All right, good afternoon, everybody. Thank you for staying with us. I am pleased to have the Columbus McKinnon Corporation with me. I'm Michael Pesendorfer. Those of you that are familiar with our work may know me as Pez, and I'm a senior associate here at Baird, covering flow and motion solutions. Very excited to have the Columbus team with us today. And here to tell you a little bit more about CMCO is EVP and CFO Greg Rustowicz and VP IR and Treasurer Kristy Moser. With that, we're going to start with some prepared remarks, and then we will ultimately move into Q&A. If you have questions, please email the session5@rwbaird.com, or we can raise hands and we can all just speak up. But with that, Greg.
Yep, thank you, Pez. So it's great to see all of you here on the last day, the last afternoon of the conference. This is the group with the staying power. So I'm going to talk to you a little bit about Columbus McKinnon. We've got some really good Q&A, and we would appreciate any questions that you do have. But I'll give you a couple of prepared remarks about the company. So we've been a leader in the material handling space for over 150 years. We've been building on this foundation as we're transforming into a more holistic provider of intelligent motion solutions for material handling.
So we started a transformation journey about four years ago to scale the business and create a platform for growth with a focus on secular markets while further differentiating our business and improving our financial results. Our strategic framework includes being market-led, customer-centric, and operationally excellent. Our strategic plans' core growth framework defines the balanced and disciplined approach to prioritizing and delivering organic growth complemented by inorganic growth in secular growth markets.
In addition to our existing product categories, we've opened new avenues of growth. With the addition of the Precision Conveyance platform in April of 2021, we expanded our TAM by $5 billion to a TAM of about $20 billion today, and Precision Conveyance is a space we really like. It's a secular growth space with high EBITDA margins, and it's highly fragmented, so it offers us an opportunity to grow further through M&A, so this diversification, the breadth of our offerings and markets we serve, provides a natural balance and added resilience for our lifting business.
That balance also provides multiple levers to attain sustainable growth and deliver on our operational and financial objectives. We've actually demonstrated our ability this past year to deliver stable results in what has been a choppy industrial environment globally. Our products are engineered to be professional grade, and they help our customers work smarter while improving the safety, uptime, and productivity of their operations. Our intelligence solutions combine equipment used to lift, move, and position materials with industry-leading controls and automation technology.
Working together, the technology is helping our customers solve high-value-added problems that are critical to their business. There are a couple of mega trends that are benefiting us as well. With scarcity of labor issues, the need to improve productivity, and ensure continuous uptime, we believe there is no one better positioned to help our customers automate and streamline the material handling needs. This will be even more important as companies onshore in response to impending tariff increases.
As companies embrace AI to deal with the scarcity of labor and optimize efficiency, we are positioning ourselves to be the connective tissue that links the digital and physical world by precisely positioning materials to enable fully automated intralogistics. When customers need a hoist, a linear actuator, or a conveyance solution, we can simplify and automate the material handling and intralogistic processes for them. As we lean into vertical market selling strategies, we are able to bring a more holistic suite of solutions customized to the needs of the end market.
We are gaining market share as we focus on the customer experience by reducing customer lead times and improving the overall customer experience. This strategy has delivered very good financial results. We've grown sales 16% from fiscal 2021 to 2024 and expanded our adjusted EBITDA margin by 450 basis points to 16.4%. We have long-term targets to achieve 40% adjusted gross margins and a 21% adjusted EBITDA margin, and we're on track to achieve those.
We continue to execute on commercial and operational initiatives to improve productivity, reduce lead times, and enhance the customer experience to scale our business and deliver top-tier financial results. Most recently, in the second quarter, we saw our orders increase 16% year over year with a book-to-bill ratio of 1.08, and we continue to gain traction with our commercial, vertical market, and customer experience initiatives. We've got a healthy project funnel, and this encouraging funnel gives us confidence in our ability to execute on our guidance for the remainder of this fiscal year and for next fiscal year as well.
We've made solid progress, but we still have opportunities to improve further. We're focused on improving our customer experience, delivering outsized growth in attractive end markets, and expanding our margins. Our businesses generate significant cash flow, and it provides us financial flexibility to reinvest in growth with attractive cash-on-cash returns. Our free cash flow is consistently above 100%. Our free cash flow conversion, excuse me.
And we have a track record of investing in growth and delivering quickly to our targeted net leverage ratio of approximately two times net leverage. So we remain confident in the long-term trajectory that we have and our ability to deliver value for shareholders. So with that, Pez, we can start the Q&A.
Yeah, absolutely. And we do have a list of questions, but obviously, we do love audience participation. So again, feel free to send them in or raise your hand. Why don't we start on the transformation?
Yes. A lot of work has been done to get the portfolio where it is today. Can you talk about the emphasis on Precision Conveyance and then how you're thinking about the mix of business at a high level moving forward?
We bought into the Precision Conveyance space back in April of 2021 when we acquired a company called Dorner Manufacturing. Since then, we've added another company called Garvey, which is an accumulation technology company. Most recently, in May of 2023, we bought a company called Montratec. Together, that's our Precision Conveyance business. It's about 20% of our overall revenue. We like it because it's in secular growth markets that Columbus McKinnon never really participated in before. It's things like food and bev, life sciences, e-commerce, for example, which have really good secular growth trends.
These are businesses that are high margin and have a great opportunity to help us grow mid to high single- digits in these businesses. We're really bullish on the space, and it's very fragmented. There's additional opportunities to further execute our M&A strategy.
So when we think about the portfolio and executing on the strategy, are there pieces of the portfolio that don't make sense anymore? When you think about transformation, how do you go about portfolio evaluation? Can you maybe talk a bit about that?
Yeah. So every year, as part of our strategic planning process, we do a full portfolio evaluation. And so back in the 2018 timeframe, we divested three companies that it didn't really make sense for us to own. And those in total had about $40 million of revenue and $1 million of operating income. So they were very dilutive to our overall margin portfolio. And one of the companies was actually a business that was totally unrelated to material handling. And so it made sense to divest those, which we did. But we continue to look at our portfolio. And one of the ways we look at it is through an 80/20 tool.
So we're an 80/20 company, and there's something called Segmentation Zero Up, where you actually look at your, you can pick a business and say, "I'm going to kind of deconstruct the P&L on an accounting basis and put it together on an economic basis." So if anyone has worked in corporate finance, you know that there's a lot of costs that get allocated, and the drivers of the cost allocation aren't always how the costs are being allocated. So that's one way that we will look at a particular product portfolio or product and say, "Does this really make sense? Is the profit that we have for it on an accounting basis really what it should be?" And so that's part of one of the tools we would use to look at it.
We always have a few businesses that we obviously would like to see profits expand more than they have. And so then the question becomes, do you have a path to improve the profitability? And if so, do you do that first before you divest? Or is it something that, like in the one case, we had a business that was totally unrelated, and there was no real opportunity to improve it. So that was one we said, "We need to get out of this business," and we were able to do so.
I think I'd put one additional lens onto that, which is, what purpose does it serve in the portfolio? Because there's going to be platforms that are high growth and give you access to great end markets and expansion opportunities. And then there's going to be businesses that may not be quite as financially attractive with as much growth opportunities, but they provide significant free cash flow, which enables you to self-fund future investment. And so those great cash-on-cash returns create a flywheel effect that enables growth in a differentiated way that you wouldn't have if you didn't have them as part of the core portfolio.
Yeah, no, absolutely. And maybe let's kind of pull on that thread a little bit. Maybe describe how you're thinking about M&A as it sits today. We've kind of talked a little bit more about the transformation, but maybe on a more forward-looking basis. How do you think about the pipeline? What are some of the characteristics and criteria you look for?
So M&A is part of our strategy because we're going through a transformation here. But what's absolutely critical is a company our size can't afford to do a bad deal. And so there is a tremendous amount of work put in understanding what a potential opportunity would be, understanding where the value creation would come from, the revenue growth, the synergies, what impact it would have on the capital structure. And we've done in the last, as I mentioned, four years or so, we've done three acquisitions of Precision Conveyance space, and they've actually all together, there's synergies in having them in the portfolio, and we're very pleased with that part of it.
But those would be the principal criteria. Now, in terms of the pipeline, there is, I would say we have the best pipeline I've seen in my 10-plus years with the company in terms of companies that are on our list. They're not always available for sale. Some of them will be available for sale down the road. But it's a robust list that we have criteria that we score them on.
It's something that's regularly reviewed with our board, and updates are given as to discussions we've had with these companies, what might be coming to market, and then obviously, now that we're in the Precision Conveyance space, we get inbounds all the time, which we'll take a look at, but it has to make sense, and it has to kind of fit with where we are in our process. And so right now, we have been focused on delivering, and we're making really good progress with that. Kristy, anything to?
Yeah, I think the only thing I'd add on is just a little bit more on the criteria. I think anything that allows us to accelerate our journey towards the 20% EBITDA through synergies and additions to the business there is always something that's very important. As we get scale as a billion-dollar business, adding on additional scale has really nice flow-through from an operating leverage perspective. So that's something that's very attractive to us. We want to look for unique and patented technologies that we can grow.
Montratec is a fantastic example of a really unique and powerful technology, but it was a little $30 million business, and they were winning business with folks like Airbus and other blue-chip companies without having the balance sheet to back it up. And so you have to think about huge critical multi-billion-dollar investments that are reliant on flawless execution from a small $30 million business. Now they're backed by a billion-dollar business, which gives us access to capabilities.
And bringing that into the broader Precision Conveyance portfolio is another important criteria, is making sure that by bringing these assets together, they're worth more to customers from a commercial and solutions perspective than they are individually. We don't want to have a portfolio of assets. We want to have assets that come together to develop better solutions that allow us to actually serve our customers together. And so that's really important as we think about where that comes.
And then two other pieces would be access to new and attractive end markets that allow us to serve people more holistically with our entire portfolio. We've got applications everywhere, but if we get inroads into vertical end markets, we get insights into their needs more holistically, and we have a suite of capabilities that we can bring to serve those customers. Finally, access to certain geographies where we might be undersized. Because while we've got fantastic opportunities and presence globally, the density of that presence could be better in certain geographies.
Yeah, no, that was quite a comprehensive, robust answer. Like maybe you were ready for that one. You know, maybe let's switch gears a little bit. I think throughout the conference, there's been a lot of positivity in general from companies. On the flip side, there have been a few companies that have talked about industrial project push-outs. If I look at your recent results, order growth has been very attractive. Can you maybe talk about what you're seeing in the marketplace and in the broader industrial landscape, how you view it?
Yeah, and I think it's different by geography. So if we start in the U.S., the pipeline has been good. I would say we've seen people delay placing orders. Orders and quotes have been generally smaller. And I think there's just been this cloud of uncertainty with the election, with when was the Fed going to start lowering interest rates. And so a lot of that is now behind us. And so we would expect that as we enter next calendar year, that we will see probably an uptick in business.
And I think generally the markets are predicting that since the election, markets have responded very favorably. Europe is, and we're very heavily concentrated in Western Europe, although we have a nice business in the Middle East. So in Western Europe, in particular Germany, we are seeing, it's a tough economic environment, I would say.
Certainly, we're seeing a slowdown with machine builders. In the Middle East, it's actually doing quite well. There's a big investment going on now in the oil and gas part of that business. And so we participate in that with our Stahl branded products, which are explosion-protected hoists. What else?
I think the thing that I'd kind of emphasize is how in that environment do you get to 16% order growth in the last quarter, which is what we delivered. And I think it comes down to the self-help initiative. So Greg talked earlier about the vertical end markets. And so those vertical end market focuses and solution-based selling has really been effective in us being able to win new business and greater share of wallet with our customers.
And so having that focus on working with large customers to get one solution, and then once we have proof of concept, there's many players that don't have the capabilities and the market cap to be able to support entire investment engineering teams that can oversee large projects. If you go down a little bit in market cap, you have proof of concept that you can now take solutions to and pitch productivity solutions, reduction of dependence on scarce labor, a variety of different needs that we can address for the customers in an effective way.
That's played out in how we delivered 33% project order growth within that. Underneath that, short cycle orders were flat. While that, we'd love to significantly outperform flat in the context of the broader environment that we're operating in and relative to competitors, it's been fairly strong. We've been able to deliver that over the past couple of quarters or positive, modest kind of single-digit growth. How we've done that, I think, is a lot of self-help improvements in our operations, in our lead times.
And that's enabled us to capture some market share along the way. And going forward, we're going to continue to focus on that. And we're certainly not all the way at full bright yet. So still some opportunity to go.
No, absolutely. Greg, I want to follow up on a point that you made earlier. You talked a little bit about 80/20 and segmentation. And typically, companies of your size aren't talking about segmentation in a way that Columbus McKinnon has. Can you maybe talk a little bit about the acceptance of 80/20 and segmentation at Columbus McKinnon? What type of tools you're utilizing and if that's more of a sales tool or if you're looking at it from more of a cost containment approach perspective?
Yeah, it's really 80/20 is about simplification, and it starts with, so we started the process in 2019. I actually brought it to the company, and it's an approach where you break your sales into quartiles, your top 25, next 25, et cetera. And what's almost always the case is your top 25% of your sales, whether you look at it by customer or by product, is 89% of your revenue.
Your next 25% is 7%. It goes in 89%, 7%, 3%, 1%. So 25% of your sales, and it's almost always the case within a point, are to represent 1% of your overall revenue, which is really kind of mind-boggling, but that's the case. And when you look at it from a customer perspective and from a product perspective, you then put it together, and that's kind of the secret sauce to say, okay, I've got A customers buying A products, that's where I'm making all my money.
And where I've got B customers buying only B products and B products only being sold to B products, you're losing money. And if you were to shut all of it, you would simplify your factories, your customer service, et cetera. And worst case, you lose 1% of your revenue. And it's like it's a no-brainer, right? Because your overhead is essentially allocated equally across all of that. And the key principle for 80/20 is you treat customers fairly, but you treat them differently.
So your top customers, you have a Raving Fan program where it's a white glove concierge service. They get the Batphone . They have a problem, they got a direct line into somebody who knows them and picks up the phone. They're not put in queue, and then when you look at the data itself, it's like there's no recipe that says, okay, you do this, then you do this, then you do this.
You basically have your people ask questions like, well, why is this customer who only buys this amount getting a better price than the guy who is buying double what this guy does? And so the natural answer is this guy's price needs to go up, so it's more or less strategic pricing is a big part of it as well and simplification.
No, that's super helpful. Thank you. And obviously, there's still margin opportunity to go. Maybe talk a little bit about the margin opportunity in front of you and where those sources are coming from?
Yeah, so if we talk EBITDA, we have plans to get to 21% EBITDA margins. We ended last year at 16.4%, 16.3%?
16.5%?
Yeah, so roughly, so we've got a little bit more to go. We have a major initiative underway where we are building out and have built a new factory in Monterrey, Mexico, and we're consolidating four factories into it. We've done two already. There's two to go. That is going to drive 200 basis points of margin expansion, gross margin expansion, which will drop to the bottom line. It's coming from two areas. One is there's a labor arbitrage opportunity with direct labor. So Mexican labor is about a third of the cost of U.S. labor, all in with benefits.
But the bigger piece of it is really coming from overhead savings. So every factory that we have, and most companies have, has a plant manager staff, right? A plant manager, a controller, you're going to have cost accountants, you're going to have shipping superintendents, you're going to have EH&S people, and the list goes on and on. None of those people make anything. They don't assemble anything. So I need one of those in a factory, but when I have four factories, I got four of those.
And so that's a big part of the cost savings, is the overhead reduction from consolidating into one. It's a scale play. And it makes sense, right, when you think about it in that context. And so that's going to be the single biggest driver we have. But that's not the only thing we're doing. We're doing 80/20, we're doing VAVE, we've got material productivity plans, we're trying to drive overhead rates in our factories down, strategic pricing.
As we get larger with some of these growth vectors that I talked about, we'll be able to scale our SG&A costs while we keep a lid on those costs.
So a question from the audience. When you look at lifting, Precision Conveyance, automation, and linear motion, how do they compete for capital dollars? How do you think about organic and inorganic across those kind of four business units?
Yeah, so really good question. So in terms of competing for capital, one, I mentioned in my prepared remarks that Columbus McKinnon is a, I used to say, and I'll say it again, one of the hallmarks of Columbus McKinnon is our cash flow generation, right? We have historically been a strong cash generator, and it's due to a couple of factors. We've got a pretty solid business, but we're also not CapEx intensive. And so our CapEx as a percent of sales is 2%-2.5% a year. So on $1 billion, it's $25 million.
And so that's not a big drag on our CapEx. So in general, we're looking for good projects that are going to improve our productivity in our factories. So from a CapEx perspective, if it's a good project, I have never said no on a capital request. We're able to manage within that 2%-2.5% range. In terms of M&A, how do we think about it? We clearly like the Precision Conveyance space and anything that would be adjunct to it, maybe potentially vision systems and other components that get used.
I mean, what we like about the space is it's got really good growth prospects in secular growth markets, life sciences, e-commerce, et cetera, that we talked about. It's got really high gross margins. We talk about an objective to get to 40% gross margins as part of our path to get to 20%-21% EBITDA margins. They're already there and then some. So it's about getting them above 40% and getting the rest of our business to that, as close to that 40% level as we can. So we like that business.
We like our automation business, which works with Precision Conveyance, but also sells into the material handling space. That's the former Magnetek business that we bought in 2015. Really good growth margins had this past quarter, 24% order growth, a nd so those are the businesses that we would look to concentrate in.
B ut having said that, you know, if there was some opportunity that made sense because it gets to the broader question of what do we look for in acquisition, so growth, revenue synergies, cost synergies, price, and what can we do with it? We're not looking to add on a third leg, right? To Kristy's point, this has all got to work together.
Yeah, know, that makes a lot of sense. With just a few minutes left here, could you maybe touch on a little bit? What was Columbus McKinnon's experience during the last Trump administration when tariffs came into play? And any first gut reactions to concerns relative to some of what the admin has been messaging?
Yeah, so we actually, that would have been 2016. Yeah, so we were buying more from China back then than we are today. I think the impact of tariffs, and this would be in our gross margin bridges that we publish in our earnings press releases, so if you go back to fiscal 2016 or 2017, you'll see that I want to say tariffs were maybe a $2 million hit to gross margin, but since then, and then with the pandemic as well, we're nearshoring as much as we can our supply base.
A nd so we have reduced our dependency on product coming from China where tariffs really, I'm sure we pay some tariffs, but it's not a meaningful number.
Yeah, and I think on the tariff side, as we see things evolve, I think we're very excited as well at the potential on the demand side. Because as we talked about earlier, where we focus and help differentiate is the fact that we can help people automate. So they're going to be bringing over production potentially from other parts of the world that had good access to labor that was fairly low cost. Now they're coming into a difficult labor environment with scarcity of labor for higher cost.
And so the desire to try to automate is going to be a natural outcome of a lot of the decisions that people might have to make to bring things on shore. As we talked about connecting the brain of the digital world with AI to Precision Conveyance, we have the opportunity to be the connective tissue that very specifically moves and orients product that enables the automation to be very specific. You're seeing the rise of dark-out facilities across various parts of the world. We're excited at the potential.
We'll see how it evolves. Some of it will be sooner. Some of it will be after we get some more insight into what are the specifics of the tariff environment that we operate in. That net-net, you know the tailwind, we believe, for demand over the next couple of years.
And then we only have just about 70 seconds here, but maybe very quickly, could maybe just touch on what gives you confidence? You have a little bit of a better assumption for the fiscal back half of the year. Maybe just what's giving you and underpinning that confidence?
Yeah, so we have a very healthy backlog at this point in the year for the remainder of the year. And then we've got a very solid funnel. We think that with the way the election broke, that'll be favorable for industrials. We think the mega trends of labor scarcity and the need to automate is a mega trend that will continue. We've got some really good opportunities in the funnel with some major players in e-commerce, battery production as well.
We didn't talk about the PowerCo opportunity with the Volkswagen subsidiary, but we've just taken $20 million of orders for that. We're expecting another $10 million any day now, and we're now in. So in the two gigafactories that they're building in St. Thomas, Canada, and Valencia, Spain, we've got the first two lines that they're building out in each of those, and they've got four more coming. We're really bullish on those two spaces now from a revenue.