps, and we're preparing to accelerate those efforts to drive improvement. We see that as a lever for future 80/20 savings and cost improvement as well as an improvement in the product offering that we have to meet our customers' needs. So there is a lot of opportunity there. It is a heavy focus for us. From a regional perspective, one of our challenges as it relates to the global footprint that we have is our ability to travel, as it's impacted by COVID, and get resources into factories around the world to help drive improvements or to provide support for the improvements that the teams locally are already driving and bringing those to an accelerated level. But the work that we're doing around PLS, product line simplification, is something that is not, I don't think, being materially impacted by that inability to travel at this point. I think we're working in a coordinated way with our teams around the world. We're identifying the appropriate next steps, and we're moving in the early innings of implementing change there. And I think that we'll see those 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.