Greetings, and welcome to the Columbus McKinnon Corporation First Quarter Fiscal Year 2020 Financial Results [Operator Instructions]. A question-and-answer session will follow the formal presentation [Operator Instructions]. It is now my pleasure to introduce your host Deborah Pawlowski, Investor Relations for Columbus McKinnon. Thank you. Ms. Pawlowski, you may begin.

Thanks, Doug, and good morning everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me on the call are Mark Morelli, our President and CEO and Greg Rustowicz, our Chief Financial Officer. You should have a copy of our first quarter fiscal 2020 financial results, which we released this morning before the market. And if not, you can access the release as well as the slides that will accompany our conversation today at our website cmworks.com.If you'll turn to slide two in the deck, I will first review the safe harbor statement. As you are aware, 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 those will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliations 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 would turn to Slide 3, I will turn it over to Mark to begin. Mark?

Thanks, Deb, and good morning everyone. First quarter of fiscal '20 is further evidence that our Blueprint for Growth strategy is expanding margins and driving earnings power. Net income for the quarter was up 141%. On an adjusted basis earnings per diluted share was up nearly 10%. Margin expansion continued to drive earnings growth. This validates the effectiveness of our Blueprint for Growth strategy and the deployment of our business operating system which we call EPAS or Earnings Power Acceleration. EPAS provides tools we use to execute our plan.Since implementing EPAS in 2017, we've consistently expanded margins and ROIC. In fact, we achieved record adjusted EBITDA margin of 16.7% this past quarter. Surpassing last year's previous record by 100 basis points. We made solid progress on ROIC as well, which reached 11.5%. We had record gross margin up 10 basis points from the prior record last year as pricing more than offset tariffs and inflation. Contributing to the improvement was $500,000 in savings from the consolidation of our Ohio facility.The simplification of our business with Phase II of the Blueprint for Growth strategy is reducing our cost structure and improving our operating leverage. We had outstanding operating leverage for the quarter as adjusted operating income increased on lower revenue base due to divestitures. After adjusting for divestitures and the changes in foreign currency exchange rates, operating margin expanded 140 basis points to more than 13%.Looking at Slide 4, we're doubling down on Phase II of our strategy this year. This phase is focused on simplifying the business, operational excellence and ramping the growth engine. Our efforts continue to deliver results and we believe there is significant runway for further improvement. Simplifying our business continues to drive earnings growth. In fact, $3.4 million in operating profit in the quarter which from…

Thank you, Mark. Good morning, everyone. On Slide 5, net sales in the first quarter were $212.7 million. As you know, we completed three divestitures last fiscal year which reduced sales in the quarter by $11.1 million. Foreign currency continues to be a headwind which also reduced our sales by $5.1 million, compared to the prior year. We expect the headwind to continue in our fiscal second quarter. At today's foreign exchange rates, the headwind will be about 1%. Adjusted for FX and the divestitures, we saw good organic growth of 1.8%. Our pricing power was evident as we saw pricing improved by 1.8%. This included some of the benefits from our 80/20 Process.Sales volume was up 10 basis points. We saw good growth from our project businesses but a slowdown in our short cycle businesses with sell-through distribution. We think the channel is managing inventory levels, given the uncertain macroeconomic environment. We saw solid growth in the quarter, particularly in the US where sales increased 2.8 million or 2.5% adjusted for divestitures. Sales outside the US were up $1.1 million or 1.1% adjusting for the effects of the divestitures in foreign currency translation.We think that organic growth of approximately 2% in the quarter was good performance given the macroeconomic uncertainty and simplification efforts that eliminates bad revenue. This reflects the progress we continue to make with customer responsiveness and ramping the growth engine. We believe we are growing share in key markets and executing well.On Slide 6, we achieved record gross margin of 35.5% in the quarter. This is a 10 basis point expansion in gross margin from a year ago, and this is our 9th consecutive quarter of year-over-year margin expansion. As Mark mentioned earlier, the 80/20 Process was accretive to gross margins. In addition, our pricing, which…

Thanks, Greg. Let me wrap up by giving you some color around our market. We're confident in our strategy and our ability to execute by leveraging the tools in our operating system. We're also seeing increased potential by expanding our target markets through greater traction as a lifting specialist and innovating to enable smart movement. The result is a better business model with growth potential and improved operating leverage.Despite some of the market weakness, we're also encouraged by growth opportunities we are seeing in specific markets. We see good demand from segments such as steel, oil and gas, aerospace, waste to energy, hydropower, defense and government-funded infrastructure. Major utilities and grid system providers are inspecting their power grids and gearing up for the storm season. The entertainment segment is growing.We have won some large orders as the touring business is strong and permanent installs are growing. We're expanding our offerings with automation-ready product and incorporating a built-in load sensor for enhanced safety. Also, our opportunity with automotive looks encouraging. OEMs are investing to compete by designing and building new models of trucks, SUVs and electric vehicles in North America. Model changeover is what drives demand for our products. While recent industrial market weakness is well reported, we remain confident in our strategy. We expect revenue to be unchanged to slightly improved over last year's second quarter, adjusted for divestitures and foreign currency translation at current rates.Last year's second quarter revenue was approximately $206 million. We are confident that our Blueprint for Growth strategy will continue to deliver stronger earnings power for the quarter and the fiscal year. Simplification and operational excellence will drive margin expansion and operating leverage.With that, Doug, would you please open the call for questions?

Thank you [Operator Instructions]. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Looking at backlogs are down slightly year-over-year, what's giving you the confidence in the growth in Q2? And second, can you talk about the quality and mix of orders in the backlog from a margin perspective?

So there's two dynamics that are happening that we talked a little bit about in our Investor Day in June that I can also elaborate on today. The first is a dynamic related to our short cycle business and this is really the historic Columbus McKinnon business that you might think of. And what we see there is some of the folks that we sell to don't want to take as much inventory as they have last year, and as a consequence, that short cycle business has depth. And it really hit a bottom in April. It moderated in May with some improvement and June and July, actually, mostly in North America. However, we do see the

Europe, in this short cycle business in Europe also particularly impacted with the weakness in Europe. However, the total for the short-cycle business is trending up, so we're encouraged by that. The second dynamic that's important to report on is that of our longer cycle or project business that is mostly related to the newer acquisitions that we've done over the last couple of years. And this is mostly some of the timing issues related to project.So we still see the project business as being quite strong in some of the segments that I spoke about. It's steel, oil and gas, power. These segments are strong. Projects are good. There's good returns. And as a consequence, these projects are continuing to go and we see very good quoting activity as well. But we do see timing issues related to that business, and as a consequence, the timing is what you're seeing in some of the numbers.In particular, what's impacting our timing is the rail business. And the rail business has a pretty lumpy impact. And so far, we've actually seen some order intake in July for the rail business, about $1.7 million of orders came in in July. This is related to orders in Germany, the Czech Republic, and China. So hopefully, that describes some of the dynamics we're seeing there.

And just a comment on the expected margin in the backlog that you have right now?

Greg, do you want to comment on the backlog margins?

Sure. So the margins in the backlog are probably going to be a little higher than they would historically be because our -- of the backlog, a reduction about $7 million of it was in our rail business. But as Mark said, we just picked up some orders here in July and that tends to be a little bit of a lower gross margin than the corporate average. But good operating income because it has lower RSG&A.

And then you made a nice reduction in your RSG&A, you have pretty good the guidance for this current quarter. How much more room is there in RSG&A to go down. How much of it is in 80/20 Plan?

So I think there's two aspects. I think there -- certainly 80/20 is predominantly hitting the gross margins. But over time, the simplification of our business also structurally reduces our operating footprint and this clearly will have a benefit of our overall spend. So I think what we're giving is responsible guidance for this next quarter and more to come as we make further traction on our simplification processes.

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

Good morning, and thanks for taking the questions here. I guess, just following up on the comments on the macro, thinking back on what you said when you reported your fiscal year-end results in Analyst Day shortly thereafter, it seems like maybe you saw the macro slowdown a little bit more maybe during that time frame or since that based on the organic growth rate guidance for the September quarter. So I'm just curious, is it more of a one-quarter timing around inventory sell-in or is it just across the board, maybe you can just help us reconcile those items a little bit more.

Sure. So let me go back to some of the commentary on the short cycle business. I think in North America in particular, we saw really drop a lot in April with some recovery through May and certainly, we're seeing some upticks in order intakes in July, and it's hard to say why that soft patch occurred. It may have been some of the inventory correction issues where folks are a little bit hesitant given the macro economic conditions and concerns on tariffs, but we do see that moderating and we are encouraged by some of the, like I said, the short cycle upticks recently. Whereas Europe, that industrial capacity is off, I think that yields more soft in Europe right now. We hope to offset that with some of the strength that I spoke about in our earnings call messages in some of the deployment on areas of strength, we are definitely seeing areas of strength.So it's important that we work to mind those opportunities and get some of our growth out of that. So we're actually pretty encouraged by what we're seeing and there is nothing that we're seeing that would indicate it would derail our strategy at all. We're very focused on our strategy. We're very confident that our strategy is right for these market conditions. So I would say, generally speaking, we're pretty encouraged for the visibility that we have.

Curious, if you have any data or comment on what you think the overall market is growing. It seems like over the past two to four quarters, the market share gains have been accelerating. So just curious to get your thoughts on that and, obviously, what your expectations are going forward as well.

I think we have seen some market share gains over the last two years, some of our initiatives on strengthening the core, some of the deployment in these growth areas. As you can hear from the remarks on this call, we continue to innovate and I think we're capturing some market segment growth as well. So I think we are encouraged by what we've been doing and the traction we've been getting. The overall market I think there is some data that's written on these.We don't spend a ton of time on what is occurring there because I think what we really focus on is our opportunities to gain share, our opportunities to grow. We do know that Konecranes reported on July 25 and they have an industrial equipment market segment that saw orders decline about 3.5% at the constant currency basis. So I think we feel pretty good about the traction we're getting and the direction we're headed in.

And I guess just last one for me. Greg, I think you had mentioned last quarter about the goal or target in terms of operating income growth in the double digit this year versus last. I mean -- in the light of a little bit more slowdown in the macro, is that something you still think is achievable or not?

Yes, we actually do because remember the whole strategy is predicated on internal improvements, and we said that we can drive double-digit earnings growth in a low sales growth environment and that's what we're seeing right now.

And I guess that would probably inherently imply that gross margins tick up from what they were in Q1, even as maybe the sales level comes down a little bit. Is that a right way to think about things?

I think long term that's the right way to think about it. There are seasonal impacts on our gross margin percentages, as you know. But we continue to work hard to improve our factories and our productivity in our factories. We got really good pricing this year so far at 1.8%. But we think we've got a handle on inflation, and that's for the most part has been tamed this year with what we're seeing on that front is really carryover impact from last year. So we would expect for the year to have higher margins than we did a year ago and we're seeing that now.

Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Hi, this is Steven Friedberg filling in for Walt. So I want to talk about, first, cost, I know you guys mentioned you're positive in Q1. But I was hoping you could provide some color on fiscal 2020 and see how the cadence plays out and if there is any surcharges rolling off.

Sure. So I'll take that one. So for pricing, as I just mentioned, we got about 1.8% price in the quarter. That did include some benefit from 80/20 and we would expect that pricing level to essentially hold for the rest of the year. Most of our price increases have been already announced and have been implemented. Our standard price increases have been announced and implemented and that's done by essentially April 1. So we're pretty confident that pricing is going to be at about this 1.8% level.

And then turning to cash flow. I know it was weak in the quarter and you guys commented $12 million for the incentive plan. I guess, can you talk about the rationale of prepaying that $12 million as well as the cadence for fiscal 2020?

So let me just clarify something, the $12 million is the annual incentive plan payment which was actually a larger payment than we've historically had largely because we had such a great year last year, and that is always paid in June. So that wasn't the timing issue. The timing issue was really on the US pension plan contributions where we paid $7 million in the first quarter and we chose to do that to, we used some of the proceeds from our divestitures the year before and we earmarked that for this payment.So we chose to pay it early. You do get some benefit from it. And you get the expected return on asset percentage, which will help EPS a little bit on it. But it was really our decision to, from a timing perspective, that it made sense for us rather than have the cash sit in the bank.

And the cadence of cash flow throughout the year.

Yes, it's definitely going to improve because if you think about it, there was $20 million of cash outflows in Q1 that are not going to repeat in Q2, Q3 or Q4.

All right, thanks.

And so, we will use -- one other point I think that's relevant here is that we do expect to pay down $65 million of debt. We paid down $10 million already, so that leaves another $55 million which will get spread over the next three quarters.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Just regarding, I guess, Blueprint for Growth, 80/20, just wanted to make sure I have or understand what your expectations are and cost, you mentioned the $10 million and that's maintained from prior. And I was under the understanding that about $2 million is going to come from that Chinese facility, but is that more fiscal '21 and then is there anything else in this bucket of restructuring or improvements that we should expect?

So in terms of what we expect from 80/20 this year, we're expecting about $10 million of incremental operating income and that's on top of the 8.5 million that we had last year. So in terms of the consolidations, those are not specifically called out as part of the 80/20, $10 million. So as we mentioned, we expect the Ohio plant closure is already completed. That's going to be $2 million of savings for the year; $500,000 was already achieved in Q1.We talked about that on the call already, And then for our China consolidation from two into one, that is under way now and we don't expect it to have a material impact on our -- from an operating income this year, but it will be mostly next year. Because it will take us into our fiscal fourth quarter to have that completed.

And then SG&A, the $46 million for the second quarter, is any of that lowering from the first quarter related to more rail projects that require less SG&A? Or is that more so related to mostly just you guys 80/20 in cost reductions, etc. And then how should we think about that for the second half of the year?

So the $46 million, I would compare it to our run rate in Q1, which was [45.1 million]. So as we look at some of the investments that we plan to make in the upcoming quarter, we think it's going to be closer to a $46 million level. We're certainly going to be adding some more on the new product development side of the house and that's going to be an important driver of growth for us going forward. And for the second half of the year at this point, we haven't really come out with guidance on it. So there is -- it can depend on quite a few things. So I think we should probably just stick with our Q2 guidance at this point.

And then, Mark, I wanted to ask about the growth factors that you presented at the Investor Day, R&D, Compass, kit cranes, engineered products all those type of things, I know you've probably started to see maybe some benefits, but I would think -- I would guess to think that we're in the early stages. Just wondering -- at what point in time do you -- should we anticipate more of a factor -- more of a starting to see a benefit from these initiatives?

I think you're right. I think it's early innings for ramping the growth engine. But I think we are beginning to see some of that trickling in now. I think we're encouraged on variable speed. We're encouraged on what we're seeing from some of our commentary today, through some of the operating leverage that we're getting from these new products at higher margins, we're really encouraged by it. SoI would think that we should start seeing greater traction as we progress through this fiscal year. As you know, getting some of the things out through product development can take a bit of time, but I'm making pretty regular updates on our earnings calls on our launches and some of the progress we're making and I think this is going to be accretive through this fiscal year.

And then last question, Greg. Just on the tax rate, is 20% a normal tax rate at this point or is it still 25?

So we have lowered where we think our effective tax rate is going to be from the 25% we talked about at the Investor Day to 22% to 23%. We think that with the current mix of earnings that we're anticipating that that's a pretty good range of where to go. It is lower. As a 331 company, we have to do very detailed effective tax rate calculations as of the end of the fiscal year which those have been completed. And so, now that we have additional information, we think the 22% to 23% rate is the right rate for this fiscal year.

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Great. Thanks, Doug. Thanks for joining us on today's call. We appreciate your interest in Columbus McKinnon. Have a nice day.