Q4 2021 Columbus McKinnon Corp Earnings Call
Greetings and welcome to the Columbus Mckinnon Corporation fourth quarter of fiscal year 2021 financial results call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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Please note of this conference is being recorded.
At this time I'll now turn the conference over at the Denver Philosophy of Investor Relations. Mr. Lascar, you may now begin.
Thanks, Rob and good morning, everyone. We certainly appreciate your time of day are interesting from the Canada here with me are David Wilson, our president and CEO and Greg wrapped with our Chief Financial Officer.
You should have a copy of our fourth quarter of fiscal 2021 financial results, which we released this morning before the market. If not you can access the release as well as the site that will accompany our conversation today at our website Columbus Mckinnon Dot com.
David and Greg will be reviewing the results of the quarter of strategy and outlook. Then after the formal presentation. We will open the line of Q&A, we kindly ask that you ask the only 1 question with the follow up question and then please get back in the queue of allow for a continuous flow of quick time.
If you'll turn to slide 2 in the deck I will first review the Safe Harbor statement.
You should be aware of and we may make some forward looking statements during the formal discussion as well as during the Q&A session.
As part of future events that are subject to risks and uncertainties as well as the 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 by the company with the Securities and Exchange Commission.
These documents can be found on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you should not consist of the presentation of additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information.
With that if Youll turn to slide 3 I will turn it over to David to begin David.
Thanks, Kevin Good morning, everyone fiscal 2021 was an unprecedented year and we were happy to end on a high note. We believe the excellent execution of our strategy by the team in the development and deployment of our enhanced the Columbus Mckinnon business system or see MBS were crucial to our success.
As markets have been recovering we have responded with agility to increasing customer demand as a result sales grew 12% sequentially to $186 million.
Which was at the higher end of our updated guidance our team worked hard to drive efficiencies against headwinds as well fourth quarter. Adjusted operating margin was 10, 1% compared with 10, 7% last year.
Our 80.20 tools continued to contribute to our earnings power of 80, 20 provided approximately $2.9 million and operating income in the quarter to help offset the headwinds that both COVID-19 and the supply chain presented.
Despite the pandemic, we were able to achieve $11.8 million in contribution to operating income during fiscal 2021, while not as visible in the year because it offset the operational headwinds associated with volume declines we expect our efforts to be rewarded as volume returns.
We generated $27 million of cash from operations during the quarter and nearly $21 million in free cash flow.
By yearend, we have dropped our leverage ratio to nearly <unk> 6.
In the wake of our recently successful debt refinancing, which Greg will address in a moment of.
Our net debt leverage ratio was about 3.4.
We expect to get that back down to our target ratio of 2 times within 2 years, excluding any additional acquisitions.
A strong sequential increase in quarterly order flow drove backlog up 13% over the trailing fiscal third quarter and up 31% year over year.
As you look at slide 4 our focus on 2.0 led us to identify and pursue the acquisition of Dorner manufacturing, which we completed just following the end of the fiscal year.
This acquisition created an additional platform from which we can expand our intelligent motion solutions and higher growth end markets.
Specialty high precision conveying puts us at the high at the center of the industrial automation equation.
Backlog for Doner at the end of April more than doubled over the same time last year to nearly $40 million.
This is slightly ahead of our expectations when we closed the acquisition at the beginning of the month of.
Our organic efforts were successful as well and accelerated and contribution throughout the year.
Despite the pandemic new product revenue or N -3 revenue, which is revenue from products introduced in the recent 3 years was up 22%. This is the second year in a row, we have exceeded 20% growth with our vitality index.
I should point out that new product innovation is also key to <unk> growth we.
We are prioritizing efforts to bring their ingenuity and precision conveying to our broader customer base, while continuing to introduce new conveying solutions to the market.
With that let me turn it over to Greg for a review of our financials, Greg. Thank you David Good morning, everyone.
On slide 5 net sales from the fourth quarter were $186.2 million down 1.7% from a year ago.
As David noted this sales level was at the upper end of our updated guidance for fourth quarter revenue of approximately $184 million to $187 million.
We continue to see demand improve sequentially and are closing the gap to pre COVID-19 revenue levels. This fourth quarter felt more of like a normal fourth quarter as we saw stocking orders begin to return in our short cycle businesses.
Looking at our sales bridge sales volume was down only $11 million or 5.8%. We did realize positive pricing as we saw year over year pricing improvement by 1% foreign currency remains of tailwind and increased sales by 3.1% or $6 million.
Let me provide a little color on sales by region for the fourth quarter. We saw sales volume decline in the U S. By approximately 10%. This was partially offset by price increases of 80 basis points.
Non U S sales volume was down approximately 1%, which was more than offset by price increases of 1.2% and favorable foreign currency translation of 6.9% by region sales volume was down 16% in Canada and down 19% of the Latin America, but EMEA was down less than 1% and APAC.
<unk> volumes increased 19%, albeit off of a small base.
We did push through normal price increases to start the fiscal year, and we announced the second price increase last week to help offset inflationary pressures and commodities and labor costs.
The second price increase will be effective at the end of June and will help preserve margins next quarter we.
We will continue to monitor inflationary pressures going forward and we will take further actions if necessary.
On slide 6 we saw our gross margin improved sequentially to 34, 4%, which compares with 34, 9% last year sales volume was still below last year by $11 million, which affects our fixed cost absorption in our factories. We also faced supply chain, the logistics challenges, which led to any.
Efficiencies in our factories, we are still benefiting from our 80.20 process, which contributed approximately $2.9 million of incremental year over year gross profit expansion in the quarter through strategic pricing indirect overhead reductions and factory closures, we are doubling down on product line simplification this year and are making.
Good progress with SKU and component reductions. Unfortunately, that's part of the process takes longer as you have to phase out of existing products and utilize the existing inventory to avoid write offs. This effort will pay dividends over a longer horizon.
Let's now review this quarter's gross profit bridge fourth quarter gross profit of $64.1 million was down $2.1 million compared with the prior year the.
This was driven by 2 factors first we saw a $3.6 million reduction in gross profit due to lower sales volumes compared to a year ago.
We also experienced negative productivity net of other cost changes of $4.5 million largely due to supply chain issues and COVID-19 related labor inefficiencies. In addition freight carriers have also been impacted as we see higher cost and longer transit times, we did see gross profit expansion from price.
Net of material cost inflation of $1.7 million, which includes about 200000 of material cost inflation in the quarter foreign currency translation increased gross profit by $2.1 million.
Factory closure costs and business realignment costs together were lower this quarter by $1.8 million.
As shown on slide 7 our SG&A costs were $46.7 million in the quarter or 25, 1 percentage of sales included in this total were $4 million of Dorner acquisition deal costs, which we have included as a pro forma item in our adjusted operating income adjusted EBITDA and adjusted EPS calculations.
Excluding these costs, our SG&A costs were actually $3.5 million lower than the previous year, Despite $2.3 million of higher annual incentive costs and stock comp cost compared with the fourth quarter of year ago.
This improved level of our SG&A was due to several factors, we had lower selling costs of $1.4 million, resulting from cost saving measures, including lower head count of unlimited travel G&A costs were down $2.9 million compared with the prior year. If you exclude the dorner acquisition deal costs of 4 million that I just covered.
We also continued to invest in R&D to drive organic growth. So those costs were actually up 800000 FX translation also added approximately $1.2 million to our SG&A costs, which also makes this year over year performance that much more impressive.
As we move into the new fiscal year, we are increasing our Q1 estimate for our SG&A to approximately $50 million, which includes the impact of the dorner acquisition. The owner adds about $7 million quarterly to our legacy our SG&A base costs as.
The sales increase throughout the year variable sales costs will increase in addition, we plan to continue making investments in R&D and we will implement merit increases in July to reward our employees as the result, we would expect our SG&A cost to increase modestly throughout the remainder of the fiscal year.
Turning to slide 8 adjusted operating income was $18.9 million.
Adjusted operating margin was 10, 1% of sales only down 60 basis points from the prior year, we are close to returning to pre COVID-19 margin levels. As we see volumes return. We've also made structural changes to the business in the past year to improve profitability, which are beginning to show up decremental adjusted operating leverage for the.
Year was 13, 5%, which is significantly better than what we saw during the great recession of 2000 of 9 when we experienced decremental operating leverage of 38% I would like to point out that while we are still finalizing the purchase accounting for the daughter acquisition. We expect total amortization expense to increase the $6.5 million per quarter is.
Dorner will approximately double the historical level of amortization expense, we've had post the Stahl acquisition.
As you can see on slide 9 we recorded GAAP income per diluted share for the quarter of 39.
Adjusted earnings per diluted share were <unk> 50.
Which were up substantially on a sequential basis, but down <unk> <unk> per share from a year ago. We still believe the Dora will be accretive to FY 'twenty 2 earnings per share by 5 to 10 cents. We are still working through the impact of the FY 'twenty 2 GAAP effective tax rate given the complexities of the <unk> acquisition and will provide our estimated tax rate in <unk>.
The lie when we report our Q1 earnings in the meantime, we continue to use 22% as our normalized tax rate for computing. The adjusted earnings per share. In addition, there have been substantial changes to the capital structure of the company and I wanted to be sure that we are transparent with the impact of this will have on Q1.
With the additional shares from the equity offering our share count per average diluted shares outstanding in Q1 is expected to be $27.2 million shares.
On slide 10, our adjusted EBITDA margin for fiscal year 'twenty, 1 declined to 11, 9% because of COVID-19, our return on invested capital of 6.6% was similarly impacted the.
The continued to target of 19% EBITDA margin and expect our ROIC to be greater than our WAC in fiscal year 'twenty 3.
It will help us achieve our 19% EBITDA margin 1 year earlier than we would have otherwise done we remain highly confident that our strategy will enable us to drive profitable growth and achieve these objectives.
Moving to slide 11, we generated $20.5 million of free cash flow this quarter and an impressive $86.6 million in fiscal year 'twenty..1. Despite the pandemic, we took rapid actions to preserve and generate cash and utilize our strategy of deployment process, which is part of our business system. The focus on working capital.
Reductions are working capitals of percentage of sales improved of 9.3%, which was a significant contributor to our free cash flow improvement.
We drove our days sale outstanding or DSO performance down to 51, 5 days and improved our days payable outstanding to.
The $58.7 days.
Inventory turns also improved to 4.4 turns.
We expect capex of $20 million to $25 million in fiscal year 'twenty..2 this includes capex for dorner of approximately $3 million to $4 million.
Turning to slide 12, we have been very busy refinancing of the capital structure Post order acquisition and I am pleased to report that we even exceeded our own internal expectations.
We utilized the $650 million bridge loan to acquire Dorner Paydown of our previously existing term loan b and pay various fees and expenses associated with the acquisition. We then issued $207 million of stock in an upsize the equity offering and once the underwriter also exercised the green shoe provision.
This equity was issued at a price of $48 per share and resulted in net proceeds of $198.7 million all of which was utilized to pay down the initial bridge loans.
Right after the equity price, we refinanced the remaining initial bridge loan with a $450 million term loan b at LIBOR, plus 275% with the 50 basis point LIBOR floor and 90.975 price. This was on the tight end of the price stock and gives us a low cost flexible capital structure.
Sure that will serve us well for the coming years with.
With the completion of the equity offering and debt refinancing we estimate that as of March 31 on a pro forma basis and excluding cost synergies, we would've been at of 3.4 times net leverage ratio using both ours and <unk> 331, LTM adjusted EBITDA.
Finally, our liquidity remains strong which includes our cash on hand of revolver availability and was approximately $155 million at the end of April.
Please advance to slide 13, and I'll turn it back over to David.
Thanks, Greg as you can see on slide 13 orders continued to improve sequentially in Q4 and were up 24% versus Q3.
We have seen improvements continuing in many markets projects that were previously on hold are now being released and new projects are being quoted this is all very encouraging.
We also saw the beginnings of inventory restocking in our distribution channels for the first time in 2 years.
I should point out that there is a degree of seasonality in our orders, we typically have stronger demand in the fiscal fourth quarter, whereas orders in the fiscal first quarter tend to decline sequentially.
This reflects distributor purchasing behavior in advance of annual price increases.
We know that year over year comparisons for the first quarter in fiscal 'twenty, 2 will be favorable considering what was happening at this time last year.
In fact through last week, the average daily order rate for our lifting business was up over 50% compared with last year.
Book to Bill for the fiscal fourth quarter was greater than 1.1 to 1 day.
Demand was strong in defense and government with a variety of projects, including shipbuilding in material handling automation of supply depots among other projects.
Man from energy markets globally was encouraging utilities were stocking up for summer good work in advance of the hurricane season.
We also had request for solutions in nuclear and thermal power generation facilities.
Demand for our fixed venue entertainment products has been improving inquiries in this market in general are picking up we would expect to continue to see this trend improve and to start seeing the convert to orders for touring shows as we progress through the year.
Both short and long term backward log were up sequentially.
Short term, which is expected to ship within the first quarter grew nearly 15% to $104 million.
While long term backlog was up nearly 10%.
This does not include approximately $40 million of additional backlog from dorner.
We are entering fiscal 'twenty 2 in a solid position with the expansion of the markets, we serve our strong competitive position and the tailwind of the recovery.
Please turn to slide 14.
For the first quarter of fiscal 'twenty, 2 we expect net sales to range between 212 in $217 million.
This of course includes the donor acquisition.
The addition of the specialty can Bang solutions platform diversified our markets into those with enduring tailwind.
We are seeing strong demand from E Commerce life Sciences, and food processing industries.
With this platform, we are accelerating our pivot to growth and improving our margin profile.
As to the supply chain, we are actively addressing inflation shortages and logistics constraints. We began implementing additional price increases this month and are working closely with our suppliers to get better purchasing and delivery performance.
We have historically been able to cover material cost inflation and believe we are positioned to continue to do so.
Looking beyond the next quarter, there's a lot that makes us excited about where we're headed.
We are driving progress with our strategy and employing new business tools to drive scalability.
We expect to deliver growth through targeted organic initiatives, including opportunities within our specialty conveying solutions platform.
And while Delevering, our balance sheet and integrating dorner, our high priorities, we will continue to actively develop our M&A pipeline.
Turning to slide 15, I'd like to remind you of our blueprint for growth 2 point out strategy.
<unk> provides the foundation and our core growth framework defines the potential that we have in front of US. We truly believe there is a lot to look forward to here at Columbus Mckinnon.
With that Rob we can open up the line for questions.
Thank you.
I'll now be conducting a question and answer session to ask the question today. Please press star 1 from your telephone keypad and the confirmation tone will indicate your line is in the question queue.
You May press Star 2 of you would like to move your question from the queue from <unk>.
The ones using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
1 of them. Please open call for questions.
Okay.
Yes.
Thank you. Our first question today comes from the line of Bank of <unk> with Colliers Securities. Please proceed with your questions.
Hey, good morning.
Morning.
I wanted to ask with the first about the backlog of Doner you mentioned it had.
More than doubled year over year I think in the in the quarter.
Can you remind us last March to your knowledge.
But was there a large dip at the very end of the quarter last year kind of life.
Net.
What you saw or is the very apples to apples pre pandemic with them a comparison.
Yes, I think the pandemic Mike Good question of course, I mean, as we look at the quarter.
Ending March for them in the prior year the.
<unk> was early in a cycle I think their backlog was around $17 million at that time.
And.
They saw in the first quarter of low or period last year. So our first quarter per second I'm, sorry, their third quarter and their annual cycle was their worst if you will from the pandemic.
Remember they have of year end in September.
And so that would of been their fiscal third quarter, which is equivalent to our first fiscal quarter of 'twenty 1.
And that was the period when they were impacted the most of my COVID-19, but their march ending balance or what we referred to as their April ending balance at $40 million is up about.
It's more than double I think it was $17 million at the time that we're referring back to.
Okay.
And then my follow up you had mentioned in the slide.
Youre still looking at 19 same type of margins in fiscal 2023.
Do you anticipate that being.
Full year type of scenario or just kind of scratching your body by the end of the year.
That was it right.
Kind of some sense as to what.
What does that 19% target mean to for next fiscal year.
Yeah, Hey, Mike It's Greg we're looking at bad as being the average for the full year.
Average okay.
Okay, well, that's great that's great color I appreciate it and I'll pass the law.
Thank you. Our next question is from the line of Michael Mcginn with Wells Fargo. Please proceed with your question.
Hey, good morning, everybody.
Hey, Mike Good morning, good morning.
So you walked through some SG&A numbers and I think the SG&A ramp you said was $7 million from.
With Dorner, and then amortization on top of that net $7 million include is that fully burdened with R&D and everything.
So just to be clear our amortization is not included in our SG&A cost legacy is 43 million dorner at 7 and that gets to the $50 million of our SG&A and as I mentioned, we do expect to ramp our spend for new product development, which falls into R&D.
But thats sort of the year.
<unk> includes the R&D for the quarter, the continued to make selective targeted investments and growth throughout the year.
Got it you also alluded to some price in the second pricing increase in that your backlog is filling up a little quicker with the shorter cycled district distribution products can you walk us through what the if the expectations are for price increases on the run and shorter cycle products being delivered in the front half.
And then maybe projects picking up the back half of what your incremental margin.
Estimates or assumptions would kind of be a scenario like that yeah. So Mike we're working to make sure that we're out of ahead of the inflationary pressures that are out there in the market and so our second price increase is really targeted at ensuring that we.
Stay positive as it relates to the net price.
Versus inflation pressure fresh generic pressures. So we're not we're not seeing this as an action that expands margins specifically in the second price increase and it's more of a.
Our movement to make sure that we're out ahead of inflation.
The back half as it relates to longer cycle projects, we obviously price them as an engineered to order projects off of.
And understanding of the market value of the project the competitive landscape and then the pricing pressures on the cost base and so we will be making sure that we have the appropriate adjustments in there.
To ensure that we're maintaining if not expanding margin and <unk>.
Just to add onto that Mike So with engineered to order product because it's a unique SKU, we don't count that as price and so our price calculations are year over year by SKU, but the change in prices. So with the engineered to order every time you quote you have the opportunity to.
You adjust your input costs and our coding software. So when we talked price. It's really just on standard short cycle product that was sold in the previous year.
Which is about half of the business. So when we talk about 1% price realized in the quarter you might think of it is really it's 2% on the on what we're actually raising prices on standard product, but there's also pricing embedded in engineered to order products based on.
How we're quoting it and how long.
And adjusting the input costs for that.
Got it and if I could sneak 1 more in on the Capex number is this sort of Oh.
I'll catch up plus integration or is this the the run rate to use going forward for the combined business.
Yes I'll.
I'll take that so.
In general this is probably a more normal level of capex at the $20 to $25 million, we spent $12.3 million. This past year and other years, we've been as high as 20% to $22 million.
And just the legacy of Columbus Mckinnon Dorner is typically in the $3 million to $4 million range and that should be plenty on a go forward basis. So I would think that this would be a good number going forward.
Got it I appreciate the time.
Thanks, Mike.
The next question is coming from the line of Chris Howe with Barrington. Please proceed with your questions.
Hey, Chris Good morning, everyone. Thanks for taking my questions.
As far as the the guidance we've.
We've kind of discussed.
For the first fiscal quarter.
Can you talk in more detail as to how this might look for dorner of dorner sales expectation and in the context of this fiscal year.
Can you remind me again about the Warner seasonality.
And its comparisons.
Over let's say your last fiscal year.
Yes, and that's a lot of any questions out there but.
The previous dorner expectations laid out for their year, ending September 30th or the.
Still in line, Yes, Chris let me jump in and then I'll ask Greg to help out so.
Dorner Dornish performance is tracking.
<unk> with our expectations of the acquisition timeframe and as I mentioned in my opening comments, even even slightly ahead of those expectations and so we feel really good about where the business is.
Their order development has been really promising from.
Some of cyclicality standpoint on their build to order business, which is their base business it's relatively.
I would say stable there Q the key.
Q3, Columbus Mckinnon period tends to be their highest period.
The calendar year end, and then that goes into the Q4 period.
Okay.
Slightly lower level, but Q1 and Q2, if there is any seasonality would tend to be a little bit lower on the build to order in a general cycle. If you will but thats exclusive of more macro drivers, which includes a lot of activity in the life Sciences and <unk>.
e-commerce sectors, and so we're seeing terrific development in terms of order pipeline there.
On a year over year basis their orders are up on a.
Quarter to date basis.
Materially.
But again first quarter last year was.
Their worst quarter, the first when I say per quarter, I'm, referring to Columbus Mckinnon quarter.
So.
Yeah really good developments there.
Greg I don't know if you have anything you want to add so so just to add on from a seasonality perspective, we don't really see seasonality in the business other than the number of working day. So when David talks about our December <unk>.
<unk> quarter being less for them, it's really a function of the Thanksgiving holidays of Christmas holidays, but there isn't really that cycle and given the growth trajectory that they've been on <unk>.
<unk> been kind of blowing through any kind of concept of seasonality now we did give a couple of markers on revenue.
Part of it of the S..1 filings in the 8-K filings, where and when we announced the <unk> acquisition I think from December of the revenue was about 98% and changed on the $8 million of change number period, ending yes, and then we said for their September.
Time frame. It was about 124, 7% of number of that are in our call and they continue which says that there's been there's a tremendous amount of growth that's happening in the second half of the year and that is just continuing.
So we're very pleased with.
The first.
And a couple of weeks that we've owned dorner it's.
A very profitable high margin business with a really great double digit growth trajectory and a fantastic team.
So we really really feel good about where we are and we're excited about how things are coming together right now and.
Working really hard on all of the things that we've committed to do to make sure that we exceed or we will achieve and exceed our targets.
That's great and if I may squeeze another question it won't be a series of questions but.
As it relates to dorner and some of your key.
Comments in the press release, David you said strategic opportunities in a fragmented market market can you perhaps.
Expand on this.
Just thoughts.
And perhaps how it may relate.
The different opportunities that youre seeing in Europe in organic pipeline.
Sure. So the market that the owner serves as a global market that approximate $5 billion. There obviously.
If the rates that Greg was just referring to a small piece of that total market, but there are 2 other major global players. In addition to Dorner and then we see of a long tail of fragmentation.
And doner today has a very large percentage of their business approximately 85% of their business is in the U S and the balance overseas and so as we look at the competitive landscape and we look at the.
The market there are a number of nice niche technology opportunities. There are also opportunities that will enable more global scale.
And.
There's just a tremendous runway and a nice pipeline of opportunities that exist and obviously, we're very focused on what's right in front of us.
Making sure that we.
Execute to the plans that we've committed to but the pipeline of opportunities.
<unk> are really nicely concentrated in areas that we think will be.
Very attractive for Donna.
Very helpful. Thanks for taking my questions I'll hop back in the queue.
Great. Thanks, Mike.
Our next question is from the line of Greg Palm with Craig Hallum Capital. Please proceed with your question.
Hi, This is Danny acreage on for Greg today, Thanks for taking the questions.
Hey, good morning, Hey, I appreciate the color on it sounds like dorner growth rates of an accelerating recently I'm wondering if you could kind of dig into the drivers behind that at all.
Certainly with the labor constraints.
Lot of companies are putting more emphasis on warehouse automation.
The thing Youre seeing from that perspective.
Danny I'm, sorry, you broke up just a little bit there in the front end of the question. So you're asking about the order rates in dorner just to confirm yes, yes. So I mean, just it seems like order rates have been accelerating recently I was just kind of wondering what the what the drivers were behind that.
I know with the labor constraints. It seems like companies are putting more of an emphasis on on warehouse automation in their distribution.
Distribution centers. So just wondering what you see for sure. We're certainly seeing that as well the 2 primary markets that we're seeing most of the.
The significant activity and although all across the board of markets are pretty favorable.
But it would be life sciences, and Thats, primarily concentrated around pharmaceutical.
Automation, if you will pharmaceutical distribution automation and the life Sciences space, and then e-commerce growth and that's in terms of warehousing in order fulfillment activities.
So yes, a lot of demand generation coming from those areas and the order pipeline continues to develop positively and we're starting to receive more and more.
Commitments from customers for orders that will come in the future relative to that opportunity and we're pretty encouraged.
Got it that's good and just piggybacking off 1 of the last questions on them. I think you were mentioning inorganic growth opportunities on the on a worldwide basis.
What is the opportunity organically for dorner for geographic expansion.
Yes, so dorner has historically grown on a year over year basis organically at about 13% over the last 5.7 years on a cash.
CAGR basis and so.
Really attractive organic performance profile clearly the work we're doing together is focused on driving incremental.
The growth beyond that we've got.
A nice set of opportunities that exist from a channel synergy standpoint, and from a geographic expansion perspective, particularly as we look beyond the U S into Europe.
And so we've got reach that they don't necessarily have legal entities and the opportunity to plug the resources and to help them scale.
And then as it relates to Columbus Mckinnon product that hasn't had access to some of the.
Channel partners that dorner enjoys we have the opportunity to bring some of our actuation and other overhead workstation crane products through their channels for per growth in the near term. So there's some really interesting opportunities that are organic and synergistic on both in both directions on top of the already terrific performance that <unk> been delivering.
Remember they've been they've been.
Owned and operated under a private equity structure for the last 7 years.
<unk> been somewhat capital constrained in.
We're working with them to expand capacity and make sure that they can scale to accommodate the the growth opportunities that are in front of them. So I think the the organic growth opportunities will be material. In addition to the the.
The acquisitive opportunities.
Alright, that's all really helpful. I'll leave it there thanks, great. Thanks, Dan.
Our next question is from the line of Matt Summerville with D. A Davidson. Please proceed with your questions.
Thanks couple of questions first I was wondering if you could comment on where you think we are with respect to distributor inventory levels currently versus prior up cycles, and maybe what inning, we're in with the restock process.
Good morning, Matt.
I guess I haven't lived through those historic cycles, but im trying to get of smart as I can on it and I'll, let Greg comment a little further after I highlight but we saw.
Channel partners leaned in in Q4 and start to place orders for the first time in a couple of years and lean and positively towards where the market was going and since then we've seen that.
That lean become.
The more forward leaning if you will.
The kind of accelerated and so we see our customers beginning to open up I'd say we're in.
We're reporting here in Q4 is the beginnings of that.
On a quarter to date basis, we're up about 70%.
Short cycle through in comparison to the prior year.
So that's kind of may through the first 3 weeks of May.
And our project business is up about 30% year over year in that same cycle. So when I commented that through the first 3 weeks in May we see orders up year over year, approximately 50%, that's the split and what the short cycle demand increase we've indicated that our channel partners are leaner.
And a little bit further on.
On the inventory and being bullish about it but I'd say, we're in the early to mid innings in terms of restocking.
Just to add on Matt I would having been here for a while this is.
Substantially less than what we would typically see in the stocking always would take place and are the orders would come in in the March time frame with delivery either in March or in the first quarter of the next fiscal year. So while we did see stocking orders still significantly below what we would normally see.
And then.
I apologize if I missed it to a prior question given the moving pieces associated with raw material costs are rolling through how youre pricing schematic is going to play out this year, how should we be thinking about core incremental margins in the base business ex doors this year.
Yes, so with the pricing that we've implemented we wanted to be sure. We stay ahead of the inflationary pressures that we're going to see we of inflationary pressures in raw materials and freight and labor costs.
Not that that's unusual but in the past year, we really.
Did not provide increases to our associates, so theres going to be a bit of of catch up here starting in July but I think all in we will.
Expect that will cover inflation, and maybe have a little bit of upside to it like we always do.
But this is really meant to cover of the inflationary pressures that we are expecting so I think the net comment is we don't expect any erosion and we're anticipating that we'll be able to lean in a little bit more.
Got it thank you guys.
Thanks, Matt.
Thank you. Our next question is from the line of John <unk> with CJS Securities. Please proceed with your questions.
Hey, good morning, guys. Thank you for taking my questions.
Just the drawdown of the previous question a little bit further for the first quarter do you expect any gross margin deterioration just in that quarter.
Does the price increase and don't take place until June.
And then maybe end of the year up as those roll through or is it more of them.
We're still able to stay ahead based on the price increases that you already did.
Yes, we would expect that we'll still be able to stay ahead, John I mean, because if you recall, we implemented our normal round of price increases that took effect. Some in January some April 1 some of.
In the U S. The third week of March and so those are all in place.
And we should not expect any erosion of the margins as a result of inflation in the first quarter, but were once again, we're trying to get ahead of what we anticipate coming down the road.
Okay, Great and then since you've announced your next price increase are.
Are you seeing another spike in demand from from people, who are trying to stock up ahead of that rolling through.
Kind of counter seasonal flow you usually see.
No nothing material yet at this point as Greg indicated we announced last week, we've had a lot of positive discussions with our channel partners.
And customers, they're they understand they're expecting it and it's not.
Challenge as it relates to implementation at this stage and we haven't seen a lot of movement in terms of order rates in the short term that we've been talking about it.
Okay, Great and then Greg just great job on the cash flow once again.
Do you see that reversing out of it as you grow this year.
And maybe building inventory.
Some of your customers, maybe and then it seems like everybody. The supply chain is trying to if they can.
Yes, no thats exactly what we would expect to happen as we as we look at free cash flow going forward, we're going to have higher interest expense as a result of the refinancing that we've done we're going to have higher capex.
Working capital is going to be.
Significantly higher we did benefit in our accrued liabilities, our working capital as a percentage of sales was I think 9.3%, but that was that benefited from a derivative that was classified as current.
And so our more normal working capital as a percentage of sales is going to be in the 14% to 15% area. So we would expect free cash flow isn't going to be as rich as it was this past year and the bulk of it really.
Coming from an increase in working capital. So we expect revenue improve and then on top of that we also have transaction costs and debt refinancing fees that are going to get paid in the month of April or have been paid in the month of April may so.
For all of those reasons, we will benefit from <unk> free cash flow, but net net it's we're going to have less free cash flow in the coming year than than this past year.
Okay, great. Thanks, but last small question did you have of breakdown as to what the owner was expected to contribute in the first quarter it within your guidance.
We did not I mean, the revenue number that we've guided to includes both legacy Columbus Mckinnon and garner we broke out the door in our SG&A at $7 million, we talked about dorner being.
Roughly 3 to $3.3 million of additional amortization, because we said it's approximately double.
We had.
Historically for amortization expense.
Yes, so we didn't break it out explicitly in the <unk>.
P&L, we had a few guidance that we provided relative to the donor performance.
Okay fair enough. Thank you guys.
Thanks, John.
Our next question's from the line of Steve <unk> with Sidoti. Please proceed with your question.
Good morning, Steve.
More from the last question I know, even if youre not breaking out the order, we can sort of ballpark, it which would say that and I know you're coming off of the typically your strongest quarter seasonally but it seems like maybe there isn't.
The pre dorner, Columbus, Mckinnon, maybe you're not looking at much sequential growth.
Certainly at the low end of your guidance, so I'm just trying to figure out it.
The chip shortage in the automotive business is slowing sales to certain end markets like automotive or there any labor issues anything that's hampering growth in Q1 of it goes away.
Yes, I don't think Theres anything specific from a market perspective that we see as negative as it relates to the sequential activity in the markets. It's more simply sequential performance in the core business based on.
The cycle in the market. So we see a lot of demand that gets placed as we've talked about given our year end price increases et cetera being placed in the.
Last fiscal quarter of the year, that's not necessarily market development driven it's more just get out ahead of price increases behavior in the channel and then as we head into Q1.
We are anticipating.
Typical cyclical decline in the core business.
But.
Certainly with.
A tendency towards.
Acceleration as we head into the second quarter.
Yes, the only thing I'd add is 1 of the movers to our revenue line as our rail business, which can have some larger projects.
And we had a very strong.
The order in the fourth quarter from our rail business and really just due to the timing of projects in our Q1, Theres, probably about a $5 million Delta in revenue net revenue timing share.
The good point Greg.
And then.
In terms of leverage and certainly it's easy for us to model out how are you.
You get net leverage under 2 times within 2 years, given your strong cash flow, but you may have touched on this what are you thinking about and what are you allowed to do in terms of actual debt repayments and just in general how you're thinking about cash yes, so from a from a debt repayment perspective.
<unk>.
The term loan B requires.
And the annual principal payment of 1% per year, which would be $4.5 million and divide that by 4 so of $1.2.50 of quarter starting.
In the next quarter and then there are what's called an excess cash flow sweep, which is 50% of in essence your free cash flow that's too based on your annual free cash flow at the end of March and it depends on your leverage ratio I think once we're below 3 times that.
Steps down the 25% and then it steps down again, but thats, we filed our credit agreements. So that's publicly out there. So we can chat about that later.
And in terms of other cash requirements pension contributions would be 1 that.
We would anticipate that pension contributions will be similar this year.
Compared to when I say this year this new fiscal year versus what we did last year and probably the neighborhood of around $7 million.
Okay.
Oh and there are no prepayment penalties on that so what we have typically done in the past.
We will use any excess cash we have to pay down debt save the interest expense and delever quickly, even though it's a net leverage ratio, we will use excess cash to pay down debt.
So theres no prepayment penalties and the financial covenant for those not familiar with the term loan b only kick in if we draw down off of the revolver.
And if we don't draw the revolver the.
The covenant isn't tested and we typically don't need our revolver for infra.
And for a period of cash requirements.
Given our strong cash flow profile.
Yeah.
Steve are you there.
Rob.
Thank you.
At this time, we've reached the end of our question and answer session I will hand, the call over to David Wilson for closing remarks.
Great. Thank you, Rob and to everyone for joining us today I'd like to take a moment to thank all of my Columbus Mckinnon associates for the resilience and adaptability of this last fiscal year.
Truly appreciate your dedication of the company and to our customers. We're looking forward to working together to create the bright future that we believe lies ahead for Columbus Mckinnon appear.
I appreciate everyone's attention and hope everyone has a great day. Thank you for your time today and goodbye.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and we thank you for your participation.