Q3 2020 Earnings Call
Greetings welcome to Columbus, Mckinnon third quarter fiscal year 2020 financial results Conference call. At this time all participants are in listen only mode. They question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please.
No. This conference is being recorded I will now turn the conference over to your host Deborah Pawlowski Investor Relations for Columbus Mckinnon. Thank you may begin.
Thanks, Jerry and good morning, everyone. We certainly appreciate your time today and your interest in Columbus Mckinnon.
Here with me are funny, our chairman and interim CEO as you are likely aware Rick was appointed interim CEO effective January Chen with departure of our former CEO Mark Marelli, who is now the CEO of on tier.
Also here with us as Greg rest, what's our Chief Financial Officer, you should have a copy of the third quarter fiscal 2020 financial results, which we released this morning before the market and if not you can access the really he says what was the slides it will accompany our conversation today at our website see him works Dot com.
If you'll turn just like to when 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 Q and a recession. 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 has stated here today These risks and it's.
Certain fees and other factors are provided in the earnings release as well as with other documents filed with Securities and Exchange Commission. These doctors can be found on the website for at Www Dot FCC Dot 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 additional information in isolation, whereas a substitute for results prepared in accordance with get we have provided reconciliation of non-GAAP measures with comparable GAAP measures in the table that accompany today's release.
And the slides for your information.
So with that if he would turn to slide three I will turn it over to rectify again, Rick Thank you Debbie.
We used to be joining all of you today, let me take a moment to introduce myself.
I've been with honest mccarran as a director for almost two decades, so I'm quite familiar with the company its products it's mark.
So my retirement from U.S.G. Corporation in 2012.
I was its executive Vice President and Chief Financial Officer, U.S.G. had about $3.2 billion and revenues at that time.
I was U.S.G. CFO for about 18 years that was employed a company words Siri May start corporation for approximately 38 years. So most of my career has been spending the building materials and construction industry.
Earlier director of Boise Cascade Company, which is listed on the New York Stock exchange as well Oh, We holdings a private company.
Well my role as the interim CEO of Columbus, Mckinnon was not expected I'm honored to be leading this team. While we are conducting our search for a new CEO.
These are exciting times, the Columbus Mckinnon.
We have a solid motivated leadership team at the helm.
We are deliberate on our promises and we have excellent momentum with our blueprint for growth strategy.
Short our future as Brian.
So with that let's turn to our review of the quarter.
We have deployed our blueprint for growth strategy for about three years and solid results of our third quarter demonstrates continued effect is.
Arches expanded yeah earnings and return on invested capital increase despite the headwinds related to the contraction of the addressable market.
Even though we experienced lower volumes, we achieved our 11th consecutive quarter of year over year margin expansion with our gross margin, increasing 20 basis points to 34%.
So what did earnings per share was 63 cents and adjusted earnings per share grew 5% just 64 cents.
Earnings growth was driven by our age play process, which contributed approximately $5.7 million to operating income.
As a reminder, contributions maybe 20 or not only reflected our cost structure, but also in our topline would strategic pricing and our priority customer account program.
The 80 20 process, we have been able to offset industrial market headwinds and continue to invest in our growth initiatives.
Our strategy plus great execution by the team kept us on track during the quarter to achieve our financial targets adjusted EBITDA margin expanded 100 basis points to 15.2% for the quarter and 16.1% year to date, Oh I see also improved by 140 basis points to 11.9%.
The third quarter also demonstrate our ability to generate substantial cash flow or the cycle in total we generated $32.4 million in cash from operations. During Q3 as Greg will discuss we've raised our expected free cash flow target for the year to $75 million to $80 million.
We have used as cash to further reduce debt leverage ratio is now just 1.3 times adjusted EBITDA, which is well ahead of our charter.
So our balance sheet provide excellent financial flexibility to pursue our blueprint for growth strategy to strengthen our earnings power and to continue to transformer business model.
Now turning to slide four I will discuss in more detail the progress we're making on phase two of our strategy.
As noted the simplification of our business 80, 20 contributed approximately $5.7 million and operating income during the quarter and although we at this point. The 80 20 process for several years, we still have quite a bit of runway left and a long list of projects to further strengthen our earnings power.
I realize approximately $14.8 million in contribution to operating income year to date, and we're very confident that we will achieve our goal of $18 million for physical 20.
Well, it's sometimes difficult to see the impact of 80 20 in the face the income statement due to the many factors that affect the piano. It's contributions can be seen in our margin performance and ability to manage through headwinds.
We believe their performances measurably improved over where we would've been historically.
Our blueprint for growth strategy has provided us with strategic direction and focus well he path, which is our operating.
Business system that a corporate 80 20 as write us with the tools and discipline to execute well.
As a result during third quarter were able to offset much of the impact of lower volume and under absorption our factories, well be sitting to realign or cost to focus on growth through our product development activities, new marketing programs and our investment in our digital initiatives. So progress continued to be made on the transformation of our earnings profile.
Now turning to slide five I'll cover in more detail some of our investments in organic growth to rapid growth engine.
In December we announced that we have formed a controls and automation center of excellence that is dedicated globally, expanding our automation product and service portfolio Center combines our skills that lifting specialists with the technology for a magnitude brands, then able smart move it to create solutions that solve our customers' high value problems with the creation of.
Center, we can leverage these capabilities across more customers and markets.
No the center have both chassis facilities and the ability to provide our customers hands on experience with our solutions.
We're also launching new products, such as art until a crane systems, which incorporates controls that can ride up to 3% improvements in productivity for critical applications.
In addition, our addressable market has been expanded by the certification in the U.S. of our explosion proof twice the related products the increase lifting capacity gain with install brand wire rope hoist and unique offerings were a magnet checked drives and controls.
Also as important note that not all new products or digital we are bringing innovation to our manual industrial products as well you tell the liberal voice that we will be launching this summer has an integrated safety break that eliminates the requirement for manual installation of chains safety stocks, you can imagine being aligned been working doesn't the season here.
Replacing transmission lines you appreciate the safety features that are new tool provides us.
With that I'll now turn over Gregs review, our financial results in greater detail. Thank you Rick good morning, everyone.
On slide six net sales in the third quarter were $199.4 million that was you know we completed three divestitures last fiscal year, which reduced sales this quarter by 9 million compared to last year.
Foreign currency also contribute continued as a headwind and reduced our sales by 1.7 million adjusted for FX and the divestitures. We saw sales volume declined by 10 point Sixmillion were 5.2%.
Well volume was down our pricing power was evident as we saw pricing improved by 1.6%, which was the same amount as last quarter. What happened. This pricing was the result of EUR 80, 20 strategic pricing initiatives.
Let me provide a little color regarding sales by region for the third quarter, we saw sales volume decline in the U.S. by 4.2%.
This was partially offset by price increases of 1.7%.
Sales outside of the U.S. were down 6.5% adjusting for the effects of divestitures.
Selling price improvement of 1.4%, partially offset a volume decline of 6.2%.
Sales volume was down in EMEA Latin America in Canada, but up in the APAC region as result of a large rail project.
The weakness we saw in EMEA, what's in both are short cycle and project businesses.
Let's now review orders and backlog, our short cycle business continued to be affected by the contraction of industrial markets. This headwind impacted our project business during the December quarter as well.
Adjusted for divestitures orders were down year over year by 9.5% overall <unk>.
It is important to note that quoting activity remains high in both the number of quotes and dollar value, but our sense is is that projects are being somewhat delayed, especially in the U.S.
As a result backlog was reduced to 125 million at the end of December well. The markets are certainly a headwind we believed that our strong market position and leading brands will dampen the effect of the industrial market slowdown.
We continue to focus on customer responsiveness and ramping the growth engine.
Rick discussed we have formed an automation division, which will introduce new products. It will expand our addressable market and grow share in key markets.
On slide seven our gross margin was 34% in the quarter. This is a 20 basis point expansion in gross margin from a year ago, and our 11th consecutive quarter of year over year margin expansion on a GAAP basis as Rick mentioned earlier, we benefited from the 80 20 process, which drove $5.7 million of gross profit expansion.
And through strategic pricing indirect overhead reductions and certain volume gains that are targeted accounts. This benefit was more than offset by the impact of the divestitures lower sales volume and mix and higher medical costs, and lower fixed cost absorption or factories due to inventory reductions which are included in.
<unk> productivity net of other cost changes category on the bridge.
Let's now review the quarters gross profit bridge.
Third quarter gross profit of 67.9 million was down three and a half million dollars compared to the prior year adjusted for the divestitures. We did see gross profit expansion from pricing that a material cost inflation and tariffs were lower than the prior year as we imported less Chinese product, we incurred 500000 of onetime costs for the phase.
Factory closures in Ohio, and China Foreign currency translation also reduce gross profit by 600000.
Productivity net of other cost changes was negative 2.2 million. This was the result of 1.1 million up higher medical costs and the impact of reducing inventories by 7 million, which negatively affected fixed cost absorption at our factories.
As shown on slide eight Rs DNA was 43.8 million in the quarter or 21.9% of sales.
Harvest DNA was 3.8 million lower than the previous year period, the reduction in our history and eight was due to several factors the impact of the divestitures reduced our rest DNA by 1 million and the benefit of FX of approximately 400000. In addition, our gionee costs benefited from a 2 million dollar reduction in stock.
Patient expense from the departure of our previous CEO.
While we're controlling our us today costs as macroeconomic conditions created headwinds. We're also actively investing for growth in key initiatives, we continue to invest in product development marketing and digital projects, while reducing costs and other parts of the organization taking this into account we're forecasting our third quarter Rs you know.
Hey to be in a range of 45 to 45 and a half million dollars.
Turning to slide nine adjusted operating income grew 1.1% when you normalize for the divestitures adjusted operating income grew 5.7% to 23.1 million.
Adjusted operating margin was 11.6% of sales 110 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.
Fight and overall decline in revenue of 8.3%, which is outstanding operating leverage.
As you can see on slide 10, GAAP earnings per diluted share for the quarter was 63 cents.
Adjusted earnings per diluted share was 64 cents compared with 61 cents in the previous year, an increase of three cents per share or about 5%.
On a GAAP basis, our effective tax rate for the quarter. It was 12.8% as we partially reversed a deferred tax asset valuation allowance and the amount of 1.9 million.
This valuation allowance was originally recorded in fiscal 2019 relating to certain foreign tax credits generated by the onetime transition tax as a result of the tax cuts and jobs Act.
We reversed the valuation allowance on the foreign tax credits utilized in our fiscal 2019 federal income tax return.
This benefit we're now expecting this year's full year tax rate to be approximately 21% to 22%.
On slide 11, we continue to expand our adjusted EBITDA margin.
For the quarter, our adjusted EBITDA margin was 15.2% an increase of 100 basis points over last year. We're also making progress on driving our ROI see higher and are now at 11.9% an increase of 140 basis points from last year's third quarter.
This progress demonstrates that we are tracking our blueprint for growth strategic goals to achieve a 19% adjusted EBITDA margin in fiscal 22, and achieving adjusted ROI see in the mid teens.
Moving to slide 12, one of the hallmarks of Columbus Mckinnon is its ability to generate cash throughout this business cycle.
Net cash from operating activities for the quarter was 32 million, which was a year over year increase of 6 million or 24% year to date, we have generated 63, and a half million dollars of free cash flow. This represents about 94% or the free cash flow, we generated last fiscal year and we still have one quarter to go.
Consequently, we're raising our free cash flow guidance to 75 to 80 million for this fiscal year.
Turning to slide 13, our total debt at the end of the quarter was approximately $252 million and our net debt was 168 million.
Our net debt to net total capitalization is now approximately 26%.
We repaid 20 million of dead in the third quarter and have reduced our term loan debt by nearly 185 million since acquiring install in January of 2017.
We made excellent progress delevering and have achieved a net debt to adjusted EBITDA level rate leverage ratio of 1.3 times, while providing us the financial flexibility to advance into phase three of our strategy.
We expect our leverage ratio to be 1.1 times to 1.2 times by fiscal year end.
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 to provide 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 de lever 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 it's 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 Rick Thanks, Greg.
I would now like to discuss our fourth quarter fiscal 2000 outlook.
Safar business is short cycle is our policy to give topline guy is only one quarter out right now based on the continuing softness in the manufacturing economy, and our order trends and backlog as we entered the fourth quarter.
We expect that our Q4 revenue will be essentially flat with third quarter and in the range $196 million to $201 billion.
Level implies a reduction of 5% to 7% from the fourth quarter of last year.
I want to assure you that we're working hard to mitigate these headwinds on both our top and bottom lines and to continue to deliver strong performance during the slowdown.
Finally, as you mentioned that there are few early indications. It's just market conditions are starting to improve for fiscal 21.
For example, we recently received a large automation system order a large crane order in several rail project orders, it's too early to call as a trend that does suggested confidence levels maybe firming.
Having said that we're not ready for the recovery as mentioned is our job to maximize our performance under any and all economic conditions.
Here a few examples what I'm talking about we completed the closure of our China facility at the end of December ahead of schedule.
We expect about $1 million in annualized savings beginning in the fourth quarter from that effort. We're on track with the closure of our second facility in Ohio by the ended the first quarter of fiscal 21, there will be an additional $5 million an annualized savings when that is completed.
Implementing the blueprint for growth strategy, we have reduced the number of facilities by six from 22 to 16, including Elizabeth, Ohio consolidation, which is in process.
In total these factory consolidations will generate about $8 million and reduce costs.
And as noted earlier, we believe that we're well on track to achieve our goal of $18 million in contribution to operating income from the 80 20 process in fiscal 2000.
We also have further business realignment efforts underway that we expect will provide additional cost savings, including projects to drive operational excellence improve our customer responsiveness and reduce indirect costs.
Thus, we expect that 80 20 will continue to provide solid incremental contributions again in fiscal 2001 that will further enhance our earnings power.
Longer term, we believe that the simplification of the business and our focus on operational excellence combined with our self funded investments in talent innovation and growth initiatives will enable us to achieve our goals of a 19% EBITDA margin and mid teens are all IC by fiscal year 22.
Now, let me take a moment updates you on our search for a new CEO, which is well underway.
We're looking for a high performance Chief Executive Officer, who can continue the momentum that we've dealt with our blueprint for growth strategy and you can lead our simplification operational excellence and wrapping the growth engine initiatives, our new CEO will also be tacit, taking our operating disciplines and business operating system Ipass to the next level.
In addition to a strong operator, we're looking for an individual who has experienced in developing and executing organic growth opportunities portfolio optimization and M&A to date, we are encouraged by the interest and disposition and where we started in person interviews shortly.
With that we will now open the line for questions.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad and confirmation tell indicate your line is in the question.
You May press star to if he would like to remove your question from the Q and for participants using speaker equipment and may be necessary to pick up your handset before pressing the star teas.
Our first question is from.
Mike.
Hi.
Dougherty and company. Please proceed.
Good morning, everybody, Mike Shlisky here.
So Chris asked about 20.
Fourth quarter.
I appreciate that you maintained your outlook.
I mean that implies that based on the first few quarters.
Hello.
Third quarter.
Okay.
Some of the major moving parts there.
Potential for some upside.
And.
In the fourth quarter.
Hi, Mike its Greg. So we did have as you know we measure it on a incremental basis so year over year. So we have no in the fourth quarter, we didnt have any carryover impact from the previous year. So this is all new activities that we expect I would think that there could be some upside opportunity for us to exceed the 18.
One dollar targeted 80 20 savings.
Okay great.
I also wanted to ask about.
Hi.
This quarter.
In that number.
So.
Place holder for a new CEO persons.
Yes.
And stock grants.
Fourth quarter.
Yes.
There's no place holder for this very Fleming hope they sold or Mike for a new CEO in the fourth quarter, but clearly that will be something to be considered in fiscal 21.
Having said that.
As interim CEO my compensation is being charged during the fourth quarter and half of my compensation by the ways in stock.
And Mike Let me just let me just add on to so there are other costs involved as well like executive search costs. So we did incur some of those in the fiscal third quarter and we'll have more of that in the fiscal fourth quarter and that's taken into account in the guidance.
So that concludes.
Okay.
Just one last one from me.
No.
Wanted to ask about one of the.
<unk>.
Issues in China.
Yes.
Anyone.
On this has been affected by that.
Change at all and trying to do that.
That's still in these over there.
Well, that's a great question, Mike a first let me say that we're pleased that to our knowledge none of our team has been.
Impacted by the virus itself, we have taken the same for cautions many companies have to effectively hawk traveled to China by team members and those in China had been asked during the lunar holidays to work from home our factory.
Those shutdown currently but we expect it will reopen.
Around February 10th, but having said that it's kind of being watched on it as you can appreciate a day to day by day basis stepping back and looking at but bigger picture I think we all have been grappling with the uncertainty associated with this.
Dennis and right now I'm sure you've had the same experience I've had where we look at the newspaper and we see 800 cases go to a thousand go too far.
5000 go to 9000, good at 17000 go to 20000, so it's really a situation that's evolving as we speak.
Involving both in terms of our knowledge of various disease as well as its ability to insect population. So.
We clearly have to take that uncertainty into account, having said all that as you know China is a relatively small part of that of Columbus Mckinnon in total and that if you just looked at the what we know today in terms of the factory shutdown and with the expectation that we'll be getting back to business.
In the latter part of February we look at about a half million dollars of revenue impact in the fourth quarter, but.
I think in fairness, we had to say to be continued and we're watching it very closely.
Okay. Thanks very much.
<unk>.
Our next question is from Chris how with Barrington Research. Please proceed with your question.
Good morning, everyone.
We're in pretty good morning.
Good morning.
I wanted to dive a little bit deeper into phase three.
As we consider the search for a new CEO in the interim can you comment on.
Just the underlying activity that you're seeing within M&A candidates.
Perhaps how that's developed.
Over the course of the past six months.
And as we assess phase three and we move towards your target of 19% EBITDA margin in fiscal year 2022.
Is there the potential for upside to this margin target.
As you look towards automation or other opportunities.
Well, thanks, Rich, let me Thats a very good question.
First let me say that we have not.
Pause our activity.
On phase three that we have been conducting which as marks explained I'm sure in previous calls has been largely associated with us thinking through.
On a thoughtful and.
Really quantitative matter as well as qualitative.
Our criteria for looking at opportunities in phase three from an M&A standpoint.
Well as thinking through our cost season, our adjacent sees that are of interest getting market research on adjacent opportunities and really conducted as mentioned literally a strategic review.
And I think Mark is contracted that in the past the what the company did and perhaps many companies do wherever you are more after two units is about your your M&A thought process and as I try to emphasize this is really more strategic so as part of that a lot of dialogue a lot of looking at opportunities a lot of Citi and if you will.
The possibility some early on conversations with with possible companies.
We have noticed just do the economic circumstances.
One or two cases, there may have been interest previously by a potential target that now they've kind of putting on the back Brenner until things settle down in the industrial markets. So it's fair to say right now most of the most of the work is planning oriented.
The new CEO will we really have the benefit when he comes in or she comes into have allowed that work in place and as mentioned we are looking for an individual that has really the up the background in as well as the opportunity to grow Columbus Mckinnon in addition to being a solid operator.
Hey, Chris its Greg Let me, let me add onto it so as we think about phase three and acquisitions weve centered on really two major themes, one being the lifting specialist in the other as smart movement. So we've identified and have a pipeline of over 400 companies that were evaluating against this criteria and doing a screening.
Process now once we do identify those then an outreach began so this is a bit of a different approach then just taking inbound.
Calls from investment bankers. This is really more of an outreach programmatic approach. So we're going to continue forward with that strategy and as you can appreciate it's very difficult to predict timing, but clearly the balance sheet is in great shape and we're optimistic that we will see the the fruits of our labor.
Her here sometime in the next fiscal year.
And has the as the pricing environment at all shifted.
Versus your prior expectations or.
Any comments there yeah. So multiples are very rich right now for sure.
And that's something that as we think about M&A you know the one thing you can change about a deal is the price should pay forward and so it's very important that we buy smart and that we have opportunities that either provide the technology, we're looking for or have outstanding synergy capabilities for us and and in addition to multiples being.
Variable EBITDA has been a variable and some companies that we had been in dialogue with are actually hit the pause button because I think they have some internal issues they are thinking through relative to their EBITDA.
Okay.
That's all very helpful end.
Just didnt want it to be over look to could you provide some more color on this large automation deal as well as large crane order more specifically the automation deal and perhaps the size of the deal.
And.
How the pricing was there and how we could expect automation or other innovative opportunities to play into your margin expectation.
As we move into next fiscal year, well first I'll start and then Greg can jump in but first let me say that the automation center for excellence is still being staffed up.
We are putting people in place we are creating if you will the the operating systems and getting the management team in place, but having said all that we were very pleased that yet.
Hey.
The order I mentioned, which is about $600000.
And more to come I mean, the quoting activity is developing nicely in that area. So so were encouraged so far in the month of January was sort of a proof point that we are on the right track.
To add to that Greg, yes. So that's clearly an area that we believe has higher margins that are our average business. So to the extent, we can drive our automation activities.
And rolled them substantially that will help our overall gross margin profile.
Okay. Thanks for the color that's all I have right now I appreciate it.
Our next question, it's from Greg Palm with Craig Hallum Capital Group. Please proceed.
Alright, thanks, and good morning to everybody there.
Maybe just starting out with a little bit of commentary on the macro itself.
Commentary on the end markets and specifically it sounds like kind of project base business felt fell down I know that was.
Little bit stronger. This this past fiscal year. So can you just talk about sort of the differences in what you're seeing out there.
Sure.
Well December was obviously.
A period, where we had.
A decline in orders and we also saw aided somewhat of a declining.
Quotes being turned into orders.
Due to the overall industrial caution in the marketplace give you a sense for the order pattern I think this may be helpful.
November orders for about 90% of October levels in December order is about 84%.
[music].
Okay.
Of the of October November October level, excuse me, so with that as the backdrop January however has seen a uptick in orders.
Relatively small but positive about 1%.
Nonetheless up and Thats. Good I would say the important thing is to look at the short cycle, which had been it really the weaker part of our book of business and that's up 11% as the project side.
9% that continues now to be softening and maybe we'll take a while to to firm up but when you then look at the next level of data, which is quotes you do see some bright spots even on the project side as we speak a Europe has seen a pretty good.
Activity in the quarter area Asia is still very soft as you can appreciate North America. However, it's picking up and particularly in several verticals steel in North America has started to pick up after a seasonal slowdown in December.
Construction utility power generation and government segments are relatively strong.
And waste energy activity is picking up so.
We feel pretty good about.
How things are starting to normalize.
Had a chance to meet with our sales team. The other day, we got some feedback on just what.
Many of our top 10 customers are saying and the word that came back.
Was basically that we seem to be stabilizing at this lower level and the good news is we're not seeing further decline it looks like things are kind of.
Slowly, but surely move into right direction. So it's early January basically now moving into February, but we see some.
Green shoots and positive signs.
Okay. All right that's really helpful. So thinking about the topline guidance specifically for the March quarter then.
Our our yet maybe some what are the underlying assumptions behind that is it that.
It falls off again in February and March because it.
On a reconcile your comments on January then looking at the specific guidance for the quarter, Yes, So Mike what really drove us to it is the fact that orders were down in the quarter by about just under 9% and when you adjust for the divestitures and FX and so we're starting the quarter with a backlog of about 125 million, which is down.
About 12% sequentially from where it wasn't September so what it really implies is that the book and Bill business picks up in the fourth quarter, which we typically do see a bit of an uptick.
People buying in advance of price increases in the U.S. and we have some incentive programs for our larger customers that and sent them too to buy inventory and get it on the shelves for the for the summer season. So.
We think that our guidance of down 5% to 7% given where we are with our backlog is really prudent guidance for the quarter and I think one way to think about is that in the fourth quarter. We still have a declining project business based on the order trends that we saw in the backlog.
And and we do expect an improvement in short cycle business.
As Greg mentioned, a lot of that often comes about because of Prebuying before a price increase where our partners in performance program and then maybe a general firming of industrial confidence, but having said that the two or some sort of offset each other and that's why we end up with kind of a flattish view for the fourth quarter versus the third.
Got it makes sense and then just kind of shifting gears to EBITDA margin targets for fiscal 2002, what are the underlying macro assumptions behind that I mean, do we have to get some pickup in growth between now and then in order to achieve those targets.
Yes, so when we set the the 19% EBITDA target in fiscal 2002 as you recall, we originally came out with a 15% target, but we got there in a year in them and certainly we had some benefits over the last two years on the topline what kind of mid to high single digit growth. So these the presumption is is that the 19% was achieved.
Okay, and kind of a low growth GDP kind of a environment. So we.
We clearly are working hard on the margin side with both 80 20 operational excellence footprint consolidation and then just really trying to lift the margins of our business with investments in new product development automation that Rick spoke about as well. So this year, we are going to end shouldn't north of 16% or right around 16%.
Were 16.1% on a year to date basis. So we've got a still have a little bit of a gap to close but we've got two years to do it and we're not giving up on that goal and we think thats, a an achievable number for us, but it does not assume that theres, a downturn or assumption.
Got it and the Delta between the 16 of the 19 does the majority of that come from gross margin expansion from here, Yes Yep.
And you'll see it in the 80 20 and the operational excellence.
Categories.
Yep, Okay, Alright, that's it for me thanks.
Our next question is from John.
And one thing with C.J.S. Securities. Please proceed.
Good morning, gentlemen, thanks for taking my question maybe to start the gross and operating margins as we head into Q4, given a roughly flat expectations for revenue are they bias that the upside or downside and kind of what are the puts or takes going into that.
Well I would say John that.
You know, we did take inventories down $7 million sequentially from September to December and that had a impact on our gross margin and we also saw the negative 1.1 million dollar impact due to higher medical costs and with our medical plans then essence, they reset January onest of.
Every year there high deductible plans. So we would expect there to be positive gross margin relative in Q4 relative to Q3, I think the IRS DNA guidance is about the same as it was I mean, it was a little bit lower this quarter, but we think the 45 to 45 and a half million dollar level is kind of the right landing spot.
For Q4.
Great. Thank you very much said that you also mentioned you know additional activities and realignments going on under the Hood I understand 80, 20 plant hasn't been implemented across all your geography and product line.
So what kind of further a quick accretion could we see in fiscal 2000 wanted to Buffy 18 million that you've kind of realized 20, you're well as you can appreciate we're working on our budget for fiscal 21, right now and we're in.
Discussion with our business units on that very topic, having said that there are number efficiencies that we are working on our early view is that could be something in the area of $9 million alone. Then in addition, we are looking at additional 80 20 opportunities.
But there is still in discussion I think.
Our hope and our desire is that we will have pretty good numbers similar to what we've had in the past going into that budget cycle. Yes, Let me give you a little bit more color John to just to remind everybody on the phone that we do we will have a the consolidation of our lives of our Lisbon, Ohio facility done in the first quarter and that's about a 5 million dollar.
Our annualized savings number we won't get all of those savings this coming fiscal year, but that's a big.
A big accretive number for us as we reduce our footprint and the one thing the the management team is absolutely committed to is driving double digit earnings growth and so we're looking at developing a plan that does that.
Great. Thank you and then in future.
After you close the the two plants.
Is there room for more consolidation or are you at the asset based on size. It that you want to be up.
There has definitely room for more consolidation and I can't give specifics as you can appreciate that would be premature we have a lot of discussion do internally, but we see opportunity. Let me put it that way no not only in the U.S., but overseas.
Okay, great. Thank you and I just finally on the CEO search I assume there hasn't been any appreciable significant impact, but it but how is anything if anything has there been any.
Change in the and the morale or the and the operation the company due to Mark leaving no idea team is intact morale is good as you can appreciate what am I first order is the business with the meet with each individual team member and I feel really good about the conversation.
And.
I'll be with the team next week in Charlotte as we go through our planning for the budget.
And just say right now is it's all positive and.
Appreciate that really the work and the support of the team.
Our our mantra internally has been same strategy same team and Sam results and that's what we're working on.
Great. Thank you.
Our next question is from Walter Liptak with Seaport Global Please proceed.
Hi, Thanks, Good morning, guys.
Well.
One.
It's good to hear about the green shoots and so I wanted to ask one more question on that and.
As you were talking about these projects somewhat short cycle.
Specifically, where are you seeing the green shoots on the geographic basis for you all Europe.
Where do you think we get.
It's coming back what region as well.
Well North America is where we've seen really a more of a firming. If you will end in activity for quotes and and.
Some early on signs that we're getting quotes turned into orders. So that's that's basically the major focal point in my comments Asia Open Air right now with quite a virus clearly and and then Europe.
Some of our project business, you're particularly as it relates mid east oil and gas still pretty good.
So.
But I'd say North America has been the early area for the Green shoots.
Okay and then.
Thinking about the the work that you're doing.
For maybe 20, if I recall, the U.S. and started purse and followed by international and so my question is in the non U.S. sale.
Was there some of that decline related to.
Pls and somebody in 20 activity or or maybe if you can help us understand how much of the decline was divestiture really or related to market versus kind of internal improvement. Thanks.
Yep. So when we think about sales outside of the U.S., we did see volume declines of about.
$6 million and total or roughly 6.2%.
And where we saw the larger volume declines was.
Okay.
Almost double digits Latin America was double digits, we had a little bit of we saw some nice growth in APAC, but that's off of US small base in Canada was down a little bit as well. So the 80 20 impact I would say we're not in Europe specific to your question. We are not yet seen a negative impact due to product line simplification.
And I think there's you know that is that work is underway.
Underway and it's being looked at but that that particular part of the 80 20 process takes a little bit longer.
Okay got it and then well last one for me.
I think we're all very price you pass your energy and what you guys are doing this impressive with the margin profits coming up.
Revenue down under which probably is flat and if you're doing that C. O surgeries, the board's going through this it sounds.
Based on the information that you gave like you're getting high interest and the CEO. The board is going to pick it someone who can fit into the cat strategy.
And I wanted to make sure I understand that that's that's kind of the.
Given the focus in the search is not changing the pass your energy and that and that Ceos that are already in the running you know I understand that's in that they are accepting of it because usually see I'm trying to imprinted on.
Its plan onto a company, you're well Rick plenty again I'd be happy to give you. Some additional information let me first kind of.
Set the table on where we are in the search process and then then I'll answer your question more directly but just give you a sense that we hit the ground running.
Basically before Christmas, we had higher guard search firm.
One ferry, who also did the search for Mark early.
And we got our specification.
Document completed in terms of what we're looking for an out in the marketplace. So we moved pretty fast as you can appreciate.
In December before the holidays, and we've been having a number of calls with our search firm.
Literally every week.
And are now scheduled as I alluded to to have our first round of interviews with Uh huh.
Candidates have risen to the top.
In by mid February so it's early in the process still I mean, often as you can appreciate you have several rounds of interviews of getting and you can you certainly have.
There are people that come into the process. After the first wave, but we feel pretty good that we're on track to get somebody on board as we've always said within six months and I and my got so sooner and over certainly working on that now what kind of individual we're looking for.
As you can appreciate.
We're very pleased with the 80 20 process, we're very pleased with the.
Discipline that are brought to the company and we certainly want that to be part of the new individuals portfolio.
But we also want as I alluded to in individual that also has experience.
Growing companies, both organically and through M&A and portfolio optimization, and Andy you'll probably have a sound your base when I say, here's here's a laundry list of what we're looking for because it almost sounds like the perfect individual but there are people out there that can touch a lot of these basis. So let me. This review that we're looking for people that have stuff.
Reggie development experience operational excellence.
As I mentioned organic growth with a commercial track record of growing businesses.
I understand burgers and alliances sleep experience, leading the dedication due diligence negotiation.
Of potential acquisitions in joint ventures Global Accountability, we are global from that person has sadly the it obtain their background that experience.
That aspect of of running the company.
Mobile operating units new markets channels innovation and on that normally leadership, which is talent management and attracting and developing the right talent and the team so.
It's a long list, but we are pleased with what we're seeing so far and we've got as I mentioned, a pretty high level of interest so more to come on it.
Okay. Thanks for all thanks for the detail on that and good luck.
Thank you.
Our next question is from Joe Mondillo with Sidoti and company. Please proceed.
Hi, guys. Good morning, good morning, Good morning, Joe.
Most of my questions have been answered, but it just a couple maybe follow up questions. So some of the comments you've made.
The $9 million of savings that you sort of roughly estimated for next year, it's not including China in Ohio facility closures.
[noise] yeah. So.
When we think about we havent fully formed all of our plan just for 80 20, but clearly as we think about our budget for next year. We would expect yes. We are going to include roughly $5 million from the facility consolidations that and that is absolutely correct. Claire having said that we're going to drive the number higher.
[music].
Okay. So just to clarify those comments.
You mean $9 million includes facility closures and potentially.
Some additional 20 saving.
Exactly determined at this point yeah.
Greg is absolutely correct 5 million of the savings in 2021.
Comes from the Ohio facility closure.
Now I am I capacity is as a leading the team we're looking for nine as well.
Okay and I just wanted a also clarify the comments that you made on sort of January business trends. You stated that orders were up 1% is that a 1% year over year train. It it yes, hi, Jeff adjusted Yeah, Yeah for divestitures and FX, yes.
Okay.
And then one thing that was not.
Exactly with pricing I'm, just curious given sort of the weaker trends or some of the slowing in the end markets overall, what kind of pricing you think you'll get going forward.
Yes, so what we've got a in the quarter in year to date is about 1.6% price and that includes about half of that is 80 20 related so call that strategic pricing, where your surgically going in and raising prices on certain products that you sell so in the upcoming year, we think it's going to be somewhat of a weaker in.
Women, but nonetheless, we would expect positive price and we historically have had price exceed inflation. So I think it's going to be probably in a similar sort of a lot okay and industrial products in North America went out their price increase for February so they're about a month or earlier than they have been historically.
Okay, great. Thanks.
Just lastly.
You stated that your search costs for the new CEO was baked into the <unk>.
Thanks.
For the fourth quarter.
How much do you think.
Yes, so it's in the neighborhood of a quarter of a million dollars.
Okay.
Alright, great. Thanks, a lot.
And our next question is a follow up from Greg Palm with Craig Hallum Capital. Please proceed.
Yeah. Thanks, one last one on capital allocation I guess, you're generating massive amounts of free cash flow here and it sounds like M&A will become a big focus here, especially with the eventual appointment of a new CEO I mean, correct me if I'm wrong, but my guess is that you could buy back your own docket current levels at a much.
Cheaper price or I guess valuation and doing any M&A, especially if prices for potential targets remain elevated. So I guess my question is at some point do Ya approach share repurchases differently and if that's not the case why wouldn't you.
Yes, so we have a so we thought about it similar to two you Greg and that we didn't have that that ability in the past, but the board recently authorized a $20 million share repurchase authorization earlier in the in the fiscal year and we look at it as more of an opportunistic lever for us.
Our focus has been on de levering this year, and we said we would de lever $65 million and we will do that we're planning to do that and and clearly our balance sheet as you know.
Below our targeted leverage ratio.
But the other factor, we think about as a in regards to share repurchase is that our floaters quite low.
And.
So we really would look at share repurchases more from an opportunistic perspective, if for some reason there was an anomaly in the capital markets and our price dropped to a level that just didn't make sense, we could see that as a.
Opportunity to go back in and perhaps offset some of the dilution that we have every year from.
From our all Alta plan.
And let me just mentioned to Greg that.
We will be having a discussion as we do each year at our March board meeting on capital allocation and it will be a priority. This year to have that discussion because of the fact that our cash flow generation has been so positive and still ahead of schedule. So.
In a bit.
A good way summarize it is it's under discussion right now.
Hi, Ken it's a good problem to have good problem to have right yes.
Yes.
And we all go back to this and it was implicit in Greg's comments, our highest and best return is investing in our company either through capital spending and opportunities to reduce costs or through organic growth and obviously inorganic growth at and gets in that equation as well.
Yeah that makes sense I mean can you give us any sense for what your valuation criteria might be when when looking at M&A going out or is it really going to be kind of a case by case basis, yes. It's gonna have to be a case by case basis, you know I should think about lifting specialists a stall acquisitions fit.
Category as you think about smart movement, a magnetek acquisition fit that category. So you know they each have different profiles from a business perspective on the smart movement, there could be a smaller company that offers the right sort of technology that would allow us to move forward much quicker than developing a technology by.
Ourselves so it's going to be a case by case prices I mean in general how do you create value growth and return on capital.
Alright, thanks, Thank you.
We have reached the end of our question and answer session I would like to turn the call back over to management for closing remarks.
Well. Thank you very much for your continued interest in Columbus Mckinnon Corporation, we really appreciate the chance to share with you our performance for the quarter and our outlook and have a nice day.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.