Greetings. And welcome to the Columbus McKinnon Corporation Second Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference may be recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski. Please proceed.

Thank you, Latonia, 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 second quarter fiscal 2023 financial results, which we released this morning, and if not, you can access the release as well as the slides that will accompany our conversation today on our website at columbusmckinnon.com. After our formal presentation, we will open the line for Q&A. So if you will turn to slide two in the deck, I will 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 by the company with the Securities and Exchange Commission. You can find those documents 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. However, you should not consider the presentation of this 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 slides. So, with that, please advance to slide three and I will turn the call over to David to begin. David?

Thank you, Deb, and good morning, everyone. Our second quarter results demonstrate the success of our efforts to drive growth, strengthen earnings power and generate cash. On a constant currency basis, revenue of $232 million was up 8.5% year-over-year, driven by strong pricing power and the contribution of Garvey, our conveying solutions bolt-on acquisition. Notably, we had record operating income in the first quarter or in the second quarter, driven by nearly 40% operating leverage, reflecting the early benefits of our regional realignment. As a result, even as we face headwinds, we reported record adjusted EBITDA margin of 16.8% in the quarter, which is another solid proof point of progress toward our longer term financial objectives. We also effectively converted earnings into cash in the quarter as cash from operations was $17.3 million and we use that to further reduce debt. As I mentioned last quarter, our new structure is creating an environment of improved collaboration across product teams within the Americas, EMEA and APAC. We are seeing some early signs of success on this front. One example is a project where we were awarded a crane system that was sold in conjunction with a major rail project. Our integrated sales team was able to readily recognize this opportunity and capture the order, whereas under our prior structure, we would not have had this visibility. I also believe we are now able to move more quickly with improvements in our customer engagement practices. We recently completed our first enterprise-wide customer Net Promoter Score or NPS survey and are advancing initiatives to improve the quality, consistency and rigor of our customer performance and communications. I will speak more to orders and backlog later in this presentation, but we will know here that we are encouraged with the strength of quotation levels…

Thank you, David. Good morning, everyone. On slide seven, net sales in the second quarter were $231.7 million, up 8.5% from the prior year period on a constant currency basis and within the guidance we provided last quarter. Delayed shipments resulting from supply chain challenges continued at a similar pace to last quarter and impacted sales by approximately $20 million -- $26 million in the second quarter. Looking at our sales bridge, pricing was a major driver of our growth, up $11 million or 4.9%. This amount was up 40 basis points from our Q1 level. Our specialty conveying platform continues to deliver strong performance, with the Garvey acquisition providing $9 million of growth. Overall volume declined slightly by 0.4% or $900,000, which was largely the result of material shortages that I previously mentioned. Foreign currency translation reduced sales by $11 million or 4.9% of sales. Let me provide a little color on sales by region. For the second quarter, the 6.9% growth we saw in the U.S. was driven by a 5.8% improvement in pricing. As you are aware, we increased prices in both March and June this year. Acquired revenue added 4.5% growth. This more than offset a 3.4% decline in sales volume. Outside of the U.S., sales grew 7.5%, excluding FX and the acquisition. Pricing improved by 3.7% and sales volume increased by 3.8%. We were encouraged with the volume increases we saw, which were approximately 1% each in Europe and Canada and 36% in Latin America. The growth in Latin America reflects the region’s lagging post-pandemic recovery, as well as specific growth initiatives that are showing traction. APAC volume was flat due to the various lockdowns that have occurred in that region of the world. On slide eight, gross margin of 37.2% was up 90 basis…

Thanks, Greg. As I mentioned earlier, we are encouraged with the strength of quotation levels even as we saw orders decline in the period. Order activity ahead of our June price increase and extended customer project execution cycles were the primary drivers of the sequential decline. More specifically, trailing first quarter orders were elevated ahead of price increases in June by approximately $10 million, and although, we are still seeing healthy quote rates on projects, customers were slow to release orders toward the latter half of the quarter given delays they are experiencing with the execution of these projects. Our backlog remains elevated given the impact that supply chain delays are having on our product delivery, motors, drives and controls, as well as electrical components continue to constrain our ability to ship products more quickly. As I noted earlier, we are heavily focused on improving delivery and communications with our customers, and we continue to navigate supply chain constraints. Internally, we have simplified our structure and are improving the flow of information to enable more proactive communications with our customers. Please turn to slide 16. We expect revenue in our third quarter to be in the range of $225 million to $235 million based on current exchange rates. As I have noted, we are focusing on executing our plan and are ready to adapt as needed for macroeconomic conditions. We continue to invest in innovation, the vitality of our portfolio is increasing, our teams are driving collaboration across product categories and we are executing on initiatives to improve our customer’s experience. We believe we are improving our position in more secularly driven markets and are delivering solutions to our target markets that help end users scale automation and productivity. On slide 17, you can see our long-term goals. We are being very intentional in our strategy deployment process to advance towards our growth and profitability targets. We believe we are a better business than we were just two years ago with a stronger earnings profile, a better product and market mix and a streamlined team that is intensely focused on execution. Although the macroeconomic environment is somewhat unsettling, we are being deliberate in our actions to create value for our customers, execute our plans and deliver on our goals. With that, Operator, we can open up the lines for questions.

Thank you. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson. Please proceed.

Good morning. This is Will Jellison on for Matt today. I wanted to start out, Greg, by asking you a follow-up question regarding some of the supply chain issues that impacted volumes through the fiscal second quarter. Can you sort of place those into context relative to your experience, say, in the last year or so, and whether or not what you saw in fiscal second quarter was incrementally worse than what you have seen before or just a persistence of things that you have been doing with for a while now?

Yeah. So this really became an issue for us, Will, about a year ago, maybe a year and a quarter, and I think in the June quarter, we were experiencing roughly a $15 million impact. This past quarter -- actually in June was the $25 million, this quarter was about $26 million. So it’s about the same level and actually the March quarter of last year was the $15 million amount. So it’s about the same. There’s pockets where different suppliers are getting better, some are still being challenged. But net net, it’s still having an impact of about the same level as what we saw in the first fiscal quarter.

First quarter, which is slightly elevated of what we saw in the fourth quarter of last year.

Yes.

Understood. Okay. Thank you. And then, on the elevated quote activity side, I was wondering, in your view that elevated core activity, where does that stand relative to Columbus’ experience in prior cycles where you would normally expect to be at this time of year in this time of environment? Is it better than you would expect about the same, I love some more color there?

Yeah. Sure. I think it’s better than what we would expect heading into a recession, in fact that’s what we are doing, but we don’t see any imminent signs of a recession. We do see strength in entertainment, utilities, steel and metals, oil and gas and mass transit. Also, the stronger secular markets like life sciences and electrical vehicles remain robust. So we are quoting more projects for F&B. Order rates are, I should say, quote rates are up year-over-year across our business. And so we are really encouraged with the strength of quoting, the engagement with our customers, they are messaging around opportunities and the challenge really has been in terms of converting orders in -- quotes into orders and the time that, that takes as our customers are really waiting on other pieces of equipment to be delivered that are associated with their longer cycle projects and then waited -- therefore, waiting to release orders to us at a time that is more consistent with when they want to cash flow their project according to the delays that they are seeing.

That’s great. Thank you gentlemen for taking my question.

Thanks, Will.

Thanks, Will.

Our next question comes from Steve Ferazani with Sidoti. Please proceed.

Good morning, everyone. I just wanted to follow up the last question in terms of you are seeing quotation rates up, did you give a sense on orders in October versus the previous quarter?

Yeah. No. We didn’t, Steve. But I can share with you that orders are up nicely sequentially versus prior quarter in the first three weeks, and although three weeks do not make a quarter. We are up about 10% sequentially quarter-over-quarter in total orders in the first three weeks of October and that split is roughly up 12% with our conveyor solutions, up 5% in our project orders and up in the low teens in our short cycle business.

When I think about mix going forward and how much of the mix is now Downer in Garvey. What are you seeing in terms of growth trends that could impact gross margins in a slowing environment, which is to say, is the mix going to lead to some gross margin improvement even if the market in general slows?

Yeah. I mean I think given the growth rates that we anticipate our businesses would grow at our highest gross portions of the portfolio enjoy expanded gross margins over the rest of our portfolio. So we would expect that in a slowing environment overall with secular trends enabling further growth in those faster growing areas, we would anticipate that we have expanded margins in that an environment.

Yeah. So, Steve, just adding on to it and it’s our -- the gross margins in our precision conveyance business are in the mid-40s and so that is accretive to the overall gross margins for Columbus McKinnon legacy business.

Great. Great. And if I can get one quick one in on cash flow. Saw a nice cash flow this quarter despite inventory still up. It seemed in the release, you said that inventories may have peaked despite the fact that we are still seeing significant supply chain constraints. Can you give a little color there and whether you would consider ramping up the debt reduction given the interest rate environment?

Yeah. So from an inventory perspective, our turns in the quarter were 3 times and we ended the March at 3.9 turns. So, clearly, we have taken on a lot of inventory in the first six months of the year from a cash flow perspective, as you mentioned, inventories are up $31 million when you exclude the impact of FX. So we have plans in place to bring our -- in total our working capital as a percent of sales back into the mid-teens. That’s going to require significantly improving our inventory turns. That process has already started. Our inventory levels crested in August and they have started to come down. It’s a -- as you can imagine, it’s not something that you can turn on a dime. It’s like turning a battleship. But we have got ample time left in the fiscal year to get inventories down substantially, get our turns up and generate more cash. And so you are right, we are in an elevated interest rate environment. Marginal interest rates for us now are 7% with our spread on our term loan. And even -- but I would remind folks on the phone, like I said in my prepared remarks, that we are 60% hedged and so that clearly is tamping down what our interest expense would be if we weren’t hedged. And so if we are able to generate more cash from a capital allocation perspective, we look at that on a regular basis with our Board. But we also are mindful that interest expense is elevated and if we -- as we generate more cash, absent an absolute perfect small bolt-on acquisition, our focus would be to try to use that cash to pay down more debt.

Great. Thanks, David. Thanks, Greg.

Thank you.

Thanks, Steve.

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

Hi. Good morning and thank you for taking my questions. I just wanted to go back to the stronger quotations and maybe weaker orders. Do you expect that gap to close or is maybe the risk of a lower conversion rate more likely as we go forward and in markets around the world start to deteriorate? How are you thinking about that in the coming quarters?

Yeah. We anticipate that it is going to close given what the level of quoting activity is in the order trends we have seen thus far in this quarter. But right now, just to give you an illustrative example, if typical conversion cycle between when a quota sent and an order is received is three months to six months in normal conditions. Customers today have component lead time changes on other pieces of equipment that they are waiting for and so if someone is waiting for a robot or if someone is waiting for engineered control panels, the automation elements of their solution from someone or they are waiting for packaging machines. Those lead times have been extended to being measured in months to being measured in over a year in some cases. And so what’s happening is where you would typically place in order for elements of our portfolio that have shorter lead times within three months to six months. Those lead times are now being extended based on those customers now waiting for other pieces of equipment. But we do expect those gaps to narrow. We think the supply chain is starting to ease certainly in specific areas and we are encouraged by not only in formation activities but the early Q3 order rates.

Got it. And maybe just to build on that, what do you think is driving the strength in quotations, is it just because you are exposed to these less cyclical markets that you have been driving towards or is it more that maybe it pent-up demand or maybe just people trying to get ahead of price increases and an increase in cost of capital to finance these things?

Yeah. I think it is because we are playing in some pretty attractive markets that are seeing demand driven by macro drivers or megatrends. I also think that we have been benefiting from our commercial reorganization and the collaboration that our teams are driving in the markets where we are getting more opportunity within the same customer base, because we are able to cross-sell and represent a broader portfolio and so I feel like we are -- we were -- we are self-helping and we are benefiting from trends that are occurring in the marketplace.

Great. And if I could sneak in one more, just directionally, how should we think of margins in the next quarter? Revenue at to down maybe, but you have done a good job with restructuring and then driving costs out and maybe there’s some inputs that might be coming down like freight and logistics. How should we think about that?

Yeah. So, good question. So, typically, what we see, Jon, in the third quarter relative to the second quarter is a 50-basis-point to 100-basis-point decline in gross margins and it’s largely due to fixed cost absorption in our factories. We do have four less shipping production days with the Christmas holidays and in the U.S. we have Thanksgiving as well as you know. So that would be typical 50 basis points to 100 basis points down if you look back in history.

Okay. Great. And sorry, did you think is there anything different this year going into that calculation?

No. I would say we would expect a similar decline…

Okay. Understood.

… in that range. Yeah.

Our next question comes from Patrick Baumann with JPMorgan. Please proceed.

Hi. Good morning, everyone. Thanks for taking my questions and congrats on the strong execution in the quarter.

Hi, Pat.

Yeah. No problem. Good morning. A quick question on just the end market demand profile that you are seeing, what would -- can you walk through key verticals and where you are seeing trends…

Yeah.

… hold in versus where you are seeing trends maybe fade a little bit, if anywhere?

Right. Right. Okay. So, as we said earlier, overall quote activity is up versus prior year. Short cycle order demand is slowing a bit, but global project orders are taking longer to convert and that’s been a bit of a challenge in terms of converting to orders. The entertainment, utility, steel and metals markets have been robust. Oil and gas, obviously, experiencing some significant trend, good positive trends of activity in mass transit or our rail business is experiencing some nice upticks. As it relates to our newer business areas, we have got really nice trends in life sciences and electric vehicle activity. We mentioned the Garvey activity with the battery cells for electric vehicle battery production. We are also seeing really good quality leads for projects, albeit some smaller projects, which are really attractive in the food and beverage space. And then e-commerce shipments are off about $8.5 million year-over-year through the first half and that’s really related to a pause in demand from our largest e-commerce customer. But we do see those orders coming back online in fiscal 2024 based on the very close relationship we have with that customer and in that space. And what I would mention is that, although we have seen that decline, we have really made great inroads at gaining traction with a number of other attractive e-commerce accounts and that’s partially offsetting the decline and kudos to our team at Dorner for the great work they are doing in the industrial automation space, where they have been able to grow that portion of the business pretty readily to help offset the challenges introduced by the year-over-year decline we saw with that one customer.

That’s helpful color. And so I would imagine that e-commerce business, that’s most of -- that explains the entire decline that you are seeing at Dorner, I guess, in terms of revenue and that’s being offset by some of the other stuff.

That’s right. That and some. Correct.

Yeah. And then maybe, Greg, can you talk about the nuances of the inventory accounting that are impacting gross margins these days? I just -- I asked because I was looking at the LIFO reserve and they have gone up quite a bit so far this year. I am just not sure how to interpret that from the outside, maybe just give some CFO color on that?

Yeah. So the LIFO reserve, so we have LIFO in the U.S. and a number of our U.S. factories, Dorner and Garvey are not on LIFO. So this is legacy Columbus McKinnon. And the LIFO reserves are going to move with inventory levels and so as our inventory has become elevated, the LIFO reserve has gone up. But once again, as we expect to lower our inventory levels over the course of the balance of the fiscal year, the LIFO reserve should also go down. And really the calculation is…

Okay.

… in terms of the LIFO reserve itself, it’s a -- you don’t really -- you don’t have the final calculation until the end of the year.

And how has that impacted, if at all, like, the gross margin, like, are there -- is there LIFO liquidation impacts on profits at all?

Not in a material way, Pat. So the margins are really being driven by the pricing, the Garvey acquisition.

Yeah. I’d add the mix. So the mix of sales, the pricing actions we have taken, the work we are doing to address our cost structure and work our team is doing in the supply chain to help offset inflationary costs. So the LIFO reserve has a nonmaterial impact, if you will, in the margins for the period.

Okay. Great. Thanks. Appreciate the color. Best of luck.

Yeah. Thank you, Pat.

[Operator Instructions] Our next question comes from Joseph DiMieri with Onex Credit. Please proceed.

Hi. My question is regarding more so of the competitive environment. Given that Crosby, Kito, distributes a large competitor in the space. How does that affect you guys, maybe if you could speak to market or product overlaps.

Right. So we completed before the announced acquisition with both Crosby and Kito with our product portfolio because we play both on the rigging side of the business where Crosby competes and in the lifting and voice side of the business where Kito competes. And so we were competing with them as separate companies in the past and we anticipate that we will be competing with them as they go-forward and come together. We feel like the competitive dynamics don’t change very much as it relates to them coming together as a single company. We feel that we have got a very competitive position with our channel partners and with the work that we do with our innovation strategy, with the new products we have been introducing and with our new regional focus as a leadership team, we feel there’s opportunities for us with our elevated focus on our customer experience and working to make sure that we are advancing competitively to -- we feel like we are well positioned to compete as that acquisition is completed.

Thank you.

You are welcome.

We have a question just queued up. We will take the questions come from Jon Tanwanteng. Please proceed.

Hi, guys. Just following up on the topic of industry consolidation, can you comment on the acquisition of Altra today by Regal Rexnord that’s the company I think you have been trying to targeting your long-term objectives, just any thoughts there and maybe a validation of your strategy there?

Yeah. That’s exactly right, Jon. I don’t want to comment on the specific transaction. But I will say that it clearly validates the strategy that we have as a company and it underpins everything that we have been trying to do as a company and speaks to the value creation that we are driving and the opportunity for us as we think about that comparable landscape and how we are performing with our gross margins, our growth and our expanding EBITDA margins given the good work that our team has been doing and how that compares against that peer set that from a multiple perspective clearly enjoys a higher multiple. So we are excited about our strategy, we are executing well and we are marching towards our five-year targets of $1.5 billion in revenue and 21% EBITDA margins.

And could you just remind us what you had built into the long-term targets in terms of the potential for a recession in the near future? Was there a specific, I guess, expectation of a decline or anything like that in that four-year, five-year period?

Yeah.

Yeah. Jon, so when we looked at back in the summer, obviously, things have changed quite a lot since then. It was clearly the view that if there was a recession, it would be mild, there would be a soft landing, and we would be able to recover very quickly.

Right. And at this stage, we are seeing nothing to indicate anything other than that, Jon, because we are seeing, as you saw this morning, GDP actually pivoting to a growth position and we are not seeing any signs of deteriorating demand in the conversations we are having with our customers.

Great. Thank you so much.

You bet. Thank you.

Thank you. At this time, I would like to turn the call back over to Mr. Wilson for closing comments.

Thank you again for joining us today. We are demonstrating our ability to execute our plan while operating in an unsettled environment. CMCO provides the playbook to drive results through all market conditions and we believe that we have the team in place to deliver. We are driving continuous improvement, both strategically and operationally and are excited about our future. We have the plans, the people and the capabilities to enable scale, strengthen our earnings power and create intelligent motion solutions that move the world forward and improve lives. Thank you for your time this morning and have a great day.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.