Q3 2023 Columbus McKinnon Corp Earnings Call
[music].
Greetings and welcome to the Columbus Mckinnon Corporation third quarter fiscal year 2023 financial results Conference call. At this time, all participants are in a listen only mode.
Brief 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 Deborah Pawlowski Investor Relations for C. M. C. O. Thank you Ms. Pulaski. Please go ahead.
Thank you Donna and good morning, everyone. We certainly appreciate your time today and your interest in Columbus Mckinnon joining.
Joining me here for the quarterly conference call are David Wilson, our President and CEO and Greg rest with our Chief Financial Officer, you shouldn't have a copy of the third quarter fiscal 'twenty three financial results, which we released earlier this morning, and if not you can access the release as well as the slides will accompany our conversation today on our website.
Right.
<unk> Dot Columbus Mckinnon Dot com.
David and Greg will provide their formal remarks, after which we will open the line for questions.
If you would 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 discussion 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 it doesn't documents filed by the company with 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 have provided reconciliation of non-GAAP measures compared with comparable GAAP measures in the tables that accompany today's release and slides.
Please advance to slide three and I'll turn the call over to David to begin thanks, Deb and good morning, everyone. Our results for the quarter demonstrates the steady progress, we're making as we execute our plan to transform Columbus Mckinnon into a higher margin higher growth business.
There were several highlights in the quarter sales were up 11% on a constant currency basis, as we captured price increased volumes to meet demand and the team successfully reduce past due backlog.
Past due backlog was reduced by $16 million or 28% as we continued efforts to improve our customers' experience.
We expanded operating margins by 170 basis points on a GAAP basis, and 70 basis points on an adjusted basis.
Q3 daily order rates increased 3% sequentially and order rates in January through last Friday are up nearly 6%.
Finally, we're seeing project activity that had stalled in Q3 begin to advance this month.
We remain bullish on Mega trends that we expect we will continue to drive opportunity for us even against the softening economic backdrop global shifts or I should say geopolitical shifts transportation and logistics challenges insufficient supply and the limitations of available labor are driving.
Investment decisions that support automation, the re shoring of manufacturing facility upgrades and expanded operational investment.
We continue to strengthen our balance sheet and improve our financial flexibility to execute our strategy.
We paid down $30 million in debt through the first nine months of our fiscal year.
And have brought our net debt leverage ratio to two seven times.
We also repurchased approximately 31000 shares at an average price of $32 17 in the quarter.
On slide four I will update you on our strategic progress as mentioned earlier growth in the quarter on a constant currency basis was 11%.
I believe our new regional leader teams leadership team structure contributed to this success in fact sales in India were up nearly 12%, excluding the impact of FX driven by both pricing and volume.
We also continue to innovate to drive growth and we introduced three new products in the quarter.
A new medium duty belk and conveyor that fills the gap between our current flagship products in capacity and capabilities.
The new line includes many features that provide competitive advantages, including flow accuracy tracking and the slim profile.
Our new $4 five ton hand chain hoist for the general industrial markets and we pre launched a next generation wire rope hoist with available frequency drive controlled motion for better speed and position control. This solution offers an easy upgrade path to a digitally connected footprint for diagnostics and remote monitoring.
Yeah.
Our NPD and minus III revenue, which we use to measure vitality was 5% of total revenue on a year to date basis and remains ahead of plan.
Our most immediate opportunity is improving our customer experience in North America to gain market share and to grow our customer base.
We have improved our performance relative to internal customer service metrics.
<unk> call wait times quotation lead times.
Our entry times engineered drawing lead times lead time accuracy delivery status update accuracy and past due backlog reduction.
We are laser focused on reducing delivery lead times and have created plans for each product that will reduce lead times to competitively advantaged levels.
While we are making progress on these initiatives, we are not yet satisfied with the results.
I should also mention that in December we successfully launched and went live with our new ERP system in Mexico.
This is consistent with our digital initiatives roadmap and is expected to improve efficiency and enable our teams to be more effectively.
To be more effective as they address both internal and external customer needs.
This also provides the foundation for future enterprise simplification efforts.
Despite supply chain headwinds and related production impacts we continue to expand margins.
We have now extracted $7 2 million in annualized costs through the business realignment efforts, we initiated earlier this fiscal year.
We have realized $4 $7 million of these savings in fiscal year 'twenty three.
And expect the balance to help offset further inflationary pressures in fiscal 'twenty four.
Rest assured we're also taking actions to identify additional cost that we can take action on in fiscal 'twenty four.
We generated $6 5 million in free cash flow in the quarter and are expecting a significant increase in cash from operations in the fourth quarter as we reduce inventory and improve working capital.
Slide five depicts our adjusted gross margin project progression over the last several years.
Since fiscal 2018, we've improved gross margin by 310 basis points and we believe we are on track to achieve our fiscal 'twenty seven objectives.
As you can see on this slide there are several levers we will address to achieve our targeted level of approximately 40%.
I want to remind you on slide six of where we're heading and why we're transforming Columbus mckinnon into a leading motion control enterprise for material handling by leveraging our product portfolio and expanding into secular growth markets. We expect our strategy to shift our mix of business into our product platforms that command.
Higher margins and have greater growth potential by organizing around these platforms. We are also identifying larger addressable markets, creating more opportunities for us to grow and succeed.
With that let me turn the call over to Greg to discuss our financial results in greater detail Greg. Thank you David Good morning, everyone.
Slide seven net sales in the third quarter were $234 million up 10, 5% from the prior year period on a constant currency basis and above the midpoint of the guidance. We provided last quarter as you know the third quarter is impacted the most from a seasonality perspective as we had for less work days in most geographies around the world compare.
With the previous quarter.
Overall, we are pleased that we were able to reduce past due backlog by 16 million. Despite persistent supply chain challenges for motors drives and other components that we purchase.
We also had delays in certain rail projects for various reasons that impacted revenue by about $4 million in Q3.
This revenue is expected to be recognized in Q4.
Looking at our sales bridge pricing gains of $11 9 million or five 5% accelerated as we converted orders to revenue at more current prices.
This was up 60 basis points from our Q2 level.
Volume increased by two 7% or $5 9 million, which we will cover in the regional update.
The acquisition revenue represents two months of sales from the Garvey acquisition, which closed on December one of 2021 <unk>.
This provided $4 9 million of incremental growth in the quarter.
Foreign currency translation reduced sales by $8 4 million or three 9% of sales.
Let me provide a little color on sales by region for the third quarter. The nine 9% growth. We saw in the U S was driven by a five 8% improvement in pricing acquired revenue from Garvey added three 5% growth in the U S sales volume was up.
6%.
Outside of the U S sales grew 11, 4% on a constant currency basis pricing improved by five 1% and sales volume increased by five 9%. We were encouraged with the volume increases we saw which were approximately 12% and Latin America, 9% in Asia, 5% in Europe , the middle <unk>.
And Africa, or EMEA and 3% in Canada.
We are especially encouraged by the volume gains in EMEA, which represents 25% of our business. The region has proven to be resilient in the face of the war in the Ukraine and in energy crisis.
Both our project business and short cycle business in Europe saw meaningful volume growth.
On slide eight gross margin of 35, 6% was up 90 basis points from the prior year on an adjusted basis gross margin was lower by 110 basis points compared with the prior year last year's third quarter was unusually strong because we didn't see our typical seasonal dip of roughly 100 basis points in gross margin in the.
Higher year, we benefited from a strong month from the Garvey acquisition as they delivered an exceptionally strong margin on a large project. They shipped right. After we acquired them. This quarter, we saw more normal sequential dip in margins.
Third quarter gross profit increased $6 9 million compared with the prior year and was driven by several factors, which you can see in the table. Let me comment on a few highlights on our gross profit bridge pricing net of material inflation and at $5 9 million of gross profit, which includes $6 million of material inflation in the quarter, we see material input inflation.
<unk> as we enter Q4, we also had an unusual product liability settlement last year that did not repeat.
The two incremental months in the quarter from the Garvey acquisition provided $1 9 million of gross profit on $4 9 million of revenue.
Offsetting these items was foreign currency translation, which reduced gross profit by $2 8 million and lower factory productivity compared with the prior year of $3 7 million.
The lower factory productivity was primarily at our <unk> facility as volume picked up for engineered to order production activity as our mix shifted to more ETF product, which is more complex than standard product. This disrupted our planning and execution processes. This is being addressed as we had a new planning tool to increase the efficiency of this.
Process.
Moving to slide nine our SG&A expense was $55 4 million in the quarter or 24, 1% of sales.
This includes purchase.
Purchase accounting item for $1 2 million related to contingent consideration paid to the owners of Gary.
The acquisition was structured with an earn out provision based on delivering certain levels of EBITDA in the first year, which was achieved this quarter. The $1 2 million represents the excess of what was estimated during purchase accounting. The total earn out of $2 million was placed in escrow when the deal closed. So there will not be a cash impact when it is paid in Q1 of <unk>.
Next fiscal year.
In addition, the sequential increase in our SG&A included 500000 of incremental business realignment and headquarters relocation costs.
The remainder of the sequential increase was due to adjustments to our annual incentive plan accruals and stock compensation.
Compared with the prior year, our SG&A costs were higher by $1 9 million, which includes the $1 2 million of contingent consideration for the Garvey acquisition, which I just discussed we.
We also incurred $1 1 million of incremental business realignment costs related to our commercial reorganization.
And the incremental two months of the Garvey acquisition added 900000 to our SG&A costs as well offsetting these increases were foreign currency translation, which reduced our cost by $1 $8 million.
For the fiscal fourth quarter, we expect our SG&A expense to approximate $54 million. We are assessing further cost reduction opportunities as we plan for fiscal 'twenty four.
Turning to slide 10 operating income in the quarter increased 32% to $20 2 million and adjusted operating income was $23 5 million operating margin expanded 170 basis points, reflecting pricing acquisition performance and higher volumes.
Adjusted operating margin was 10, 2% of sales a 70 basis point increase over the prior year.
As you can see on slide 11, we recorded GAAP earnings per diluted share for the quarter of 42 upbeat sense versus the prior year.
Our tax rate on a GAAP basis was 28% in the quarter for the full year. The tax rate is expected to be between 30, and 32%, which reflects a six percentage point impact.
The two discrete items that we discussed in our Q1 earnings call.
Adjusted earnings per diluted share of <unk> 72 was up 12% from the prior year.
Our EPS was negatively impacted by <unk> <unk> per share from higher interest expense versus the prior year, we had a favorable impact from FX gains as well as mark to market investment gains, which together favorably impacted EPS by <unk> 12 per share year over year, even though we are 60% hedged the interest rate exposure interest expense.
It is expected to increase to $7 6 million in the fourth quarter.
Weighted average diluted shares outstanding were approximately $29 million and our pro forma tax rate is 22% for calculating non-GAAP adjusted earnings per share.
On slide 12, our trailing 12 month adjusted EBITDA margin was 15, 7%, we're making steady progress towards our target of $1 5 billion in revenue with a 21% EBITDA margin in fiscal 'twenty seven.
Our return on invested capital of six 9% was impacted by the <unk> acquisition.
Oh, I see as a key metric in our long term incentive plan and we expect to see this improve over time.
We continue to advance our efforts to reduce overhead improve productivity and simplify both our product lines and factories.
We will also drive the top line as well these are the key elements to delivering on our growth and profit goals.
Moving to slide 13, we had positive free cash flow of $6 5 million in the third quarter. This includes cash inflows from operating activities of $10 8 million in Capex of $4 2 million.
Third quarter cash flow was impacted by approximately $15 million of higher cash interest and cash tax payments compared to the prior year.
As we turn to the fiscal fourth quarter, we expect strong free cash flow as we drive earnings and reduce working capital investments full.
Full year capital expenditures are expected to be in a range of $13 million to $15 million or between three five to $5 5 million of Capex in the fourth quarter.
Turning to slide 14, we have a strong and flexible capital structure comprised of a term loan b, which requires $5 3 million of annual principal payments as well as an excess cash flow sweep depending on our total leverage ratio.
We have been actively paying down our borrowings and made another $10 million payment in the quarter, bringing the total debt payments year to date to $30 million, we expect to pay an additional $10 million in the fourth quarter.
The term loan B are 60% hedged with interest rate swaps that blend to a swap rate of approximately two 8%.
As of December 31, our net debt leverage ratio was two seven times, we have prioritized debt repayment in the current environment and expect to see our leverage ratio dropped to under two five times next quarter.
As David noted, we took advantage of market conditions to repurchase about $1 million of stock in the quarter.
Finally, our liquidity, which includes our cash on hand, and revolver availability remained strong and was approximately $166 million at the end of December .
Please advance to slide 15, and I will turn it back over to David.
Thanks, Greg as I mentioned earlier daily order rates improved 3% sequentially in Q3.
On a year over year basis, there were two major impacts that affected our Q3 order levels.
FX had a $9 million negative impact in the period.
Additionally, there was a $9 million impact the orders, resulting from the curtailment and new warehouse investment by a large e-commerce customer.
Year to date orders for this customer are down approximately $25 million, while current order activity with this customer has paused. We are highly engaged with them on other promising and innovative new projects.
I should also highlight that we are excited about additional e-commerce applications that we are winning.
We are working with several integrators that are serving end users who are looking for increased production efficiencies within their intra logistics systems.
Our backlog remained stable at $329 million in the quarter and was more current given the 28% reduction in past due orders we achieved in the period.
Let me wrap up on slide 16, with some thoughts regarding our outlook.
First looking to the fourth quarter, we expect to deliver quarterly revenue of about $240 million to $250 million.
This implies fiscal 'twenty three growth of 6% for the full year on a constant currency basis, which is in line with our strategic plan.
As I mentioned earlier, we are planning for a measurable improvement in cash generation in the quarter through a reduction in working capital.
We are encouraged with the developing view of fiscal 'twenty four as well.
We anticipate that we can deliver growth on the order of low to mid single digits for the year.
While quotation to order conversion timing has been extended.
Customer activity and quotation levels have held up well and we are not seeing indications of an industrial recession.
We also think that a stabilizing environment will help advance projects that had been held up and decision making processes.
There's actually quite a lot of activity in a number of our markets. For example, we see continued strength in the EV market, whether it be for vehicle or battery production.
Energy and utilities around the World are also very active from water treatment wastewater management and waste to energy power facilities.
The active oil production in the middle East utilities are adding new plants and upgrading older facilities to drive improved efficiencies.
Defense has also been and <unk> been active with missile elevation devices and chain hoists to erect mobile pence.
And life Sciences were providing automated pharmaceutical packaging and delivery systems for prescription fulfillment.
Finally, I'd be remiss, if I didn't mentioned that demand for our entertainment solutions continues to be solid.
We are hyper focused on improving our customers' experience and are executing plans to do so this will enable improved market share and expanding addressable markets. We also look as we look beyond fiscal 'twenty three given the activity, we're seeing in our markets our efforts to improve customer experience and are strong.
Backlog, we expect to continue to grow even as the economy moderates.
We are committed to achieving our longer term goals and expect to deliver additional steady proof points as we advance.
Donna with that I'll open up the call for questions.
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The first question is coming from Matt Summerville of D. A Davidson. Please go ahead.
Hi, Good morning. This is bill Jellison answer Matt Summerville today.
Hi, good morning.
Thanks for taking my question. The first thing that I was curious about is as we head into fiscal year 2024, I was curious about how you're thinking about pricing entering that youre considering that in fiscal 'twenty three to date, it's been especially strong.
And I'm curious as to how you're approaching that equation as we head into the next periods here.
Okay. Yeah. Thanks, well, obviously, we've made a lot of pricing moves over the past 12 months as we've managed through inflation and tried to stay positive as it relates to price cost.
As we look into the new year and as we think about our bridge looking at this year versus next year were thinking there might be another 3% to 4% that might translate as we look at where inflation rates might be our cost position and where we think we've got leverage with our portfolio.
Understood.
Okay, and then Greg I had a follow up question from you from from prepared remarks, it sounded like during the quarter.
I interpret it correctly you are able to actually recover some of the sales that had been pushed out in prior periods. As a result of the supply chain and I was just curious if we could get a better understanding about what enabled that.
Yes, so well what we actually saw was that supply chain constraints. We're about at the same level was better in certain <unk>.
Component categories and worse than others. So net net we still had roughly a $24 million impact, which I think was maybe a $1 million better than it was in the second fiscal quarter.
So was there something else in the prepared remarks.
They have led you to a different conclusion.
No I was I was just interpreting the comment of the $16 million.
Backlog reduction yeah, that's right yeah. So well this is David I'll jump in a little bit. So yeah, we did reduce best backlog by about $16 million sequentially in the quarter that was a 28% reduction in total past due backlog, where we're able to make progress as it related to supply chain delays as it relates to those particular.
Items and our backlog is becoming more current greg's comment related to opportunities to even do better than what we did given.
The items that were left on the dock if you will.
But we are continuing to make progress there and I think we are seeing some loosening in the supply chain. There are spot challenges that we're addressing every single hour.
But.
We are making progress there and expect to continue to make progress as we head through this quarter.
Understood. Thank you for that clarification.
Great. Thanks Bill.
Thank you. The next question is coming from Steve Lorenzi of Sidoti <unk> Company. Please go ahead.
Good morning, David Good morning, Greg.
I appreciate all the info on the call. This morning, a couple of things I wanted to check in on Craig.
You explained a little bit to the year over year gross margin decline I think you alluded to.
Dark dark Garvey order at the end of <unk> year ago.
But I'm just trying to make sure that.
Most of the sea change, particularly because your revenue was essentially flat sequentially, but we saw the gross margin decline I'm, just trying to get a sense of gross margin trends.
So great question, Thanks for that Steve So a year ago, our gross margins, where I believe 37, 2% in the quarter.
And they actually were the same level as they were in the fiscal second quarter. So we didn't see our historical drop and what I was mentioning is that a large driver of why we didn't see our historical 100 basis point drop that we would typically see because of less workdays is that we had we owned garvey for one month, but they had a.
Tremendous month of December with some meaningful revenue to one large customer there.
That had almost 60% gross margin. So it was a very very accretive and that's why we didn't see the typical drop now this year, we saw a drop a little bit more than 100 basis points. I believe it was 160 basis points from Q2, and what I talked about on the call was that we actually.
About 100 of that would we would normally expect with just less working days you know there were only 60 working days versus 64 in the <unk>.
September quarter, but in addition, we did have lower productivity, which you've seen in our bridge largely driven by our <unk> factory, which is our largest most complex most highly engineered factory and we've had.
We've seen more of a mix shift where we have more engineered to order product and less standard product, which is more complex.
Takes more time and also we had issues just with the planning of.
These large projects and so that impacted us.
As well in the quarter and we are introducing a solution for that challenge as we speak and are going live with our new production planning module.
Sure.
For that facility that augments our supplement what we have in place today with our SAP solution to take that to a next level and we expect to see benefits for that that will phase in in our Q1 of next year time period. So.
So as we think about our Q4 gross margin, Steve we would expect normally around a 37% gross margin, we're kind of in that ZIP code, especially with the additional work days. However, we are going to see roughly an 80 basis point.
Mix negative mix impact from some rail projects that are going to ship in the quarter in our rail business has typically it's about a $10 million of revenue and it typically is.
As you know our gross margins are much lower than the overall corporate average so that is going to have about an 80 basis point 80 to 100 basis point impact.
Steve those are projects, we had been sorry, Steve those are the projects that have been delayed given those supply chain issues, we've talked about and so theres been some pricing impacts cost impacts that are phasing through on those a lot of electrical component of price adjustments in controls and.
That's the impact of the lower margins than typical volume in that.
Business in a quarter is about three times less than what we're shipping and so that drives this mixed shift.
And the margin impact Greg's talking of about 80 basis points.
So when we think about this moving forward even past this quarter.
Generally mixed shift has been helping you because dorner and garvey have been growing at a faster rate than our higher margin you mentioned the e-commerce customer how are you thinking about <unk>.
Mix shift over the next multiple quarters in terms of what youre seeing from orders et cetera.
So we think we can continue to drive accretive margins in the business over the mid to long term. We have this issue that Greg just referred to in the period, which is driven by the shipment of this very large volume of legacy orders that are that we need to get through the system.
But we anticipate that.
The volume increases we would expect to see continuing to come from those faster growing segments as well as our own work around 80, 20, and productivity improvements driven by our more stable and improving supply chain will allow us to to drive expanding margins.
Okay.
Thanks, David Thanks, Greg.
Great. Thanks, Steve Thanks, Steve.
Thank you. The next question is coming from Jon <unk> of CJS Securities. Please go ahead.
Hi, good morning, Thanks for taking my questions.
David I was wondering if you could just comment a little bit more on the visibility you have into the rest of 2024.
Are you actively planning for a soft landing at this point or is there something different.
<unk> places do you expect any significant weakening from here or does your crystal ball tell you that things are going to stay pretty healthy at this point.
Right now we have a pretty good bead on certain current activity and as we look to the quotation and customer discussion activity, we see no signs of an industrial recession as we were talking about earlier in the prepared remarks.
Obviously, our crystal ball doesn't go out.
Years and years, and obviously things can change at this point, we're planning on a relatively soft landing and the way that we're thinking about the way the year develops and if there is an impact it's an impact that would come later in our period, but we're anticipating that we can deliver low to mid single digit growth next year, given the current environment.
The activity, we're seeing in the marketplace, our improvement initiatives around share gains in customer additions as well as the backlog that we have which is still pretty robust yeah and just to add on.
We typically lagged by a quarter or so and as David mentioned, our backlog is.
Very healthy currently and that will I think buffer us even if there is.
A bit of a slowdown or recession later in our fiscal year.
Got it no that's very help.
One encouraging to hear.
Greg I think I got the message on the longer term margin there from what you said.
Spanning but did you give any directional thoughts on gross margins in the current quarter I.
I know, it's usually a little bit better for you just on volume, but are there any other puts and takes that we should be.
Yes, so John that was really what we talked about with Steve a few minutes ago, where normally we would expect roughly the 37% gross margins roughly in the fourth quarter and if they'd be expanded from current levels, but we're going to have this negative mix impact from a rail business that we think it's roughly about an 80 basis point negative impact.
That was the past quarter I got it okay.
And then last of all just in terms of the.
On the cash flow that you're expecting to generate in the near future I assume that working capital improvement and supply improving to the point, where you can do that or is there something else that we should be thinking about.
Yes, no. It is it's largely going to be driven by working capital improvement as you know were carrying almost $32 million more inventory than we started the year with and we've been working on this and we expect to see meaningful improvement in our working capital utilization in the fourth quarter, and we will see a really strong free cash flow timeframe.
For us.
Got it thank you very much guys.
Thanks, Sean.
Thank you. The next question is coming from Walter Liptak of Seaport Research. Please go ahead.
Hi, Thank you good morning, guys.
Just wanted to follow up on the.
The.
Productivity system that you're putting in the ERP and as that started going in and.
Just wanted to get an idea of the size of that manufacturing location, you know, maybe as a percentage of square footage or whatever but yes.
Are you expecting or could we see some disruptions.
Similar to what we saw was that Europe Europe you ran.
Now, while we have a 600 person roughly manufacturing facility over in Colombo saw Germany, It's our largest manufacturing facility.
It's the stall acquisition effectively.
We implemented SAP went live had good success in the wake of that implementation as we continue to ramp volume the mix shift that Greg referenced to a more engineered to order balance.
Balance of production had an impact on planning activities somewhat impacted.
Impacted by supply chain challenges as well and that created a level of disruption in the period that led to productivity losses, we are implementing a.
An adjustment to the planning module for that system is it's an additional tool that we're confident we will enable our eto highly complex eto business to have a much more efficient planning and execution process and don't anticipate that'll have a disruptive impact on the business and we're implementing that as we see.
And that will continue into the first quarter of next fiscal year, when we'll start to see some benefits begin to be realized.
Okay, Great and then.
Greg during the.
Thanks for that David.
You talked about that $3 7 million dollar productivity.
I'm sorry could you could you just provide the details of that again, yes.
So that so the negative productivity is largely due to this issue that we're talking about.
With the mix shift in our culture saw factory and remember the stall businesses. The highly engineered explosion protected products and they have very very complex bombs that are more than that are much more than S&P can handle so we'd have to add an additional system onto it that well.
Help us from a planning perspective, and it will increase.
It's really will improve our production planning as well as improve our capacity utilization, which is really where the productivity.
<unk> comes comes into play so that was the lion's share of the negative productivity that we had okay. Great. Okay. Okay, and then I wanted to ask you about the.
There was a comment David I think that you made about.
Lower quote to order turns.
And I wanted to ask about.
Last quarter in the second quarter.
You called out that there was a lot of quoting activity was there something that changed in the last three months that.
Theres delays in some of these.
Quote to order times.
Yes, so quote activity while it actually is remaining very robust we're in great conversations with customers there is.
High levels of demand around quotation activity the conversion on those quotes to orders has taken longer and what we saw was that that began to take effect in Q2, and we talked about that in the last call. That's what you're referring to I believe and as we progressed through this quarter. We saw that continue but we are seeing many <unk>.
Projects that had been stuck in that cycle start to break loose as we've come into January and that's very encouraging I don't know.
All cases, what all the drivers are but I would say, we're seeing a new capital budget as people enter their new fiscal periods and we're seeing a better view one stabilization around economic activity, perhaps or a later cycle.
Recession, if there is a view there is a recession and so people are moving forward with investments that they were pausing on as we saw them pause through the last couple of quarters. So the quotation activity if I if I Miss communicated that is not an issue.
Demand visibility looks good it's more the conversion and the timing on those projects and how they're they're coming through.
Okay, great great. Thanks for that clarification that sounds very good.
And maybe just a last one for me.
On the gross margin conversation.
You guys have that 40% target.
Which is great and it sounds like there's a little bit of a headwind. This quarter. How are you thinking once you get through that.
That that rail.
Gross margin issue. How do you are you looking for more step change like you had in 2023 and 2024.
More incremental.
Yes, I'll take that at Walt it's really going to be.
<unk> improvement process that we're going to.
Step up.
In essence, we'll be exiting this year at roughly the 37% gross margin level and.
Over the next.
Four plus years, we really would need about 300 basis points to get to the 40.
Percent.
Gross margin in fiscal 2007, so we think it's going to be more of a steady level I think it's going to be steady and progressive we're going to try to put more proof points on the board each time, we report in <unk>.
Pointing to how we're climbing that hill, but if you think about it on an linearized basis, you might be thinking at a 75 basis point kind of climb per year to get to that 40% and there will be some lumps in there with some larger initiatives that we have planned that maybe.
More a year plus out in terms of timing and impact but the.
Progression through productivity improvements, our 80 20 work.
The work that we're doing around <unk>.
Better.
Better management in the supply chain and the visibility to our planning will enable us I think to show steady and.
Consistent progress.
Okay sounds great. Okay. Thank you very much.
Thanks, a lot.
Thank you. The next question is coming from Patrick Baumann.
J P. Morgan. Please go ahead.
Alright, good morning, Thanks for taking my questions.
Morning.
A quick one just mechanically on the backlog just.
With book to Bill below one in the quarter how is it how did it hold up stable sequentially like was like what what are kind of moving parts. There. Yeah. So it was more FX driven I guess, yeah, Pat than anything else. If you think about the move.
Move in FX in the period, we saw book to Bill that was less than one we shipped $2 30, we booked $2 15 in the gap is really the FX adjustment in the period, it's all FX pads. So the backlog is as mark too.
U S dollars as of September as of December 31, so.
And as you know the euro moved quite a bit from it.
Basically being below one.
End of September to roughly I think today, it's around 109.
So it would've been around 108, roughly at the end of December .
Okay understood.
And on the orders.
Dynamics.
You said, 6% growth in January which I think you said its sequential versus maybe just.
The third quarter.
My Pet's first sequential versus the third quarter up about 6% on a period to date basis through Friday of last week.
Got it yes, so you'd kind of be up.
And to kind of close to 230, maybe if that continued.
Through the quarter from the $2 15 number.
Hi, My question is.
Assuming.
Supply chain eases. So you can work down the backlog to more normal levels.
What absolute level of orders do you think you need to support an outlook for low to mid single digit growth in revenue in 2024.
Yes.
We're forecasting that we see demand continue at current levels that where we're seeing a relatively stable base of activity.
Through the period and we can support the level of outcome that we talked about with a stable base of demand and so it is not.
Really aggressive or ambitious as it relates to increasing order activity nor is it assuming any material declines in demand.
And we're obviously working on initiatives that will help us to grow and to gain access to more opportunities and so if things do improve we will certainly be seeking to capitalize on them, but we.
We think that with the basic stable continuous performance that we like we've been having we can we can execute to those levels.
What is what is kind of I think you've said this in the past what's the normal backlog level like what's kind of a more normalized level than the $3 30, you're at right now so.
So if you look at the legacy business, we have about $125 million more backlog than historical levels and so that means we're roughly at we used to run say roughly at $160 million of backlog. So that would take you to $2 85, and the difference between the $329 285 is the precision convey.
Lance.
Backlog for Guardian Doner.
Got it.
Okay. That's helpful.
And just one quick one on your SG&A side.
The commentary around.
In the slides and I think on that.
On the interim around.
Working too.
Find more cost reductions like what's.
Can you give some color around that.
Actions, you've taken there and that may be actions, you've already taken as well and then how we should think about the run rate of our SG&A into next year.
Okay, Yes, so Pat.
Yes.
We're not satisfied with our <unk> as a percentage of sales and as we plan for next year and we think about the volume that we have in the business.
Given the moderate growth that we were talking about we think that there is a need for us to be more proactive as it relates to the cost base clearly what we've said in previous discussions is that we're going to get benefit from scale and thats very true and as we execute on our strategy and grow the business there are opportunities for us to get good scale on the <unk>.
Investments that we had in place, but we're also taking a proactive approach to the new structure that we've put in place that enables us to unlock we think some more value as it relates to that cost structure.
And.
So we're taking a hard look at that in the period were not giving a specific guide at this point, but.
We'll probably be more prepared to talk about that as we enter Q1 and finish up this year, yes, so pad overall and as we think about our long term target of 21% EBITDA margin.
We're looking at roughly 40% gross margins SG&A as a percent of sales of roughly 21% and then there is.
A point and a half add back for depreciation so.
Getting to 21% is a combination of being really efficient with our spend but also scaling as David mentioned.
Got it got it okay. So in a year in which maybe the growth isn't there.
Hi, as you would want in the long term plan you would look to be more efficient I guess on your spend it sounds like yeah look at structural costs and structural costs and we will benefit from a lot of the investments that we've made in digital investments over the past year, including.
A couple of SAP implementations this past year vault into <unk> as well as in Mexico.
Okay that makes sense.
Thanks for the time I appreciate it.
Thanks Pat.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time.
The next question is coming from Jon <unk> of CJS Securities. Please proceed with your follow up question.
Hi, guys just a follow up on the large customer that is currently paused in E Commerce do.
Do you expect them to come back in the near term at any point in would be at a similar level of scale or something different I assume their push for automation is going to decrease at all so just wondering what your thoughts are.
Yes.
Yeah. That's a great question, John and we are very actively engaged in dialogue with them as a customer and working with them and many other customers in the space and excited about the opportunities that exist. There, obviously, it's a pretty material impact to absorbed in AR.
Nine month period, but we.
Really proud of the team really excited about the investments we've made in this space and think that the longer term opportunities. There are really great and so when you look at what will happen over time and the Capex that will be spent in automating.
Delivery and execution as people think about e-commerce or E delivery, we think we're going to really see some nice developments there both with this customer and others and so the discussions that we're having involved project opportunities that are every bit as large as what we've experienced in the past and could be even more significant but obviously that.
It depends on timing and how things developed and the pace at which they do but when you look more broadly at the market in general.
And you think about the distribution and execution of order fulfillment and the automation needs in that environment and our focus on being very relevant there I think there's a nice opportunity.
Got it. Thank you and then just coming back to the improvement in cash flow I know, you're planning to pay down $10 million of debt and what's the plan for the excess at this point I know you're going to be purchasing some shares.
Are you planning to keep that powder dry or is that does that.
Potential use of the capital yes.
Yes, so we will be pushing the entire quarter on the cash front to reduce inventory and collect more receivables et cetera, and a lot of times. The last couple of weeks of the quarter is when you see a pretty significant spike as well from a full court press on and so we will probably end up with the cash on the balance sheet.
Okay got it thank you.
Great. Thanks, Sean.
Thank you at this time were showing no additional questions in queue. At this time I would like to turn the floor back over to management for any additional or closing comments.
Great. Thank you Donna we appreciate everyone's interest in Columbus Mckinnon in closing Q3 represented another proof point, along the path to delivering on our strategic objectives, we had double digit growth on a constant currency basis.
32% increase in operating income, we made progress towards improving customer experience and we further reduced debt.
We are excited about our future and we look forward to updating you again after we close out the fiscal year have a great day everyone.
Ladies and gentlemen. This concludes today's event you may disconnect. Your lines at this time or log off the webcast and enjoy the rest of your day.
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