Q2 2021 Columbus McKinnon Corp Earnings Call
At EBITDA margins and ROI see in the mid teens, but the timing for the achievement of these objectives has been negatively impacted by COVID-19.
Moving to slide 11, we generated $35.7 million of free cash flow for the quarter and $44.2 million year to date, we took rapid actions to preserve and generate cash and utilized our business system to focus on working capital reductions.
Our working capital as a percent of sales improved to 14.1%, which was a significant contributor to our free cash flow improvement.
We achieved our first half inventory targets and over delivered on our days sales outstanding or DSO performance.
Capex spend will ramp in the second half of the year as we have several projects underway to improve productivity in our factories.
We expect capex of approximately $14 million to $15 million for the full year.
Turning to slide 12, our total debt at the end of the quarter was approximately $275 million and our net debt was approximately $89 million.
Our net debt to net total capitalization is now approximately 16% we.
We repaid the minimum required principal payments on our term loan in Q2 of $1.1 million and plan to pay the same amount quarterly for the remainder of fiscal 2001.
We have made excellent progress delevering and have achieved a net debt to adjusted EBITDA leverage ratio of less than one times, which provides us sufficient financial flexibility to weather the current pandemic.
We have a flexible capital structure, which is covenant light. This means our financial covenant is only tested if we have outstanding borrowings against our revolver after.
After quarter end, we repaid the $25 million of outstanding borrowings on our revolver that we initially drew in April so the covenant won't be tested at December 30, Onest, assuming no borrowings are outstanding.
We also extended the maturity date of our revolver to August of 2023, which gives us a stable capital structure for almost the next three years.
Finally, our liquidity, which includes our cash on hand, and revolver availability remains strong and has increased to approximately 245 million.
Please turn to slide 13, and I will turn it back over to David.
Thanks, Greg if you would turn to slide 13, you will see our trend in order rates and backlog.
Overall, we saw order rates improve approximately 26% compared with the fiscal first quarter.
The most significant sequential increase came in July and thereafter orders held at about the same level through August and September.
Our short cycle business, which primarily sales through distribution saw order rates increased throughout the quarter and finished up 41% following the low levels in the trailing first quarter.
And our short cycle business, our government, which includes defense utility chemical processing and infrastructure markets remain active.
Entertainment is often slow, but it is still very slow.
Our project business, which has a longer sales cycle cycle and a lumpy order pattern has had a strong July and then softened in August and September.
While cobot continues to present unknown market risks channel partners are increasingly more optimistic for improved project activity in 2021.
In fact, some delayed projects are coming back to life and are being planned for early 2021, our recent quote activity reflects this.
We did have a number of encouraging project wins during the quarter. This.
This included in order to supply actuation technology for a customer that is providing material handling systems to Amazon.
We also had a win to provide an actuator stabilizing system for a truck manufacturer in Israel.
We had solid bookings in rail with a total of $5 million in orders in the quarter and current quote activity for rail remains strong.
We are winning in the defense industry as well with an order.
To provide the complete control system for shipyard cranes.
Using the construction of the Columbia class submarine.
Our short cycle business also had a win and defense with a large order that will ship over the next six to nine months to support the Us Coast Guard.
Backlog was up 2% year over year, and improved 12% or 16 million sequentially.
At about 147 million total backlog is back to pre co good levels.
Short term backlog increased by $8 million ending at approximately $86 million.
Long term backlog increased 8 million as well through approximately $61 million, including some project wins that will not ship until fiscal year 2002.
As you look at Slide 14, we had a number of configurator upgrades and product launches in the quarter.
10 point, so now availed on our Compass Configurator closing a competitive gap for Columbus Mckinnon.
While we have always supplied tandem hoists, the ease of the configuration and instant coal generation for tandem hoists encompass is powerful for our crane builder customers.
Tandem placed safely lift larger more complex or a lengthy lows with tandem heists our customers can move these loads much more efficiently.
While protecting both the load and their people.
We have improved and simplified the configuration process for this very complex claim system and now provide detailed drawings of tandem hoists and crane components. So you can see the product business being designed.
We also added the Intelli lift auto detection capability to our Intelli series of cranes solutions in the quarter.
The controls for this product will alert the operator to a misaligned or imbalanced load or a snag condition use.
Using sensors and a status controlling closure the system activates lights and an optional no warning horn, if aside pole or an off center Hec is detected. It can then be corrected manually or his preferred can be automatically adjusted with the automated system option.
Finally, we are setting the competition on their heels with the advanced engineering design of our utility lever hoists. This.
This includes the Yale Ergo 360 used in Europe, and the improved little mule hot stick lever hoist for the us market.
These tools have advanced safety features and improved ergonomics importantly, the incorporation of the hockey stick for the upgraded little Newell is a feature frequently required by utilities in the us for the safety of the alignment.
Our new product development priorities are focused on improving our customers experience and.
And helping end users of our products to increase safety and their operations and enhance productivity.
If you'll turn to slide 15.
Looking forward, we are encouraged with the improved stability in our markets, while recognizing that there is still risk associated with increasing infection rates during the winter months.
It's also worth noting that our fiscal third quarter has approximately three fewer shipping days than our second quarter.
Given these factors we are expecting that sales in the fiscal third quarter will be a similar levels that we had in the second quarter.
At the midpoint of our range. This implies about a 3% increase in average sales per shipping day over what we had in the second quarter.
Typically our third quarter declined sequentially versus the second quarter and is our weakest quarter of the year.
From a longer term perspective, our leadership team invested heavily over the last quarter to evolve our blueprint for growth strategy.
This resulted in clarity that we will strengthen and expand our business system with a broader set of core competencies that will establish a stronger foundation and develop a Columbus mckinnon way for enabling growth and creating scalability.
The strategic framework for CMBS, which you will see on this slide is underpinned by the key principles of bidding market led customer centric and operationally excellent with people and values at a center.
In other outcome of our strategic planning process is our emerging core group growth framework.
Which defines parallel paths for growth and clear organic and strategic initiatives focused on strengthening our core.
Growing our core expanding in our core and re imagining our core.
The foundation of CMBS in combination with our developing core growth framework will enable Columbus mckinnon to realize attractive organic and acquisitive growth.
Given our strong cash generation, we expect to put our capital to work efficiently with the advancement of our strategy.
We consistently prioritize organic growth, while expecting to evolve to a more programmatic acquisition process.
We plan to inform you more fully with details of the advancement of our strategy during our fiscal fourth quarter.
As we maneuver through these still unprecedented times, we know that our people are at the core of our success and their health and safety our priorities.
We are excited about our future and expect a stronger Columbus mckinnon to emerge.
Daryl we can now open the line for questions.
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Thanks.
Our first question comes from the line of Greg Palm with Craig Hallum. Please proceed with your questions.
All right. Thanks, Good morning, everyone I, maybe I missed it but just a little bit more color on the cadence of orders or overall demand activity, maybe kind of what you're seeing in October as well as in any maybe end markets that surprised you to the upside or even downside.
Yes. Good morning. Good morning. Thanks for the question. So we saw order rates improve in the in the quarter. Obviously, we highlighted that in the prepared remarks.
We saw them increased 26% they were up in July materially and then leveled off in August and September and obviously compared to.
The first quarter, we saw a pretty material increase.
Order rates improved sequentially, 41% in our short cycle business and 12% in our project business.
And then really through Friday October 23rd orders are down.
2.3% through those first 17 days.
Compared with the September levels. So thats, an overall level of two point Threex and our project business is up 1.3%, but our short cycle business is down about 5%.
Okay. So I mean, I just was going to try to reconcile the guidance for the December quarter versus the.
The order commentary the backlog levels in September so is it may be more of a function of what you're seeing in October and maybe some assumptions around what happens in the next two months versus sort of what you saw in the backlog levels that you ended with the from the from the September quarter per se.
Yes, I think it all ties together so as we as we exited the quarter, our backlog was up $16 million, but.
But 8 million of that was long term, which means that shifted beyond the quarter and then 8 million of that was short cycle. So we entered the quarter up 8 million.
In backlog, but we have.
Three lower three less shipping days in the period.
And so that as a percentage is about 5% less shipping days and that ends up with about the equivalent level of sales impact. If you will in terms of our ability to turn that around that coupled with the rates that we see running through the first few weeks in October right.
The lead us to a point, where we feel like the guide is consistent with what we should expect but in reality. If you look at our history sequentially from Q2 to Q3, we typically see a decrease in sales we've seen it over the last several years, it's a cyclicality in the business.
And so what we're saying is that.
We're really seeing improvements over our legacy performance we're seeing.
Quarter, two to quarter, three stability and we're guiding to a consistent level with Q Q2, and so.
We really have to ship about 3% more per day.
In the in the average rates going from Q2 to Q3, given the three less shipping days.
To be able to achieve the targets that we've given you for Q3. So I think we feel we feel good about this we think that.
The markets, we expect them to be stable.
As we continue through Q3, but we we feel like with what we entered the quarter with in terms of backlog and how we see things progressing at the moment were in a position to deliver performance thats consistent with our Q2 levels in the 250 to 160 range and then execute.
At those levels, which would be an improvement over prior year trends.
And Greg just to add on so as David said, our fiscal third quarter is historically, our weakest, but we feel what we feel really good about is we're probably about 55% booked for the quarter. So we still have a significant book and bill side.
At our borders that do need to come in in the quarter and but the 55% at the midpoint is actually a pretty good level for us.
Okay makes sense I'll hop back in queue best of luck going forward. Thanks. Thanks, Greg.
Thank you. Our next question is coming from the line of John Tamarin Tank CJ Securities. Please proceed with your question.
Hi, Good morning, everyone. Thank you for.
Question.
Hey, congrats on a first full quarter allocate too.
Thank you my first one.
Is there any reason to think gross margins might go down in Q3 at all or should you continue improving them sequentially given all the initiatives you have going on under the Hood.
So John typically what we see in the third quarter is.
We do see lower gross margins largely because of.
Less shipping days, our factories operating last but also our customers tend to shut down for longer periods of time. So our fixed cost absorption is at its lowest level in the December quarter.
But having said that we have made tremendous improvement and driving gross margin. We've got positive price, we would expect that to continue and we.
With the factory consolidations in the 80 20 process, we feel good about the gross margin levels that were currently at but having said that we would typically expect small degradation in gross margins in the third quarter.
Yes from Q2 levels is good.
Good you do expect the degradation from Q2 at this point a small one.
It would be historically, what we would see.
But with the improvements you may not.
Yes, I would say John that.
You know, especially given the current situation with co bid in Europe that it's going to fixed cost absorption is still going to be a challenge for us in the fiscal third quarter.
Okay understood and also a similar question on cash flow you did a great job on the working capital improvements.
Do those hold or do you expect to get some back at some point.
As volume returns, we would expect our working capital needs to go up we did a fantastic job managing our our dsos or days sales outstanding were going to continue to work hard to maintain levels current to where they are on the inventory front as volume improves in the second half of the year, we would expect that were going to.
Have to make incremental investments in inventory.
Understood. Thank you and finally, just one quick one if I could beat the Opex step up I get in Q3 that does that come back down in Q4 as accruals. We normalize is that the expectation at this point.
We would expect that the Q3 level is going to our Q4 levels going to be similar with the Q3 level.
As people return to work and we will have the you know the management incentive accrual.
And for the entire second half.
And as well as the growth investments will continue.
Okay.
Thank you. Our next question is come from the line of.
Mike Shlisky of Colliers Security. Please proceed with your question.
Good morning, everybody.
[music].
So hey, maybe I'll start off with just a quick follow up on the last question can you maybe quantify for US if you have Irish today.
All right you noticed this coming quarter here can you give any sense as to how much of that increase is going to be from growth investments and how much is from some of the.
More mundane shannay coming back from people coming back to work.
Sure so in broad strokes, Mike, it's about $2 million for incentive comp. It's a couple of million dollars for growth investments. It was a couple of million dollars related to return to work.
So it's really probably two three buckets adds about those numbers.
Numbers.
Okay great.
And then secondly, I I'm wondering a little more clarity on one of the orders that you had noted in the quarter here and that was the Amazon related order.
Could you, maybe just a little bit more color on many.
Assuming that that that quarter again, and I'm curious when you work with Amazon when you spend one item to Amazon sometimes.
Theres a very large order that comes after that when you have the state we need this for for another 50 585 locations around the world right. I mean is there any any any any.
Possibility of getting a large order after this first order from Amazon.
Right, Yes, we do feel good about that a litter, it's being sold through customer that is providing the solution to Amazon, but we do have visibility into further demand for that solution and we feel like we're in a good position as that demand evolves, but yeah, it's exciting to be participating in that supply chain to Amazon.
And it is a noteworthy order for us that.
A level that gives us confidence that we could do some more and our team is actively working on those opportunities.
Can you just maybe.
Just like maybe a little further like what it was that was ordered or is that.
Yes. These are actuators that we're selling to the partner that are being configured into the solutions for air how Amazons warehousing solutions.
Okay, so lets being put into Amazon warehouses, not amazon's customers warehouses.
Presale on Amazon, it's things that.
The company Amazon's using their own operation correct.
Okay, great. Thanks, so much I'll pass along.
Okay.
Okay.
Thank you. Our next question comes from the line of Chris now with Barrington Research. Please proceed with your question.
Good morning, David Congrats.
Morning, Chris Good morning.
Good morning.
So net net debt.
Turns is about 0.97 times this environment seems to change as we turn on the news each day, but can you talk about capital allocation priorities.
As we move forward through this uncertain environment understanding that there may be opportunities in the backlog of phase three but if there were to be something to happen to the downside those would obviously be pushed out.
And does this in any way change your acceleration of the growth engine providing.
A time to pause and invest in some of these product development opportunities that you've mentioned in the slide deck.
Yes. Thanks, Thanks, Chris Let me start and ask Greg to pick up where I think off and what I would say is that our capital allocation methodology, we have a nice framework for capital allocation that weve defined and we're not deviating from.
And so Greg can talk a little bit more about the specifics of that framework, but we expect to maintain a consistent set of priorities as we advance clay.
Clearly, we have liquidity and we have the ability to invest in.
Growth initiatives, and we are investing in organic and we plan to be investing in strategic growth options and so we're excited about the position that we were in we feel like the the improvements in operating performance. The team has deliberately positioned us to be able to make investments that we'd like to make as we go forward.
And we have a capital allocation methodology that will allow for that so we feel good about it and I'll, let Greg comment further I think Chris what you're what you're also asking us about the fact that we are our leverage ratio is below our target of two times.
Sitting at under one so.
In a pandemic thats actually a pretty good place to be relative to the alternative and we do think that we have ample dry powder and lots of flexibility with our capital structure to fund our growth initiatives, whether it's a new product development, whether it's in productivity Capex and another part of our capital allocation strategy is returning cash.
Cash to shareholders and with our dividend we look at it every March and our policy is to have a consistent ever growing dividends. So in March we'll we'll kind of get a sense of where we expect the next fiscal year to end and make any adjustments as required but we're in a really good spot with over $245 million liquidity and.
As we look at inorganic growth. We're in once again have a great position to to move forward.
Great and one follow up question.
We talked about the trends that we're seeing in October how that combined.
With some other factors like the shipping days.
Leads us conservatively to 150 to 160.
For the upcoming quarter.
But perhaps in line with some of David's initial comments about this quarter relating to 80 20 minutes.
And also some of the pricing improvements.
What sort of opportunities or buckets that are in place too.
Exceed your expectations, knowing that gross margins will come down slightly but.
Just some opportunities that you're working on that could come to fruition or could potentially push.
Into the following quarter.
Yes, Thanks, Chris Good question and as we as we look out into the quarter. We obviously always have on assessment of risks and opportunities and I would say that we havent healthy backlog as we mentioned that backlog is up $16 million $8 million of that is anticipated.
And contribute to the quarter and the short cycle areas that amount that is above historic levels that is.
Pushed out into period beyond the quarter is an area, we're looking at where there might be opportunities to potentially drive a higher level of execution. So we're looking at that healthy backlog also at order rates to improve that could certainly harkless to execute at a higher level.
We're constantly looking at opportunities to improve the business. The team is very performance oriented and moving with a level of agility that I think is improved over over past levels and so were coordinated we're looking for opportunities we clarified our strategic focus areas as we go forward and the team.
Seems really working on making sure that we're executing well in this period to tee us up over the long term and so we're making some investments as you heard as it relates to some SGN AD spend and we're making sure that we're positioning ourselves to get out and get the growth that were targeting but we feel good about where we are and we think that.
Opportunities would primarily be volume oriented.
Okay. Thanks, I appreciate the color I'll hop back in the queue. Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.
Hi, David Gagan Bad this is off one today.
Hey, Austin good morning.
Hi, I had a few questions. The first being could you comment or elaborate a bit on trends you're seeing in input costs.
Okay.
Sorry, we missed the last part trends in what.
Input costs.
Input costs raw materials.
Yes, I mean, I guess, what I would say is that we've had a pretty good performance in our supply chain, both in terms of delivery and making sure that we're getting that.
Kind of prioritization that we required in this environment from our vendors and so we've been able to have relatively stable performance.
No no material interruptions in supply.
And we've been able to execute in a way that has driven the supply chain savings that we've been targeting and so consistent with our operating excellence focus that we have as a company and the emphasis on supply chain improvements that outpace.
Supply chain.
Inflation and were material inflation in the supply chain, we've been performing at a level that has been achieving our targets and so we've seen input costs remain consistent with the way that we've been modeling the business, which has really been to drive and deliver a year over year improvement that now.
To our bottom line.
In recent times, we were obviously seeing an increase.
Rate of infection in certain parts of the world that we havent seen any impacts on our supply chain from yet and I don't know, how that's going to evolve but at this point I'd say input cost remain consistent with what we'd be expecting.
And the trend overall is driving an improvement in those input costs.
Yeah, and so year over year cost in we have seen zero inflation from a raw material perspective on a net basis and thats in our gross margin bridge.
Okay. Thank you for the color.
And just a quick follow up if you could elaborate on you talked about 80 20 savings and I'm just curious.
If you could provide maybe an update on your SK, you rationalization process and how thats playing out is there any.
Any regional dynamic to that you know given recent developments in light of cobot et cetera.
Sure Thats a good question Austin. So we this is a big provides a priority for us it's a part of our strategic deployment process and something we're heavily focused on as an organization.
We're I'd say in the very early innings of the rationalization and product line simplification initiative. We've highlighted this is an opportunity for the company and the the early work is really around developing the appropriate product line roadmaps for the product offerings, making sure that we're looking.
Looking at this from a comprehensive lens or through a comprehensive lends us understanding our customers their needs our product portfolio, how it meets those needs and future development opportunities that were pursuing to rationalize and kind of re platform products, but we've done the early work around the product line Roadmaps and.
We are preparing to accelerate those.
Efforts to drive improvement, we see that as a as a lever for future 80, 20 savings and.
Cost improvement as well as an improvement in the product offering that we have to meet our customers needs. So there is a lot of opportunity. There is a heavy focus for us from a regional perspective, one of our challenges as it relates to the global footprint that we have is our ability to travel.
It's impacted by co bid and get resources into factories around the world to help.
Drive improvements or to provide support for the improvements that the teams locally are already driving and bringing those to an accelerated level, but the work that we're doing around pls product line simplification is something that is not I don't think being materially impacted by that inability to travel at this point I think.
Were working in a coordinated way with our teams around the world. We're identifying the appropriate next steps and we're moving in the early innings of implementing change there and I think that we'll see those benefits overtime.
Great. Thank you so much.
You bet. Thanks.
There are no further questions at this time I would like to turn the floor back over to David for closing comments.
Thanks.
Great. Thank you Dara.
Thanks for joining us today.
We're pleased with our performance in the quarter reporting strong sequential improvements in orders sales margin and cash, resulting in a strengthened financial position and improve liquidity.
More importantly, we are gaining momentum as an organization.
I Hope you are as excited as I am.
And about the future potential of Columbus Mckinnon as we execute on our plan to drive growth with strength and earnings power.
Have a nice day.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Great. Thanks.
Okay.