Greetings. Welcome to the Columbus McKinnon Corporation Third Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Please note, this conference is being recorded. I will now turn the conference over to your host, Deborah Pawlowski, Investor Relations for Columbus McKinnon. You may begin.

Thanks, Shamali, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me on the call are David Wilson, our President and CEO, and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the third 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 on our website at www.columbusmckinnon.com. After our formal presentation, we will be opening the line for Q&A.

Great. Thank you, Deb, and good morning, everyone. These are certainly interesting times, and I'm very proud of the way the Columbus McKinnon team continues to rise to the challenges presented by the pandemic. We have continued to lead with health and safety at the forefront through these dynamic times. Even as global infection rates accelerated in the December quarter, we're able to exceed our revenue targets, grow our daily order rates, and meet our customers' requirements. Through all of this, we have been evolving our Blueprint for Growth strategy to Blueprint for Growth 2.0. Our Columbus McKinnon Business System, or CMBS, is developing to provide the underpinnings for the discipline, processes, and core competencies necessary to scale our business. We believe that core elements of CMBS are enabling us to drive results today as we address challenges such as labor availability, supply chain shortages, and delayed freight schedules. I'll talk more about our strategy and CMBS in a moment, but let's hit on the highlights of the quarter first. Sales of 165 - $166.5 million surpassed our expectations even as we dealt with the staffing, supply chain, and logistics challenges associated with rising rates of COVID-19 infections.

Thank you, David. Good morning, everyone. On slide 7, net sales in the third quarter were $166.5 million, down 16.5% from a year ago. As David noted, the sales level exceeded the upper end of our prior guidance for third quarter revenue of approximately $150 million to $160 million. Demand was impacted by the COVID-19-induced recession compared with the prior year, but encouragingly, the gap continues to improve sequentially compared with the trailing quarters as markets recover. Looking at our sales bridge, sales volume was down approximately $38 million or 19%. However, we did realize positive pricing as we saw year-over-year pricing improved by 1%, of which about 60% was related to our 80/20 Process. Foreign currency remains a tailwind and increased sales by 1.5% or $3 million. Let me provide a little color on sales by region. For the third quarter, we saw sales volume decline in the U.S. by approximately 20%. This was partially offset by price improvement of 80 basis points. Outside of the U.S., sales volume was down approximately 18%, which was partially offset by price increases of 1.1% and favorable foreign currency translation of 3.3%. By region, sales volume was down 11% in Canada and APAC, and down 20% in Latin America and EMEA. On slide 8, given our seasonality and fewer production days in the quarter, our gross margin was 33.2%, which compares with 34% last year. We feel that this is good performance given the 16.5% reduction in revenue we experienced, as well as COVID-19 pandemic challenges with staffing, supply chain, and freight. We have improved our mix of businesses and have benefited from our 80/20 Process and operational excellence initiatives. The 80/20 Process contributed approximately $3.5 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions, and factory closures.

Thanks, Greg. Orders were $169 million in the quarter, down slightly from the trailing second quarter due to seasonality and three fewer working days. On an orders-per-day basis, rates actually increased sequentially by 2.5%. During the quarter, we had some interesting project wins that drive sustainability. These included clean energy applications in both wind and hydropower, as well as supporting a manufacturer of infrastructure systems for sustainable water flow management. We had several wins in the transportation industry as we are supporting the significant global efforts to develop new production lines for electric vehicles. We are also seeing new demand driven by shifts to new technologies such as electric and hydrogen-powered public transit systems. Other highlights include the energy market, where we were selected to provide crane systems for an LNG project in Mozambique, as well as a natural gas power plant in Thailand. Another area of growth benefiting from the pandemic is packaging, where we have won a number of smaller projects to provide lifting equipment to manufacturers of oil used in the food industry. The defense industry is strong across all of our businesses. For example, we received an initial order for automated linear actuators used in a missile launch system in the quarter. We expect this to lead to further opportunities over the next several years. Finally, through the first 15 days of January, our daily order rates are up 8.5% versus the average in Q3. And as I noted earlier, our backlog remains above pre-COVID levels. These trends are encouraging. Please turn to page 16, and I will discuss our outlook for the fourth quarter and our perspective as we advance into the new calendar year. Our backlog, order trends, and customer inputs provide confidence as we enter the final quarter of our fiscal year. We…

At this time, we will be conducting a question-and-answer session Our first question is from Mike Shlisky with Colliers. Please proceed with your question.

Hello. Good morning.

Hi, Mike. Good morning.

Good morning. I guess I want to start off, you had mentioned there have been some issues with the freight markets or freight conditions, freight supply, as well as your supply chain in general. Have any of those begun to improve at all here in the first calendar quarter of the year?

I guess what I'd say is we're seeing rising rates of infections globally, and we've had some impacts in terms of the expediting that's been required to make sure that we're moving materials the way that we've needed to, and we were able to overcome them and exceed targets in Q3, as we just reported. As we're entering Q4, I'd say that things remain in the same state. We're working very successfully with our strategic partners and the supply chain. And I think we're in a position where we're not anticipating significant changes as we progress through the fourth quarter from what we saw in the third quarter.

Okay. Great. Thanks for the color there. And maybe secondly, I'm curious - sorry. Yes. I'm curious, your comments that you're still on track eventually to get to that 19% EBITDA margin level is certainly encouraging. But you've also - it seems like you've expanded or matured what the program that originally got you to kind of set these goals, and it seems like it's gotten a lot more aggressive or a lot more expansive since the original Blueprint for Growth came out. So I'm kind of curious, is there any room to go past 19% if what you're doing ends up being successful over a period of time? Or is kind 19% the core to expect even with all these new goals and kind of new strategies here?

Well, I guess the way I'd answer that, Mike, is that - and we've talked about this in the past, we're very focused on that target and making sure that we achieve that target. But we are working very hard on a number of initiatives that are making Columbus McKinnon a better and stronger business and anticipate that over time, as we scale, that we can move beyond those targets. And so that's not where we would stop. But that's certainly the target that we have right in front of us.

Okay. That makes sense. I’ll pass along. Thanks.

Thank you, Mike.

And our next question is from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.

Yeah, thanks. Morning, everyone. Certainly feels like the recovery has strengthened a little bit more than kind of how we were all expecting a few months back. I mean, you gave some good color on end-market conditions and certain verticals where you're seeing some success. I'm just curious, is it - do you feel like it's being led more by short cycle or projects? And what are inventory channels or inventory levels like in the channel at this point? I mean how much of this is sort of real demand versus restock into the channel?

Right, right. I would say, to start with the last question, inventory in the channel remains at a very low level. So I don't believe that what we're seeing here is representative of an increase in stocking levels. But in the third quarter, we saw short-cycle and project orders increase in terms of our sales delivery on the order of 5.5% apiece. So 5.5% and 5.6%, respectively, and that was pretty consistent across the board. I guess as we think about order rates in the quarter, our short-cycle order rates were - just checking a note here. Short cycle was down about 2%, and projects were down about 3% in absolute terms from an orders perspective. So no real material difference as it relates to those two types of business. But we are seeing order inquiries and engagement relating to project activity increasing quite a bit. We're having very active discussions with our customers related to projects that are gaining more traction and activity that had previously - some of them have been on hold and others are new activities that are coming forward.

Okay. That's helpful commentary. And then as it relates to gross margins, I didn't hear any commentary on input costs. I'm just curious whether the rise of increase in steel lately, if that's expected to have some sort of impact. How should we think about gross margins in the near term?

Yes, so...

Do you want me to take that, David?

Yes, Greg, would you take that? Yes.

Sure. So in terms of the fourth quarter, we're anticipating inflation, raw material inflation to remain muted. We don't expect there to be a significant increase. And really, to date, our raw material inflation has been close to zero. We do, however, think that as we move into our next fiscal year, that inflation is definitely going to become more of a headwind. We certainly have seen some very modest steel prices. So far, a lot of our contracts are locked in, so it's as not as much of an issue for us here in the short term. But clearly, there's going to be pressure, we think, as we head into our fiscal '22 on raw material inflation.

Okay. So just to clarify, it's just more of a by-product of timing. So the fixed contracts may need to get, I guess, renegotiated based on this level of steel at some point? Is that the way to think about it?

Yeah. We would expect there to be some additional inflation here. Yet to be determined, but we also have some strategies that we will implement and have been implementing to offset it. But the delay increases, we force our suppliers to kind of give us the details on kind of what their prices should cost versus just kind of accepting across-the-board increases. We look to add different suppliers and change sources if necessary. And we also have a big focus on material productivity and VAVE cost-savings projects. So there's a number of things we're doing and expect to do to offset any inflation we would see in fiscal '22. But clearly, what we're all seeing and reading about is going to be real.

Yeah. Okay, makes sense. All right. Thanks for the color. Good luck going forward.

Thanks, Greg.

And our next question is from Matt Summerville with D.A. Davidson. Please proceed with your question.

Hi, David, Greg and Deb. This is Austin Bender on for Matt. I have two quick questions. First, if you could speak to the actionability with respect to your M&A pipeline and how the funnel of activity has developed there?

Sure, sure. So I think the M&A markets are becoming active again. We're clearly focused on refining our criteria and making sure that we're focused on, as we've talked about in the past, a future that's more focused on intelligent motion solutions. So we're building out an M&A process as part of CMBS. We have an active and developing pipeline. And as you'd imagine, we're evaluating opportunities, and those opportunities are bearing stages in terms of their actionability. But as I mentioned, we anticipate and our plan would be to be active in the fiscal '22 period.

And I'll just add on, Austin, that clearly, from a balance sheet perspective, we've got lots of dry powder available.

Yes, definitely. Thank you for the color in there. Second question, just real quick. You touched on the highlights you're seeing across some of the end markets, the positives. I was wondering if maybe you could elaborate on the areas where you're still seeing challenges?

Sure. Yes. Well, clearly, the entertainment market is the one that stands out, right? Entertainment is a market that, given the inability to gather, it's having an impact on live shows, and those are basically non-existent at this time - or touring shows. There are some live shows with fixed venue act - locations. But our entertainment business has been impacted the most. We're seeing some green shoots start to emerge as people have been doing renovations on locations and gearing up for a recovery, but it's still at a very low level. We're also seeing that the oil and gas and chemical markets are down compared to last year.

Okay. Thank you.

And our next question is from Chris Howe with Barrington Research. Please proceed with your question.

Good morning, David and Greg.

Good morning, Chris.

Morning. I wanted to follow up on some of your comments in regard to order rates. You had mentioned some of the positives in Q3 as it relates to clean energy, electric vehicle production, et cetera. With the incoming administration with President Biden and potential things on the horizon, any potential upside that we could potentially see impacting some areas of the business, first and foremost, perhaps electrical vehicle production and some of the other areas?

Sure. As I mentioned, there continues to be investment in that area, and we're benefiting from that investment as we provide solutions that assist in establishing those production lines for global electronic vehicle or electric vehicle production. I'd also anticipate that with the push towards more of an energy transition to clean energy, the work that we're doing in support of wind and hydropower and other sustainability areas could see benefits from stimulus or incentives that might exist to help support that. Those would be my initial thoughts as it relates to potential investments.

Yeah. And just to add on, I would also expect that there will be a stimulus package on infrastructure spend. And if they pass it, that'd certainly help us going forward.

Great. And just a follow-up question, perhaps you can talk more about automation solutions and driving the growth engine as we get to a run rate normal at this point next year and kind of what your expectations are for that piece of the business as it develops. And I'm sure, as it develops, there will be a good incremental impact on the margin line?

Sure. Yes. As the world shifts more towards a focus on increasing safety, uptime and productivity through automation technologies that are now available through the solutions that we provide, as well as, in a defensive posture, trying to position their own enterprises against the risks of a second wave of pandemic or the needs for social distancing, I think we're well-situated to grow along with that trend to more automation in place. Clearly, customers want to make sure that they are limiting risks, as well as improving productivity. And we think that those solutions continue to expand in importance as customers deploy their capital. That, coupled with reshoring, with growth in terms of order fulfillment requirements, I think we're going to see a trend that will help us further as we advance. And clearly, those are higher-value solutions for our customers.

Thanks for taking my questions.

Thanks, Chris.

Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi. Good morning, gentlemen. Thanks for taking my questions and nice quarter. I just wanted a little bit more clarity on the recovery commentary you made a year out from here. You did $215 million-ish in revenue, both Q3 and Q4 2019. Is that the bogey that we're looking at? And maybe to follow up on that, what kind of EBITDA margins do you expect at that level given all the continuous improvements you made in cost and efficiency and all that in the past year or so?

Yeah. I mean, I think that when we talk about a level of orders that is kind of normal run rate, we think, in the order of maybe $200 million to $210 million is the way that we think about a normal run rate for the business. And we're anticipating, based on our own internal forecast as well as the economic recoveries that are being forecasted, that we would be at that rate as we head into the same quarter next year And so obviously, there's some forecasting going on there, but that's what we're anticipating at this stage. And clearly, with the work that we've been doing with the business to make the company stronger, to address our RSG&A costs as well as to continue to improve our cost of goods sold position, we anticipate that we would have EBITDA margins that would be improved from the rates that we were experiencing when we were last at those run rates. Greg, is there anything that you want to add to that?

Yes, thanks. So just to level-set everyone on the call. So we were about 15.7% adjusted EBITDA margin in fiscal '20. I'd expect that we're at least 100, 150 basis points north of that with all of the improvements that we've made. So clearly, progressing towards the 19% EBITDA margin, but certainly, this upcoming fiscal year is still going to be a year of recovery for us.

Got it. That's really great color. And then just, Greg, one more thing. I heard you mention in the gross profit bridge, you said that there is some - I think there was a headwind associated with the product simplification. Could you talk about that a little bit? Was it just the ramp-up process? Or is there something else going on in there that we should think about?

No, it wasn't with product line simplification. It's with the consolidation. So the consolidation of the factory in Ohio certainly had some challenges as trying to do that in the midst of a pandemic. And so that's really what I was referring to.

Got it. So was it a little bit over cost or a little behind schedule, maybe a little both? I'm just trying to figure out what that was.

Yeah. I would say with some of the challenges we've had, not only, I would say, implicit to Columbus McKinnon, but certainly, with the supply chain for the -- some of the components in the product that was transferred over, we've had challenges. We incurred expediting fees to get product components into our facility. That is -- that took over the bulk of the product line that got moved.

Got it. Thank you.

Thanks, Jon.

And our next question is from Walter Liptak with Seaport Global. Please proceed with your question.

Hi, thanks. Good morning, everybody.

Good morning, Wal.

I wanted to do a couple of follow-ups. One on the last question that you talked about with the $200 million to $210 million of orders. And I just want to make sure I understand this, that you're thinking that when you get back to that level of orders, the operating -- you should get about 150 basis points of margin. Is that right?

Yes.

Yes. Probably somewhere between 100, 150.

Okay. And then you guys are doing 80/20. So I would imagine that on top of that, there's going to be some benefits from 80/20. Or is that leverage and 80/20 projects?

Yeah, that's already included. It's really everything we've done to date that's gotten us to where we've gotten to plus what we have planned going forward. Okay. And last quarter…

Up through that recovery period. So just up through the point at which we get to those run rates again. And so that's the point. But those -- then in the years that follow, there's additional opportunity.

Right. You guys talked about doing product line simplification, PLS, in the future. I wonder, have you started on that? And is that in some -- in that 100 to 150 basis points of margin?

Yeah. So our progress through to that point is included in that number, and then there's work that continues beyond that.

And that swap, I think we talked about this in the past. So product line simplification was really the one tool in our 80/20 that we think has a lot of room yet to advance. And Columbus McKinnon is a relatively complex company. We have a lot of different SKUs, and we think that there will be a big advantage to simplify our product line in our portfolio. But that one will take time, but we utilize the strategy deployment process as well, and that is one of the top two items that we're pushing this over the next year to 18 months.

Okay. Got it. Okay, thank you for that. And I wanted to ask about the incoming order rates. I think you said that the daily order rates were up -- did I catch that right, 15% for the last 15 days?

No, 8.5% versus Q3.

Okay. That must have been wishful thinking. Okay.

Yes. No, the first 15 business days of January. So 8% over 15 days covered.

Yeah.

Okay. Is that because of project work that's beginning to come through, do you think? Or is it - are you seeing it in the channel as well?

Yeah. It's actually split probably about 55-45 in terms of run rate versus projects. So projects represent a portion, and quarterly run rate is a portion. And actually, I'm - I was looking at the wrong number here, apologies. It's about 13% project-driven and about 4% quarterly-driven. The one was pretty hidden there. So I was quoting the wrong numbers. 4% quarterly run rate and 13% project averaging the 8.5%.

Okay. Okay. And - right. So the project work is significant. I wonder if you have -- if you took all those different things, all those different projects that you're working on in clean energy and EVs, in defense and LNG and things and -- what size of an opportunity is that?

Yeah. I mean, it's something that obviously there are big drivers around the demand there, and things are moving in a way that is increasing our activities. And so our typical rail or transit project as there's a shift to more public transportation driven by electric vehicles or hydrogen-powered vehicles is on the order of $1 million to $3 million, let's say, in terms of range. And those are for roof working platforms for high-speed train maintenance or bus station maintenance work. And then as we think about orders that might be more in line with the typical automotive vehicle-related activities, we're seeing orders that are in the $1 million, $1.5 million a year range on a year-to-date basis. So I think there's an acceleration of that, but it's not enormous, if you will.

Okay. Got it. Okay, good quarter, guys. Thank you.

Thank you. Thanks, Wal.

Our next question is from Christopher Keller with Loomis Sayles. Please proceed with your question.

Good morning. Thanks for taking the question. Regarding your future M&A decisions, do you have any debt leverage ratio policy that you would be seeking to abide by?

We do. And I'll let Greg take that one.

Sure. So maybe the best thing is to look at kind of history and when we bought STAHL, temporarily, we flexed our leverage ratio up to - was about 3.7 times leverage. But we had a pretty clear line of sight on being able to delever quickly, which we clearly did, in a very short period of time where most people would say we're underlevered today. Our overall target in general is to be about two times levered. We would flex up if need be, maybe to a STAHL sort of a level, but clearly, with the understanding that we have the ability and would be able to very quickly delever.

Okay. Great, thanks. And then last question is regarding your sustainability initiatives. Thank you very much for proactively addressing that on your slide deck. I was wondering if you could give us some sense of what you think the material risk factors are for the environmental, social and governance pillars or your general sustainability risk factors, nothing detailed. I know - I recognize you're going to come out with something on that later. Just trying to understand what you think the kind of the key risks are and how can you go about addressing them? Thank you.

Sure. Thanks, Chris. And as we focus on sustainability and our overall approach there, we've been really working to drive opportunities that are both quick-hit opportunities and then more longer term strategic opportunities that we're addressing. And we've brought on board a full-time resource who's helped us to organize around that. And we've got a tremendous amount of enterprise engagement around our approach. We've been able to get some information out about the company and about our policies and about our approach that I think have helped us to drive some improvements in our assessments as it relates to the social and governance scores associated with ESG. And as you look at our environmental scores, we haven't seen as much of a progression there in terms of the outside agencies assessments and ratings. But we have been very focused on driving improvements in those areas. And I think I have a pretty good story to tell, it's just a matter of telling it. And so we're working to make sure that we have that material available. We've established our baseline measurements and targets for improvement. And we're driving a lot of work around site green team initiatives that drive improvements across the overall organization. And so I feel like we're making great progress. I'd say that's our most material area of opportunity. And overall, I think we're in a pretty good position. It's more a matter of getting the information communicated and being in a position to leverage the momentum that we've built up and the engagement we have across the whole enterprise to drive those improvements.

Okay. Thanks very much. That’s all from me.

Terrific. Thank you.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to David Wilson for closing remarks.

Great. Thank you, Shamali, and thank you everyone for joining us today. Our agile management team and the tools of CMBS are driving solid operating results in a difficult environment. We're realizing sequential growth, generating cash and delivering better than we have historically in downturns. The improving landscape is encouraging. And importantly, we are making the pivot to growth with the evolution of our strategy to Blueprint for Growth 2.0. We are looking forward to talking with you soon about our progress. Stay well, and have a great day. Thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.