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Edited Transcript of CMCO earnings conference call or presentation 31-Jan-19 3:00pm GMT

Q3 2019 Columbus McKinnon Corp Earnings Call

AMHERST Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbus McKinnon Corp earnings conference call or presentation Thursday, January 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah K. Pawlowski

Kei Advisors LLC - Chairman, CEO and Founder

* Gregory P. Rustowicz

Columbus McKinnon Corporation - VP of Finance & CFO

* Mark D. Morelli

Columbus McKinnon Corporation - President, CEO & Director

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Conference Call Participants

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* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Joseph Logan Mondillo

Sidoti & Company, LLC - Research Analyst

* Matthew Butler Koranda

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Columbus McKinnon Corporation's Third Quarter Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Deborah Pawlowski, Investor Relations for Columbus McKinnon.

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Deborah K. Pawlowski, Kei Advisors LLC - Chairman, CEO and Founder [2]

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Thanks, Brenda, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon.

On the call with me today are Mark Morelli, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the third quarter fiscal 2019 financial results, which were released earlier this morning and if not, you can access of those as well as the slides that will accompany our conversation today, at our website, cmworks.com.

If you'll turn to Slide 2 in the deck, I will first review the safe harbor statement. As you are aware, 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 compared in accordance with GAAP -- prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release and the slides for your information.

So with that, please turn to Slide 3, and then we'll turn it over to Mark to begin. Mark?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [3]

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Thanks, Deb, and good morning, everyone. We delivered another quarter of solid results and remain optimistic about our future. We're demonstrating excellent execution of our Blueprint for Growth strategy as we are improving the earnings power of Columbus McKinnon.

For the quarter, we had strong organic sales growth of 6%, adjusting for the impact of FX, as we gained share by improving availability and shortening our lead times for quotes.

Upping the strong sales growth was a $3.5 million rail project we delivered in Saudi Arabia in the quarter as well.

For the seventh consecutive quarter, gross margin expanded year-over-year. Gross margin was 33.8%, expanding 90 basis points. On a GAAP basis, we had a diluted loss per share of $0.03 in the quarter that was driven by the noncash charge associated with the remaining businesses held for sale. However, on an adjusted basis, diluted earnings per share improved 39% to $0.61.

Further, adjusted EBITDA margins expanded 130 basis points to 14.2% and stands at 15.1% year-to-date.

Through our self-help strategy, we're deploying our operating system that includes our 80-20 process, which is helping to drive significant bottom line growth.

In fact, we realized $5.5 million in savings in the quarter from our strategic initiatives. There's a long runway ahead of us with a lot of opportunities to further drive improvements.

We continued to generate strong cash flow. We paid down $50 million of debt year-to-date. Our net leverage ratio has crossed an important milestone as it's now below 2x net debt-to-EBITDA, once again, ahead of target. We will continue to prioritize our cash to reduce debt and improve our net leverage ratio.

Another important metric for us is ROIC. With the strength of our financial performance, adjusted ROIC was 10.5%, an improvement of 190 basis points year-over-year.

Please turn to Page 4 and let me update you on our progress with our Blueprint strategy. We are currently in Phase 2 of our Blueprint for Growth strategy and it has 3 focal points: Simplify the business, improve productivity and ramp the growth engine. We've employed our 80-20 process across about half of the company thus far. On previous calls, we've discussed elements of our process as part of our earnings power acceleration operating system.

We also spoke about product line simplification and the launch of our new wire rope hoist platform. We now expect to have our legacy model rope hoist line completely converted to the new platform during the first half of fiscal 2020. The conversion lowers our costs and significantly reduces our SKUs while enhancing our product offering. The new hoists are more compact, offer more features and run smooth and quiet due to their superior engineering.

Our expanded product range allows us to compete in the high end of the market with the STAHL brand and leverage the Yale brand in the midmarket for a very competitive offering.

Our execution of the 80-20 process is clearly demonstrating results and we're confident we're on the right path and we can deliver more.

Of the approximately $7 million of savings we've identified in fiscal 2019, $4.1 million has been captured year-to-date.

Through the simplification lens, we identified the 3 divestitures disclosed previously: The tire shredder business was sold on December 28, 2018. We signed the stock purchase agreement yesterday for the sale of CES, which is expected to close at the end of February. We are making progress on the sale of the remaining business, which is the German forging operation.

The second focal point is Phase 2 -- of Phase 2 is improving productivity. Our success here is demonstrated in several areas. First, our operational excellence initiatives are improving efficiencies at our factories and generating considerable savings. Of the nearly $8 million saved through productivity improvements, $3.5 million is directly attributable to operational excellence.

Our focus on eliminating waste and reducing the amount of indirect labor is paying off. In fact, we're improving productivity by reducing indirect labor support levels. Other actions include improving material productivity and streamlining scheduling processes.

We're investing as well in upgrades like paint systems and intensified training for operators to improve throughput and quality.

Second, with the combination of operational excellence and product line simplification, we're able to consolidate factories in Ohio and eliminate about 50,000 square feet. This consolidation should be completed early in fiscal 2020 from which we expect approximately $2 million in savings.

Ramping the growth engine is the third point of Phase 2. Here, we focus on enhancing our professional grade position by improving our product offerings and delivering solutions that offer greater productivity and safety. We believe this will position us in higher growth applications and lead to market share gains.

Our variable speed drive hoists are gaining traction with customers. We're launching our Lodestar VS, now in a full range of 1/8 to 3 tons capacity. This product lines features CM HI-Tech, which stands for hoist interface technology, a unique, easy to use computer interface.

This gives operators the ability to quickly adjust hoist speed and performance parameters to deliver the precision load control their applications demand.

We also see one of our core values, be easy to do business with, as a means of growing sales. This is another area in which our team is making major strides. Our digital tools, specifically our cloud-based configuration tool Compass, is a great example. Compass is an enhanced tool on our digital platform that improves customer productivity. Our customers complete their design work online more efficiently and we continue to increase the number of products offered on the platform while quoting activity continues to grow.

We expect further enhancement to continue to outpace the competition and are aligning resources to improve new product development.

In April, we're opening our Center of Excellence in Charlotte, North Carolina. By centralizing key talent, we believe we can more efficiently drive product development, new line customer tools and operational efficiencies. This focuses our human capital rather than spreading people and investments too far and too thin.

With that, let me turn the call over to Greg to cover the financials. Greg?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [4]

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Thank you, Mark Good morning, everyone. On Slide 5, consolidated sales for the third quarter of $217.4 million were up approximately 4% from the prior year. Without the impact of FX, we saw organic sales growth of $12.7 million, or 6.1%. This was slightly better than the top-end of the outlook provided last quarter of 4% to 5% sales growth, excluding adjustments due to foreign currency translation.

Sales volume was up $9.9 million or approximately 5% and pricing was higher than the previous year by $2.8 million or 130 basis points.

Year-over-year, pricing improved about 30 basis points from Q2 levels, largely due to our 80-20 pricing initiatives.

As you know, we typically raise prices for the majority of our businesses in fiscal Q4, and those plans are underway. While the markets are competitive, we have demonstrated our ability to capture pricing annually.

Foreign currency translation remained a headwind in the quarter of approximately 2% and we expect the headwind to get worse in the fiscal fourth quarter.

At today's foreign exchange rates, the headwind will be in the range of 3% to 4%. We saw solid growth in the U.S., and non-U. S. sales results were positive despite the impact of FX.

For the quarter U.S. sales were up $7.9 million, or 7.3%. Sales outside of the U.S. were up $800,000 or 0.8%.

Excluding the effects of foreign currency translation, we saw organic growth of 4.8% outside the U.S.

It's important to note that our non-U. S. growth included a large rail project that Mark mentioned, which was valued at approximately USD 3.5 million, delivered to the Middle East. We feel good about the sales performance this quarter, which is historically our weakest quarter from a seasonality perspective. We believe we are growing share in key markets and executing well.

On Slide 6, we recorded a strong gross margin of 33.8% in the quarter. This is a 90 basis point expansion in gross margin from a year ago, and it's our seventh consecutive quarter of year-over-year margin expansion.

As you know, Phase 2 of our strategy is focused on simplification and operational excellence. We're seeing good traction with driving margin expansion as a result of these initiatives.

Let's now review the quarter's gross profit bridge. Third quarter gross profit of $73.4 million increased by $4.7 million or 6.9% compared to the prior year. The 3 largest contributors to gross profit expansion were higher sales volume, productivity, and pricing net of material cost inflation.

Sales volume contributed $2 million of gross profit while productivity and pricing net of material cost inflation each contributed $1.6 million.

Year-to-date, we've achieved a record level of productivity of $7.9 million as our strategy takes hold. The impact of higher pricing continues to offset raw material inflation and tariffs.

We expect tariffs to have up to a $1 million negative impact in the fourth quarter.

In fiscal 2020, with the current tariff schedule and no mitigation efforts, tariffs will have about a $3 million negative impact on gross profit.

We are actively working to mitigate this headwind. Foreign currency translation reduced gross profit by $1 million this quarter.

As shown on Slide 7, higher SG&A costs were $47.5 million in the quarter or 21.9% of sales. This is an improvement of 260 basis points from the previous year.

As a reminder, the prior year third quarter included pro forma cost totaling $4 million and the current quarter has pro forma cost of $500,000.

In addition, FX was a benefit in the current year of approximately $800,000 or 160 basis points. Selling costs decreased by 6.3% and G&A cost decreased by 8.7%. Selling cost decreased due to FX and some structural cost changes. The decrease in G&A cost is due to FX and $3.4 million of pro forma cost that occurred in the prior year for STAHL acquisition cost and a net reduction in insurance recovery litigation cost compared to the prior year.

Excluding these pro forma costs and the impact of FX, G&A costs were up 9.5%. This was primarily due to higher annual incentive comp and stock comp compared to the prior year as a result of the company's strong financial performance this year.

Our fourth quarter forecasted RSG&A run rate has been lowered as a result of the tire shredder divestiture and is expected to be in a range of $47.5 million to $48.5 million.

Turning to Slide 8. Adjusted income from operations grew 29% to $22.9 million or 10.5% of sales, a 200 basis point improvement over the prior year. Our adjusted operating leverage in the quarter was 59%, which is a strong leverage ratio.

Overall, our operating performance is driving earnings power. As Mark noted in this quarter, we achieved savings of $5.5 million related to our Blueprint for Growth strategy.

We had a noncash charge this quarter related to an additional impairment on our businesses held for sale. The total charge of $16.7 million was a result of our updated estimate of fair market value. This was partially offset by a $1.1 million gain on the sale of the tire shredder business.

While the impact to GAAP operating income was $15.6 million, these are small, noncore businesses and are not reflective of the earnings power of our core business.

As you can see, on Slide 9, GAAP earnings per diluted share was a loss of $0.03 that reflects the noncash charge I just discussed. Adjusted earnings per diluted share was $0.61 compared with $0.44 in the previous year, an increase of $0.17 per share or 39%.

On a GAAP basis, our effective tax rate in the current quarter was 134%. This was impacted by the impairment on the remaining businesses held for sale, which is nondeductible, partially offset by the reversal of the transition tax related to the Tax Cuts and Jobs Act. We have finalized the accounting for this and do not believe that a transition tax is required.

While we expect the full year tax rate to be in a range of 27% to 29%, we believe our normalized tax rate is 22% and that the rate used to calculate non-GAAP -- and this is the rate used to calculate non-GAAP adjusted EPS.

On Slide 10, we continue to expand our adjusted EBITDA margins. On a year-to-date basis, our adjusted EBITDA margin was 15.1%, an increase of 140 basis points over last year. We also continue to make progress on driving our ROIC higher and are now at 10.5%.

As a reminder, our Blueprint for Growth strategy goal is to achieve 19% adjusted EBITDA margins in fiscal year 2022 and achieve an adjusted ROIC and the mid-teens.

Turning to Slide 11. Our working capital as a percent of sales was 17.9%, an improvement of 180 basis points over the trailing quarter. This was due to a 3-day improvement in DSO performance for the company overall.

Last year's fiscal third quarter was 50 basis points lower due to the impact of the STAHL acquisition. Inventory turns were 3.8 turns, an improvement over the trailing quarter. We think there's opportunity to further improve inventory turns going forward.

On Slide 12, net cash from operating activities for the quarter was $26.2 million, which was higher than the prior year amount of $16.5 million.

Year-to-date, we have generated approximately $47 million of operating free cash flow. We expect strong cash flow generation and free cash flow conversion in the fiscal fourth quarter. Our guidance for capital expenditures for fiscal 2019 has been lowered to approximately $10 million to $12 million for the year.

Turning to Slide 13. Our total debt was approximately $315 million and our net debt was approximately $257 million as of December 31, 2018. Our net debt to net total capitalization is now below 38%.

We repaid $25 million of debt in the third quarter and have reduced our term loan debt by nearly $120 million since acquiring STAHL 2 years ago today. We made excellent progress delevering and have achieved a net debt to adjusted EBITDA ratio of 1.99x, which is now below our targeted net leverage ratio of 2x.

From a capital allocation perspective, our plan is to use our free cash flow to continue to delever our balance sheet. We expect to exceed our debt repayment target of $60 million in fiscal 2019.

Please turn to Slide 14, and I will turn it back over to Mark.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [5]

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Thank you, Greg. Let me give you some color on our markets. Globally, entertainment remains a sweet spot for us where our new black load chain offering has been well received. There are more applications for automation in the entertainment segment that plays into our brand positioning and offerings.

On the industrial automation front, our DDC Series 2 new drive platform for the conversion of old DC power cranes in factories such as steel mills is a leading choice for these engineered to order projects.

The relative strength of the oil and gas industry is driving mid and downstream activity and is an area of growth for us. Globally, our oil and gas, petrochemical and power generation customers look for the precise and safe lifting and positioning of heavy equipment. In many cases, these markets require explosion-proof hoists, which is a core competency for us.

In the construction industry, where backlog is quite high, confidence remains strong in the distribution channels for construction equipment and contractors.

In the utility market, where power grid modifications are expected to drive demand for our new strap hoist launching in March. While lumpy, our rail project pipeline is stronger than it ever has been. Customers are upgrading infrastructure and electrifying rail systems as they expand new routes and replace diesel trains.

I'd say a soft spot might be automotive, however, we're still seeing model changes. The advance of new models of SUVs, trucks and electric vehicles is a plus for us.

Geographically, demand in North America remains strong and Europe continues to grow. There were some -- there was some slowness in the Middle East, which was related to project timing. China is less than 2% of our total sales and doesn't have a significant impact on our results.

As we've discussed, we're making excellent progress with our Blueprint for Growth strategy. We're advancing through Phase 2 with many successes that are visible in our results.

I'd like to point out that globally, the Columbus McKinnon team is doing a great job. The team is rising to the challenge, embracing the Blueprint for Growth strategy and further transforming into a performance culture. Our new mission, vision and core values resonates with employees and helps us identify with our new collective or core culture.

Our new organization structure is more streamlined and focused on adding value to customers and drives the key tenets of our strategy. I'm very proud of this dedication, commitment and drive to achieve results for customers and shareholders.

Given the continued strength of order backlog growth during the quarter and the solid outlook from customers, we expect organic growth in the fourth quarter of fiscal 2019 to be approximately 4% to 5%. Last year's fourth quarter comparator revenues should be reduced by approximately $3.3 million related to the tire shredder divestiture and $1.5 million related to the expected timing of the CES divestiture.

There's also about $600,000 in related operating income. Our outlook is not adjusted for a foreign currency exchange headwind, which we estimate could reduce revenue by approximately 3% to 4%.

We are on track to achieve our long-term goals over the next 3 years to measurably strengthen our earnings power, reaching 19% in adjusted EBITDA margins and ROIC in the mid-teens.

Allow me to reiterate that our strategy is to improve the earnings power of Columbus McKinnon with a better business model focused on industrial technology. We are confident that the changes we're making create a more resilient business. Our strategy is working. Our team has gained traction and we believe the changes we are making are sustainable. Brenda, we're now ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Greg Palm with Craig-Hallum.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Anyways, Mark, thanks for the commentary on the end market exposure. Was curious if you saw any sort of change or inconsistency with the cadence of sales as the quarter trended on from a month-by-month basis? And curious what you're hearing or seeing so far in January.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [3]

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So the project-related businesses saw very strong demand and our order growth was, I think, well received. We're very encouraged by that. Folks are really progressing well on projects related to steel, aerospace. As I said in my remarks, power generation is very good as well as utility markets. So I think the demand we're seeing on the projects business is very, very good. We do have a seasonal downturn related to the industrial-type products and this happens every year this time as folks who follow the business know, and this is where people try to manage some of their budgets and their inventories for the end of the year, and we saw that normal drop off. So I think there, that was very normal. And I think we probably are seeing an outsized growth in projects which, like I said, we're very happy about.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. Great. As it relates to smart hoists, didn't hear a whole lot on the call, but you've had some more time to digest the initial launch, so just kind of curious what you're hearing from customers. I mean, does it make you more confident, less confident in the opportunity going forward?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [5]

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Yes, it makes us more confident. In fact, we were just now expanding the range and we have a press release that's going out that announces we're expanding an 1/8-ton 3-ton capacity. The feedback we're getting is very well received, particularly because of the ease-of-use interface. And so this is very intuitive for folks, on how you set parameters for the hoist and control it. And so I think it's a very good offering with a really solid to use interface and we're getting some very positive feedback with that.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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And in terms of, kind of overall acceptance, in it -- I mean -- this is sort of a new product set, new application for a lot of your customers so how are they sort of thinking about overall adoption and sort of time line in doing that?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [7]

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Yes, this right now is positioned at the premium end of the market. So it's folks that want to enhance productivity, and I think they see the benefits of this. So I think that it's a very good offering and we feel good about it and as we continue to expand, we'll be pushing more into the middle part of the market. We're also excited because as I mentioned, this launch, we're actually getting preorders for that, which is not normal for us to get preorders ahead of the launch. And setting ourselves to an encouraging sign.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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That's great. Last one for me. You've done a really a fantastic job at delevering here over the past year. I mean, I'm just wondering, have your capital allocation priorities changed at all? I've always thought that additional M&A would maybe be further down the road. But you've got an industrial environment that is softening a bit. I'm assuming valuations are coming in. So curious if that changes your thinking around acquisitions at all?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [9]

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Well, as you know, our Phase 3 does involve M&A. However, we're really comfortable with our current posture of generating strong cash flow and continuing to pay down debt. We haven't fully engaged on Phase 3 yet, we're doing the M&A work. So I don't suspect anything in the near term and I think the capital allocation strategy we have is great, particularly with the current outlooks for the market. So we will continue to pay down debt below the 2% target that we've had. Greg, do you want to make any comment on that front?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [10]

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No, I think that's clearly the focus. One of the hallmarks of the company is our ability to generate cash. And at least for the immediate time, we will continue to delever the balance sheet. We do expect to exceed our target of $60 million of debt repayment for the year. We've already paid down $50 million and we expect, at least for the first couple of quarters next year, until we're more fully into our Phase 3, we'll continue to delever the balance sheet.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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I guess, if I could just sneak in one more quick one. It looks like free cash flow -- it might have been, I don't know if it was an all-time record in the quarter, it was a record for as far as I go back in my model. But have you changed the expectations or estimates for free cash flow this year?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [12]

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Yes, I would say you're right. It's fantastic performance on the free cash flow generation, really, the hallmark of our company. Typically, the fourth quarter is a really strong free cash flow quarter for us and the other thing I would point out it's we have lowered our CapEx guidance for the year from approximately $15 million, to $10 million to $12 million. So obviously, that will increase the operating free cash flow that we generate. And our expectation is that with the new EBITDA margin target of 19% in fiscal 2022, that we would expect more cash flow generation going forward. For example, at least in the $70 million to $75 million range next year. Probably $60 million to $65 million this year. $70 million to $75 million next year.

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Operator [13]

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Our next question is from the line of Matt Koranda with Roth Capital.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Just wanted to start out with a clarification on the Q4 guide. So if I net the FX headwind against the organic guide, come up with something about 1% overall growth combined and then we need to take out the additional headwind from the divestiture of tire shredder and then another $1.5 million related to the crane equipment service business. So altogether, I think it spits out at something like $211 million in total for Q4. Is that sort of roughly directionally correct?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [15]

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Yes, Matt. It's Greg. Yes, you're thinking about it absolutely right. It's going to be in the neighborhood of $210 million to $212 million is our best estimate at this point.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

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Okay, got it. And then, I mean, the underlying organic growth is still pretty healthy. Just wondering if you could talk about the key drivers of that growth in the coming quarters and the, typically, the way I think about some of the macro data that comes out, that leads -- that's kind of a good leading indicator for Columbus McKinnon, if I look at PMI or capacity utilization figures globally, I mean, there are puts and takes around the world but I would say, in general, the direction is either sort of in decline or maybe in the U.S., it's obviously, still expanding, but just at a lower rate. What are the key drivers to just kind of sustain that low single-digit to mid-single-digit growth rate in the out quarters? I mean -- I know you guys mentioned share take as something that seemed critical to the quarter and your organic growth there and the outperformance. But wondered if you could talk a little bit more about share take, your expectations for unit growth and then also pricing as we move into fiscal '19 and then I guess, just '20 for you guys.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [17]

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Yes, we've really got some really good initiatives that are really driven by the 80-20 process because it gives us the clarity of what we should focus on and we talked a lot about how we shed bleeders as part of that, but there's also parts of the business that you want to emphasize and we deploy more around that. I think an excellent example of that is the -- this project we talk about, this wire rope hoist platform consolidation. It's not really a cost reduction for us. It is really a repositioning of that product line and it helps us to expand into different market segments as well as well as added capacity. That's a great example of how we get better coverage with a better product and translates into share. The second point that I'd like to make is that some of these digital tools, particularly in an environment where supply chains are stretched, customers are actually stretched with resources. It might be hard for them to get labor to be able to focus on these kinds of things. If you can improve their productivity, you're going to be a lot easier to do business with and that actually leads to share gain because folks need to get their work done and if you can get it done quicker and easier and by the way, reduce lead times and lead times on quote and on products, then you're going to gain share. And I think that's exactly what we're beginning to see. I don't think we're going to see huge outside growth if the markets go down, but I think we feel really good about a low growth environment, which is very healthy for us and our strategy is perfect for that. So I think we see good markets as you said. If there is slow growth, we're very happy to enjoy that slow growth with our strategy.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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Okay. I heard a lot of commentary about share take in there, which is positive. Anything else on sort of the pricing environment as we head into sort of a critical time period for you guys where you typically make -- make price increases?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [19]

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Yes. So we did see our year-over-year pricing increase from about 1% the last couple of quarters to 1.3%. And that would have been largely due to some of our 80-20 initiatives, but as we go forward, you're right. We have a number of our businesses that raised price in this fiscal fourth quarter, our U.S. business being the largest, has a mid-March, early March effective date. So right now, we've gone out with what we expect and it's a competitive market and you don't unfortunately get all that you ask for, but we'll continue to press on that. We've had good pricing leverage in Europe. Their prices went into effect in January and some of our other businesses have price increases effective in April. But all in all, I'd say, we're cautiously optimistic. We'll continue to drive pricing forward and they'll continue to offset some of the headwinds we see with tariffs and raw material cost.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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That's helpful. And then last one, since you mentioned 80-20. Wanted to attack it from the savings front. It looks like you're expecting an incremental, roughly $3 million in savings in the fourth quarter for you guys, from 80-20. So maybe you could talk a little bit about the buckets that that's coming from? I think Mark mentioned some of the simplification of the wire rope hoist product, but any more color on that? And then for fiscal '20, I think you guys had said that 80-20 savings should be higher than the $7 million that you're doing in '19. So any way to dimension that or directionally, kind of provide a little commentary on where that should be, that would be helpful.

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [21]

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Yes. So your math is right, Matt, on that. We are targeting $7 million of savings. We've achieved $4.1 million in our -- through December. So that implies about another $2.9 million in Q4 and it comes from a number of areas. I mean, there's customer list simplification, product list simplification. We're also looking to service our bigger, more important customers better and we call that our ratings fans program. As a result of that -- and a refocus on where we're making money and perhaps where we're not making money, we kind of redeploy resources and in some cases, we've taken some indirect costs out of our facilities as we simplified our manufacturing processes because we've got less product that is being made. So it comes from all those areas, and it's typically a gross margin story. And it's -- there is some incremental pricing that comes from it that we saw in this past quarter. About half of the company is into the 80-20 process now. The other half is going to get going with it this calendar year. So we're excited about that. One of our businesses is further along than others and that's in the U.S., in our industrial products business and we're seeing a lot of good savings coming out of that business.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay, and then for fiscal '20, anything more directional in terms of the magnitude of the savings, I think you guys said, it's going to be more than fiscal '19. But is that what we'll leave it at, at this time or any additional color?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [23]

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Yes. No, I think at this point, I don't -- we're not ready to go out with another target. What we do know is that we got started in and around the March time frame this past year. It takes a bit to get trained, and analyze the data to make decisions, to implement decisions. So we'll see the full year run rate next year. And then for the businesses that haven't started the process yet, we've got the run the analytics. So it's too premature to talk about what we might see there.

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Operator [24]

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Our next question comes from the line of Joe Mondillo with Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [25]

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Just to follow up on that, I guess. Looking at the other sort of 50% that you have to tackle on 80-20, what kind of time frame -- I mean, you just mentioned that there's some analytics that you have to look at before starting to implement. But I think you initially started with North America or your sort of maybe easier, low-hanging fruit ways to implement. I'm just wondering sort of what kind of time frame are you guys sort of thinking about overall level in terms of that other half of 80-20? Is this going to be within the next 6 to -- 4 or 5 months, do you think you're going to be starting to implement? Or is there going to be a pause between what you've done so far and tackling the rest of things?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [26]

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So this is a phase activity, as you can imagine. You can't do it all at once. So I think we -- as you said, we tried to start with areas that we thought might be some low-hanging fruit. But we are starting with our engineered products -- lines of products now. And we'll be moving that forward next. And then we, obviously, have our STAHL business that we're also keying up for later in this calendar year. So I think we do have a good pipeline of activity here. Folks are really engaged. I think people are really excited about it because they see the benefits of it. And so I think we are pretty methodically moving through the company here at a pretty good clip. So we'll update you more as we go through it. But we're going forward, for sure.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [27]

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Great. And then in terms of sort of productivity improvements and maybe potential efficiency improvements with square footage, whether it's consolidation or anything else that you can sort of take advantage of, how should we think about what you've done with that and how much room of improvement you have with that?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [28]

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So great question because it gives me an opportunity to highlight that we've really added a lot of new talent here in our operations team. As you know, Bert Brant came in, headed -- Head of Operations. We're also bringing in new folks in terms of supply chain, operations leads and also on our safety side. So the team is really getting their legs under them and really digging in and what's encouraging about it, it's very data-based approach where we look at some facts on how we can tackle the problem in a logical order where we can get some of the biggest benefits. And it's encouraging because it really shows how much opportunity there is in this business and what a tremendous runway of opportunities we do have. So it's a fairly new team. We've done a lot of topgrading to the organization and bringing in folks that really have seen some best class examples out there. And I think for a company like Columbus McKinnon who's been on a lean journey, it really ramps up our approach significantly. So we're very encouraged, not only with what we're beginning to see we can deliver, but what more we can deliver.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [29]

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Okay, and then, just looking at the core business, taking out -- and I don't know -- taking out sort of the restructuring benefits and everything that you're getting from that, in terms of the incremental margin, could you sort of update us on how you think about sort of, just normalized core incremental margins?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [30]

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Yes, I think you're kind of referring to kind of the operating leverage, Joe?

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [31]

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Yes, that's correct.

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [32]

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So historically, the company's always had really strong operating leverage and it's historically, we would have said it's somewhere between 30% and 40%. I would say that we are expecting that to actually go higher because a lot of our strategy is of -- is a self-help strategy, where we're driving -- our performance driving costs out of our products. And we would expect -- like this quarter for instance, our operating leverage was 50 -- almost 60%. I think last quarter, it was over 100%. So as we're able to move our initiatives forward with this strategy, we should continue to see very strong operating leverage. So our strategy isn't dependent on high growth. It's kind of a low growth assumption. But yes, we still think we can drive roughly 400 basis points of EBITDA margin improvement.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [33]

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Okay. And just to clarify. When you say sort of, should be higher, are you accounting for sort of all the benefits that you're going to see from savings of less personnel here, or less inventory and the process over here is more efficient, so we're seeing savings there? In terms of the incremental savings, I'm trying to sort of take that out and just think about, sort of the incremental margins ex future cost savings relative to restructuring. Is that still sort of the case in terms of your comments relative to higher than the 30% to 40%?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [34]

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Yes, I would say -- if I understand your question, I would say that once we've made more progress with our strategy, we would expect to have higher gross margins than the 35% level we have today and so probably, on a normalized basis down the road, it's probably in the 40% to 45% leverage. So higher than the historical 30% to 40%.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [35]

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Okay, perfect. And then I also wanted to ask just in terms of geographical exposure and what you're seeing. It seems like the common theme around the industrial sector is Asia and China, are sort of the worst. And it's bled a little bit into Europe and they're seeing a little bit of softness, but not as much as China. U.S. is holding up, seemingly the best. Your non-U. S. sales, I guess, if you exclude that rail shipment, it looks like maybe down a little bit, low single digits. And it was sort of flattish, even including that rail shipment. Sort of how are you -- could you talk about your non-U. S. exposure, what you're seeing, what you're hearing and what the trend is going into this quarter beyond what you're seeing?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [36]

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Yes. So I would concur with some of your statements that the China area or Asia Pacific, it might be a bit slower. It's not a large part of our business. And I think net-net, we have more opportunity to gain share. In Europe, we're seeing a slower growth environment, but our business continues to be strong. And as we said in our remarks and on the other Q&A here, that we like a slow growth environment because it works really well for us. So we don't have any concerns there. We do see continued demand going forward, and so we're very comfortable with where that business sits, but it certainly has slowed a bit compared to last year this time. In Europe -- excuse me, in the U.S., things continue to be quite strong and as I gave some color as well, we see some real strong project demand. Actually, that demand is continuing into this year, this calendar year. So our outlook, from our visibility, is good. And so we don't have reason to be really overly concerned. Obviously, you read a lot on the macro trends. But right now, things look pretty good to us.

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Operator [37]

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Our next question comes from the line of Walter Liptak of Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [38]

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I wanted to ask, kind of a follow-on to the last one with the revenue growth for next quarter, the 4% to 5%. Are you expecting that across-the-board or are there -- is the U.S. is stronger, some international, weaker? I guess, a little bit of guidance on a regional basis, please.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [39]

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Sure. Well, we continue to see strength in the U.S. market. I would say the North American markets because Canada's also strong. And once again, I think Europe is seeing some slow growth. I can give you a little more color on that compared to the Middle East. We did see the Middle East fall off a little bit. But we believe that's due to project timing issues. We have a lot of oil and gas projects into the Middle East and there's a normal ebb and flow of that based on project timing. So we're not really concerned about the Middle East, but we did see some weakness due to the project timing. But Europe continues to grow and I think net-net, we have more opportunities to expand in China and Asia just because we have such low share, but we're not exposed there as other companies may be. So we're not really feeling as much impact from that.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [40]

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Okay. Okay, let me ask another one, just on the EU. And you commented that project-based business is where you got the best visibility. Is the EU a heavier project region of the world? Or is it more distribution, book and ship business?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [41]

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Yes, it's about equal mix. The STAHL has a great historical project business there, but we also have an industrial products base. It's more historical at Columbus McKinnon. So we definitely have a -- we see both sides of that.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [42]

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Okay. Okay, and if I could ask a pricing one. Do you guys do an annual price increase? And if you did, I wonder about when it was implemented and how much can we expect at the top line over the next 12 months from that?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [43]

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Yes. So Walt, it's Greg. We typically raise prices annually and the timing is different depending on the region of the world. So in the U.S., that is underway right now and that has been announced to our customers with early March effective date. In our industrial products business in Europe, that has already been enacted, effective January 1. In Asia Pacific and Latin America, that is an April 1 timing. And STAHL as well would also be an April 1 timing. So in terms of where we're going to end up, it's probably too early to tell. We'll have, I think, a better sense a little bit further down the road. It is a competitive environment. Once again, the company's always proved its ability to get price and we've always have had price exceed raw material inflation, at least over the last 7 years -- 7, 8 years.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [44]

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I'll add some color on that, too, as well. Because the 80-20 process, which is different for Columbus McKinnon, is a lot more insightful on where you actually raise price. So I think instead of just going out to the markets and raising generally speaking, which I think we've demonstrated good traction on, we're a lot more insightful, actually where we should be raising price more. So we're also seeing the benefits of that. So I don't think there's any reason for us to be less pessimistic about price. I think we're more optimistic about price.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [45]

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Okay, that sounds great. And I would like to ask one more question about some of the profit growth and gross margin. I guess, first, just a comment, congratulations on the profit growth, 29% year-over-year and some of the other metrics that you called out. But I wanted to ask one about gross margin on Page 6 and some of those buckets. And I wondered if you were surprised by anything during the quarter that was different versus your expectations to get that little bit of lower gross margin?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [46]

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Yes, Greg -- I'm going to have Greg answer that too, but I want to jump in. Thank you for asking that question, Walt. We were not surprised at all. This is a seasonally down quarter for us. Every Q3, we have less working days. We have -- it's typically a lower-margin period for us. So we saw exactly what would have expected and we also saw the year-over-year growth that we would have expected. So Greg, do you want to give some more color on that?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [47]

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Yes, so on a reported basis, the gross margin year-over-year expanded 90 basis points and that included the impact of -- we're beginning to see some of the costs roll in from the Ohio plant closure. You took that out, we had 100 basis point improvement versus a year ago. I think you're -- when you look at it sequentially, to Mark's point, the third quarter is typically our seasonally slowest quarter. We have 3 less working days. We're absorbing less of our fixed costs in our manufacturing facilities. And then the only other factor this year, which impacted us, was the rail projects. We had record rail sales this quarter and those tend to carry a lower gross margin than our typical business. Although the operating margins are quite strong, it's a business that just doesn't have a lot of SG&A associated with it. So not surprised at all. From our perspective, it's our seventh quarter in a row of year-over-year gross margin improvement and expectations would be that we'll continue to drive margin improvement going forward with the operational excellence initiatives as well as the 80-20.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [48]

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Okay. All right. That sounds great. And if I can ask about -- I can see the seasonal change third quarter to fourth quarter, but are we expecting in the fourth quarter a similar improvement in gross margin as you had last year? I guess, what kind of range should we think about for gross margin?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [49]

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Yes. Well, we don't really give guidance on gross margins, Walt. But I mean, I think if you look at the track record, you can kind of see how it typically rolls out. It would not be a stretch to say that Q4 gross margin's going to be better than Q3's, for sure. Just because there's more shipping days, it's typically our strongest quarter of the year from a revenue perspective. So it's hard for us to pinpoint exactly where we think it's going to end up. That's a lot of moving pieces to it. And the one thing I would say is, there is a lot of upside as well but there are some headwinds that we're offsetting, like tariffs, raw material inflation's been a bit of a headwind this year although that appears to be moderating somewhat.

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Operator [50]

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(Operator Instructions) Our next question comes from the line of Jon Tanwanteng of CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [51]

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Yes, Greg, can you talk about the profitability of the tire and crane business recently, so we can better model the earnings impact as they're divested? My understanding is that they've improved year-over-year compared to the...

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [52]

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Yes, yes. So great question, Jon. We wanted to make it a little easier for the folks who are modeling this and so we've included a slide. I'm not sure if you've seen it, Slide 17 in our deck, which in the appendix section, which basically provides the sales and the operating income for the 3 businesses together for so far this year. And so year-to-date, we've had about $30 million of revenue, $29 million and change, and about $3.1 million of income from operations. And you can see that -- on that page that it's actually -- the income from operations is around $700,000 in the first quarter and it's grown to about $1.5 million in Q2 and then $1 million in Q3. One thing I would point out is beginning in Q2, there was about $600,000 of depreciation, which was no longer being taken, which is a result of the held for sale accounting requirements. And so the reality of it is, is that the Q2 and Q3 earnings numbers are really more an EBITDA number. EBITDA is exactly the same as operating income in those 2 quarters. And so that's part of the change there.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [53]

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Got it. That's very helpful. And then Mark, just going back on a previous question. You talked about share gains. It's great that you're seeing that now. But what are your competitors doing? Are they noticing at all? Or are they standing still? How much run rate for your share gains is there, really?

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [54]

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So it's hard for us to really comment on what actions the competition is taking. Historically, we've been in a competitive market. I like being in competitive markets. It keeps you on your toes. But the key is that we are gaining share and I think we have a lot of headroom in that area. If you look at some of our share over a long periods of time, I think Columbus McKinnon has maybe taken the eye off the ball and I think we've lost some share. And so I think with this real focus and sense of purpose around what really is going to drive value for our customers and follow deployment around that, I think we have some very concrete ways to be able to do that. I think one other area that has not really come into the fold yet is in the area of new product development. And this is the third part of our strategy that we're working on that is really part of Phase 2, is how do we ramp our growth engine and we're just getting started on that. You see some of our variable speed offerings coming out. And we have a lot of great ideas that the folks have been working on. So we think there's a lot related to the automation space, where we see very solid growth and demand at higher margins than -- that are growing higher than market rate. So I think we should think of this strategy as very much about simplification, rationalization in the early innings, but as we get into later innings, it's much more about growth. And I think there's a tremendous headroom here.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [55]

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Got it. That's helpful. And then finally, it's a long way to 2022, where you have your targets out there. If there is a downturn in that time frame, where can be reasonably expect margins to trough? If sales are down 10% or 20% and also given all the things that you're still trying to do to improve the margins and operation until then.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [56]

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Yes, I'll answer generally and see if Greg can answer a little -- with more color. Look, I think the business is not recession-proof. If there is a recession, obviously, the business will go down. However, I think what we fully expect in a low growth environment that we're going to make excellent progress and we're going to make a lot more progress on the bottom line due to our initiatives here. And when you model it, I think the business is going to perform a lot better than it did in the last downturn of equal magnitudes. Greg, do you want to comment?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [57]

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Yes. So John, I think if I understand your question, if sales were to drop, say, 10%, that's roughly a $90 million drop. Everything else being equal, we'd expect to lose 35% to 40% of that and so it'd be about $36 million. And then from there, there'd be a lot of tactical items we would do to reduce that gap and I think we would offset -- I know last time in 2008, I wasn't here. But there was a substantial reduction in SG&A cost. I mean, clearly, the company would tighten its belt on expenses, professional services, you'd readjust the headcount in the factories, so they're -- travel. So all of those tactical things would offset some of that margin, and you can look at the historical -- in 2008, how much progress we did there. But I would say the key point that I would say is that we're going to be starting from a much higher level. And so if we're -- if there's a recession 2 years from now and we're at a 16% or 17% EBITDA margin level by then, yes, there will be a reduction, but we're coming from a much higher level. And so from that perspective, we'd be better than we have been in the past recessions.

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Operator [58]

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Our next question is from the line of Joe Mondillo from Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [59]

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Guys, just a quick follow-up question. Just wondering, as we look towards sort of fiscal '20 and relative to your free cash flow guidance, wondering what your thoughts are on working capital needs as well as CapEx?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [60]

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Yes, so we haven't actually given CapEx guidance yet. We're just in the early innings of our budgeting process. So let me hold off on answering that one. I mean, we do see room on the inventory side. But as the company ends up getting bigger, there will clearly be more receivables -- or as we expect sales to increase, there'll more receivables. More payables as well, but certainly, more receivables. So one thing, I guess, you might want to think about, and I'm not sure if you factor it in, is pension contributions of roughly $12 million a year as a use of cash.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [61]

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Okay, and so -- yes, I'm sorry, go ahead.

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [62]

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And then -- no, and the other item, at least in the short term is the company's having a really strong year. And so there will be bonuses paid out to the management team in probably the June time frame.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [63]

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Okay. So just to follow-up on the inventory part of it. I mean, if you're seeing sort of -- just hypothetically, let's say, low single digits revenue growth. Could you say you could keep your inventory flattish? Is that sort of the -- kind of ballpark thinking?

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Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance & CFO [64]

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Yes. Without actually running the math, I mean, the other way I would look at it is from an inventory turns perspective. We're at 3.8 turns today. We expect to be close to 4 turns by the end of the calendar year -- or fiscal year, sorry. And we'd like to see some more improvement on that next year, but -- yes, okay.

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Operator [65]

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Okay, thank you. This concludes our question-and-answer session. I'd like to turn the floor back to Mark Morelli for closing comments.

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Mark D. Morelli, Columbus McKinnon Corporation - President, CEO & Director [66]

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Thanks, Brenda. Thanks for your interest in Columbus McKinnon. Just for your information, we plan on hosting an Investor and Analyst Day on Thursday, June 13, in New York. We plan to update you further on our progress and our plans for our Blueprint for Growth strategy.

So thanks a lot. Have a good day. Bye now.

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Operator [67]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.