Greetings. Welcome to the Columbus McKinnon Corporation Fourth Quarter Fiscal Year 2021 Financial Results Call. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Deborah Pawlowski, Investor Relations. Ms. Pawlowski, you may now begin.

Thanks, Rob, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer.

Thanks, Deb, and good morning, everyone. Fiscal 2021 was an unprecedented year and we were happy to end on a high note. We believe the excellent execution of our strategy by the team and the development and deployment of our enhanced Columbus McKinnon Business System, or CMBS, were crucial to our success. As markets have been recovering, we have responded with agility to increasing customer demand. As a result, sales grew 12% sequentially to $186 million, which was at the higher end of our updated guidance. Our team worked hard to drive efficiencies against headwinds as well. Fourth quarter adjusted operating margin was 10.1% compared with 10.7% last year. Our 80/20 tools continue to contribute to our earnings power. 80/20 provided approximately $2.9 million in operating income in the quarter to help offset the headwinds that both COVID and the supply chain presented.

Thank you, David. Good morning, everyone. On slide 5, net sales in the fourth quarter were $186.2 million, down 1.7% from a year ago. As David noted, this sales level was at the upper end of our updated guidance for fourth quarter revenue of approximately $184 million to $187 million. We continue to see demand improve sequentially and are closing the gap to pre-COVID revenue levels. This fourth quarter felt more like a normal fourth quarter as we saw stocking orders begin to return in our short-cycle businesses.

Thanks, Greg. As you can see on slide 13, orders continued to improve sequentially in Q4 and were up 24% versus Q3. We have seen improvements continuing in many markets. Projects that were previously on hold are now being released and new projects are being quoted. This is all very encouraging. We also saw the beginnings of inventory restocking in our distribution channels for the first time in two years. I should point out that there is a degree of seasonality in our orders. We typically have stronger demand in the fiscal fourth quarter whereas orders in the fiscal first quarter tend to decline sequentially. This reflects distributor purchasing behavior in advance of annual price increases. We know that year-over-year comparisons for the first quarter in fiscal 2022 will be favorable considering what was happening at this time last year. In fact, through last week, the average daily order rate for our lifting business was up over 50% compared with last year. Book-to-bill for the fiscal fourth quarter was greater than 1.1 to 1. Demand was strong in defense and government with a variety of projects, including shipbuilding and material handling automation at supply depots among other projects. Demand from energy markets globally was encouraging. Utilities were stocking up for summer good work in advance of the hurricane season. We also had requests for solutions in nuclear and thermal power generation facilities. Demand for our fixed venue entertainment products has been improving. Inquiries in this market in general are picking up. We would expect to continue to see this trend improve and to start seeing this convert to orders for touring shows as we progress through the year. Both short and long-term backlog were up sequentially. Short-term, which is expected to ship within the first quarter grew nearly 15% to…

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question today comes from the line of Mike Shlisky with Colliers Securities. Please proceed with your question.

Hi. Good morning. I want to ask quickly first about the backlog at Dorner. You mentioned it had more than doubled year-over-year, I think in the quarter. Can you remind us last March to your knowledge, was there a very large dip at the very end of the quarter last year kind of like what you saw, or is it very apples-to-apples really pre-pandemic for them comparison?

Yes. I think the pandemic – Mike, good question, of course. I mean as we look at the quarter ending March for them in the prior year, the pandemic was early in its cycle. I think their backlog was around $17 million at that time and they saw the first quarter of our period last year. So our first quarter, their second -- I'm sorry their third quarter in their annual cycle was their worse, if you will from the pandemic. So remember they have a year-end in September and so that would have been their fiscal third quarter, which is equivalent to our first fiscal quarter of 2021. And that was the period when they were impacted the most by COVID. But their March ending balance or what we refer to as their April pending balance at $40 million is up about -- it's more than double. I think it was $17 million at the time that we're referring back to.

Okay. And then my follow-up. You had mentioned on the slide that you're still looking at 19% EBITDA margins in fiscal 2023. Do you anticipate that being a full year type of scenario, or just kind of scratching by the end of the year as an exit rate, kind of sentence as to what does that 19% target mean to you for next fiscal year?

Hey, Mike. It's Greg. We're looking at that as being the average for the full year.

Average? Okay. That's great color. I appreciate it. And I’ll pass it on.

Thanks, Mike.

Thank you. Our next question is from the line of Michael McGinn with Wells Fargo. Please proceed with your question.

Hi. Good morning, everybody.

Hey, Mike. Good morning.

Good morning.

So you walked through some SG&A numbers and I think the SG&A ramp you said was $7 million from -- with Dorner and then amortization on top of that. Does that $7 million include -- is that fully burdened with R&D and everything?

Yes. So just to be clear amortization is not included in our SG&A costs. Legacy is $43 million, Dorner is $7 million and that gets to the $50 million of RSG&A. And as I mentioned, we do expect to ramp our spend for new product development, which falls into R&D.

That $50 million includes the R&D….

For the quarter.

And we're going to continue to make selected and targeted investments in growth throughout the year.

Got it. You also alluded to some pricing -- the second pricing increase and that your backlog is filling up a little quicker with the shorter-cycle distribution products. Can you walk us through what the expectations are for price increases on the front end shorter cycle products being delivered in the front half? And then maybe projects picking up the back half, what your incremental margin estimates or assumptions would kind of be in a scenario like that?

Yes. So Mike, we're working to make sure that we're out ahead of the inflationary pressures that are out there in the market. And so our second price increase is really targeted at ensuring that we stay positive as it relates to net price versus inflationary pressures. So, we're not seeing this as an action that expands margins specifically in the second price increase and it's more of a movement to make sure that we're out ahead of inflation. And the back half, as it relates to longer cycle projects, we obviously price them as an engineered-to-order project, off of an understanding of the market value of the project, the competitive landscape and then the pricing pressures on the cost base. And so, we'll be making sure that we have the appropriate adjustments in there to ensure that we're maintaining if not expanding margin.

And just to add on to that Mike. So, with engineered-to-order product, because it's a unique SKU, we don't count that as price. And so our price calculations are year-over-year by SKU, but the change in prices. So with engineered-to-order, every time you quote, you have the opportunity to adjust your input costs and our quoting software. So, when we talk price, it's really just on standard short-cycle product that was sold in the previous year, which is about half of the business. So, when we talk about 1% price realized in the quarter, you might think of it as really, it's 2% on what we're actually raising prices on standard product. But there is also pricing embedded in engineered-to-order products based on, how we're quoting it and how long and adjusting the input cost for that.

Got it. And if I could sneak one more in. On the CapEx number, is this sort of a catch-up plus integration, or is this the run rate to use going forward for the combined business?

Yes. I'll take that. So, in general, this is probably a more normal level of CapEx at the $20 million to $25 million. We spent $12.3 million this past year. In other years, we've been as high as $20 million to $22 million. On just the legacy, Columbus McKinnon Dorner is typically in the $3 million to $4 million range and that should be plenty on a go-forward basis. So, I would think that this would be a good number going forward.

Got it. Appreciate the time.

Thanks Mike.

The next question is coming from the line of Chris Howe with Barrington. Please proceed with your question.

Good morning everyone. Thanks for taking my questions. As far as the guidance that we've kind of discussed for the first fiscal quarter, can you talk in more detail as to how this may look for Dorner -- a Dorner sales expectation? And in the context of this fiscal year, can you remind me again, about Dorner seasonality and its comparisons over let's say your last fiscal year?

Yes. But I'll...

And that's too many questions on there, but the previous Dorner expectations laid out for their year ending September 30, are those still in line?

Yes. Chris, let me jump in and then I'll ask Greg to help out. So, Dorner's performance is tracking consistent with our expectations at the acquisition timeframe. And as I mentioned in my opening comments, even slightly ahead of those expectations and so we feel really good about where the business is. Their order development has been really promising. From a cyclicality standpoint, on their build-to-order business, which is their base business, it's relatively I'd say stable. Their -- the Q3 Columbus McKinnon period tends to be their highest period at calendar year-end and then that goes into the Q4 period at a slightly lower level. But Q1 and Q2, if there is any seasonality would tend to be a little bit lower on the build-to-order in a general cycle if you will. But that's exclusive of more macro drivers, which includes a lot of activity in the life sciences and e-commerce sectors. And so, we're seeing terrific development in terms of order pipeline there. On a year-over-year basis, their orders are up on a quarter-to-date basis materially. We had -- but that -- but again, first quarter last year was their worst quarter -- the first -- when I say first quarter, I'm referring to Columbus McKinnon's quarter. So yeah really good development there. And Greg, I don't know if you have anything you want to add to this context.

Yeah. So just to add on, from a seasonality perspective, we don't really see seasonality in the business other than the number of working days. So when David talks about our December legacy quarter being less for them, it's really a function of the Thanksgiving holidays, Christmas holidays, but there isn't really that cycle. And given the growth trajectory that they've been on, they've been kind of blowing through any kind of concept of seasonality. Now we did give a couple of markers on revenue as part of the S-1 filings and 8-K filings where -- and when we announced the Dorner acquisition I think through December, the revenue was about $98 million and change $98 million and change...

Number period ending.

Yeah. And then we said for their September timeframe, it was about $124.7 million is the number that I recall. And they -- which says that there's been -- there's a tremendous amount of growth that's happening in the second half of the year and that is just continuing. So we're very pleased with the first month and a couple of weeks that we've owned Dorner. It's a very profitable high-margin business with a really great double-digit growth trajectory.

Yeah and a fantastic team.

So we really, really feel good about where we are and we're excited about how things are coming together right now and working really hard on all the things that we've committed to do to make sure that we exceed or we achieve and exceed our targets.

That's great. And if I may squeeze another question. It won't be a series of questions. But as it relates to Dorner in some of your comments in the press release David you said strategic opportunities in a fragmented market. Can you perhaps expand on this thoughts? And perhaps, how it may relate to the different opportunities that you're seeing in your inorganic pipeline?

Sure. So the market that Dorner serves is a global market that approximates $5 billion. They're obviously at the rates that Greg was just referring to a small piece of that total market. But there are two other major global players in addition to Dorner and then we see a long tail of fragmentation. And Dorner today has a very large percentage of their business. Approximately 85% of their business is in the US and the balance overseas. And so as we look at the competitive landscape and we look at the market there are a number of nice niche technology opportunities. There are also opportunities that will enable more global scale. And there is just a tremendous runway and a nice pipeline of opportunities that exist. And obviously, we're very focused on what's right in front of us and making sure that we execute to the plans that we've committed to, but the pipeline of opportunities are really nicely concentrated in areas that we think will be very attractive for Dorner.

Very helpful. Thanks for taking my questions. I'll halve back in queue.

Great. Thanks, Howe.

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

Hi. This is Danny Eggerichs on for Greg today. Thanks for taking the questions.

Good morning, Danny.

Good morning.

Hey, I appreciate the color on -- it sounds like Dorner growth rates have been accelerating recently. I'm wondering if you could kind of dig into the drivers behind that? I know certainly with the labor constraints a lot of companies are putting more emphasis on warehouse automation. Just anything you're seeing from that perspective?

Danny, I'm sorry, you broke up just a little bit there in the front end of the question. So you're asking about order rates in Dorner just to confirm?

Yeah. Yeah. So I mean just -- it seems like order rates have been accelerating recently. I was just kind of wondering what the drivers were behind that.

Yeah.

I know with the labor constraints, it seems like companies are putting more of an emphasis on warehouse automation in their distribution centers. So I just wanted to understand?

Sure. We're certainly seeing that as well. The two primary markets that we're seeing most of the significant activity and although all across the board markets are pretty favorable, but it would be life sciences. And that's primarily concentrated around pharmaceutical automation, if you will pharmaceutical distribution automation in the life sciences space and then e-commerce growth and that's in terms of warehousing and order fulfillment activities. So yes, a lot of demand generation coming from those areas. And the order pipeline continues to develop positively and we're starting to receive more and more commitments from customers for orders that will come in the future relative to that opportunity and we're pretty encouraged.

Got it. That's good. And just piggybacking off one of the last questions on. I think you were mentioning inorganic growth opportunities on a worldwide basis. What is the opportunity organically for Dorner for geographic expansion?

Yes. So Dorner has historically grown on a year-over-year basis organically at about 13% over the last five, seven years on a CAGR basis. And so really attractive organic performance profile. Clearly, the work we're doing together is focused on driving incremental growth beyond that. We've got a nice set of opportunities that exist from a channel synergy standpoint and from a geographic expansion perspective, particularly as we look beyond the US into Europe. And so we've got reach that they don't necessarily have legal entities and the opportunity to plug resources in to help them scale. And then as it relates to Columbus McKinnon product, that hasn't had access to some of the channel partners that Dorner enjoys, we have the opportunity to bring some of our actuation and other overhead workstation crane products through their channels for growth in the near-term. So there is some really interesting opportunities that are organic and synergistic in both directions on top of the already terrific performance that they've been delivering. And remember, they've been owned and operated under a private equity structure for the last seven years. They've been somewhat capital constrained and we're working with them to expand capacity and make sure that they can scale to accommodate the growth opportunities that are in front of them. So I think the organic growth opportunities will be material in addition to the acquisitive opportunities.

All right. That’s really helpful. I’ll leave it there. Thanks.

Great. Thanks, Dan.

Our next question is from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

A couple of questions. First I was wondering if you could comment on where you think we are with respect to distributor inventory levels currently versus prior up cycles? And maybe what inning we're in with the restock process?

Good morning, Matt. I guess I haven't lived through those historic cycles but I'm trying to get as smart as I can on it. I'll let Greg comment a little further after I highlight, but we saw channel partners lean in in Q4 and start to place orders for the first time in a couple of years and lean in positively towards where the market was going. And since then we've seen that lean become more forward leaning if you will and become accelerated. And so we see our customers beginning to open up. I'd say we're in – what we're reporting here in Q4 is the beginnings of that. On a quarter-to-date basis, we're up about 70% short-cycle through – in comparison to the prior year. So that's kind of May – for the first three weeks of May. And our project business is up about 30% year-over-year in that same cycle. So when I commented that through the first three weeks of May, we see orders up year-over-year approximately 50%. That's the split. And what the short-cycle demand increase would indicate is that our channel partners are leaning in a little bit further on inventory and being bullish about it, but I'd say, we're in the early to mid innings in terms of restocking.

Yes. Just to add on Matt, I would – having been here for a while. This is substantially less than what we would typically see and the stocking always would take place and the orders would come in the March timeframe with delivery either in March or in the first quarter of the next fiscal year. So while we did see stocking orders, still significantly below what we would normally see.

And then – I apologize, if I missed it. To a prior question, given and then the moving pieces associated with how raw material costs are rolling through how your pricing schematic is going to play out this year, how should we be thinking about core incremental margins in the base business ex-Dorner, this year?

Yeah. So with the pricing that we've implemented, we want to be sure we stay ahead of the inflationary pressures that we're going to see. We have inflationary pressures in raw materials, and freight, and labor costs. Not that they're unusual, but in the past year, we really did not provide increases to our associates. So there is going to be a bit of a catch-up here starting in July. But I think all in, we will expect that will cover inflation. And maybe have a little bit of upside to it like we always do. But this is really meant to cover the inflationary pressures that we are expecting.

Yeah. So I think the net comment is we don't expect any erosion. And we're anticipating that we'll be able to lean in a little bit more.

Yeah.

Got it. Thank you, guys.

Thanks, Matt.

Thank you. Our next question is from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi. Good morning guys. Thank you for taking my question. Maybe just to drill down the previous question, a little bit further, for the first quarter, do you expect any gross margin deterioration just in that quarter, because the price increases don't take place until June? And then, maybe end-up the year up, as those roll through, or is it more of a -- that you're still able to stay ahead based on the pricing increases, that you already did?

Yeah. We would expect that we'll still be able to stay ahead, Jon. I mean, because, if you recall, we implemented our normal round of price increases that took effect, some in January, some April 1, some in the U.S. the third week of March. And so those are all in place. And we should not expect any erosion to margins, as a result of inflation in the first quarter. But once again, we're trying to get ahead of what we anticipate coming down the road.

Okay, great. And then, since you've announced your next price increase, are you seeing another spike in demand from people who are trying to stock up ahead of that rolling through, kind of counter season what you usually see?

No nothing material yet at this point. As Greg indicated, we announced last week, we've had a lot of positive discussions with our channel partners and customers. They're -- they understand. They're expecting it. And it's not a challenge, as it relates to implementation at this stage. And we haven't seen a lot of movement in terms of order rates in the short-term that we've been talking about it.

Okay, great. And then, Greg just a great job on cash flow once again. Do you see that reversing out as you grow this year? And maybe building inventory like, some of your customers' maybe? And then it seems like, everybody's supply chain is trying to if they can.

Yeah. No. That's exactly what we would expect to happen. As we look at free cash flow going forward, we're going to have higher interest expense, as a result of the refinancing that we've done. We're going to have higher CapEx. Working capital is going to be significantly higher. We did benefit in our accrued liabilities. Our working capital as a percent of sales was I think 9.3%, but that was -- that benefited from a, derivative that was classified as current. And so our more normal working capital as a percent of sales is going to be in the 14% to 15% area. So we would expect, free cash flow isn't going to be as rich as it was this past year. And the bulk of it really coming from an increase in working capital, as we expect revenue to improve. And then, on top of that, we also have transaction costs and that refinancing fees that are going to get paid in the month of April, or have been paid in the month of April May. So for all those reasons, we will benefit from Dorner's, free cash flow, but net-net it's -- we're going to have less free cash flow in the coming year, than this past year.

Okay, great. Thanks. Then, last small question. Did you have a breakout as to what Dorner was expected to contribute in the first quarter, within your guidance?

We did not. I mean the revenue number that we've guided to includes both, legacy Columbus McKinnon and Dorner. We broke out the Dorner SG&A, at $7 million. We talked about, Dorner being roughly $3.2 billion $3.3 million of additional amortization, because we said that it's approximately double, what we had historically for amortization expense.

Yeah. So we didn't break it out explicitly, in the full P&L. We had a few guides that we provided relative to Dorner performance.

Okay. Fair enough. Thank you, guys.

Thanks, Jon.

Our next question is from the line of Steve Ferazani with Sidoti. Please proceed with your question.

Good morning, Steve.

Follow-up from the last question, I know even if you're not breaking out Dorner, you can sort of ballpark it, which would say that, and I know you're coming off of typically your strongest quarter seasonally, but it seems like maybe there isn't in pre Dorner, Columbus McKinnon. Maybe you're not looking at much sequential growth certainly at the low end of your guidance. I'm just trying to figure out if the chip shortage in the automotive business is slowing sales to certain end markets like automotive, or if there are any labor issues, anything that hampering growth in Q1 that goes away?

Yes. I don't think there is anything specific from a market perspective that we see as negative as it relates to the sequential activity in the market. It's more simply sequential performance in the core business based on the cycle in the market. So we see a lot of demand that gets placed as we talked about given our year-end price increases, et cetera are being placed in the last fiscal quarter of the year. That's not necessarily market development driven, it's more just get out ahead of price increases, behavior in the channel. And then as we head into Q1, we're anticipating a typical cyclical decline in the core business, but certainly with a tendency towards acceleration as we head into the second quarter.

Yes. The only thing I'd add is, one of the movers to our revenue line is our rail business, which can have some larger projects. And we had a very strong order in the fourth quarter from a rail business, and really just due to the timing of projects in our Q1, there is probably about a $5 million delta in revenue timing.

Revenue timing. Yes. Good point, Greg you made.

And then in terms of leverage and certainly it's easy for us to model out, how you get net leverage under two times within two years given your strong cash flow. But you may have touched on this, what are you thinking about and what are you allowed to do in terms of actual debt repayments? And just in general how you're thinking about cash?

Yes. So from a debt repayment perspective, the Term Loan B requires an annual principal payment of 1% per year, which would be $4.5 million and divide that by $4 million, so $1.25 million a quarter starting in the next quarter. And then there are what's called an excess cash flow suite, which is 50% of in essence your free cash flow, that's due based on your annual free cash flow at the end of March, and it depends on your leverage ratio. I think once we're below three times that steps down to 25% and then it steps down again, but that's -- we filed our credit agreement so that's publicly out there. So we can chat about that later. And in terms of other cash requirements, pension contributions would be one that we would anticipate that pension contributions will be similar this year compared to -- when I say this year this new fiscal year versus what we did last year and probably the neighborhood of around $7 million. Oh, and there are no prepayment penalties on debt. So what we have typically done in the past is we will use any excess cash we have to pay down debt, save the interest expense and delever quickly. Even though it's a net leverage ratio we will use excess cash to pay down debt. So there is no prepayment penalties and the financial covenant for those not familiar with the Term Loan B only kick in if we draw down off of the revolver. And if we don't draw off the revolver, the covenant isn't tested and we typically don't need our revolver for intra period of cash requirements given our strong cash flow profile.

Steve, are you there. Rob?

Thank you. At this time, we've reached the end of our question-and-answer session. I'll hand the call over to David Wilson for closing remarks.

Great. Thank you Rob, and to everyone for joining us today. I'd like to take a moment to thank all of my Columbus McKinnon associates for their resilience and adaptability this last fiscal year. We truly appreciate your dedication to the company and to our customers. We're looking forward to working together to create the bright future that we believe lies ahead for Columbus McKinnon. Appreciate everyone's attention. Hope everyone has a great day. Thank you for your time today and goodbye.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and we thank you for your participation.