Q2 2020 Earnings Call
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Hi, it's the Columbus Mckinnon earnings call.
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At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now let's turn the conference over to your host Mr. Polaski Investor Relations for Columbus Mckinnon. Thank you you may begin.
Thanks, Melissa and good morning, everyone. We certainly appreciate your time today and your interest in Columbus Mckinnon.
Joining me on the call or Murali, our president and CEO and Gregg Moskowitz, Our Chief Financial Officer, you should have a copy of the second quarter fiscal 2020 financial results, which we released this morning before the market. If not you can access the release as well as the slides. It was a company your conversations day at our website see him works Dot com.
If you'll turn to slide two in the deck I will first review the Safe Harbor statement.
You should be aware that we may make some forward looking statements during the formal discussions as well as during the Q1 day session. These statements in light of 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 securities and exchange.
Commission.
These documents can be found on our website, where it www dot.
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During today's call. We will also discuss them non-GAAP financial measures. We believe those will be useful in evaluating our performance you should not consider the presentation as additional information in isolation or as a substitute for results prepared in accordance with gas. We've provided reconciliation of non-GAAP measures with comparable GAAP measures of the tables that accompany today's release in the slide.
For your information so with that if you turn to slide three I will turn it over to most to begin mark. Thank you Dan.
We've deployed our blueprint for growth strategy over to want to half years, now and we continue to demonstrate its effectiveness with our results this quarter.
We're improving our margin and earnings even in the face of significant industrial market headwinds.
After adjusting for divested businesses and foreign currency exchange rates revenue in our second quarter fiscal 2020 was up 2%.
The impact of already 20 process provided more than $3 million in revenue driven by strategic pricing and our priority customer account program.
We saw strong strong growth in our projects business, which overcame the decline in demand from our short cycle business.
In total our 80 20 process contributed $5.2 million, an operating margin, including incremental revenue and 2.1 million in savings from overhead cost reduction.
This benefit is more than offsetting industrial market headwinds as well as enabling us to invest in growth initiatives.
As a result, net income grew 4% year over year and outpaced revenue growth.
Adjusted net income was up over 8%.
Our strategy and execution is keeping us on track as we continue to achieve our targets.
Adjusted EBITDA margin expanded 80 basis points of 16.2%, an ROI fee was up 180 basis points to 11.7%.
A hallmark of Columbus, Mckinnon, as our strong cash generation through economic cycles.
As we execute our strategy and improve our business model, we're strengthening this tradition.
We generated 40 million in cash from operations. This quarter, we use the cash to further reduce debt.
Our leverage ratio is now just 1.5 times adjusted EBITDA ahead of target.
The changes we've made to our business model have improved our performance as global industrial markets have weakened.
After a year of decline industrial capacity utilization and six months of is Sam manufacturing declines in the U.S., we continue to make progress.
We've grown organic revenue and consistently expanded margins and ROI see while investing for innovation and strengthening our balance sheet.
Please turn to slide four.
We're doubling down on phase two of our strategy and are now raising our target for 80 20 process benefits this fiscal year.
Through the first half of this year, we've achieved $9 million and contribution to operating income this was higher than the total benefits to earnings in the prior year and our performance year to date gives us confidence to raise our full year guidance to $18 million up from a previous target of 12.
Our self help strategy shed unprofitable revenue and focus on areas of growth with our customers. It also provides the resources to strengthen our business.
The 80 20 process gives us the lens to reduce indirect overhead costs and improve material productivity driven by simplification of our product lines.
We're shutting footprint with our first factory closure in Ohio, and one in China I should note that China factory closure is on track to be complete by the end of this fiscal year.
And we announced yesterday, we're closing a second facility in Ohio, enabling us to consolidate operations and wait for all North Carolina, which is our North American manufacturing center for wire rope products, and Damascus, Virginia, which is our North American manufacturing center for chain hoists.
This removes overhead costs and allows us to fund initiatives to improve our competitiveness.
The true value of our strategy is demonstrated through the success, we're having by funding our investments.
This fiscal year, we hired nearly 30 people focused on product innovation marketing and digital initiatives.
We also offset headwinds from the global macroeconomic and industrial markets.
We more than offset declines in our short cycle business higher tariffs and higher medical costs.
Our year over year comparisons in the quarter were also better despite the loss of income from our intentional divestiture of less profitable businesses.
Please turn to next slide.
Let me give you a couple of examples of how we're realizing innovation in our business as a result of solving high value customer problems.
First we're building on our legacy as a listing specialists by creating solutions for intelligent motion.
This quarter, we launched several new products that strengthen our business through innovation.
One of these as our revolutionary Propath automated workstation, crane, which increased productivity and improves worker safety.
The Propath provides an auto dispatch mode that enables preprogram movement at powers. The bridge trolley endpoints motions or in other words provides multi axis automated movement to enable the line worker to be more productive.
The automated workstation crane travels to designated location with its low leading the operator free to work on other more critical tasks.
This intelligent workstation assist operators to be more productive and improved safety.
Without our unique solution the worker manually guides, the crane and have slowed to the next location and inefficient use of valuable labor.
Another example of our innovation solutions, providing intelligent motion is you enhancement of our smart hoist electric chain offering now with fully integrated low sensing technology.
Operators can remotely measure their low real time.
This solution improves headroom compared with external solutions.
We improve equipment uptime, because less equipment in wiring is exposed for applications such as in the entertainment industry. The integrated low sense are also eliminates extra shipping cases, simplifying transportation and setup.
We're also creating ways to leverage in scale critical automation solutions for wire rope hoist crates. We recently launched no fly zone control module, we standardize hardware and software auctions now we are making them available and our new and improved online Crane Configurator op.
Operator can easily program, a crane to avoid obstacles and high traffic areas to improve productivity and safety.
We have more projects in the pipeline as well and I look forward to discussing more about innovation and growth through our intelligent motion theme.
With that let me turn it over to Greg Hill review the financials in greater detail. Thank you Mark good morning, everyone.
Slide six net sales in the second quarter $207.6 million. So as you know we completed three divestitures last fiscal year, which reduced our sales in the quarter by 9.2 million.
Foreign currency continues to be a headwind, which also reduced our sales by 4 million compared to the prior year.
This headwind will continue in our fiscal third quarter will negatively impact sales by approximately 1.5% that today's foreign exchange rates.
Adjusted for FX and the divestitures, we saw good organic growth of 1.8% or.
Our pricing power was evident as we saw pricing improved by 1.6%.
As a result of our 80 20 strategic pricing initiatives sales volume was up 20 basis points in a difficult industrial environment.
We saw double digit organic growth in our project businesses, but a slowdown in our short cycle businesses globally. The channel continues to manage inventory levels given this uncertainty.
This quarter, we saw organic growth in the use of 80 basis points adjusted for divestitures.
This is largely due to strategic pricing initiatives from our 80 20 process volumes were down 80 basis points.
Sales outside of the US were up 2.9% adjusted for the effects of divestitures and FX, we saw the benefits from strategic pricing as well as higher volumes.
Sales volume was up in EMEA, but down in Canada, EMEA APAC region.
The higher volume we saw on EMEA was primarily in the middle East in Germany.
This was the result of strong sales in our project business for stall branded product along with a large rail project delivered into Germany, which more than offset weakness in our European short cycle business.
Overall, we were encouraged with organic growth of approximately 2% in the quarter given the industrial market headwinds that exists in our 80 20 simplification efforts it eliminates fed revenue.
This reflects the progress we continue to make with customer responsiveness and ramping the growth engine.
We are introducing new products that we will expand our addressable market and grow share in key markets.
On slide seven our gross margin was 35.4% in the quarter. This is a 40 basis point expansion in gross margin from year ago, and our 10th consecutive quarter of year over year margin expansion on a GAAP basis.
As Mark mentioned earlier, we benefited from the 80 20 process, which drove $5.2 million of gross profit expansion from strategic pricing indirect overhead reductions in certain volume gains at our targeted accounts.
This benefit was more than offset by the impact of the divestitures.
FX tariffs and higher medical costs, which we saw this quarter.
Let's now review the quarters gross profit bridge.
Second quarter gross profit of 73.5 million was flat compared to the prior year adjusted for the divestitures.
We did see gross profit expansion from pricing net of material cost inflation and productivity, which were directly attributable to the 80 20 process.
Pricing net of material cost inflation contributed 2.6 million in productivity contributed 400000 of gross profit more than offsetting the higher medical costs that I mentioned previously.
Foreign currency translation reduce gross profit by one and a half million antero set a negative impact of $800000 in the quarter.
We also incurred 200000 of cost for the Ohio factory closure, which we announced yesterday.
As shown on slide eight Iris gene eight was 45 million in the quarter for 21.7% of sales.
This was a reduction in Rs gionee of 2.3 million in an improvement of 10 basis points from the previous year.
The reduction in our Sta was largely from the impact of the divestitures, which reduced our us junaid by 900000 in FX, which was a benefit in the current year of approximately 800000.
In addition, we reduced selling costs by consolidating several warehouses in the us last year.
This reduced selling costs by 400000.
While we are controlling our ESG costs as macroeconomic conditions create headwinds. We are also actively investing for growth in key initiatives. In fact, we made approximately $1 million of investments in product development marketing and digital projects in the quarter.
Our strategy will continue to drive a net reduction in our Sta cost this year, even while we invest in growth.
We are forecasting our third quarter Rs gionee to being a range of 45 to 45 and a half million dollars.
Turning to slide nine adjusted operating income grew 3.4%.
If you normalize for the divestitures adjusted operating income grew 9.6% to 26.3 million.
Adjusted operating margin was 12.7% of sales 100 basis point improvement over the prior year.
With our blueprint for growth strategy and specifically our 80 20 process, we were able to grow adjusted operating income despite an overall, 4.4% year over year decline in revenue.
Partially driven by divestitures in FX, which is outstanding operating leverage.
As you can see on slide 10, GAAP earnings per diluted share for the quarter was 69 cents.
Adjusted earnings per diluted share was 74 cents compared with 70 cents in the previous year, an increase of four cents per share for about 6%.
On a GAAP basis, our effective tax rate for the quarter was 23.6%.
We expect the full year tax rate to be approximately 22% to 23% in fiscal 2000.
On slide 11, we continue to expand our adjusted EBITDA margin for the quarter per adjusted EBITDA margin was 16.2% an increase of 80 basis points over last year.
We're also making progress on driving our ROI see higher and are now at 11.7% an increase of 180 basis points from last year's second quarter.
This progress demonstrates that we are tracking our blueprint for growth strategic goals to achieve a 19% adjusted EBITDA margin in fiscal 2002, and achieving adjusted ROI see in the mid teens.
Moving to slide 12, net cash from operating activities for the quarter doubled to $40 million on a year over year basis year to date, we have generated $33 million of free cash flow. We are on track to deliver 70 to 75 million of free cash flow this fiscal year.
One of the hallmarks of Columbus Mckinnon is its ability to generate cash throughout the business cycle, we expect to grow our free cash flow by approximately 10 million per year over the next several years.
Turning to slide 13, our total debt this quarter was approximately $271 million in our net debt is 199 million our net debt to net total capitalization is now approximately 30%.
We repaid $20 million have died in the second quarter and reduced our term loan debt by nearly 165 million since acquiring install in January of 2017.
We made excellent progress de levering and achieved a net debt to adjusted EBITDA leverage ratio of 1.5 times, which provides us the financial flexibility to advance into phase three of our strategy.
Let me reiterate on page 14, our thoughts on capital allocation.
We will continue to use our financial flexibility to invest in growth initiatives. We will also investing capex projects with good cost savings as these will be accretive to our overall financial objectives. While we have achieved our net leverage target. We will continue to use our surplus cash to pay down debt and delever the balance sheet.
For the remainder of this fiscal year.
We plan to deploy capital for Smart M&A as we move into phase three of our blueprint for growth strategy.
We also plan to pay a dividend that is consistent and grows over time.
Our final priority will be share repurchases that we would consider opportunistically as we weigh our other capital allocation priorities.
Please turn to slide 15, and I will turn it back over to Mark.
Thanks, Greg.
Our blueprint for growth strategy is improving our performance, even as industrial market headwinds persist into the third quarter. Our self funding strategy will continue to be a key enabler for us to make investments for innovation and growth.
We expect to Q3 organic revenue to decline approximately 2% year over year about a point of this decline is related to 1.7 million dollar in rail projects that won't repeat in the quarter because of timing of project flows.
Overall, our global rail business pipeline is growing however, it is uneven from quarter to quarter.
Our expectations for the quarter would be worse, if not for the benefits of the focus on growth segments, our priority customer accounts program and strategic pricing.
As we look further out we believe we will deliver solid earnings growth as we gain more benefits from phase two of our strategy.
To restructurings and cost reductions were implementing our driven by our strategy and validate that we're on track to achieve our targets for fiscal 2022.
A key enabler is a simplification of our product lines, which has allowed us to make measurable realignments in our business and improve our competitiveness.
As I mentioned earlier, we now have the visibility to initiate another round of rationalization that will include another facility closure.
We announced yesterday that we will close our second manufacturing site in Ohio, located in Lisbon, which we expect to complete in the first half of fiscal 2021.
The Lisbon, Ohio consolidation, we expect to realize $5 million an annualized savings.
With that we will have rationalized six facilities since we initiated our blue print strategy and we're now down to 16.
In addition, we've been making investments in human capital and key suppliers to drive innovation and ramp our growth engine.
These investments have been self funded even as we expand margins.
We continue to make progress and we're narrowing the gap to achieve 19% EBITDA margins and mid teen ROI see in fiscal 2022.
This represents top quartile performance, among very well respected industrial technology names.
Please turn to the next slide.
We put in slide 16, as a reminder of the phases and elements of our blueprint for growth strategy and how these phases layer upon each other.
We're making excellent progress and their significant runway improvements ahead.
We are further in our our efforts in phase two and initiating phase three.
We continue pivoting our business to a growth oriented industrial technology company.
We expect to discuss with you our intelligent motion theme in further detail sometime in the first half of next calendar year.
So with that Melissa will now open the line for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question can you.
You mean crestor too if you like to remove your question from the Q for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star team.
Our first question comes from the line of might Schilsky with Dougherty and company. Please proceed with your question.
Good morning, guys can you hear me okay.
Yes, we can hear you find life all right great.
So historically, we've seen your fiscal Q3 gross margins take a step down from Q2.
That might be due to having fewer shipping days and I guess, some customer holidays, maybe even.
But given you've done so well recently on your gross margin is there a chance that you actually see a seasonal decline that's close to zero. This.
Year.
Yes, I'll I'll start the answer and I'll, let Greg follow up so you're absolutely right. We do see a seasonal decline in the December quarter.
Folks, particularly in the short cycle business, they try to manage their inventory for the year calendar year end and I think this seasonal activity is while reported.
But directionally, we are seeing more improvement on our margins because our 80 20 is driving the results and so I'll I'll turn it over to Greg to see if you want to any additional color.
Hey, Mike. So if you look at last year's gross margins, if you adjust for the divestitures and some of the non-GAAP adjustments. We had we were at about a 34.4% gross margin. So we are seeing good progress from a margin perspective, with 80, 20, though but theres been headwinds in the quarter.
This current quarter, which are likely to continue tariffs are going to continue. We also saw a significant increase in medical cost this quarter well over a million dollars, which we expect to continue into the coming quarter and then as you know or can see we have also been reducing our inventory levels and so it puts it.
It's a lot tougher from a manufacturing perspective to absorb those fixed costs in our 80 20 process has been taken indirect overhead out five goods to continue challenge when the volumes the production volumes drop in our facilities.
Okay, Great Thats great color.
I also wanted to ask about some of the some of the sort of volumes in the quarter I was actually surprised the volume was down at least.
One of 2% in the quarter.
Coming to share with us a few of the puts and takes.
Three near key end markets and whether you thought you gained any kind of share in the quarter perhaps.
Sure, let me start off a little bit higher level and I'll break it down for years. So first of all we've been really encouraged with our project related businesses. They were up double digit no more than 10% in the quarter, which I think did show some some outstanding traction in some of the verticals that we've been serving there and this more than offset.
Some of the decline in the shorter cycle business that we saw down sort of mid single digits, I think mostly due to some of that macro industrial headwinds that everybody's reporting on so some of the verticals that are really driving our strength our comps retrofits into this steel industry. There's been some really good projects there we've seen.
Good demand in Aerospace Entertainment has been strong for US is while new construction and also utilities have been quite good as were.
Selling into infrastructure projects on the utility side.
Great Thats, great color, Mark if I could just throw one more in here.
About the about the announcement last night for the Ohio closure.
That was press release separately different to of course, I mean can you guys just a sense of timing of the upfront costs and the benefits. You had mentioned was going to be completed in the first half of fiscal 21.
But as any of it could take place any of the cost of benefits actually take place in fiscal 20 and is any of that part of the change in the benefits from each one you've got that went from 12 million to $18 million.
Hey, Mike its Greg I'll take that one so the the additional benefit on the 80 20 side I'll take the back half of your question first going from.
A target of 12 million 18 million is largely due to the success. We've had in the first half of the year Weve.
Generated over $9 million of benefit through the first half of the year and that run rate that were on would say, we should be able to double that in the second half of the year, So nothing really to do.
With this program, although it does have the benefit of the Salem, Ohio consolidation that took place at the beginning of this fiscal year. So with regards to the Lisbon, Ohio facility, because remember we said two facilities in Ohio and as the Salem and then there was the Lisbon, one that want to it we expect to take seven to 10 months to comply.
Theres, it's it's a complex move it's a sizable factory that the work in the product lines have to be switch to the waste roll North Carolina facility in Damascus facility, we don't really see any benefits showing up this fiscal year. In fact, we think it's really more likely that we're going to start to see the.
Full benefits in the second half of next fiscal year, given the timing that it takes to do this but we will start to incur and have started modestly to incur.
Some of the onetime costs that are going to be associated with the move.
Oh, okay.
Is that plant in.
Live in a lease plan to an owned plan is there an asset to be is to be sold there I'm asking because I'm.
Curious.
Have a change to your to Europe .
Outlook for ROI see if you have a bit lower asset base or is there. Some also some large cash on coming in at some point for our quick question. So we do put that into our 10-K every year. Our we have a schedule on all of our facilities that has an owned facility I think it's some going off the tougher mine, it's about a 77000.
In square foot facility, roughly and so at the right time, we will work with our brokers to put their property up for sale.
The book value of the facility isn't as large as you might expect it's an older facility. So in total it's a couple of million dollars from a size perspective.
So yes, it will have an impact on ROI c., but I think more importantly, it's the benefit of taking now $5 million of overhead.
It also gives us a chance to reduce inventory because it's really streamlining our operations. What's driving it is is the product line simplification and so I think what we're seeing also some pretty big benefits in ROI see that you've seen some great traction on for the 80 20 process. So I think thats kind of.
Lens that we're dealing at last and I think there should be some commensurate benefits as well.
Perfect guys. Thanks, so much I will hop back in the queue appreciate it.
Thank you. Our next question comes from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Thank you good morning, guys and congrats on the results are pretty impressive stuff given the macro.
Thanks, Greg.
So maybe just starting with some of these new products you highlighted a few on the call again, I mean, whether thats crane kits smart movement et cetera. What are you most excited about and I guess more importantly, what's the initial feedback or reception that you're getting from either the distributor distribution base or current customers.
Yes, there is couple things I'm excited about his team we're talking about now for the first time as intelligent motion and under that being we're gaining traction in a number of areas. They sell workstation Crane, we just announced its kind of new to the market when you think of us.
Providing some automation typically in the larger stop this large wire rope hoist overhead cranes or talking about here on the pro path is a workstation and this is uses our unified life rail. So you can really enable a worker in a workstation to be more productive in say so.
We're very excited about that net it's interesting because each one of these examples that we're showing were driven by interactions with our customers. So it's not like we're in the lab sort of inventing these things were literally out working with customers trying to figure out how can we solve their higher value problems and then these ideas come off and and then with the tree.
Auction is there so already getting demand for some of these products. Another Great example was the load satellite talk about this integrated into the whole Hcl folks want to read real time from the low salaries have an integrated brings all those benefits that we talked about so I'm really excited about those two new offerings. We also have more to come on on the.
Wire rope hoist side that we talked about in providing more automation there were actually forming a dedicated group on that automation side for for those larger wire rope hoist cranes. In there is I think a lot of runway that can be provided there. So I think you're beginning to see that some of these investments are beginning to pay off in were actually beginning to see some.
Some volume come through its kind of trickling through but we'll probably see about a point of revenue growth due to this these initiatives this fiscal year, which kind of offsets deploying of of negative.
Takeout that we get from the 80 20 process. So I think you'll be seeing us moving into next fiscal year, we can get even more traction.
Got it that's that's really helpful.
As it relates to the business that goes through distribution I'm curious, how you feel inventories our position in the current environment and I guess in terms of your guidance for the December quarter does it assume consistent de stocking any increase in destock and just sort of curious.
The thought process into how you arrived at the guidance.
Yes. So we're we're trying to figure that out carefully given that the markets, particularly in that short cycle side is a week and we do believe that people will piano kind of continue to I'd destock and manage inventory levels down.
For the the ended the fiscal year and work, we're trying to fight that through a number of growth initiatives, but we're that's all we're anticipating will happen. Obviously, we watch those orders kind of on a daily weekly basis. So it'll it'll on unfold as we go forward towards.
The holiday season and of course, you got some downtime there too with with folks taking time off so we anticipate there'll be some weakness there what offsets that that weakness and now we're counting on is.
We have some good projects that not only that.
Our magnetek brand business actually ramps up this timing year, because folks are getting ready for this this holiday maintenance shutdown period. So they want product, where they can actually do retrofits and so that demand is running up end, where we've got some really good traction with some of the niche.
But as we've been working on there. So we think thats, that's going to be offsetting that so hopefully in in the wash it will come out to what we're guiding to Annette Nick we've got some confidence around that.
Okay.
Yes, Greg So I'll just add on and Mark did highlight that we do have a lumpy rail business and a year ago, we had particularly strong revenue in the quarter. So about a point of that revenue decline is really related to the rail business.
Yes, Thats right. Thanks for the reminder.
Then last one for me really impressive cash flow here in the quarter I mean in addition to debt Paydown Im just kind of curious what would you highlighted your.
Our term capital allocation priorities, which.
Accelerate the M&A timeline at all just given the environment, we're in and some of the valuations coming in coming down or not.
Let me take that first and I'll turn it over to Greg.
So I did talk about on the phone that we are initiating our phase three but we're not running out to kind of accelerate any M&A. There what we're really meaning by those comments is that it's we're initiating an outreach program, it's very different than the type things we've looked at before in the past because.
I just sort of programmatic in nature, where were we developed pipelines in targets and its once again on this intelligent motion Deane. So we're going to talk more about that in the next calendar year ceremony on a detail here, but we're not going to rush out in our buying anything right away just to hopefully get data out there and I'll turn it over to brag about price.
Equities also on the capital allocation, yes, so maybe just add a little more color to slide 14, which I covered in my prepared remarks, so for the balance of this fiscal year, we do intend to pay down another $35 million or debt thats going to put our leverage ratio at about 1.11 0.2 times adjusted EBITDA, our target is to time so.
So clearly well underneath catch so that'll give us a lot of dry powder as we move into phase three a reminder, on our capital structure, we have a term loan b, which matures in 2024 in our revolver matures in 2000 Twin January 2022, so it's likely that sometime next summer, we'll be looking to recapping.
Wise the balance sheet, because when we recapitalized the revolver.
The terminal and we'll have to go along with that so those are in the short term once again pay down debt like we said we were doing what we said we're going to do and then next year, we'll see how things progress with our phase three of the strategy and determine what make sense.
Yes, it makes sense good luck going forward. Thanks.
Thank you. Our next question comes on line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Hey, good morning, guys. Thank you for taking my questions.
Maybe to start with given the uncertainty and end markets and the visibility you have in the short cycle kind of that business.
What is the sensitivity from an EBITDA margin standpoint.
And our dollar decline and you're right.
Revenue.
I know you a lot of cost and efficiency programs going on that are going to take up the percent, but just purely from a revenue standpoint, what's the decremental if those sort of profitability.
Yes. So good question, John So historically Columbus Mckinnon has been in the 35% to 40% operating leverage range when when volume goes up and we've been outperforming that last year. We are operating leverage was 59%. This year, it's actually not meaningful can't be calculated because of revenues going.
Down and yet our operating income has gone up as part of the self help strategy. The benefits of our 80 20 process. So on the downside, we would certainly expect to do better than our historical 30% to 40% home maybe in the.
25% to 30% range on the way down but once again, we've got so much improvement opportunities that we can look at going forward that we're going to try and obviously dampened the negative impacts volume.
Okay, great. Thank you and then.
Just to go back on the use of cash barring any acquisitions in the near and medium term would you consider share buybacks as you pay down debt and get below one times.
EBITDA.
Yes. Good question, we do review that every year with our board in the March timeframe, we'll clearly have discussions around that as a potential.
Use of cash going forward I think it's a great problem that we have in that we are a very strong cash generator throughout the cycle throughout the business cycle I.
I think what's more important to us we clearly want to fund our growth initiatives for sure.
The balance sheet and from a leverage perspective is going to be in really good shape, which gives us the flexibility too as we.
Walked about earlier move into the M&A side of things and we clearly want to maintain our dividend and grow it regularly over time. So the share repurchase opportunity is if we do have an authorized share buyback, which is available to us, but we look at it opportunistically because one other factor to consider is that no our floating.
Actually quite low.
And we have all a lot of our holders maintain physicians for a long period of time, so we're mindful of that dynamic as well.
Okay fair enough and just to.
Pointed out that you could buy on shares at a discount that maybe look where you might be looking on in terms of and industrial technology standpoint.
Just purely from a valuation basis now.
It obviously consider yes.
Last question for me you do have done a great job with consolidation and then enabled by the consolidation of.
The product line simplification is there more room to rationalize your asset base as you go through that process or are you kind of out where you want to be in terms of capacity and asset footprint.
We have more runway there I think what weve sort of announce on this call into it in through what we released yesterday is.
Is sort of another kind of round a rationalization is what happens is you.
You are looking at it to this 80 20 lands are sort of figured out your product lines you take a pretty good Swat and then you kind of step back and need to do some more analysis and you sort of figured out what we've kind of announced yesterday, but I think there's certainly more runway here and as we have more clarity will announce it.
To the markets as well I think it's also kind of good timing because as we do this and markets have softened I think that will give us greater visibility into our next fiscal year on how we're going to generate the earnings. So our very encouraged by that we're very encouraged by non in what we're doing but also the potential of what we see.
Great just one follow up what percentage of the way through are you in terms of products and market simplification and rationalizing.
And your supply and design footprint.
I think Tom just on an endings Bay basis for we were saying we're about in the third fourth inning of of this initiative generally speaking in.
And you see us generating more it to the bottom line that we did last year I think thats also been demonstrated but a lot lot more work to do here a lot more runway to go there were excited John about the possibilities, we haven't run out of ideas to teams have done really well and as remain.
Before we had about half of the company started a year ago and the other half of the company started this year so.
We do expect.
A pretty good runway of opportunities moving forward for the next several years.
Great. Thanks, guys.
Thank you. Our next question comes from the line of Joe Mondello with Sidoti and company. Please proceed with your question.
Hi, good morning, guys.
Hey, Joe.
So.
Just wanted to ask your question on the third the backlog in sort of your order trends of the backlog, excluding the divestitures with down quite a bit year over year in the order trends obviously implied.
That things have weakened a little bit just wondering what your what you've seen in your order trends in October and how things have progressed.
I guess throughout the quarter and Coburg.
Wondering how that sort of has trended.
Yes, let me give you some color on that so first of all lets just rolling back a little bit. If you may remember, we saw orders down kind of April actually through the July period. They rebounded a bit in August and then decline again in September I think orders also declined for us in October .
But keep in mind that rail is also pretty lumpy and it's not really indicative of the health of the pipeline I know, it's something that we obviously lots a lot to but theres a lot to ebb and flow with us on on rail.
And our industrial products short cycle business improved in August and September and also you know through the summer it was quite encouraging but as you've seen that thats weaken as well and the project business is a bit lumpy. So a trend in order is not necessarily meaningful there as well.
We're encouraged by the quoting activity and also the pipelines, which were getting a lot better measuring terms of the health of the pipeline and quoting and we're seeing.
The quoting activity going up so.
It's obviously something that we're looking at Greg you want to maybe do a walk through through the all the size of the pipeline for folks sure sold the backlog on a year over year basis is down about $23 million 14%.
But it's $4 million of is just due to FX rates so in local currency.
Spent about 19 million in about $13 million of that is rail so as we've talked about rail our larger projects. It's lumpy. We had a really strong order intake a year ago on on a couple of projects. The pipeline is still very strong for Elds, just really more of a timing issue also.
While the remainder of the of the decline is really in our short cycle business and Thats down about 6 million. Our project business backlog is about the same now when you look at it sequentially.
We're down about $5 million fraud in September from the June levels currency really isn't a factor in that.
And that's part of the reason why we guided down about 2% on revenue.
The quarter, but in October I can tell you October backlog is about the same as it was in September .
Okay, and then just in terms of the rail business are you, implying that timing wise on the third quarter is going to be a little bit.
Tougher comp just given those trends that you saw there.
In that things potentially rebound on rail in the fourth quarter or is this.
Sort of.
Timing.
In terms of the next couple of quarters than that things hopefully start to rebound next year just trying to.
Cash out what you mean by sort of the timing on what you're seeing enough in the rail side of things.
Yes, let let me give me some color for sure.
We're going to have headwind in the December quarter by about 1.7 million.
Year over year on rail.
And as you can see the backlog has also decreased but overall the thing that you don't see on the rail side is that our project pipeline is increasing and if you think about what this is this season infrastructures business globally or folks are electrifying.
Diesel trains they're also.
Doing more infrastructure projects on rail and this is a global business and people have not cut off that spanning a lot of its driven by government spending and this is continuing to go forward. So why you're seeing some of that ebb and flow that project business. We don't think thats on a long term decline, we think thats actually.
Longer term, increasing and we'll guide it appropriately into the next calendar year, but we were pretty happy with where that business is going and the potential than it has.
Okay, and then just regarding the savings that you announced by.
Upping sort of the guidance in turn from 12 million 18 million wondering how much of that you have realized thus far and.
More sort of fourth quarter weighted in terms of the rest of the that you haven't realized or how does that sort of play out in the back half.
Yes so.
The way, we look at it as we're looking for the year over year incremental impact of the initiatives. So as initiatives from the prior year hit the one year Mark a fall off so we see.
We are starting to see some of that so savings that were in the first half of this year start to tail off but we've got new ideas and new actions that have taken so in general it's we should see.
Pretty close to a 50 50, it might be a little more 50 50 split between the additional $9 million savings over the next two quarters might be a little more heavily weighted towards Q4, because there is a volume element to it with our targeted accounts, but in terms of.
Actions taken today, we feel very comfortable that.
We can hit the $18 million number for the full year.
I mean, there anyway. So how do you have an idea of how much of that you've already realized in the first time.
Yes that once that was 9 million dollar in dollars.
So it's really kind of double that run rate, but once again theyre spirit, our actions that are grandfathering off at the one year Mark.
Hum.
In Q3, where in Q4, we actually.
Fully grandfathered off items, Okay, and Greg I don't know if you have this at your fingertips I can follow up with you, but if you don't I'm just wondering what the gross margin for the fourth quarter.
Was last year actually divestiture.
Yes, I do have internal 35.4%.
Our 34.0 I'm sorry.
Okay, Great and then last question I'm not sure if I heard that in the prepared commentary and then any the questions on just regarding phase three and M&A.
We're.
Pretty healthily.
In the midst of all the restructuring insights in your debt has come down.
You know quite a bit so you've done a really good job with that just wondering where we are with phase three and M&A and sort of that part of that strategy.
Sure. So we've initiated phase three in terms of thinking through how we want to approach that and it's quite different than what Columbus Mckinnon is done in the past its much more of an outreach program based on strategic view, we're calling that keen intelligent motion, we'll talk more about that.
In the next calendar year.
But we're pretty excited about it and.
We think that it's going to have a lot of benefits, but it's too early to really let's say that we're going to be doing anything near term, we're not going to be doing transactions clearly this fiscal year, but the fact that we get started on is great and because it's going to take some time to putting in place.
Okay and then last question for me just regarding sort of.
Some of the growth initiatives that you've been taken in terms of new products are in B.
The kick crane.
Opportunity some of the opportunity the engineered products, where are we would you say mark in terms of seeing some of the benefits from that still really early and we haven't seen a whole lot and maybe next year, we see a lot more how would you describe and how the progression is what we're trying to take share and drive.
More growth.
Sure so.
I think it is early if you think about phase two one of the elements of phase two is ramping the growth engine and we're still.
Planning those seeds in Kannan nurturing as they come up but.
But we are beginning to see some pretty measurable tractions from that and so I think it is early innings, we are seeing some results hitting heading.
Our revenue line, we think that its offsetting some of the negative attributes of 80 20 rationalization on the topline too so.
I think you will see into the next fiscal year that that this will certainly build so we're very encouraged by this into teens are spending a lot more time as you can see we're building out our teams on this we're making the necessary investments were super happy about that because you know times are not great from an industrial market perspective were bigger.
Turning to see the benefits one thing I do want to throw out is it last time that this business saw it sort of I assume contraction.
Below 50, it's kind of a hard pressed compare but when we look back on.
That in December of 2015. This business saw organic revenue declined to about 4%. It saw adjusted operating margin decline about harmed waste 20 basis points, and we had operating margins around 8% and thats a fewer to compare to this past quarter.
It's pretty big difference, where we're growing 2% hundred basis point margin improvement or 13% operating margin. So I think the combination allows us rationalize and then also ramp in the seeds for growth is a really good strategy and I think we're executing right on plan and we're very encouraged by it.
Okay, great. Thanks, I appreciate you taking my questions.
Thank you. Our next question comes from the line of Walter Liptak with Seaport Global Securities. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
And thanks for going through the.
The backlog I think there we've got a lot of clarity on.
And the decline.
The question I had about the backlog was you mentioned the short cycle business being down I think 6 million.
And I wonder how much of that or do you can quantify how much is related to.
Pls kind of your own actions to get rid of bad revenue as you described earlier or how much is related to just distributors or other short cycle customers.
So we see probably about a point takeout.
At the top line in the business due to overall rationalization efforts from 80 20, but there is.
Well reported slowdown in the short cycle business people have really cut back on inventory levels a lot there.
They have.
What.
Our kind of waiting to see what's going to happen next on trade wars are related to Brexit type things in Europe , Europe has been really hard hit.
By an industrial softness there that I think is also while reported so I think thats clearly reflected there in our numbers.
Okay, great and with regard to.
To your inventory levels.
Greg I think you mentioned that your inventories, which you alluded to him coming down again.
In the next quarter or what's the right inventory level for where we are with this.
That's real slowing.
Yes. So we're currently focused on bringing our inventory levels back down we look at it on a turns basis. We are about 3.8 turns.
In September we want that number for better play into fiscal year.
It's.
The operations team is focused on it it's a lot of hard work to do that but we're committed to driving working capital improvement in fact, when you look at our overall working capital as a percent of sales we're down to about 17.2% and that compares to a year ago of 19.7%. So a lot of progress was made this quarter.
And with the working capital initiative, then as we continue to move through the 80 20 process with product lines of education, that's going to help.
As well take inventory out.
The system in and we would think that the total benefit of 80 20 from an inventory perspective. This is tens of millions of dollars of potential.
Once it's fully agree then 80 20 is is really impressive.
Outside of my questions on that offline.
Just one that you guys in comment Tom was.
With pricing and I Wonder if you can help us with what are the pricing strategies. The time, maybe the timing of pricing given the way raw materials.
Moved around over the last six or nine months.
How are you thinking about pricing.
Yes, so in terms of pricing, we've seen a great benefit and strategic pricing initiatives to 80 20.
I think overall in the quarter, we saw price of about 1.6%.
And 80 20 strategic pricing was a good bit of that our normal price increases vary by region typically in the US. It's in the March timeframe in Europe . It's around January in a package in April I think in Latin America, It's generally the April .
Timeframe and and so those are more or less.
Market increases based on what the competition is doing based on what raw material prices are doing et cetera, but what we're really bullish about our the.
Strategic pricing initiatives coming out of 80, 20, which are very sticky and very strategic in terms of what we're going after and.
Thats.
Thats been very beneficial this year for us for sure.
Okay sounds great. Thank you.
Thank you. Our next question comes from the line of Mike Schilsky Shlisky with Dougherty and company. Please proceed with your question.
Hey, guys. Thanks, It looks like my question was actually answered I appreciate it.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Murray for any final comments, great well. Thanks folks for your time, an interest in Columbus Mckinnon have a nice day.
Thank you. This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.