Q2 2023 Columbus McKinnon Corp Earnings Call
[music].
Greetings and welcome to the Columbus Mckinnon Corporation second quarter fiscal year 2023 financial results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms. Deborah Pawlowski. Please proceed.
Thank you Tania and good morning, everyone. We certainly appreciate your time today and your interest in Columbus Mckinnon.
Joining me on the call are David Wilson, our President and CEO and Greg rest with our Chief Financial Officer.
You should have a copy of the second quarter of fiscal 'twenty three financial results, which we released this morning, and if not you can access the release as well as the slides that will accompany our conversation today on our website at Columbus Mckinnon Dotcom.
After our formal presentation, we will open the line Q&A.
So if you'll 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 and 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 by the company with the Securities and Exchange Commission.
You can find those documents 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. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP we.
We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides.
So with that please advance to slide three and I'll turn the call over to David to begin David. Thank you Deb and good morning, everyone. Our second quarter results demonstrate the success of our efforts to drive growth strengthen earnings power and generate cash on a constant currency basis revenue of $232 million was up eight 5%.
Year over year, driven by strong pricing power and the contribution of Garvey, our conveying solutions bolt on acquisition.
Notably we had record operating income in the first quarter or in the junior in the second quarter, driven by nearly 40% operating leverage reflecting the early benefits of our regional realignment.
As a result, even as we faced headwinds we reported record adjusted EBITDA margin of 16, 8% in the quarter, which is another solid proof points of progress toward our longer term financial objectives.
We also effectively converted earnings into cash in the quarter as cash from operations was $17 3 million and we use that to further reduce debt.
As I mentioned last quarter, our new structure is creating an environment of improved collaboration across product teams within the Americas EMEA and APAC. We are seeing some early signs of success on this front. One example is a project where we were awarded a crane system that were sold in conjunction with a major rail project.
Our integrated sales team was able to readily recognize this opportunity and capture the order, whereas under our prior structure, we would not have had this visibility.
I also believe we are now able to move more quickly with improvements in our customer engagement practices. We recently completed our first enterprise wide customer net promoter score or NPS survey and are advancing initiatives to improve the quality consistency and rigor of our customer performance and communications.
I'll speak more to orders and backlog later in this presentation, but we'll know here that we are encouraged with the strength of quotation levels, even as orders declined in the period.
Order activity ahead of our June price increase and extended customer project execution cycles, where the drivers of the sequential decline.
We would expect to see continued opportunities within our target markets driven by Megatrends.
Automation, and Digitization energy and environmental infrastructure investments and the regionalization of manufacturing.
Slide four provides a dashboard that highlights the progress we're making in relation to key strategic objectives as we strive to achieve our financial targets for fiscal 2027.
As you know we are unlocking the potential of Columbus Mckinnon through the execution of <unk> MBS and our core growth framework see MBS underpins, our strategic framework by providing the playbook for standard work and scalable processes with an emphasis on being market led customer centric and operationally excellent.
We then see MBS, our 10 core competency areas, where we are working to ourselves and that will enable scalable sustainable performance as we deliver on our plan b.
The advances we are making towards achieving one 5 billion in revenue and 21% EBITDA margin by fiscal 'twenty seven are proof points and there are several initiatives that underpin these results.
I think it's important for us to share a summary of the progress we're making in relation to a selection of these objectives.
Our recent regional reorganization is enabling us to better leverage our intelligent motion solutions across customers industries, and geographies and is improving our global market position.
We drove seven 5% year to date growth on a constant currency basis, as we focused on areas, where we can capture growth.
Two cycles.
You will recall from our Investor day that we are targeting a 5% CAGR for our organic business and with acquisitions, a 10% CAGR over the strategic planning period.
We are also executing to improve the vitality and customer relevance of our product portfolio.
A specific kpis, we monitor and measure progress in this area as our NPD and minus three revenue.
This is a percentage of revenue that is driven by new products introduced within the last three years net of any cannibalization that can occur from new product introductions.
We are practically doubled this metric as a percentage of sales since fiscal 2019, and it has grown more than five times since fiscal 17.
Not always perfect. However, the complexity of our previous organizational structure and product portfolio combined with persisting supply chain delays has resulted in delivering communications challenges that have negatively impacted our customers' experience.
As I stated earlier.
We recently completed our first enterprise wide customer net promoter score or NPS survey and we are advancing initiatives that will improve our company's responsiveness delivery and communications with our customers.
Shifting to bottom line measures, we're expanding margins and we are driving cash generation.
Gross margin improved to 36, 5% on a trailing 12 month basis, a new 12 month record for the company.
Our business realignment actions are both reducing the complexity of our enterprise while also improving our cost structure. This program is simplifying our go to market approach and takes out approximately $6 8 million of cost on an annualized basis with a little under a year payback.
As I already mentioned, we reported record operating income and adjusted EBITDA margin in the quarter.
We are delivering on our transformation strategy and are pleased with the progress we are making.
Looking to slide five you can see the specific progress, we're making on gross margin.
To achieve our fiscal 'twenty seven goals, we will need to approach the 40% gross margin level.
For the first half of fiscal 'twenty three gross margin was 37, 4% and we are narrowing that gap to 40%.
If you review, our Investor day deck from June Youll find the bridges that provide the details on how we expect to achieve our goals.
Execution requires a combination of volume strategic pricing simplification of our product lines reduction in overhead costs and well timed acquisitions that are accretive to margin.
Slide six depicts the transformation that Columbus Mckinnon is undergoing.
We are striving to be the global leader in intelligent motion solutions for material handling leveraging our technologies and areas that are benefiting from the persistent trends of automation productivity and supply chain regionalization.
Within this opportunity set while all of our businesses will continue to grow.
We believe our specialty can bang linear motion in automation solutions will grow at the fastest rates.
This is expected to result in a mix shift over time to our higher margin businesses that are serving less cyclical markets, such as life Sciences, and food and beverage.
Our disciplined and thoughtful acquisition strategy is also focused on the faster growing product categories.
In fact, the benefit of adding our specialty conveying platform was clearly demonstrated this quarter, our strategic move to acquire dorner enabled us to acquire Garvey in December of last year, and this quarter garden contributed $9 million in revenue at 50% gross margin rates.
This was driven by a project for the EV market that was specific to the management and flow battery cells and the customers' production process.
While we have generally been benefiting from the expansion of production lines for electric vehicles. This precision conveyance application is more specific to the underlying growth in the electric vehicle battery production.
The specialty conveying platform has been a game changer for Columbus, Mckinnon and is central to our transformation.
With that let me turn it over to Greg to review the financials in greater detail.
Thank you David good morning, everyone.
On slide seven net sales in the second quarter were $231 7 million up.
Eight 5% from the prior year period on a constant currency basis and within the guidance, we provided last quarter.
Delayed shipments, resulting from supply chain challenges continued at a similar pace to last quarter and impacted sales by approximately $20 million $26 million in the second quarter.
Looking at our sales bridge pricing was a major driver of our growth up $11 million or four 9%.
Amount was up 40 basis points from our Q1 level.
Our specialty conveying platform continues to deliver strong performance with the <unk> acquisition, providing $9 million of growth.
Overall volume declined slightly by <unk>, 4% or 900000, which was largely the result of material shortages that I previously mentioned.
Foreign currency translation reduced sales by $11 million or four 9% of sales.
Let me provide a little color on sales by region for the second quarter to six 9% growth. We saw in the U S was driven by a five 8% improvement in pricing.
As you are aware, we increased prices in both March and June this year.
Wired revenue added four 5% growth this more than offset a three 4% decline in sales volume.
Outside of the U S sales grew seven 5%, excluding FX and the acquisition.
Pricing improved by three 7% and sales volume increased by three 8%. We were encouraged with the volume increases we saw which were approximately 1% each in Europe , and Canada, and 36% to Latin America. The growth in Latin America reflects the region's lagging post pandemic recovery.
As well as specific growth initiatives that are showing traction.
APAC volume was flat due to the due to the various lockdowns that have occurred in that region of the world.
On slide eight gross margin of 37, 2% was up 90 basis points from the prior year I.
On an adjusted basis gross margin was higher by 50 basis points driven by the Garvey acquisition, which was 50 basis points accretive to our adjusted gross margin this quarter.
Let me point out a few highlights on our gross profit bridge second quarter gross profit increased $5 2 million compared with the prior year and was driven by several factors. The Garvey acquisition provided $4 5 million of gross profit of $9 million of revenue equating to a 50% gross margin.
Pricing net of material inflation added $4 4 million of gross profit demonstrating our pricing power.
Offsetting these items was foreign currency translation, which reduced gross profit by $4 1 million, reflecting the strong U S dollar compared to the euro.
Moving to slide nine our SG&A or our operating expenses were $52 5 million in the quarter or 22, 7% of sales.
This included $1 2 million of business realignment costs as we advanced our new commercial structure.
Sequentially operating expenses were lower than Q1 by 700000 due to the benefits of our business realignment and FX translation.
Compared to the prior year, our SG&A costs were higher by $1 $3 million with the acquisition, adding $1 2 million.
We also incurred 900000 of incremental business realignment costs related to our commercial reorganization we.
We invested an incremental $1 6 million in R&D cost and our annual Merit increases became effective July one.
Offsetting these increases were about $1 million in savings from the commercial realignment and foreign currency translation, which reduced our cost by $2 $3 million for the fiscal third quarter, we expect our SG&A expense to approximate $54 million.
Turning to slide 10, we achieved record operating income in the quarter of $27 4 million and adjusted operating income of $28 6 million op.
Operating income benefited from the acquisition and our pricing power, which more than offset the negative impact of foreign currency translation that reduced operating income by $1 6 million <unk>.
Adjusted operating margin was 12, 4% of sales a 100 basis point increase over the prior year and up 130 basis points from the trailing quarter.
We realized strong operating leverage in the quarter of 38, 6%.
As you can see on slide 11, we recorded GAAP earnings per diluted share for the quarter of 49.
Our tax rate on a GAAP basis was 26% in the quarter.
For the full year tax rate is expected to be between 29% and 31%, which reflects a six percentage point impact from the two discrete items that we discussed last quarter.
Adjusted earnings per diluted share of <unk> 73.
It was down <unk> <unk> from the prior year impacting EPS was higher interest expense as well as FX losses, and mark to market investment losses, which together impacted EPS by <unk> 10 per share year over year.
Even though we are 60% hedged the interest rate exposure interest expense is expected to increase to $7 2 million in the third quarter.
FX and investment losses are also expected to continue in the third quarter as well we estimate these combined headwinds will impact pretax earnings by $1 million.
Weighted average diluted shares outstanding will approximate $29 million and our pro forma tax rate is 22% for calculating non-GAAP adjusted earnings per share.
On slide 12, our adjusted EBITDA margin for the quarter was a record 16, 8% and our trailing 12 month EBITDA margin increased to 15, 6%.
The <unk> acquisition was accretive to our adjusted EBITDA margin in the quarter by 80 basis points.
Our trailing 12 month return on invested capital improved to six 9%, we are making progress towards our targets of $1 5 billion in revenue with a 21% EBITDA margin is covered at our recent investor day.
Moving to slide 13, we had positive free cash flow of $15 million in the second quarter. This includes cash inflows from operating activities of $17 million and capex of $2 million.
We anticipate that our free cash flow will continue to build through the course of the fiscal year as we drive earnings and reduced working capital as a percent of sales back to the mid teen levels.
We now expect full year capital expenditures to be in a range of $12 million to $15 million down from previous guidance due to the timing of projects.
Turning to slide 14, we have a strong and flexible capital structure comprised of a term loan b, which requires $5 $3 million of required principal payments annually and has an excess cash flow sweep depending on our total leverage we paid down $20 million of debt year to date and expect to paid $40 million for the entire fiscal year.
The term loan B are 60% hedged with interest rate swaps that blend to a swap rate of approximately two 8%.
As of September 30 on a pro forma basis, which includes <unk> LTM adjusted EBITDA, but excludes expected cost synergies our net leverage ratio was two eight times.
We are prioritizing debt repayment in the current environment.
Finally, our liquidity, which includes our cash on hand, and revolver availability remained strong and was approximately $173 million at the end of September .
Please advance to slide 15, and I will turn it back over to David.
Thanks, Craig.
As I mentioned earlier, we are encouraged with the strength of quotation levels, even as we saw orders decline in the period.
Our activity ahead of our June price increase and extended customer project execution cycles were the primary drivers of the sequential decline.
More specifically trailing first quarter orders were elevated ahead of price increases in June by approximately $10 million and although we are still seeing healthy quote rates on projects customers were slow to release orders towards the latter half of the quarter given delays they are experiencing with the execution of these projects.
Our backlog remains elevated given the impact that supply chain delays are having on our product delivery motors drives and controls as well as electrical components continue to constrain our ability to ship products more quickly.
As I noted earlier, we are heavily focused on improving delivery and communications with our customers and we continue to navigate.
The supply chain constraints internally, we have simplified our structure and our improving the flow of information to enable more proactive communications with our customers.
Please turn to slide 16.
We expect revenue in our third quarter to be in the range of 225 million to $235 million based on current exchange rates as I've noted we are focusing on executing our plan and are ready to adapt as needed for macroeconomic conditions. We continue to invest in innovation the vitality of our portfolio is.
Creasing, our teams are driving collaboration across product categories, and we are executing on initiatives to improve our customers' experience we.
We believe we are improving our position and more secular driven markets and are delivering solutions to our target markets that help the end user scale automation and productivity.
On slide 17, you can see our long term goals.
We're being very intentional in our strategy deployment process to advance towards our growth and profitability targets. We believe we are a better business than we were just two years ago with a stronger earnings profile, a better product and market mix and a streamline team that is intensely focused on execution.
Although the macroeconomic environment is somewhat unsettling.
We are being deliberate in our actions to create value for our customers execute our plans and deliver on our goals with that operator, we can open up the lines for questions.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys once again Thats star one at this time, one moment, while we poll for our first question.
Our first question comes from Matt Summerville with D. A Davidson. Please proceed.
Good morning, this is well Jonathan on for Matt today.
Wanted to start out by asking you a follow up question.
<unk> that some of the supply chain issues that that impacted volumes during the fiscal second quarter can you sort of place those into into context relative to your experience say in the last year, or so and whether or not what you saw in fiscal second quarter was incrementally worse than what you've seen before or just a persistence.
Things that you've been dealing with for a while now yes.
So this really became an issue for us well about a year ago, maybe a year and a quarter and I think in the June quarter, we were experiencing roughly a $15 million impact.
This past quarter.
Actually in June was the $25 million this quarter was about $26 million. So it's about the same level and actually the March quarter of last year was the $15 million.
The amount so it hits.
About the same there is pockets where.
Different suppliers are getting better some are still being challenged but net net it's still having an impact of about the same level as what we saw in the first fiscal first quarter, which is slightly elevated over what we saw in the fourth quarter of last year, yes.
Understood. Okay. Thank you and then.
On the elevated quote activity side.
I was wondering in your view.
That elevated core activity, where does that stand relative to columbus's experience in prior cycles, where you would normally expect to be at this time of year. In this type of environment is it better than you would expect about the same I love some more color there, yes, sure I think it's better than.
What we would expect heading into a recession. If in fact, that's what we're doing but we don't see any imminent signs of a recession.
We do see strength in entertainment utilities steel and metals oil and gas and mass transit also the stronger secular markets like life Sciences, and electrical vehicles remain robust. So we're quoting more projects for F&B.
Order rates are sure. It's a quote rates are up year over year across our business and so we're really encouraged with the strength of quoting the engagement with our customers their messaging around opportunities.
And the challenge really has been in terms of converting orders in <unk>.
Quotes into orders in the time that that takes as our customers are really waiting on other pieces of equipment to be delivered that are associated with their longer cycle projects.
And then waited therefore waiting to release orders to us at a time that.
As more consistent with when they want to cash flow their project. According to the delays that they are seeing.
Okay.
That's great. Thank you gentlemen for taking my question.
Thanks will.
Our next question comes from Steve <unk> with Sidoti. Please proceed.
Good morning, everyone. I just wanted to follow up that last question in terms of you're seeing quotation rates up did you give a sense on orders in October versus the previous quarter.
Yes, we didn't Steve, but I can share with you that orders are up nicely sequentially versus prior quarter and the first three weeks and although three weeks do not make it.
Quarter, we're up about 10% sequentially quarter over quarter in total orders.
In the first three weeks of October .
That split is roughly up 12% with our conveyor solutions up 5% and our project orders and up in the low teens and our.
Our short cycle business.
When I think about mix going forward and how much.
The mix is now Dorner, Inc. Rfps, what are you seeing in terms of growth trends that could impact.
Gross margin in a slowing environment, which is to say.
Is the mix going to lead to some gross margin improvement even if the market in general flows.
Yes, I think given the.
The growth rates that we anticipate our businesses would grow at our highest gross portions of the portfolio enjoy expanded gross margins over the rest of our portfolio and so we would expect that.
In a slowing environment overall with secular trends, enabling further growth in those faster growing areas. We would anticipate that we would have expanded margins in that kind of an environment.
Yes, so Steve just adding onto it and it's our gross margins in our precision convinced business are in the mid <unk>.
And so that is accretive to the overall gross margins for Columbus Mckinnon legacy business.
Great Great and if I can get.
One quick one in on cash flow.
So a nice cash flow this quarter, despite inventory still up it seemed in the release you said that inventories may have peak. Despite the fact that we're still seeing significant supply chain constraints can you give a little color there and whether you would consider ramping up the debt production given the interest rate environment.
Yes, so so from an inventory perspective, our turns in the quarter were three times and we ended the March had three nine turns so clearly we've taken on a lot of inventory in the first six months of the year from a cash flow perspective, as you mentioned.
Inventories are up $31 million when you exclude the impact of FX. So we have plans in place to bring our in total our working capital as a percent of sales back into the mid teens, that's going to require a significantly improving our inventory turns that process has already started our inventory levels crested in <unk>.
And they have started to come down.
As you can imagine it's not something that you can turn on a dime, it's like turning a battleship, but we've got ample time left in the fiscal year to get inventories down substantially get our turns up.
And generate more cash and so you are right. We are in a an elevated interest rate environment.
Marginal interest rates force now or 7% with our spread on our term loan and even but I would remind folks on the phone like I said in my prepared remarks that we are 60% hedged.
And so that clearly is tamping down.
What our interest expense would be if we werent hedged and so if we're able to generate more cash from a capital allocation perspective, we look at that on a regular basis with our board, but we also are mindful that interest expenses elevated and if we as we generate more cash absent.
An absolute perfect small bolt on acquisition, our focus would be to try to use that cash to pay down more debt.
Okay. Thanks, David Thanks, Greg.
Thank you thanks, Steve.
Our next question comes from Jon <unk> with CJS Securities. Please proceed.
Hi, Good morning, and thank you for taking my questions I just wanted to go back to the stronger quotation and maybe weaker orders do you expect that gap to close or maybe the risk of a lower conversion rate more likely as we go forward and markets around the world start to deteriorate how are you thinking about that.
In coming quarters, we anticipate that it is going to close given what the level of quoting activity is in the order trends we've seen thus far in this quarter.
But right now just to give you an illustrative example, if typical conversion cycle between when a quota center an order is received as three to six months.
In normal conditions.
<unk> today have.
Component lead time changes on other pieces of equipment that they are waiting for and so if someone's waiting for a robot or someone's waiting for engineered control panels.
The automation elements of their solution from somewhat or are they waiting for packaging machines.
Those lead times have been extended.
Being measured in months to being measured in over a year in some cases and so what's happening is where you would typically place an order for elements of our portfolio that have shorter lead times within three to six months. Those lead times are now being extended based on those customers now waiting for other pieces of equipment, but we do expect those gaps in <unk>.
So we think the supply chain is starting to ease.
Certainly in specific areas and we are encouraged by not only the quotation activities, but the early <unk>.
Q3 order rates.
Got it.
Maybe just to build on that but what do you think is driving the strength in quotations is it just because youre exposed to these these less cyclical markets that you've been you've been driving towards or is it more of that.
Maybe pent up demand or maybe just people trying to get ahead of price increases and an increase in cost of capital.
Finance these things.
I think it is because we're playing in some pretty attractive markets that are seeing demand driven by <unk>.
Macro drivers are mega trends.
I also think that we've been benefiting from our commercial reorganization and the collaboration that our teams are driving in the markets, where we're getting more opportunity within the same customer base, because we were able to cross sell and represent a broader portfolio and so I feel like we are.
We're help where self helping and we're benefiting from trends that are occurring in the marketplace.
Great and if I could sneak in one more just.
Directionally, how should we think of margins in the next quarter.
Revenues flat to down maybe but you've done a good job with the structuring and then driving costs out.
And maybe theres, some inputs if that might be coming down like freight and logistics, how should we think about that yeah. So good question. So typically what we see John in the third quarter relative to the second quarter is a 50 to 100 basis point decline in gross margins and it's largely due to fixed cost absorption in our factories.
We do have four less shipping slash production days with the Christmas holidays and in the U S. We have Thanksgiving as well as you know so that would be typically 50 to 100 basis points.
Down if you look back in history.
Okay, Great and sorry did you think is there anything different this year going into that calculation.
No I would say we would expect.
Kind of a similar decline.
So understood at that range.
Our next question comes from Patrick Baumann with Jpmorgan. Please proceed.
Hi, Good morning, everyone. Thanks for taking my questions and congrats on the strong execution in the quarter.
Yes, no problem.
Good morning, a quick question on them.
Just the end market demand profile that youre seeing what can you can you kind of walk through.
Key verticals.
And where youre seeing trends.
Hold it hold in versus where you are seeing trends, maybe fade a little bit if anywhere right right. Okay. So as we said earlier overall quote activity was up versus prior year.
Short cycle order demand is slowing a bit.
But global project orders are taking longer to convert.
And that's been a bit of a challenge in terms of converting to orders.
The entertainment utility steel.
Steel and metals markets have been robust oil and gas obviously experiencing some significant trend good positive trends of activity in mass transit or our rail business is experiencing some nice upticks.
As it relates to our newer business areas, we've got really nice trends in life Sciences and electric vehicle activity, we mentioned.
The gardy activity with the battery cells for.
Electric vehicle battery production.
We're also seeing really good quality leads for projects, albeit some smaller projects, which are really attractive in the food and beverage.
Space.
And then e-commerce shipments are off about $8 $5 million year over year through the first half and.
And that's really related to a pause in demand from our largest e-commerce customer but.
But we do see those orders coming back online in fiscal 'twenty four based on the <unk>.
Very close relationship we have.
With that customer in that space and what I would mention is that although we've seen that decline.
<unk> made great inroads at gaining traction with a number of other attractive e-commerce accounts and Thats, partially offsetting the decline in kudos to our team at doner for the great work, they're doing in the industrial automation space, where they've been able to grow that portion of the business pretty readily to help offset the challenges introduced by the year over year.
Year decline, we saw with that one customer.
That's helpful color.
And so I would imagine that ecommerce business. That's most of that explains the entire decline that youre seeing at Dorner I guess in terms of revenue right and that's being offset by some of the other stuff that's right that and some correct yep.
Yes.
And then maybe Greg can you can you talk about the nuances of kind of the inventory accounting that are impacting gross margins. These days.
I asked because I was looking at the LIFO reserves and they've gone up quite a bit so far this year.
I'm just not sure how to interpret that from the outside maybe just give some color on that yes. So the LIFO reserve. So we have LIFO in the U S and a number of our U S factories, dorner and Garvey, our not on LIFO. So this is kind of legacy Columbus Mckinnon, and our LIFO reserves are going to move with it.
Inventory levels and so as our inventory has become elevated the LIFO reserve has gone up but once again as we expect to lower our inventory levels.
Over the course of the balance of the fiscal year in the LIFO Reserve should also go down.
And really in that calculation is in terms of the LIFO reserve itself. It's a.
You don't really you don't have the final calculation until the end of the year.
And how does that how is that impacted.
If they don't like the gross margin I guess are there is there a LIFO liquidation kind of.
Pax on profits at all.
Not in a material way Pat so the margins are really being driven by the pricing.
The Garvey acquisition.
Yes, I'd add the mix so the mix of sales the pricing actions. We've taken the work we're doing to address our cost structure.
And work our team is doing in the supply chain to help offset inflationary costs. So.
So the LIFO reserve has a non material impact if you will.
And the margins for the period.
Okay, great. Thanks, I appreciate the color best of luck. Thanks Pat.
Yes.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Joseph <unk> with Onyx credit. Please proceed.
Hi, My question is regarding more so the competitive environment given that Crosby Quito introduced a large competitor in the space. How does that affect you guys. Maybe if you could speak to market our product overlaps.
Right so.
We competed before the announced acquisition with both Crosby and Quito with our product portfolio, because we play both from the rigging side of the business, where Crosby competes in and the lifting and voice side of the business were keto competes and so we were competing with them as separate companies in the past and we anticipate that will be.
Competing with.
With them as they as they go forward and come together, we feel like the competitive dynamics don't change very much as it relates to them coming together.
Single company.
We.
Feel that we've got a very competitive position with our channel partners and with the work that we do.
With our innovation strategy with the new products, we've been introducing and with our new regional focus on as a leadership team. We feel there is opportunities for us.
With our elevated focus on our customer experience and working to make sure that we're advancing competitively we feel like we're well positioned to compete.
Is that acquisition is completed.
Thank you.
Youre welcome.
Okay.
We have a question just queued up we will take the question come from John <unk>. Please proceed.
Hi, guys just following up on the topic of industry consolidation can you comment on the acquisition of <unk>.
Today Bye bye Regal rack store in Canada, that's the kind of company I think you've been trying to.
Target and your long term objective just any thoughts there and kind of maybe a validation of euro strat.
Our strategy there.
Yes, that's exactly right John I don't want to comment on the specific transaction, but I will.
Say that clearly validates the strategy that we have as a company and it underpins everything that we've been trying to do as a company and speaks to the value creation that we're driving and the opportunity for us.
We think about that comparable landscape and how we are performing with our gross margins our growth and our expanding EBITDA margins given the good work that our team has been doing and how that compares against that peer set from a multiple perspective clearly enjoys a higher multiple so we're excited about our strategy.
We are executing well and.
We're marching towards our five year targets of one 5 billion in revenue and 21% EBITDA margins.
Could you just remind us what you had built into our long term target in terms of the potential for a recession in the near future what was there a specific.
I guess.
The expectation of a decline or anything like that in that in that four to five year journey.
Yes, yes, John so when we looked at back in the summer obviously things have changed quite a lot since then.
Was clearly the view that if there was a recession it would be mild there'd be a soft landing and we would be able to recover very quickly.
And at this stage, we're seeing nothing to indicate anything other than that John because we are seeing as you saw this morning, GDP actually pivoting to a growth position and.
We're not seeing any signs of deteriorating demand and the conversations we're having with our customers.
Alright, thank you so much.
You bet. Thank you.
Thank you at this time I would like to turn the call back over to Mr. Wilson for closing comments.
Thank you again for joining us today, we are demonstrating our ability to execute our plan while operating in an unsettled environment see MBS provides the playbook to drive results through all market conditions, and we believe that we have the team in place to deliver.
We're driving continuous improvement both strategically and operationally and are excited about our future we.
We have the plans the people and the capabilities to enable scale strengthen our earnings power and create intelligent motion solutions that move the world forward and improve lives.
Thank you for your time this morning and have a great day.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.