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Edited Transcript of CMCO earnings conference call or presentation 27-May-20 12:00pm GMT

·49 min read

Q4 2020 Columbus McKinnon Corp Earnings Call AMHERST Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Columbus McKinnon Corp earnings conference call or presentation Wednesday, May 27, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Wilson;Incoming President and Chief Executive Officer * Gregory P. Rustowicz Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO * Richard H. Fleming Columbus McKinnon Corporation - Independent Chairman of the Board ================================================================================ Conference Call Participants ================================================================================ * Danny James Eggerichs Craig-Hallum Capital Group LLC, Research Division - Research Analyst * Huang Howe Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst * Jonathan E. Tanwanteng CJS Securities, Inc. - MD * Joseph Logan Mondillo Sidoti & Company, LLC - Research Analyst * Michael Shlisky Dougherty & Company LLC, Research Division - Senior Research Analyst * Walter Scott Liptak Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst * Deborah K. Pawlowski Kei Advisors LLC - Chairman, CEO and Founder ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Columbus McKinnon Corp. Fourth Quarter Fiscal Year 2020 Financial Results. (Operator Instructions) Please note that this conference is being recorded. At this time, I'll turn the conference over to Deborah Pawlowski, Investor Relations for Columbus McKinnon. Ms. Pawlowski, you may now begin. -------------------------------------------------------------------------------- Deborah K. Pawlowski, Kei Advisors LLC - Chairman, CEO and Founder [2] -------------------------------------------------------------------------------- Thanks, Rob, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are Rick Fleming, our Chairman and interim CEO, and Greg Rustowicz, our Chief Financial Officer. Also joining us today are our President and CEO-Elect, David Wilson. You should have a copy of the fourth quarter fiscal 2020 financial results, which we released this morning before the market. If not, you can access the release as well as the slides that will accompany our conversation today at our website, www.columbusmckinnon.com. After our formal presentation, we will be opening the line for Q&A. We kindly ask that you ask only one question with a follow-up question, and then please get back in the queue to allow for continuous flow and adequate time. If you'll turn to Slide 2 in the deck, I will first review the safe harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with 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 those will be useful in evaluating our performance. You should not consider the presentation of additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information. So with that, if you turn to Slide 3, I will turn it over to Rick to begin. Rick? -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [3] -------------------------------------------------------------------------------- Thank you, Deb. Good morning to all of you. Thank you for joining us today. As Deb mentioned, we have a special guest today. During our last earnings call, I shared with you that we hope to identify and hire a new CEO by June of this year. So I'm extraordinarily pleased that even with the challenges of COVID-19, we were able to achieve this target and hire our candidate of choice, David Wilson. As we announced on May 14, David joins us from Flowserve Corporation where he was the President of the Pumps division. Effective on June 1, he will be our new President and Chief Executive Officer and a Director of the company. You will hear from David before we open the Q&A session. Now let's turn to Slide 3. Before we discuss our results for the quarter, I'd like to briefly update you on COVID-19 and its impact on Columbus McKinnon. During these unprecedented times, our response to this pandemic has been guided by our core values with the preemptive values being the health and safety of our employees, the trust of our customers and business continuity. In early March, we established a COVID-19 Task Force, which rolled out a communication process to keep our locations continuously informed. We quickly implemented stringent processes to reduce the spread of the virus with the goal of ensuring the safety, health and well-being of our employees and their family. We seamlessly transitioned over 1,000 employees to a remote work environment. We also implemented the appropriate processes and took the necessary steps to be an essential business and critical supplier so that we could serve our customers while manufacturing in a safe environment that protected our employees. As a result of these actions, I'm pleased to report that all of our manufacturing facilities have been able to remain open except Mexico, which was closed until recently due to government restrictions and our Brighton, Michigan facility, which was impacted by the shutdown of the auto industry. Regarding business continuity, it was clear to us that the sudden and significant downturn in the demand for our products required swift action. We also knew that cash generation and liquidity preservation will be critical given the lack of visibility regarding the duration of the pandemic. So we rapidly took the necessary actions to align our operations to the significant decline in market demand that we were experiencing. We quickly implemented furloughs, layoffs and short work weeks. We also developed a plan to reduce inventories, while continuing to focus on strong on-time delivery performance. Also, we suspended merit increases and bonuses for the first half of fiscal year '21. And importantly, given the successful execution of our Blueprint for Growth strategy and the discipline provided by our business operating system E-PAS, we entered this crisis with significant financial strength. Due to our record cash generation during fiscal 2020, we had almost $200 million of liquidity on March 31, which consisted of $114 million of cash on hand and $84 million available on our revolver. Further, our strong cash generation during the year allowed us to pay down our debt by $51 million, leaving us with a leverage ratio of just 1.1x. Given the COVID-19 recession, we elected to pay only the minimum debt service of $1.1 million in Q4 to preserve cash, and we will likely continue at this level during the remainder of the pandemic. Lastly, our solid financial position enables us to continue to selectively invest in growth initiatives even during this slowdown. I will cover some of these initiatives following Greg's discussion of our financial results. Turning to Slide 4, I'll now discuss our near-term and long-term objectives. For the near term, our goals are to continue to generate positive cash flow and operating income. Our Blueprint for Growth strategy is key to our ability to achieve these goals. In addition to the cost reductions taken to address the COVID-19 recession, we are continuing our focus on the 80/20 Process and operational excellence. In fact, we are ahead of schedule regarding the closing of our Lisbon, Ohio facility. We expect to have this shutdown completed by July and continue to expect about $5 million in annualized savings. Given our positive cash flow and our confidence in our financial strength, we also expect to maintain our dividend during this recession. For the long term, our objective is still to become the market leader in safe and productive motion control products and solutions for our customers. We recognize that our future growth requires continued investment in technology and new products, building and retaining our enterprise talent pool and advancing Phase 3 of our Blueprint for Growth strategy. David joins us at an opportune time to drive the portfolio optimization and M&A efforts of Phase 3 of our Blueprint for Growth strategy. Let's now turn to the results of our fiscal '20 fourth quarter and the year that ended March 31. Please turn to Slide 5. The success of our strategy was demonstrated throughout the year as we expanded margins and achieved many of our financial goals, even as the industrial markets were slowing despite the falloff in demand in the latter half of March, we had a record adjusted gross margin of 36.1% in Q4. For the year, net income was nearly $60 million, and our adjusted EBITDA margin expanded 60 basis points to 15.7% further, the return on invested capital improved to 11.5%. As you can see on Slide 6, we had record cash flow from operations and record free cash flow in FY '20. This performance was facilitated by strong working capital management, as indicated by working capital to sales ratio of 14.5%, a 200 basis point improvement over our third fiscal quarter of this year. Turning to Slide 7, I will now update you on the progress we are making with our 80/20 Process. Not only did we outperform our original goal of a $12 million contribution to operating income in fiscal year '20 we also exceeded our updated goal of $18 million. As you can see, 80/20 contributed $20.4 million to operating income during the year. Most of this contribution was realized in the gross profit line, as previously noted, it also includes the $2 million in savings realized from the closure of the same Ohio facility at the end of fiscal 2019. We achieved this performance despite the $10 million reduction in sales that occurred in the latter half of March due to COVID-19. In fact, we were on track to achieve our previous revenue guidance for the quarter, were it not for the pandemic. We expect to continue to realize contributions from 80/20 in fiscal '21, although it will be difficult to quantify these amounts until we have more visibility regarding the shape of the recovery. The 80/20 Process remains a key element of our operating discipline and will continue to be so under David's leadership. With that, I will now turn it over to Greg to review our financial results in greater detail. Greg? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [4] -------------------------------------------------------------------------------- Thank you, Rick. Good morning, everyone. On Slide 8, net sales in the fourth quarter were $189.5 million. Clearly, COVID-19 impacted our business results in the quarter. We were tracking towards our $200 million top line, but saw order rates for our short-cycle business decline in the second half of March. We estimate that volumes were negatively impacted by about $10 million in the quarter, all occurring in the second half of March when countries began the lockdown. Later on the call, Rick will further discuss the COVID-19 impact that we are seeing today. As you know, we completed 3 divestitures last fiscal year, which reduced sales this quarter by $4.8 million compared to last year. Volume declined by approximately $23 million or 10.8%. While volume was down, our pricing power was evident as we saw year-over-year pricing improve by 1.3%. About 3/4 of this pricing was a result of our 80/20 strategic pricing initiatives. Foreign currency also continued as a headwind and reduced our sales by $2.3 million. Let me provide a little color on sales by region. For the fourth quarter, we saw sales volume decline in the U.S. by 13.1%. This was partially offset by price increases of 1.3%. Sales outside of the U.S. were down 9%, adjusting for the effects of divestitures. Solid price improvement of 1.4% partially offset a volume decline of 8%. Sales volume was down in all international regions by mid- to high single digits as a result of COVID-19. Turning to orders and backlog. Both our short-cycle and project base businesses were impacted similarly by COVID-19. Adjusted for divestitures and the impact of foreign currencies, orders were down year-over-year by 11.3%. Sequentially, we did see orders improve approximately 10% in both our short-cycle and project-based businesses. As a result, backlog grew by 4.5% to $131 million from $125 million at the end of December. It's important to note that quoting activity continues at pre-COVID-19 levels but our sense is that many projects are being delayed, especially in the U.S. While there is much uncertainty globally on the effects of COVID-19 and the shape of the recovery, we believe that we have bottomed out in April and encouragingly, there are signs that our customers and channel partners are getting back to work globally. As an essential business, all of our factories are operating today. We stand ready to flex production volumes back up at the appropriate time. Our strong market position in leading brands continue to serve us well, especially in times like these. We continue to focus on customer responsiveness and on-time delivery as the channel has been reducing inventory levels, and this will be more important than ever. On Slide 9, our gross margin was 34.9% in the quarter. On an adjusted basis, eliminating the effects of factory closure costs and business realignment costs, we achieved a record adjusted gross margin for the quarter of 36.1%. For the fiscal year, as Rick mentioned earlier, we achieved a record GAAP gross margin of 35%. We clearly benefited from the 80/20 Process, which drove $5.5 million of gross profit expansion in the quarter and $20.4 million in the fiscal year through strategic pricing, indirect overhead reductions and certain volume gains at our targeted accounts. This benefit more than offset the impact of the divestitures, lower sales volumes and lower fixed cost absorption at our factories due to lower sales levels in conjunction with significant inventory reductions that we are undertaking to drive free cash flow. Let's now review the quarter's gross profit bridge. Fourth quarter gross profit of $66.2 million was down $8.9 million compared to the prior year, adjusted for the divestitures. We did see gross profit expansion from pricing, net of material cost inflation, and tariffs were lower than the prior year, as we imported less Chinese product. We incurred $1.3 million of onetime costs for the factory closures in Ohio and China, which was the same amount as the prior year, so this did not have an impact on the gross profit bridge. Foreign currency translation reduced gross profit by $800,000. Productivity, net of other cost changes was negative $1.6 million. About half of this negative variance was related to higher workers' compensation costs incurred in the quarter related to 3 old claims. As shown on Slide 10, RSG&A was $46.3 million in the quarter or 24.4% of sales. RSG&A was $2.7 million lower than the previous year. Reduction in RSG&A was due to several factors. Divestitures reduced RSG&A by $400,000, and we benefited from FX translation of approximately $600,000. In addition, we lowered our RSG&A costs by $3.9 million, which was partially offset by $2.2 million of additional costs for the CEO search, higher bad debt accruals and business realignment costs. With the current COVID-19 pandemic, we have taken quick and decisive actions to reduce our RSG&A cost in the coming quarters. We have eliminated merit increases, foregone bonus accruals, reduced headcount and significantly reduced travel, to name a few. We will monitor market demand and we'll add back resources when the timing is right. We will, however, continue to invest in select growth initiatives, as Rick will discuss further. Taking all of this into account, we are forecasting Q1 FY '21 RSG&A of approximately $39 million. Turning to Slide 11. Adjusted operating income was $20.2 million. Adjusted operating margin was 10.7% of sales, an 80 basis point decline from the prior year. The driver of this decline was the impact that COVID-19 had on our sales volume. Decremental operating leverage in the quarter was a negative 17%, which is significantly better than what we saw in the 2009 time frame. For the year, our adjusted operating income declined $2 million on low revenue of $67 million, yet adjusted operating margin expanded 70 basis points to 12.1%. This represents a decremental margin of 3%, which is outstanding performance considering the circumstances. Our Blueprint for Growth strategy and specifically our 80/20 Process and operational excellence initiatives helped to drive this margin expansion. As you can see on Slide 10 (sic) [Slide 12], GAAP earnings per diluted share for the quarter was $0.39. Adjusted earnings per diluted share was $0.58 compared with $0.69 in the previous year, a decrease of $0.11 per share, about 16%. For the full year, adjusted EPS was $2.78 per share, an increase of 1.5%. We expect fiscal '21's full year tax rate to be approximately 21% to 22%. On Slide 13, we continue to expand our adjusted EBITDA margin. For the year, our adjusted EBITDA margin was 15.7%, an increase of 60 basis points from last year. Our return on invested capital was a solid 11.5%, an increase of 30 basis points from last year. Our Blueprint for Growth financial goals of 19% EBITDA margin and mid-teen ROIC remain unchanged. However, the shape of the recovery curve from COVID-19 will determine when we are able to achieve these goals. We continue to utilize our 80/20 Process to drive efficiencies so that when the recovery comes, we will be able to accelerate our growth and further strengthen our margin profile. Moving to Slide 14. You've heard me say a time that one of the hallmarks of Columbus McKinnon is its ability to generate cash throughout the business cycle. Net cash from operating activities for the quarter was $36.5 million, which was a year-over-year increase of $10.8 million or 42%. For fiscal year '20, we generated a record $97.4 million of free cash flow. This represents about a 45% increase in free cash flow. We were clearly ahead of the curve in reducing our working capital needs heading into the pandemic. We took rapid actions to preserve and generate cash. We drove our working capital as a percent of sales to 14.5%, which contributed to the record free cash flow. Going forward, we believe we still have opportunities to reduce our inventory levels further. In addition, we will manage CapEx to $5 million in the first half of the year, and we'll reassess our CapEx in the second half of the year based on current economic conditions. Turning to Slide 15. Our total debt at the end of the quarter was approximately $251 million, and our net debt was $137 million. Our net debt to net total capitalization is now approximately 23%. We repaid the minimum required debt in Q4 of $1 million and plan to pay the minimum required debt in fiscal '21. We have made excellent progress delevering and have achieved a net debt to adjusted EBITDA leverage ratio of 1.1x, which provides us the financial flexibility to weather the current pandemic. We have a flexible capital structure, which is covenant light, which means our financial covenant is only tested if we have outstanding borrowings against our revolver. Subsequent to March 31, we did draw $25 million on our revolver for liquidity and working capital purposes, while demonstrating that we have a supportive bank group led by JPMorgan. Please turn to Slide 16, and I will turn it back over to Rick. -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [5] -------------------------------------------------------------------------------- Thank you, Greg. I will now discuss some of the select strategic initiatives that we are continuing to fund even during this slowdown. Our transformation into an industrial technology company requires a strong digital platform, and we are continuing to invest in this area. Our digital platform project has been underway for the last 2 years, and it is a critical underpinning of our strategy. If you've not been to our website lately at www.columbusmckinnon.com, and for this audience, investors.columbusmckinnon.com. I encourage you to check it out. Our new digital platform provides a unified and comprehensive presentation of all of our brands, further enables our customers to have a seamless, integrated digital experience where they can use our configurator, communicate with the appropriate support staff and buy our products. This slide shows the homepage from the website, and it depicts an operator controlling our equipment from a computer. As part of this effort, we have developed a Product Information Management system or PIM, which is a single digital asset that contains a comprehensive products catalogs. The PIM sees website, our configurator, which is known as Compass and our e-commerce capabilities. It's also a critical tool that will support our channel partners and an essential element of our transformation into an industrial technology company. Another critical factor in our transformation is the continued development of new products. Shown on Slide 17, our product advancements that we are making in automation and simplification for crane solutions customers. These branded solutions create safer work environments for our customers by protecting the health and safety for their employees. For example, Intelli-Protect is a further evolution of our no-fly-zone solution, it is now offered with a single zone using limit switches or a multi-zone configuration that addresses 8 different zones using laser positioning. This product has easy programming and control that is driven by an app that can be used on laptops, cellphones and tablets. Most importantly, Intelli-Protect is a standardized offering versus an engineered-to-order solution and this reduces its lead time from roughly 7 weeks to just 7 days. Another automation solution that addresses both productivity and safety is our Crane Kit, which we have continued to enhance and expand in terms of lifting capacity and product features such as explosion protection, rain covers and stainless steel control panels. Additionally, that has load displays and rail sleeves providing more complete product offering. Importantly, we have also enhanced our Crane Kits to be plug-and-play. This makes the crane easier and quicker to install, and it eliminates the errors that can occur during assembly and wiring. We are excited about the advancements that we are making with our products and the opportunity to grow this revenue stream. As such, even during this downturn, we are continuing to find ways to solve our customers' high-value problems through product design and development. If you now turn to Slide 18. I will provide some details on our outlook and then introduce David. The near shutdown of the Americas and Europe in April resulted in a 37% drop in orders compared to April of last year. Our orders have since stabilized and even firmed a bit during May. At these demand levels, we now expect that our first quarter revenue will be in the range of about $130 million to $140 million. However, even at these low revenue levels, we expect to achieve our near-term goals of generating positive operating income and cash flow. As mentioned, to conserve cash, we plan to make only the minimum required debt payments during this downturn. However, it should be noted that we reduced debt by nearly $186 million over the last 3 years due to our strong cash flow and this gives us considerable financial flexibility. Given this financial flexibility and our confidence in our ability to generate positive cash flow, we expect to maintain our dividend at its current level. Regarding our other long term priorities, we will continue to invest in select strategic growth initiatives and in our Phase 3 M&A research and outreach, albeit at a more measured pace due to the pandemic. And importantly, we will continue to execute our Blueprint for Growth strategy with this focus on operational excellence and ramping the growth engine. Now it is my pleasure to turn the call over to David Wilson, our President and CEO Elect. But first, I want to tell you why we are so excited that he will be joining us shortly. During the search process, David became our candidate of choice because of his proven success with operational excellence and customer-centric commercial growth. He has substantial international and business development skills and a demonstrated track record of delivering results. And most importantly, he has strong leadership skills and a proven track record of driving performance cultures to even higher levels. Given his background, leadership capabilities, passion for excellence and his cultural fit with Columbus McKinnon, the Board unanimously decided that David J. Wilson should be our next President and CEO, and we are delighted that he will be joining us on June 1. So with that, I will now welcome David. David? -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [6] -------------------------------------------------------------------------------- Thank you, Rick, and good morning, everyone. It's a pleasure and an honor to have the occasion to address you today even before I'm officially onboard at Columbus McKinnon. First, allow me to introduce myself, and then I will tell you why I am very enthusiastic about having the opportunity to lead CMCO. I'll be joining the company on the 1st of June after I finish the transition of my responsibilities at Flowserve Corporation, a leading fluid motion and control products and services company with approximately $4 billion in revenue. I joined Flowserve back in September of 2017. Since then, Flowserve has been undergoing a transformation. And as part of that effort, we consolidated 2 divisions into the Pumps division. I've been the President of the Pumps division since it was formed in July of 2018. Prior to Flowserve, I was President of the Industrial segment at SPX Flow, which was spun out of SPX Corporation in September 2015. Combined, I was with SPX in the spinoff for nearly 20 years. At SPX, I served as President for a number of their industrial, technology, flow control, automotive and food and beverage equipment businesses, many of which were similar in size or larger than Columbus McKinnon. In these roles, I was responsible for defining the strategic visions for the businesses, developing growth initiatives, implementing business simplification processes and restructurings as well as leading acquisition and portfolio management strategies. I also have quite a bit of international experience having spent the better part of the decade living and working abroad in both Asia and Europe. I began my career as an engineer for Polaroid Corporation and advanced quickly into manufacturing and product development leadership roles. I'm an electrical engineer by education, and I'm originally from the Northeast, as is my wife. My family and I are sincerely looking forward to our move to Buffalo. You may be wondering what attracted me to this opportunity at Columbus McKinnon. First, I was impressed with Columbus McKinnon's industry leadership. This is clearly demonstrated by the company's well-known brands and strong customer relationships. In addition, Columbus McKinnon has a logical foundation for its growth strategy with its focus on smart movement, and being a lifting specialist. Finally, I believe there are tremendous opportunities to grow Columbus McKinnon by advancing our motion control technologies with new product development and acquisitions that expand our addressable markets and target growth trends. For these reasons, I was truly drawn to this opportunity. I'm also impressed with the effectiveness of the Blueprint for Growth strategy, which defines direction, provides for accountability and has clearly improved the earnings power of the company. I'm looking forward to working with the team to advance Columbus McKinnon's 80/20 Process and operational excellence initiatives. I'm also excited about Phase 3 of the strategy. While we're currently in unprecedented times given the pandemic, I've seen that the team has acted quickly to adjust to the current market environment, while also pursuing the select strategic initiatives that Rick discussed. I look forward to working with our team to navigate through this period and leading the development of a stronger, more sustainable growth platform centered around market segmentation, innovative product development and acquisitions. Initially, I'll be getting to know the global team and operating cadence. Then as restrictions lift, I plan to get out to meet customers and in the midst of all that, hope to have the opportunity to meet some of you, even if only virtually for now. In closing, I'd like to add that I have very much enjoyed my interactions with the Columbus McKinnon Board throughout the recruiting process. I'm impressed by how intelligent, thoughtful and engaged, each of them is individually and how aligned they are collectively. I'm truly looking forward to partnering with them as a member of the Board of Directors. On that note, I'd like to extend a big thank you to Rick and the other members of the Board for this opportunity. I'm ready to build upon the solid foundation that the team has established and take Columbus McKinnon to the next level. I'll turn it back to you now, Rick. -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [7] -------------------------------------------------------------------------------- Thanks, David. Operator, we can now open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from the line of Chris Howe with Barrington. -------------------------------------------------------------------------------- Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [2] -------------------------------------------------------------------------------- First off, congratulations, David, and I look forward to meeting you in the not-too-distant future. -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [3] -------------------------------------------------------------------------------- Thank you, Chris. -------------------------------------------------------------------------------- Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [4] -------------------------------------------------------------------------------- Just starting off, looking big picture. As we look at your current liquidity position of 1.1x and 1.1x leverage ratio in combination with your overall balance sheet position. And the current environments that we still sit in, how should we think about the impact this has on the timing of your Phase 2 initiatives, in combination with Phase 3, which is on the horizon, understanding there might be some delay given the uncertain optics that we're currently in. Perhaps you can comment on that and then I have one follow-up. -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [5] -------------------------------------------------------------------------------- Yes. Chris, it's Greg. How are you? -------------------------------------------------------------------------------- Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [6] -------------------------------------------------------------------------------- Good. -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [7] -------------------------------------------------------------------------------- So as you know, and as you follow, we're in great shape from a capital structure perspective and well below our covenant level of 3x. And just to remind you again that the covenant test only comes in the plate if we were to draw off of our revolver. So I think we're going to continue to pursue the Phase 2 operational excellence items as well as 80/20. And regarding Phase 3, we're still doing a lot of pre-work to get ready for that, but I think we've just got to be responsible in this current time frame until we know that things have stabilized, and it makes sense to move forward with potential acquisitions. And I think this also gives David time to get on board and learn the business, understand it better and help set the strategic direction for the company. -------------------------------------------------------------------------------- Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [8] -------------------------------------------------------------------------------- Great. That's helpful. And then following up on that, has there been any change or material shift in what you're seeing as far as the backlog of opportunities that would be viable for Phase 3 as companies, similar to your size or smaller, are stressed during this time and as they come out of this pandemic environment? -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [9] -------------------------------------------------------------------------------- Chris, this is Rick. I mean, I would simply say that as we do our work on Phase 3, to date, we have not seen any major change in party's willingness to consider strategic initiatives. The pandemic is still kind of fresh in their minds and people are kind of working through it. But I assure you that we have continued our research. We've had some outreach, albeit at a more measured pace, as I've indicated because of the pandemic. And a lot of the heavy lifting on strategy will, of course, continue particularly as David joins us and helps us through that strategic analysis. So I don't want you to think that it's not top of mind with us. But the pandemic does provide some constraints such as travel and certainly due diligence in this market right now. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question is from the line of Joe Mondillo with Sidoti & Company. -------------------------------------------------------------------------------- Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [11] -------------------------------------------------------------------------------- Hope you're all doing well. First question, just related to the RSG&A guidance that you provided for the first quarter. I was just a little surprised, given that your sort of revenue guidance is calling for sales down around 35%, 37% year-over-year. The RSG&A guidance is just about 12% year-over-year decline. So I'm just curious of why that would not decline a little more given the revenue guide? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [12] -------------------------------------------------------------------------------- Yes. So I think -- Joe, this is Greg. So clearly, there's a piece of our selling costs that truly are variable. And we have taken out a significant amount of cost in the RSG&A line, mostly in the selling and the G&A, in particular. But it's -- by its nature, it's going to have more fixed cost in it than you might see in the manufacturing area or gross profit area. So we have made -- taken substantial headcount reductions as a company overall. And we've also implemented short work. As Rick mentioned, we've eliminated merit increases, foregone bonuses in the first half of the year, cut travel to virtually 0 professional services have, for the most part, been eliminated. So as we looked at our cost structure, we've taken an aggressive approach to reducing all costs to protect liquidity and profitability of the company. But I think just by its nature, SG&A is going to have a little bit higher proportion of fixed costs in it. -------------------------------------------------------------------------------- Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [13] -------------------------------------------------------------------------------- Okay. And my follow-up would be, could you provide an update on sort of -- at this point in terms of your visibility, what you see for cost savings for fiscal '21? I believe you were sort of calling out about a $13 million, $14 million on one of the prior calls. Could you just update us on what you foresee in terms of 80/20 and further cost cuts, facility closures, et cetera? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [14] -------------------------------------------------------------------------------- Yes. So in terms of actions we've taken on an annualized basis, it's about $36 million of cost. And that's all the items that I mentioned before. And I would say, though, that we are going to flex up when volume does start to return. So I wouldn't look at it as that our cost base is going to be down $36 million for the entire year. But it's really running at about a $9 million a quarter rate. And regarding 80/20, we do have -- as Rick mentioned on the call, the Lisbon, Ohio facility will be completely shut down by July. So we'll get 3/4 of the benefit of that, which is a $5 million annualized benefit. We have a little bit of a carryover from our consolidation in China, which is about $750,000. So in total, we should see about $5 million from factory consolidations. We are continuing to develop plans for further consolidations, but we're not ready at this point in time to announce any further consolidations. And it's a little bit hard right now with the travel restrictions as well. -------------------------------------------------------------------------------- Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [15] -------------------------------------------------------------------------------- And if you don't mind, I just want to follow-up really quick to, so we're clear. The $9 million per quarter, $36 million, that's not incremental, correct? That's what you've already sort of realized and taken out of business. -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [16] -------------------------------------------------------------------------------- No, that's incremental in the quarter, additional actions. So that's part of the real. Yes. Just to be clear. So our typical RSG&A is about a $45 million run rate. So dropping down to $39 million in the quarter is $6 million of the $9 million. Hits in that line. And then the other $3 million would be more or less direct and indirect costs and cost of goods sold. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Next question is from the line of Mike Shlisky with Dougherty & Company. -------------------------------------------------------------------------------- Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [18] -------------------------------------------------------------------------------- David, welcome to you. -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [19] -------------------------------------------------------------------------------- Thank you, Mike. -------------------------------------------------------------------------------- Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [20] -------------------------------------------------------------------------------- So I've been hearing a lot of companies as they kind of reopen are finding at least some of their machines were not designed for swift a play off. These are kind of uncustomary shutdowns for a lot of these companies out there. So some machines were broken, corroded or otherwise out of service after that time frame. And some of the first phone calls that they made were to some of their suppliers to shop for equipment to either repair or just send a new one. I was kind of curious, I know it's early, it's just -- some areas are just now coming back, but have you seen that happen at any customers? Are they calling you on the first day saying, are -- things just are not working here and you can come in and -- custom. -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [21] -------------------------------------------------------------------------------- Yes. Mike, this is Rick Fleming. Clearly, as companies come back, Autoissue is a good example, we are seeing more quoting activity. We're seeing more orders. But in all fairness, I'd say right now, it isn't showing up necessarily in actual shipments yet. Although things in May certainly were better than April, starting to firm and stabilize, the way I characterize it. And it looks like as June, it opens up more in terms of the economies that will have a higher level of activity, but it's still early days, is the best way for me to put it. The anecdotal evidence is good that we're stabilizing, it's trying to move up. But the bottom line hasn't yet shown up other than the fact that, as I say, we're getting a lot more quote activity. The other thing that's kind of interesting to note is we are not seeing projects being canceled that were in many industries, committed CapEx. Steel, for example, is a good area. We've also added a number of projects, surprisingly enough in oil and gas that we're committed, that seem like they're going forward, they may be a little bit delayed. But we haven't seen outright cancellations to a high degree yet. So we're feeling that things are starting to get a little bit better, but I don't want to overstate it right now. -------------------------------------------------------------------------------- Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [22] -------------------------------------------------------------------------------- Okay. And my follow-up was just on the pricing outlook. I guess, can you give us some view as your near-term outlook on that part of your business? I'd imagine you're not planning to chase a lot of pricing, and this environment might not be worth it given what could be a somewhat short downturn. But just kind of your Greg's best view on the pricing outlook for the year. -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [23] -------------------------------------------------------------------------------- Yes. So we typically do announce price increases in the U.S. in the March time frame. We did pull that up a little bit. So we would expect -- you're right, the market right now is not all that receptive to price increases. But nonetheless, I would expect that we will see positive price increases as an enterprise in the upcoming quarter. So we're not seeing price declines, which I think is a good thing, and there should be some incremental pricing that we see. It might not be to the level that we've seen this past year, which is around 1.3%, but it should still remain positive year-over-year. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question is from the line of Jon Tanwanteng with CJS. -------------------------------------------------------------------------------- Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [25] -------------------------------------------------------------------------------- David, congrats on the appointment. My first one for you. I know it's a little bit early and you still need to take more time to peak under the hood. But maybe coming on board, looking at it with a fresh set of eyes, what's jumping out as the most immediate opportunity or a challenge for you personally as we prepare for post-pandemic world? -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [26] -------------------------------------------------------------------------------- Thanks for the question, and appreciate the opportunity to talk to you. I guess I'm pretty excited about the fact that Columbus McKinnon is an industry leader and well -- has well-known global brands and a strong set of customer relationships. And as you have seen, the company has made significant progress with the Phase 1 and Phase 2 initiatives they've implemented over the past few years, executing on the Blueprint for Growth strategy. I mean just to cite a few examples, progress in establishing the mission, vision and values-driven performance culture. The discipline and rigor with which the team has implemented its business operating system, including the implementation of the 80/20 Process. And then the resulting gross margin expansion and reduced debt levels that enable the company to deliver returns with a lower risk profile. And so I believe the Columbus McKinnon is in the early stages of a significant transformational agenda, and I'm truly energized by the opportunities that lie ahead. We must advance the company's Blueprint for Growth strategy and advance the performance differentiation that will be enabled through true operational excellence. And in parallel, we need to pivot hard towards growth, both organic and acquisitive. And I believe there are many attractive avenues for us to pursue. Clearly, we're in unprecedented times, and we need to focus on first things first. And the team has demonstrated their ability to be agile and to respond rapidly in this pandemic environment, safeguarding employees, complying with CDC, federal state and local requirements and adjusting new market levels. But I'm confident we can get through this. And I'm truly excited about becoming a leading global industrial technology company. -------------------------------------------------------------------------------- Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [27] -------------------------------------------------------------------------------- Got it. Greg, I was just trying to get a sense of which quarter may end up being the trough for you as it stands now. What are your clients telegraphing to about the third calendar quarter? Are they planning for steady ramp back up? Or is it maybe a second dip or wave that maybe in the cards that you are planning for such a scenario at all? And then what would you do in that case? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [28] -------------------------------------------------------------------------------- Yes. So as Rick mentioned, we would expect, clearly, with things firming up in May and countries getting back to work in Germany, for example, all of the automotive manufacturers are back working in the U.S., states are now opening up. So my personal sense, and I'll ask Rick to comment on this as well, that I would expect that our first fiscal quarter is going to be the toughest quarter for us and that we should start to see things returning to normal. But having said that, my personal belief is until there's a vaccine, it's going to be a year before we see year-over-year growth that while things will improve, they're not going to be above this current year, which was really an outstanding year for us from a company perspective. Maybe, Rick, you'd like to comment as well? -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [29] -------------------------------------------------------------------------------- Yes. Thanks, Greg. Let me just set the table a little bit regarding the trends and then we can talk about the outlook. But just to give you a flavor for the period of March and April, we've given you some aggregate numbers, but one way I look at it is sequentially and March orders for the industrial business, which is our short-cycle business to a high degree, basically came in at 88% in February. And then April was 70% in March. So that gives you a sense of the dramatic drop that we had. And it mirrored pretty much a lot of the statistics that you've seen from the indexes like the supply chain index. But having said that, May has firmed and we haven't closed the books yet, obviously, on May, but it may even be up a bit. And we're starting to see some interesting trends on orders. We had a large automation division order recently for the Army Corps of Engineers. We -- it's probably -- 433,000 rail order came in, 825,000 for radio controls for a Chevron project. So as I mentioned, the project business continues to seem to be active. And now, as Greg alluded to, we're starting to see sections of the economy to come back. Our entertainment vertical has been really radio silent since the pandemic, and now you're hearing the talk of Las Vegas at least starting to come back. So there are some early signs that things could get better. So to Greg's point, I think the first quarter of our new fiscal year will be definitely the -- I think the low point, and we're hopeful that we're going to come back. But I do have to tell you that in this kind of environment, you've got to be really prepared to be nimble. And so a lot of it is scenario planning. So we have kind of a view that we will be working toward and hopefully unfolds on our recovery. But if it doesn't, we're prepared to take the action necessarily to deal with whatever comes our way. So you've got the base case, you've got the level 2 actions that you can go to. They're all pre-vetted, and we have been thinking a lot about them. And obviously, David will be helping us with that. But we have another layer of earnings actions and cash actions that we can implement if necessary. But we're hoping that we've seen the worst, and we're hoping that we start to come out of this. I think Greg also summarized it well. We have a collective view that this pandemic is not going to be behind us in any way, shape or form until we get a vaccine. So although we might have some recovery, it's going to be sluggish, and it's probably going to be an elongated type of U recovery as opposed to any sort of V. I hope that's helpful. -------------------------------------------------------------------------------- Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [30] -------------------------------------------------------------------------------- . It is. I wanted to touch on one more point. You mentioned the breakeven revenue level in your press release. I'm wondering, what does that include in terms of cost reduction? You know from 80/20 or -- the temporary stuff that you're doing. Is there more cost reductions after that? And then does the true breakeven become even lower? Or is that kind of the trough level and then trough -- where you expect EBIT margin to be at, at the worst? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [31] -------------------------------------------------------------------------------- Yes, so I will... -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [32] -------------------------------------------------------------------------------- Well, go on, Greg, take that one. -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [33] -------------------------------------------------------------------------------- Yes, let me take this one. Yes, so the breakeven level, we felt that it was important that people understand the magnitude of the cost savings actions that we have taken. So that's with everything that has been implemented to date. And so if, for example, orders were to take another decline from current levels, there are certainly more actions that we could take. They would be very painful for sure, but they are -- we know what we would do. So I think what the takeaway is, is with the revenue guidance that we've given, and given the breakeven, we would expect positive operating income. But the one thing you do have to remember is that we do have to carry about $3 million of interest expense. So if you're looking at it from a net income perspective, that's got to be factored into your calculus on it. But once again, at the current -- at that $125 million level with the actions we've taken to date, we believe we would be breakeven or slightly better from a adjusted operating income perspective. And that takes into account all of the 80/20 that we've done last year, the benefits of the Lisbon consolidation, all the additional actions we have taken. But there would be more taken if need be. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Our next question is from the line of Walter Liptak with Seaport Global. -------------------------------------------------------------------------------- Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [35] -------------------------------------------------------------------------------- Congratulations, David, on the new job. -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [36] -------------------------------------------------------------------------------- Thank you, Walter. -------------------------------------------------------------------------------- Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [37] -------------------------------------------------------------------------------- My question is about the revenue guidance, the $130 million to $140 million. It looks to me like the midpoint of $135 million is down about 37%. And so I just wanted to get a better idea. You talked a couple of times about what firming up means. Does that mean that we've kind of taken the step-down, and we're now at a kind of stable level like on a week-to-week basis? Or like the first couple of weeks, I wonder if you can compare the first couple of weeks of May to what you're seeing now in the last few weeks of May and get a better idea about the firming that's going on? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [38] -------------------------------------------------------------------------------- Yes. So well, let me start with that. And so we clearly have seen may levels firm, as Rick said, which means that they are equal to or slightly better. Now we do have variability day-to-day in orders. And so that's a part of what has to be taken into account. But when I look at like the average order rates through Friday of last week, they are slightly better than they were for the whole month of April. -------------------------------------------------------------------------------- Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [39] -------------------------------------------------------------------------------- Okay. And I wonder if you could talk a little bit about the trends in distribution versus projects? Because it sounds like there are some projects that might be skewing the number a little bit. And if you could help us think about your distribution business, how big is that now as a percentage of revenue and if there was destocking that was going on that, I guess, should come to an end at some point? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [40] -------------------------------------------------------------------------------- Yes. So when we look at April orders, we were more impacted in our short-cycle business, down probably over 40% projects, not quite as bad, maybe in the 30% range. We do -- as Rick said, we are still getting large projects. We just won a large project in Saudi Arabia, which is over almost EUR 3.5 million. So that's a nice order that we'll get and be able to fill in the latter half of the year. So I would say that projects, it's still down double digits, maybe not quite to the same extent as what we're seeing in our short-cycle business. And in terms of your question on distribution, about 62% roughly goes through distribution. And the channel is being very, very careful about adding inventory. And the one part of the channel that's doing really well are the specialty distributors, which are the MSCs and the fastenals, where they're -- they've got a lot of MRO activity and they're open and they're supplying lots of different pieces or MRO products to their customers. So that channel seems to be more active for us. -------------------------------------------------------------------------------- Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [41] -------------------------------------------------------------------------------- Okay. Great. And maybe the last one for me would just be geographic. You guys have a lot of business in Europe, I think about 1/3, and you've got some Asia business. I wonder if there's any trends going down there or out there. And what I'm thinking of is, it seems like China, Asia is maybe ahead of the curve with opening back up for business, followed by Europe and then the U.S. later? Are you seeing any trends geographically? -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [42] -------------------------------------------------------------------------------- This is Rick. And yes, China is starting to come back, surprisingly, even the entertainment business is coming back a little bit in China. So -- but it's relatively small as a part of the company, but we are seeing positive trends in that area, less so in Japan right now. Just to give you a flavor for the fact that not all countries in the region are on the same time horizon right now as it relates to recovery. In Germany, as Greg mentioned, it is just starting to open up. The autos are coming back. We're starting to have -- factories have more activity. Commerce is starting to move ahead from a near standstill. So that seems to be improving in that part of the world as well. And then Latin America, I would say, in Brazil just totally shut down right now. So nothing going on down in that area and Mexico just barely coming back right now. So it's a situation where it really does vary by region. And the U.S. is probably one of the areas that are a little more active right now in addition to Europe and China. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- The next question is from the line of Greg Palm with Craig-Hallum. -------------------------------------------------------------------------------- Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- This is Danny Eggerichs on for Greg Palm. Congratulations and welcome to David. -------------------------------------------------------------------------------- David Wilson;Incoming President and Chief Executive Officer, [45] -------------------------------------------------------------------------------- Thank you, Danny. -------------------------------------------------------------------------------- Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [46] -------------------------------------------------------------------------------- I guess as we're looking at kind of the start of opening back up the economy and getting past this pandemic, are you seeing or planning on seeing any increased interest for automation or smart sensor technologies or anything like that? -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [47] -------------------------------------------------------------------------------- We are very excited about the prospects for our new automation division and we are seeing interest. Right now, we've been booking about $1 million a month up until lately. In that area with the new division that we formed. So we feel pretty good about the opportunities, and particularly, the fact that automation probably going to be a mega trend in the new post-COVID economy, particularly in the warehouse area. So we see some pretty good reasons to want and consider that as an area for future growth as well as new products. So the answer is yes. And a lot of that, by the way, is going to be oriented towards making sure the facilities -- health and safety considerations and automation adds in that area to health and safety. -------------------------------------------------------------------------------- Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Yes. Makes a lot of sense. I guess, and then just one. Any update on the kind of competitive landscape given this unusual time in the market? -------------------------------------------------------------------------------- Gregory P. Rustowicz, Columbus McKinnon Corporation - VP of Finance, Treasurer & CFO [49] -------------------------------------------------------------------------------- Yes. So I'll take that one, Danny. So clearly, our competition has affected by COVID, like we have. And both of our main international competitors, they're both public companies. They both have websites where you can take a look at different things. I know in the case of Konecranes, they've taken dramatic actions in Finland, where they have a very large workforce to move to short work weeks and lay people off. So I think everybody is rightsizing their businesses to the volume levels. But I would say that you could probably take a look on their websites and get more information. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- (Operator Instructions) At this time, I'll turn the floor back to Rick for any closing comments. -------------------------------------------------------------------------------- Richard H. Fleming, Columbus McKinnon Corporation - Independent Chairman of the Board [51] -------------------------------------------------------------------------------- Well, thank you. Thank you for joining us today. We look forward to reporting our first quarter of fiscal year '21 in July, and we hope that we have greater clarity regarding the economic outlook at that time. In the meantime, Stay safe and be well, and thank you. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Thank you, everyone. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.