Q4 2022 Columbus McKinnon Corp Earnings Call
Greetings and welcome to the Columbus Mckinnon Corporation fourth quarter fiscal year 2022 financial results Conference call.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host.
Sean southward of Investor Relations. Thank you. Please go ahead.
Thank you Donna and good morning, everyone. We certainly appreciate your time today and your interest in Columbus Mckinnon.
Here with me are David Wilson, our President and CEO and Greg <unk>, Our Chief Financial Officer, you should have a copy of the fourth quarter fiscal 2022 financial results, which we released this morning before market.
Not you can access the release as well as the slides that will accompany our conversation today.
At our website Www Dot Columbus Mckinnon Dot com.
After our formal presentation, we will open the line for Q&A. Please limit yourself to one question with a follow up and then return to the queue to allow for continuous flow and adequate time.
If youll turn to slide two in the deck I'll 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&A session. 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 is stated here today.
These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with 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 consider the presentation of this 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 slides.
With that please advance to slide three and I'll turn the call over to David to begin David.
Thank you, Sean and good morning, everyone, we outperformed expectations with record sales in the quarter and for fiscal 2022, even while we were challenged with the inefficiencies created by supply chain constraints and inflation.
Sales in the quarter were up 36% over last year's fourth quarter to a record level of $253 million organic growth was a very strong 17%.
We're steadily advancing our transformation to be the global leader in intelligent motion solutions for material handling and Columbus Mckinnon is uniquely positioned to help solve many of the critical challenges. The world is facing today, we are central to the investments being made in infrastructure global efforts to localize and rebalanced supply chains.
The need for automation in the midst of shortages in labor availability and the need for safe ergonomic material handling in a world of factory automation and direct to consumer delivery.
As we executed to meet customer needs and growing demand for our products gross margin was impacted in the quarter given rapid increases in freight and expediting cost associated with high inflation and the effect that the war in Ukraine, and the shutdowns in China are having on the global supply chain.
We also completed a large project, where we did not recover the full impact of recent material cost increases given the rate at which cost inputs escalated and the strategic nature of that customer relationship.
Our operating income was $24 million and our adjusted operating income established a new record level in the quarter at nearly $29 million.
EBITDA margin in the quarter was 15, 4%.
We are taking further accurate actions to address the risks associated with this unusual operating environment and remain committed to realizing our longer term financial targets.
Fiscal 2022 was a year of significant progress and represents a step change in Columbus Mckinnon business model and mix as we execute on our strategic transformation.
We began the year with the addition of a precision conveyance platform through the acquisition of Dorner.
This platform expanded our offerings provided increased access to attractive markets with strong secular tailwind.
And diversified our revenue stream with higher margin business.
We later added the market leading capabilities high growth and accretive margin profile of Garvey to this important strategic platform.
We also accelerated organic growth through initiatives levered initiatives, leveraging our core growth framework looking outward to our customers and markets to clarify opportunities, while innovating with automation and rethinking our commercial strategy.
We also benefited from further core market recovery and increasing demand across targeted secular growth markets, the food and beverage life Sciences and E. Commerce markets remained robust and the entertained containment market began to pick up nicely in the latter half of the year.
We ended fiscal 'twenty, two with record quarterly orders of nearly $270 million in.
And entered fiscal 'twenty, three with a backlog of over $309 million also a new record.
If youll, please turn to slide four I'd like to highlight the significant progress we've made over the past year as we re imagined our portfolio and improved our approach to the markets, we serve to unlock Columbus Mckinnon has potential.
Given this transformative work approximately 40% of our business is now tied to higher growth higher margin markets.
If you'll advance the slide five I'll now turn the call over to Greg to review, our financial performance in the quarter, Greg. Thank you, David and good morning, everyone.
On slide five net sales in the fourth quarter were $253 4 million up 36% from the prior year period and significantly ahead of the guidance, we provided last quarter.
While supply chain challenges continued we had significant backlog that allowed us to prioritize shipments that exceeded our guidance.
As David mentioned it has been a constant struggle to match up material availability with the timing of supplier shipments and customer requirements.
This challenge resulted in an estimated $15 million of delayed shipments in the fourth quarter.
Sequentially sales were up 17% as we benefited from strong order rates incremental pricing and a full quarter of the <unk> acquisition.
Overall, our position convinced platform added $45 million of revenue in the fourth quarter, which was up 11, 3% from third quarter levels.
Looking at our sales bridge sales volume was a major driver of growth with volume up $23 million or 12, 5%. We also saw pricing accelerate with year over year pricing improvement of four 5%, which was higher than last quarter's three 4%.
Our pricing actions resulted in $8 4 million of year over year price up from the $5 6 million of year over year price, we reported last quarter.
Foreign currency was a headwind and reduced sales by $5 million or two 7% of sales.
Let me provide a little color on sales by region.
For the fourth quarter, we saw continued strength in the U S with sales volumes up 15, 9%. We also improved pricing four 7% up 110 basis points from third quarter levels.
Outside of the U S sales volume was up approximately 9% as volume increased approximately 40% in Latin America, 15% in Canada and 12% in APAC.
Volume also increased 5% in Europe .
We saw improved pricing outside the U S. A four 3%, which was 120 basis point improvement over third quarter levels.
With the current economic backdrop of significant material inflation and higher freight costs, we took more aggressive pricing actions in the fiscal fourth quarter, which is also our timeframe for implementing annual price increases.
We will do what is necessary to protect and grow margins in this environment, while balancing customer requirements and maintaining our leadership position.
On slide six gross margin was 33, 7%, which included a $3 $2 million negative impact from the recent Garvey acquisition for amortization of backlog acquired and inventory step up expense. This completes the amortization of backlog acquired inventory step up.
Expense, which were both recognized over one inventory turn.
Normalizing for these items, our adjusted gross margin was 34, 8%.
This was up 20 basis points from the prior year.
Gross margin was lower than what we were expecting a sequential gross margins declined 190 basis points.
This was due to rapidly rising cost in the quarter, primarily freight costs, both inbound and outbound as well as additional raw material inflation associated with Eto projects.
In addition, we were also impacted by inefficiencies associated with juggling production schedules due to supply chain constraints.
Overall, our position conveyance acquisitions were 130 basis points accretive to our adjusted gross margin this quarter.
Let me point out a few highlights on our gross profit bridge fourth quarter gross profit increased $21 4 million compared with the prior year and was driven by several factors.
Our acquisitions provided $17 3 million of gross profit.
Sales volume and mix added $7 6 million and pricing net of material inflation added three offsetting these items were acquisition related amortization of backlog expense and inventory step up expense together, representing $3 $2 million and lower productivity net of other cost changes of $1 3 million, which.
Included the higher freight costs that I just discussed.
Foreign currency translation reduced gross profit by $1 8 million.
As shown on slide seven our SG&A costs were well controlled coming in at $54 8 million in the quarter or 21, 6% of sales.
With record sales in the quarter, we leveraged our SG&A costs as a percent of sales and demonstrated the power of scale.
Our SG&A costs were sequentially higher by two 4%, which included $1 1 million of business realignment expense and a full quarter of Garvey, our SG&A of $1 5 million, which was sequentially higher by $1 million.
Compared with the prior year, our SG&A costs were higher by $8 1 million. This was largely due to additional costs from acquisitions of $7 7 million and business realignment costs of $1 1 million, partially offset by dorner acquisition deal costs of $4 million incurred in the fourth quarter of fiscal year 'twenty one.
In addition, with the U S dollar strengthening foreign currency translation lowered our SG&A costs by $1 million.
For the fiscal first quarter, we expect our SG&A expense to range between 53% and $54 million.
Turning to slide eight.
Adjusted operating income was $28 6 million.
Adjusted operating margin was 11, 2% of sales up 110 basis points from the prior year.
This margin expansion included the impact from the accretive acquisitions completed this past fiscal year, which contributed 60 basis points. We also benefited from operating leverage on improved volume and strategic pricing.
As you can see on slide nine we recorded GAAP earnings per diluted share for the quarter of 41.
Adjusted earnings per diluted share of <unk> 79 was up substantially from 60 cents in the prior year period.
As a reminder, we are adding back amortization expense on a tax effected basis to our adjusted earnings per diluted share calculation.
With the recent and significant increase in interest rates since January interest expense is expected to be approximately $6 2 million in the first quarter weighted.
Weighted average diluted shares outstanding are anticipated to be about $29 million and we will continue to use 22% as our pro forma tax rate when calculating non-GAAP adjusted earnings per share.
On slide 10, our adjusted EBITDA margin for the full year was 15, 4%. This was improved over the prior year by 350 basis points. Our recent acquisitions were accretive to our adjusted EBITDA margin by 190 basis points.
Our return on invested capital also continues to improve and was seven 5%.
We are executing plans that will drive margin expansion and are still targeting 19% EBITDA margins and double digit ROIC.
But the timing of achieving these goals is becoming less clear in the current macroeconomic environment.
Nonetheless, the team is focused on executing our strategy and driving long term shareholder value.
Moving to slide 11, we generated approximately $22 million of free cash flow in the fourth quarter for the full year, we generated $35 8 million. This includes cash outflows of $14 million related to acquisition deal costs.
We also added approximately $40 million of inventory to meet rising demand and lessen supply chain impacts.
Our working capital as a percent of sales was 15, 5%, which was in line with what we were expecting.
Capital expenditures were $13 million for the year, we expect capital expenditures of $25 million to $30 million in fiscal 'twenty three as we invest in our factories to enable the next leg of our margin expansion initiatives.
Turning to slide 12, we refinance the capital structure last April and May as a result of the Dorner acquisition, which included an equity offering and a new $450 million term loan b.
We refinanced the Garvey acquisition utilizing the accordion feature of our term loan b and borrowed an additional $75 million. The current term loan B principal outstanding is $502 $6 million, which carries an interest rate of LIBOR plus 275, with a 50 basis point LIBOR floor.
The term loan B is 60% hedged with interest rate swaps that blend to a swap rate of approximately two point or 8%.
As of March 31 on a pro forma basis, which includes <unk> March LTM adjusted EBITDA, but excludes expected cost synergies, our net leverage ratio ratio improved to two seven times.
We expect to achieve our targeted leverage ratio of two times towards the end of fiscal 'twenty three barring any additional acquisitions finally, our liquidity, which includes our cash on hand and revolver availability remains strong it was approximately $198 million at the end of March please.
Please advance to slide 13, and I'll turn it back over to David.
Thanks, Greg as you can see on slide 13, we had exceptionally strong orders in Q4 with an average daily order rate that was up 13% compared with the trailing third quarter as I shared earlier, our Q4 orders were nearly $270 million, a new record and accelerated throughout the quarter as you may <unk>.
Call. We previously reported that order rates were up approximately 7% through the first three weeks of January So February and especially especially March were quite strong.
Even with record sales of $253 million in the quarter order growth outpaced sales in our backlog grew to a new record level of $309 million.
Long term backlog, which is expected to ship beyond the first quarter was about 44% of our total backlog and our short term backlog was $174 million.
If you would please turn to slide 14, you'll see that we expect sales in the first quarter to be in the range of 220 million to $230 million. This range includes a $4 million sequential FX headwind versus Q4.
And in eight to 9 million dollar year over year, FX headwind, while our backlog and market demand remain robust the cascading effects of the war in Ukraine, and the pandemic related shutdowns in China are expected to have further impacts on our supply chain and the availability of materials.
We're also implementing our new ERP platform at stall in Germany. This is the last major building block of our European system, Harmonization initiative, which will enable us to realize further cost and productivity synergies through integration and shared services.
This is however expected to have an impact on first quarter shipments as we complete training go live and execute through the transition.
Even with these headwinds our guidance range of $220 million to $230 million represents a mid single digit year over year organic growth rate at the midpoint.
We continue to see significant demand in all markets and are encouraged by the traction we're gaining with our organic growth initiatives. In fact through mid may sequential order rates in our first quarter have been effectively in line with the record levels. We saw in Q4.
During this period of supply disruption high inflation and macroeconomic uncertainty we remain laser focused on execution.
We're taking further action to deliver operational cost and price improvements, while executing to address increasing customer demand.
We're also very encouraged by our longer term prospects and look forward to sharing details associated with our strategy and updated targets during our Investor day on June 23rd.
We are truly creating a better more scalable and more profitable business model for Columbus Mckinnon as we evolve into the global leader in intelligent motion solutions for material handling.
With that Donna we can open the call for questions.
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The first question is coming from Matt Summerville of D. A Davidson. Please go ahead.
Thanks, a couple questions.
Obviously, I would assume that youre going to have lower absorption in Europe in Q1 volume, obviously going to be.
Perhaps down all things considered on a sequential basis given your revenue guidance.
How should we be thinking about kind of the go forward margin cadence.
I guess earnings seasonality, if you will as we move throughout the year and in particular.
How should we be thinking about incremental operating margins as we move beyond Q1.
Good morning, Matt.
Fair questions and important ones for us to address on the call we.
Are you expecting that will pick up some of the margin erosion that we had in Q1 and make advancements from there is sorry, Q4 and make advancements from there as we head through Q1 based on pricing and other actions that we've taken within the business, but we do acknowledge that there are the challenges you mentioned.
Relating to absorption, particularly associated with lost time and training hours, we're putting into our stall.
ERP implementation and so we anticipate a step forward from what we saw in Q4, but acknowledged that they probably wont be at the rates that we would have normally been trending too.
But for that implementation and.
And Matt. This is Greg in addition to that we've got backlog record backlog of $309 million that and to a large extent is priced at old pricing has worked.
We choose.
To reprice the backlog given we've taken purchase orders already for the.
For the business.
So that's another factor in this.
We're really encouraged by the longer term prospects for the business and the targets. However, and we remain on a similar trajectory about for a bit of a seasonal impact or project related impact in this first Q1.
And then as a follow up.
How should we be thinking about incremental realized price in fiscal 'twenty three relative to fiscal 'twenty, two and to the extent you're willing to talk about it how much of a list price increase did you guys put through during the March timeframe for your normal annual sort of increase thank you.
Mhm, Yeah, I think what we're anticipating is that we'll probably see given what Greg just highlighted relative to the backlog we're carrying at a record level. The pricing actions. We recently took and the phasing of that cost price mix as we worked through that backlog and get new backlog at the incremental price.
Level is that we'll probably see a second half that has a better price cost ratio.
And.
So I think thats, probably the best way to be thinking about this.
This year in price realization for the company, but we remain.
As we were last year very focused on making sure that we're taking actions to offset those cost inputs and as you saw throughout last year were successful at outpacing cost inputs through Q2, and Q3 and then in Q4, we outpaced material cost increases but were impacted by freight charges that came.
And very quickly and rapid increases in some particular material costs that came through and so that's a timing element that will we will.
We will get out from under.
Yes, and maybe to also add on to David's comments in general Matt We've raised prices anywhere between five and 10% probably on average towards the higher end of that range different by region.
And we're clearly.
Whether it's remain steadfast in looking at our inflationary pressures and we will look at other ways to realize our margins.
The additional price increases <unk> surcharges.
Understood. Thank you guys.
Thanks Pat.
Thank you. The next question is coming from Chris Howe of Barrington Research. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
I wanted to follow up on the last call that we had you talked about the Garvey and dorner.
Synergies revenue synergies you picked up that order in the prior quarter can you talk about.
How they performed together in the quarter and the different dynamics Youre seeing.
Whether its pulling.
Pulling some of daughters customers into Garvey or vice versa, Whats your anticipation for there.
Performance.
This fiscal year.
Our businesses are doing very well, we're really pleased with the acquisitions continue to remain very bullish about our strategic intent and.
The direction that we're taking the business and for the fourth quarter sales and the acquisitions were about $45 million.
And we continue to emphasize the synergistic opportunities across the business. We completed training brought the teams together really focused on making sure that the ability to cross sell across the businesses was not only as it was when we got through the acquisition and realized a couple of quick win.
But it was enhanced.
Both businesses continue to make good progress as it relates to representing the broader portfolio. So I think that we're just starting to chip away at the.
The tip of the iceberg there, yes, so a little more color as well so we did recognize revenue synergies.
$850000, so far including the $700000 that we talked about last quarter, and we've got almost $2 million.
Current active quotes out there for.
Jordan Garvey products, where the process. We've cross trained the sales forces. We expect that this is just going to continue to ramp up exponentially.
Performance wise, both businesses in the quarter delivered what we were anticipating David talked about the revenue low 40% gross margins, 25% EBITDA margins. So.
On track for what we were expecting and the other point would be is that the one project that we recognized kind of below margin or below.
Average margins was actually in that segment. So we've taken actions to address that going forward.
Okay, and then a follow up question.
The 19% adjusted EBITDA target double digit ROIC.
It's still <unk>.
<unk>, but the timing is a little bit less clear.
Can you put less clear into further context is that.
We have what happened in Q4, we still have a challenged environment here going into Q1.
How does the duration of this challenged environment impact.
Some of your comments about it being less clear.
Just a quarter by quarter basis, we will get a better picture on how the second half looks or any more color there would be helpful.
Sure.
That's fair, Chris and I would say, it's probably like you said, we're going to get better visibility as we progress quarter by quarter. We have a management plan that achieves that goal by the end of this year.
We are executing in an environment thats, not enabling us to execute to that plan given macro factors supply chain disruptions higher inflation and the impacts are.
The port shutdowns in China, and so forth and so we're seeing.
Those effects playing out, but we're confident and really committed to making sure that we execute the plan that we have self help where we need to control we can control.
This is a business that if we don't achieve that outcome in the timeframe that we outlined previously we will achieve it as things stabilize and the business gets back to a more normal footing. So.
Nothing's really changed but for the economic environment relative to our pursuit of that.
That goal.
And we will talk more about our.
Goals beyond reaching that point, when we get together during our Investor day in June .
Okay, and I apologize if you mentioned it already but the euro ERP implementation in Europe , that's affecting Q1 with a more limited production schedule to facilitate the implementation that is expected to be completed in Q1. It is in fact, we're going live now we're working through all of the transition elements.
The system is performing as expected.
The impact on our operational areas is as we would expect we've done 12 implementations of this type across the enterprise.
And this is the last as I said in my prepared remarks remarks, the last major building block that really enables us to get more synergies across Europe .
And drive better performance as we go forward and so we expect this to be a Q1 Q1 impact.
And for us to be able to drive better performance as we go forward.
Yes, and Chris This is clearly our largest factory in the system. Our most complex factory in the system. We went live may 1st the systems working with <unk>.
Robley at about 80% efficiencies this week from a shipping perspective, but it's really just the learning curve. So it's and it's not like we haven't done. This before we've had 12 of them, but none of them have been of this size.
So it's.
It's just part of the process I guess the pain of what you have to do to get the system implemented, but then you reap the benefits down the road all very positive all very focused on what we're trying to achieve as an enterprise.
Okay. Thank you.
Thanks, Chris.
Thank you. The next question is coming from Greg Palm of Craig Hallum. Please go ahead.
Yes. Good morning, Thanks for taking the questions I just wanted to go back to the revenue guidance.
Even if you.
You sort of add back or sort of normalize the cadence given.
FX given ERP.
<unk> suggests that revenue is going to be down quite a bit sequentially, which I don't think is normal seasonality. So just help us understand exactly.
Correct and that supply chain gets worse, because it sounds like overall demand is still pretty strong.
Yes, that's right demand is very strong dragon and as you can see you can see that in the backlog you can see that in the bookings rates, obviously very encouraging.
Dynamics, but as we execute on our backlog and look at this quarter, we're facing sequential FX headwinds of about $4 million and then we're facing the impact of.
That implementation that we mentioned in Europe .
And so the combination of those elements and adjusted organically. When you think about acquisition volume period over period, and so forth. We are in a position where this represents a 6% increase.
Or mid single digit increase over prior.
Prior year first quarter and typically we do have a seasonality impact as we head into our Q1 from Q4, we didn't see that last year, because we were recovering from the pandemic and so if you look back a year, you'll see that that was not the case, but if you look back beyond that youll see that there is a historic.
Pattern of Q1, Thats lower than Q4, that's more of a seasonal effect for the business, yes, it's usually.
2019, it was about a four $4 million to $5 million impact, but also with the SAP implementation, we pushed really hard to get production out of cultural slow. So we wouldn't be disrupting our customers so that the fourth quarter.
Had that impact, but having said that I talked about the fact that we had about $15 million of revenue that was hung up with supply chain, but I think the team.
It is very nimble, we have such a large backlog and the fact that we made the right decision in the order of $40 million more inventory allowed us to kind of pivot and work on other.
Other orders and ship those orders.
So the Q4 number did have that I would say.
Positive impact of <unk>.
We're working hard to push production, our production and revenue out of the stall.
Facility.
Got it okay and I mean, just since we're on that subject how should we think about normal seasonality.
This year just given the last couple of years have been anything but that.
Yes. So if you go back in history and with what we believe today.
The first half of the year is versus the second half of the year is more or less a $50 $50 $51 49 kind of a split so historically the fourth quarter to quarter. We just finished as the.
The seasonally strongest quarter as people buy in advance of price increases they buy in advance of the summer entertainment season, construction et cetera.
Our company's 12 31 companies now have their new Capex budgets.
That are approved and so theyre moving forward, our weakest quarter as always the December quarter, Theres less shipping days and just a.
On the industrial side, the business does see a reductions in inventory as our channel partners manage their inventory for the further yearend reporting and so first half second half look is going to be within a point of $50 51 way or another Q2 up over Q1 in Q3 down and then.
Q4, our strongest.
Perfect. Okay, great. Thanks, so much for the help.
Thanks, Greg.
Thank you. The next question is coming from Jon <unk> of CJS Securities. Please go ahead.
Good morning. Thank you for taking my questions I, just wanted to get back to the 19% EBIT target question I assume you will talk about this more on your Investor day, but I was wondering if you're expecting to get to the same profit dollars if not the percentage at this point within the same timeframe.
Yes, so from a dollar perspective, we talked about the way we've got to get there is essentially roughly 39% gross margins or SG&A as a percent of sales of around 21% and then we picked up a point and a half two points by adding back depreciation and.
And so from a scale perspective, and we saw the benefit of scale. This quarter on our SG&A costs were at $253 million or $1 billion kind of a run rate. Our SG&A is at that level. So we've got to.
Get to that $1 billion plus to get the IRS, G&A, where we need to get it to.
And then clearly with supply chain, we've got to get out in front of all of the inflationary pressures that we're seeing and we're working very hard to do so.
So they're happy it yes, so I mean, clearly this quarter or this fiscal year I think we did $908 million of revenue and we need $100 million plus more.
Got it thank you.
Could you also talk about the order trends in Q1. So far is this end demand been stronger a worsening that's accounting for seasonality.
<unk> and the input prices supply chain pressure has actually gotten worse and moderate that you've seen them so far.
Yes, yes.
So the order rates have been more or less in line with the record levels. We saw in Q4 and as I mentioned Q4 progressed throughout <unk>.
February and March.
Faster rates of input on our quarter to date basis, we are running with short cycle orders up about seven 5% projected orders down slightly north of 20% and then our acquisition orders up near 30%.
And so on a net basis were more or less in line with order rates relating to.
The fourth quarter, so feel really good about demand, we're seeing strong demand across really all of our end markets.
That has continued into the first quarter and we're obviously watching that closely but very focused on execution as a team in this period.
Laser focused as I said in my prepared remarks on our execution and meeting the commitments that we have improving our customer experience and driving the results that we're committed to getting to and then John on the inflation question. So in the quarter. If you look at our sales bridge and our gross margin bridge you can see that price was.
$8, four but price net of material costs was $3 million. So $5 4 million was raw material inflation, you annualize that and you're I think you are at $21 6 million.
That's going to get worse before it gets better.
And we could be seen inflation in the $24 million to $26 million range on materials and on top of that we've clearly seen gas prices go up which for trucking costs. Our costs are up marine costs are up there is issues in ports and with congestion there's issues in China.
With Covid shutdowns that are affecting things in so logistics costs are actually double per container or what they were.
The start of our previous fiscal year. So that's another factor in the equation. So.
I think that answers your question.
Okay, Great. It does and then just to clarify I think you said before that you still expected with all of that to see a sequential pick up in gross margin or did I hear that correctly.
Yes, we think we're going to improve on where we are right now I mean, clearly this was not where we wanted gross margins to be and we will make improvement as we've got more pricing that we've announced in the quarter and that roughly high single digit range that I mentioned on the call.
And it's just a matter of what else has got what other shocks are we going to see to the system right. Nobody in January when we had this last call no one.
Would have predicted where we are today.
Yes.
Understood. Thank you guys.
Yes.
Thanks, John .
Thank you. The next question is coming from Steve.
Steve <unk> of Sidoti. Please go ahead.
Good morning, David morning, Greg.
Good morning, you mentioned a couple of times you mentioned a couple of times that one larger project and the impact it had given the higher material costs.
And obviously your revenue came in much higher than guidance can you offer any kind of way to quantify the impact either on revenue or margins on that one project.
Yes.
Yes, it was.
Just under a $1 million impact from a margin perspective.
So 30 basis points.
Okay.
And how are you thinking.
We've talked about this on the call before in the idea of a dorner and Garvey.
Perhaps more project oriented.
And how you would manage the costs related to those projects clearly things are a lot more challenging right now than in normal times, but you said you were addressing it how are you thinking about that how are you addressing it right.
Right.
Yes Fair question, Steve So what we've done is we've reduced the shelf life on our quotations and so theyre shorter cycle quotations and theyre tied to the latest pricing and then where we can negotiate we're getting price escalators are in this tied to indices. So we're able to drive change orders more clearly in the conversations with customers we have.
Also made changes in our project execution business team and so we're advancing our Columbus Mckinnon business system, focusing on our office of program Management project management and.
We've made some some resource adjustments there as well. So this is I think a unique case.
And I think you're right as it relates to the dynamic nature of that business and particularly in this kind of an environment, but we feel like we've got a postmortem assessment. This particular project very well understood specifically outline where some of the issues were that resulted in that outcome and we've taken corrective.
<unk> not only in our systems and the way that we approach the processes that manage the projects, but also in the team and in the communications, we've had with our customers.
Yes.
The fortunate piece of it is there's really two main inputs, it's either going to be aluminum or stainless steel.
That has created the issue.
That's helpful. Thank you.
Wanted to ask a question on capital structure. How you are thinking right now 200 million in liquidity, we know interest rates are rising.
Sounded like you are using some interest rates swaps can you talk about what youre doing with that and how youre thinking about prepayments, giving not the expected increasing interest rate environment. Yes. So I mean, I think the one thing we're going to do is manage our capital structure conservatively and appropriately and.
And that's why we entered into another interest rate swap this quarter. It was.
February 14th and so we've locked up 60% of our interest rate risk and a swap rate of 2.8 and as we think about liquidity. We think we've got ample liquidity, we still have a programmatic M&A strategy, but we understand where things are right now with all the macro uncertainty and we're going to be cautious with.
How we approach it and in terms of debt repayment. Our 10-K is going to be filed this evening.
And there, we're estimating roughly $40 million.
$41 million I think of principal payments.
Annually, so roughly 10, a quarter tons of 11 a quarter.
Okay.
Thank you for that and then just the last one in you've addressed it but I do want to ask it again.
In terms of everyone's waiting to see some signs of a slowdown in demand and it sounds like you're very clear on this when we saw it in your bookings and your backlog are you seeing any kind of signs that youre seeing slowdown in any of your end markets.
Yes, the only comment that I'd make that might add a little more color to the conversation so far as Steve is a reference to project quotation conversion.
So project quotation activity is very high.
It is up there is a lot of active dialogue and it's encouraging but the cycle at which those orders are converting on the project side is a little slower than it had been a quarter or two quarters.
Okay.
Is there any is it is it directed at any search sort of end markets or is that a broad kind of an answer yes, it's a broad answer but.
But.
Yes. It is kind of the activity, we're seeing we are seeing some activities.
Phasing.
Just as people are talking about a project that might be a $5 million project that delivers over six months, they might be saying, Hey look I want to release, the first $3 million of it and I wanted to run over nine months.
Okay.
Okay.
Great. Thanks.
Thanks, David Thanks, Greg appreciate it a wholly.
Okay. Thanks, Steve.
Thank you. The next question is coming from Pat Feldman of J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking my question.
Just wrapping covered already maybe if you could help.
Freight dynamics, a little bit more.
I guess I'm just wondering.
Just a little bit more detail what impacted the sequential gross margin.
Related to freight just like what exactly escalated so much versus your January expectations.
Thank you called this timing element in response to another question, but I'm just not clear what aspect of this is timing or why you refer to it that way, yes. So what we're really talking about is freight cost sequentially went up close to $3 million, which is well over.
Whats at 110 basis points.
Add up gross margin and it was really across the board I mean, clearly we've all seen what has happened with gas prices at the pump.
Five to $6, a gallon while that translates into higher.
Truckload cost for moving product domestically, we have seen significant increases in marine cost we've seen.
If there are certain parts that we need desperately and we have to air Freedom are Fred I'd also are up I mean, you see that if you travel commercially how expensive airline tickets have now gotten so this is all within the quarter.
This increase is at a year over year change. This is basically what happened in the December time frame versus what we experienced.
In March and some of it probably due to the Ukraine.
Situation, that's going on over in Europe , right now port disruptions in China, I think the the timing element to this pad is the.
Realization that.
This was occurring as fast as it was in our ability to get out from under it with our own actions.
And make sure that we're making adjustments in our pricing structure to accommodate those changes and so that's where the timing element comes into play.
And you mentioned $24 million to $26 million.
Materials I guess.
Inflation expectation.
Yes.
Yes, but I don't think that includes freight but in any event, but what are you expecting what are you expecting from a pricing perspective for the year based on actions you've taken.
Yes, so what we've taken so far is.
High single digits is where we should average now having said that once again, we've got record backlog that doesn't have current pricing right because our our pricing all went into effect either later in the second week in March or April one.
And so to the extent, we're working down backlog it we're not going to see the benefit of the current pricing. So there's this lag and so we're working with to look for other ways to help recover this.
Understood.
And then the slides mentioned mentioned something about precision conveying backlog down on project timing what end market was that in reference to in particular, just curious if you could give some color on that.
Yes, there were some.
Project business is really focused on the food and beverage life Science and E Commerce markets and as we look at remember I made some comments earlier about quotation activity conversion to project activity a lot of very engaged customers an exciting project opportunities that are just taking longer to get to the closure time frame. So I think that.
Just the nature of the Lumpiness of the business.
Understood Okay. Thanks.
Thanks Pat.
Thank you. The next question is coming from Michael Mcginn of Wells Fargo. Please go ahead.
Hey, Thanks for the time, just going back to the question regarding that large project and the charge that was associated with that how many customers do you have that are like that and then maybe also how many projects do you currently have in place.
That are similar to that.
Yes, so that was a.
Top 1% from a size perspective, it was a big big number and that's why it had such a big gross margin impact right. I mean, if you think about the split of business roughly 50 50 in that business projects versus short cycle build to order type project activity, we probably have.
$20 million in any given quarter that is active relative to project related business in this business would've related.
In approximated, 15% to 20% of that amount and this would have been a large project and so we don't have very many that are of that scope in the backlog.
And.
Like I said from a process standpoint from a timing perspective.
Complexity associated with some of their rapidly rising input costs.
And the strategic nature of the opportunity and follow on opportunities in the aftermarket opportunities thereafter.
We werent able to recover all we recovered some we weren't able to recover all of the escalation in price.
Great and then in terms of precision conveyance.
I guess simple question what end market are you more bullish on for this year.
e-commerce or food processing.
While we're encouraged by by all of the markets that we're pursuing but I would say from a dynamics perspective, given the rate at which E. Commerce grew over the last couple of years through the pandemic I think the growth there is going to be attractive, but it's not going to be as explosive as it was over the last couple of years.
And so we're seeing great traction in food and beverage and life Sciences. In addition to the already great.
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Experiences, we're having an e-commerce and we're also expanding our customer base and ecommerce, which obviously gives us further threads to pursue.
Okay.
Okay, maybe if I could just sneak one more in.
<unk> consolidated their services and their products business into one I believe.
Are you expecting anything competitively to come out of that dynamic or just business as usual.
I think that they are obviously changing shifting gears in the wake of the walk away from the <unk> acquisition or merger.
I think there.
They have gone through a lot of adjustments I don't think they've they've demonstrated and historically that has lacked disciplined in terms of their approach to the markets and so we're not.
Particularly concerned about that strategic shift.
Yes, the one thing I would say is now they will.
Be more directly competing with our channel.
Had a.
A private.
They're R&M business was really sold into the channel, but now that they have combined the service with the equipment that will be.
Much more I think visible in competing with our channel, which should help us.
Great I appreciate the time.
Thanks, Mike.
Thank you. The next question is coming from Walt Liptak of Seaport. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning.
Yes.
Good call so far a lot of detail. So I'll ask one about working capital, yes, I wonder how youre thinking about some of the working capital components.
In the first quarter for example, do you need to build some.
Inventory.
And then how do you expect to end the year on some of these working capital accounts.
So as I think about working capital.
We ended the year at 15, 5%.
We are probably that 15% range is where we would expect working capital to be at the end of the year there could be some temporary blips along the way I mean, clearly we're going to have lower sales than we had in the first quarter versus the fourth quarter, which will impact our metrics inventory turns dsos and <unk>.
But I think the right way to think about it is <unk>.
15%.
I think we demonstrated last year and ability to flex in the.
Experience.
Lead to make moves through the pandemic, we went down to below 10%.
And as we were experiencing growth, we ramp up to the mid ramped back up into the mid teens with the addition of the $40 million of revenue. We expect this year to be relatively stable at that level, but to greg's point, there could be some period to period blips, but thats, where we expect to end the year.
Okay, Alright, great. Thank you.
Once again, ladies and gentlemen that is star one if you would like to register a question at this time.
The next question is a follow up coming from Jon <unk> of CJS Securities. Please go ahead.
Yes.
Hi, sorry, I was just wondering if you could just give us a little more color on the.
When you're implementing this ERP system in Europe , you are losing a little bit of revenue are you planning to recover that in future quarters or does that push that the whole stack a bit.
No we do expect to recover it in the in the year. This is just.
And impact in the period and as we get more efficient coming out of this quarter, we expect to consume that backlog and ship those dollars and revenue yeah. So another way to think about it John is orders are not being canceled we did accelerate shipments into the March time frame, knowing that we had the ERP implementation upon us.
So that benefited and maybe you could say outsized the Q4 revenue a little bit but orders are not being canceled.
Understood. Thank you.
Thanks, John .
Thank you, we're showing no additional questions in queue at this time I would like to turn the floor back over to Mr. Wilson for closing comments.
Great. Thank you Donna fiscal 'twenty, two was a year of significant progress and represents a step change for Columbus Mckinnon as we advance our strategic transformation, we completed two transformative acquisitions and executed to deliver terrific results for the year, including 40% growth in revenue 75% growth in operating.
<unk> income and 81% growth in adjusted EBITDA as I stated earlier in this period of uncertainty we remain laser focused on execution and improving our customers' experience. We're taking further actions to improve the business and our performance while executing to address increasing customer demand.
We're truly creating a better more scalable and more profitable business model and mix for Columbus Mckinnon as we evolve into the global leader in intelligent motion solutions for material handling.
Finally, I want to emphasize how proud I am of our global team of talented Columbus Mckinnon associates. They have remained resilient agile and focused on results and improvement through what has been a very challenging and dynamic period. As a result of Columbus Mckinnon is not only persevered, where emerging as a stronger and.
Better company. We appreciate your time today and your increasing interest in Columbus Mckinnon, Thank you and make it a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.
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