Greetings, and welcome to Columbus McKinnon Corp's First Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Deborah Pawlowski. Please proceed.
Thank you, Claudia, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here are David Wilson, our President and CEO, and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the first quarter fiscal 2023 financial results, which we released this morning, and if not, you can access the release as well as the slides that will accompany our conversation today on our website at columbusmckinnon.com. After our formal presentation, we will open the line for Q&A. If you'll turn to slide two in the deck, I'll review the S afe 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. You can find those documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides.
With that, please advance to slide three, and I'll turn the call over to David to begin. David?
Thank you, Deb, and good morning, everyone. We continue to execute our strategy to drive growth and stronger earnings power and have started fiscal 2023 delivering on each of these objectives. The team is executing well and driving improvements in the business despite the challenges presented in this hyperinflationary environment that also continues to be plagued by ongoing supply chain constraints. Sales grew 6.5% to $220 million on a constant currency basis, and we achieved record gross margin in the quarter of 37.5%, both on a GAAP and a non-GAAP basis. At our Investor Day in June, we discussed that we recently realigned our business under two leaders that have geographic oversight. Terry Schadeberg now leads the Americas, and Appal Chintapalli now leads EMEA and APAC.
This realignment has created go-to-market and cost synergies for CMCO and is strengthening collaboration within our businesses and with our customers while delivering productivity benefits. This approach, while only launched in May, contributed to this quarter's Adjusted EBITDA of 15.9%. Demand remains strong in the Americas and across EMEA, driving orders to $267 million in the quarter. Notably, this was an increase over Q4's record level on a constant currency basis and has orders running at over a billion-dollar annualized rate. This is another indication of the early successes that are resulting from our business realignment. Strong demand and continued vendor capacity constraints led to a Book-to-Bill ratio of greater than 1.2 in the quarter, and we ended Q1 with a very robust $352 million in backlog, another record.
We continue to control what we can control and are making good progress with our transformation. At this stage, we are delivering results that are in line with the trajectory we'd expect to be on given the broader macro environment. Our confidence in our strategy and ability to achieve our long-term financial targets remains high. Please turn to slide four. I want to remind you that we are executing a strategic plan that unlocks CMCO's potential through a structured, disciplined business system and a core growth framework that drives market leadership. We expect this combination to produce a transformed enterprise that delivers growth with top-tier financial performance, which we believe will result in outsized shareholder value creation. Turning to slide five, I'll highlight our efforts to bridge to our targeted adjusted gross margin of approximately 40%.
As I pointed out, gross margin this quarter reached 37.5%, a new record for Columbus McKinnon. We achieved that while implementing a new ERP system in our largest manufacturing facility, while also continuing to address significant supply chain constraints. We're executing on plans that will reduce overhead through factory simplification and provide both material and labor productivity enhancements. These include sizable gains from 80/20 simplification, both at the factory footprint and product line levels, as well as from value-added engineering. We're also delivering growth through the strategic initiatives we have defined within our core growth framework. This growth enables CMCO to scale and better leverage fixed factory costs. In addition, we're increasing our competency within our pricing disciplines and are pricing for the value we deliver to customers. This can be seen in our recent results.
Finally, our acquisition strategy is expected to be accretive to margins. If you'll please advance to slide five, I'll turn the call over to Greg to review our financial performance in the quarter. Greg?
Thank you, David. Good morning, everyone. On slide six, net sales in the first quarter were $223 million, up 6.5% from the prior year period on a constant currency basis, and within the guidance we provided last quarter. As we have discussed for the past year, ongoing supply chain challenges continue to impact our ability to meet customer demand. This challenge resulted in an estimated $25 million of delayed shipments in the first quarter, about $10 million higher than we have been experiencing, but on a relative basis, about the same percentage of total backlog. The shortages are primarily in drives and controls, and motors with drives and controls directly impacted by the chip shortages. Looking at our sales bridge, pricing was a major driver of our growth, up $9.6 million or 4.5%.
The Garvey acquisition added $8.5 million of growth. We did see volumes decline 2% or $4.3 million. While the demand is there, as I noted, we are still constrained by material shortages, preventing us from getting more volume out the door. The decline in volume can also be attributed to the ERP implementation at our largest operation in Germany that we discussed on the last call. This impacted volume in the quarter about $11 million or 5% as the team worked through the learning curve of a new ERP system. The environment is now stable, and this should not be a headwind going forward. Foreign currency was a headwind that reduced sales by $7 million or 3.3% of sales. Let me provide a little color on sales by region.
For the first quarter, the U.S. improved pricing by 5.1%. Sales volumes were flat for the reasons I noted earlier. Outside of the U.S., pricing improved by 3.6%. Sales volume was down approximately 5% as volume decreased approximately 8% in Europe, primarily due to the ERP implementation, and 15% in APAC, due to the impact that the pandemic is having in that region of the world. Offsetting these declines were volume increases of 21% in Latin America and 5% in Canada. As David stated earlier, our order rates remain robust and annualized to over a billion-dollar level. We have record backlog and expect that when supply chains improve, we will see even stronger top-line growth. On slide seven, we achieved record gross margin of 37.5%.
This was up 280 basis points from the prior year. On an adjusted basis, gross margin was higher by 120 basis points as we benefited from incremental pricing, a favorable mix, and favorable one-time inventory adjustments, which more than offset the negative impact on absorption from the ERP system implementation in Germany. Overall, our precision conveyance businesses were 100 basis points accretive to our adjusted gross margin this quarter. Let me point out a few highlights in our gross profit bridge. First quarter gross profit increased $8.5 million compared with the prior year and was driven by several factors. The Garvey acquisition provided $3.1 million of gross profit. Pricing net of material inflation added $3.1 million of gross profit as we have successfully passed through material inflation increases. Favorable mix added $1 million.
In the prior year quarter, we also had $3.5 million of acquisition inventory step-up expense and integration costs associated with the Dorner acquisition, which did not repeat. Foreign currency translation reduced gross profit by $2.5 million. As shown on slide eight, SG&A costs were $53.2 million in the quarter, or 24.1% of sales. SG&A expense included $1.7 million of business realignment costs and were $51.4 million excluding these costs. This was lower than the guidance given last quarter, principally due to lower stock compensation expense as equity prices declined throughout the quarter, and we adjusted our FY 2021 LTIP grant to its expected performance payout. Compared with the prior year, SG&A costs were lower by $4 million.
This was due to $8.7 million of acquisition and deal and integration costs incurred in the prior year related to the Dorner acquisition. While foreign currency translation lowered our SG&A costs by $1.6 million, $1.4 million of incremental SG&A costs were incurred related to the Garvey acquisition. For the fiscal second quarter, we expect SG&A expense to range between $54 million and $55 million, which reflects the timing of our July 1st merit increases, offset by measures we are taking to control costs. Turning to slide nine, operating income in the quarter was $22.8 million, and adjusted operating income was $24.6 million.
Adjusted operating margin was 11.1% of sales, equivalent to the prior year and down slightly from the trailing quarter as we had less scale for SG&A costs as a % of sales due to the lower sequential sales volumes. As you can see on slide 10, we recorded GAAP earnings per diluted share for the quarter of $0.29. Our tax rate on a GAAP basis was 52% in the quarter. This reflects two discrete items that increased the tax rate by 27 points. The rate was unfavorably impacted 15 points due to a settlement for income tax assessments related to tax periods prior to our acquisition of STAHL. In accordance with the tax indemnification clause of the share purchase agreement, we received full reimbursement from STAHL's prior owner, which was recorded as a gain in other income during the quarter.
The tax rate was also unfavorably impacted by 12 points due to the recording of a U.S. state tax valuation allowance. For the full year, the tax rate is expected to be between 29% and 30% with these discrete items. Adjusted earnings per diluted share of $0.69 was equivalent to the prior year period. As a reminder, we add back amortization expense on a tax effective basis to our adjusted earnings per diluted share calculation. With rising interest rates, interest expense is expected to increase to $6.8 million in the second quarter. Weighted average diluted shares outstanding were approximately 29 million, and we will continue to use 22% as our pro forma tax rate when calculating non-GAAP adjusted earnings per share.
On slide 11, our Adjusted EBITDA margin for the quarter was 15.9%, and our trailing 12-month EBITDA margin was 15.4%. The Garvey acquisition was accretive to our Adjusted EBITDA margin in the quarter by 20 basis points. Our trailing 12-month return on invested capital was 6.8%. We are targeting $1.5 billion in revenue with a 21% EBITDA margin as covered at our recent Investor Day. We have a detailed plan to achieve these objectives over the next five years and have been executing our strategy to drive long-term shareholder value. Moving to slide 12, we had negative free cash flow of approximately $14 million in the first quarter. This includes cash outflows from operating activities of $11 million and CapEx of $3 million.
The negative free cash flow was anticipated and reflects the timing of our annual bonus payments for fiscal year 2022, as well as incremental investments in inventory to meet future demand and lessen supply chain impacts. We expect capital expenditures of $25 million-$30 million in fiscal 2023 as we invest in our factories to enable the next leg of our margin expansion initiatives. Turning to slide 13, we have a strong and flexible capital structure comprised of a Term Loan B, which requires $5.2 million of required principal payments annually and has an excess cash flow sweep depending on total leverage. We paid down $10 million of debt in the quarter and expect to pay $40 million for the entire fiscal year.
The Term Loan B is 60% hedged with interest rate swaps that blend to a swap rate of approximately 2.08%. As of June 30th, on a pro forma basis, which includes Garvey's LTM Adjusted EBITDA, but excludes expected cost synergies, our net leverage ratio was 2.9x. We have a strong history of delevering after acquisitions and plan to prioritize debt repayment as part of our capital allocation, along with bolt-on acquisitions at a reasonable price. Finally, our liquidity, which includes our cash on hand and revolver availability, remains strong and was approximately $168 million at the end of June. Please advance to slide 14, and I will turn it back over to David.
Thanks, Greg. As you can see on slide 14, we had another quarter of strong order performance, with orders up 11% on a constant currency basis. Notably, our average daily order rate, which typically declines in the first quarter, held steady with the trailing fourth quarter. We do believe we benefited from advanced stocking orders ahead of the most recent price increases that we implemented. This quarter's order growth once again outpaced sales, and our backlog grew to a near record, a new record level of $352 million. Long-term backlog, which is expected to ship beyond the second quarter, was up 20% sequentially to $163 million. Short-term backlog was up 9% sequentially and represents approximately 54% of total backlog.
If you'd please turn to slide 15, you'll see that we expect sales in the second quarter to be in the range of $230 million-$240 million. This range is inclusive of an estimated $12 million year-over-year FX headwind. While our backlog and market demand remain robust, vendor capacity continues to affect material availability. Even with these headwinds, our sales guidance range reflects a mid-single digit year-over-year organic growth rate at the midpoint. We continue to see significant demand in all markets and are encouraged by the traction we're gaining with our organic growth initiatives. We're also encouraged by early signs of commercial and operational improvements resulting from our recently implemented business realignment.
Finally, if you'd please turn to slide 16, I wanted to remind everyone that we're moving beyond the blueprint and targeting top-tier financial performance over our five-year strategic planning period. We're executing to our strategy to transform Columbus McKinnon into a global intelligent motion solutions enterprise. As we enter Q2, we continue to control what we can control and are working to positively impact the things that we can't directly control. We're making very good progress with our transformation and are delivering results that are in line with the trajectory we would expect to be on at this point, given the broader macro environment. As I said earlier, our confidence, both in our strategy and our ability to achieve our long-term financial targets remains high. With that, Claudia, we can open up the call for questions.
Thank you very much. At this time, we will be conducting a question- and- answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please, while we poll for questions. The first question comes from Matt Summerville through D.A. Davidson. Please proceed, Matt.
Morning, this is Will Jellison on for Matt Summerville today. A couple of questions here. The first one is about orders. I'm wondering what kind of dollar contribution from orders did you see from Dorner and Garvey this quarter? Then bigger picture, I'd love an update on what kind of synergies you're seeing from those two businesses together. Thinking about that first synergy you saw in fiscal third quarter, that $700,000 order on ready-to-eat packaged foods. Just wondering if there's anything similar to that happening.
Hey, Will, good morning. Nice to have you on this morning. We do not disclose individual line of business activity and wanna continue to maintain that position. As I think about order activity in general, our orders were up 11% year-over-year on a constant currency basis. Just to provide a little more color on splits, we had EMEA orders up 12%. I know EMEA is an area of concern for a number of us. You know, it was a bright spot as we think about that. Really pleased with order activity across the board. We're seeing demand across all of our end markets, and we are encouraged by trends around quotation activity in general, and that's true for all of our lines of business.
Understood. Okay.
Relative to your second question, I think I caught it, but you broke up a little bit there. You were asking about the project that we had last quarter, where there was a level of concern around the execution of the project and some cost impact associated with that. No, we did not see anything like that continue in this quarter. Our actions to continue to execute on CMBS and drive the right kind of project management execution in our business is leading to, I think, the right kind of performance when we deliver on projects.
Okay. Sorry, I must have misspoken. What I was wondering about was. Oh, you know what? Check that. Question answered. My follow-up, though, is I wanna pivot to talking about freight and logistics, because I know that was a little bit of a challenge last quarter. I was wondering how pricing stood relative to some of those pricing headwinds you saw in-
Mm-hmm.
Freight and logistics during the period.
Right. I'll start, and if Greg wants to add on, please do, Greg.
Sure.
The freight costs period over period from Q4- Q1 were down $3.2 million. We're really pleased with the work we've done around pricing. As I mentioned, we think we're you know becoming more disciplined as it relates to pricing for the value we delivered. We did have a price increase that went into effect in March, and then a second price increase that just went into effect at the end of June. We think that we are you know well-positioned with the increases we put in place. The quarter execution of backlog is always a bit lumpy. We've got projects that are in the backlog or even short cycle business that's in the backlog that sits at pre-price increase levels.
As that phases through this coming quarter, there'll be some, you know, timing differences between when those orders are received, when price increases went into effect, and when they ship. We believe our price cost ratio is gonna continue to expand as we advance throughout the year.
Understood.
Yeah, we're
Thanks. I'll take more questions.
Thanks, Will.
Thank you. The next question comes from Chris Howe from Barrington Research. Please proceed, Chris.
Good morning, David. Good morning, Greg.
Morning, Chris.
Morning, Chris.
Morning. Just wanted to dive further into the record gross margin in the quarter of 37.5% on an adjusted basis. If we think about that percentage, in the different buckets that you mentioned, the favorable mix, and the other factors that contributed to that performance, have these remained relatively consistent through the first month of the second quarter? In other words, do you expect to maintain this level into the second quarter, given that it is a record?
Yeah. Great question, Chris. As David just mentioned, we did see lower freight costs in the quarter by about $3.2 million sequentially compared to Q4's level. That's really broken into two pieces. You've got inbound, and you've got outbound freight. On the outbound freight, we did take action to recover more of our outbound freight. As a percent of sales, we saw our outbound freight costs decline by about 1%. On the inbound side, that's a function of the materials that are coming in, as well as the cost of materials coming in. We did bring in a little bit less materials from Asia, which did lower it somewhat. Nonetheless, we were down $3 million.
We did also experience some favorable inventory adjustments with the conversion to our new ERP platform, which gets, you know, amortized out over one inventory turn. But offsetting that was the fact that we did see fairly low fixed cost absorption in the quarter in the German facility, which is our largest facility. Net that, when you put it all together, Chris, we think we would expect similar gross margins to this in Q2, but albeit a little bit lower just because of some of the one-time favorable benefits that we did experience.
Okay. That's very helpful. See where I wanna shift with this follow-up question. I guess, can you talk more about the delayed shipments, $25 million, $10 million higher? I think you had an extra $1 million of ERP impact, $10 million versus $11 million. As we think about Q2, and some of the delayed shipments from Q1, how should we think about that? You got some of these shipments back here in the second quarter already. Are you anticipating kind of that $25 million again, just to be conservative?
Yeah, we're hoping to narrow that, Chris. We obviously are working every day to ship to customer demand and work within the supply chain to get things flowing the way that we would expect them to. There are some capacity constraints that we're dealing with, primarily driven by chipsets or you know, ICs that are coming from the Far East that go into the products that we produce, as well as into the you know, the motor subassemblies that we ultimately ship with our products. That's really the crux of our supply chain challenge. It's really driven by motor delivery and electronic components and drives and controls. That's the lion's share of the impact. As we flow through the balance of this quarter, we think things are starting.
We're seeing indications that things are starting to loosen, but you know, we've seen other challenges pop up as well, and we're, you know, anticipating that things are gonna be similar but on an improving trend as we advance through the quarter.
Okay. Thanks for taking my questions. I'll hop back in the queue for others.
Great. Thanks, Chris.
Thank you. The next question comes from Jon Tanwanteng from CJS Securities. Please proceed, Jon.
Hi. Good morning. Nice quarter, guys.
Thanks, Jon.
Greg, I think you made the comment that you expect growth to improve as supply improves. What are your customers telling you know, just in terms of their outlooks and the potential for any kind of recession, which, you know, they in some places we're struggling to see?
Jon, I'm not sure I got your question. Could you repeat, please?
Yeah. You said you expect growth to improve as supply improves. You know, that would imply that you expect demand to continue being strong for the next, you know, foreseeable future. I'm just wondering if your customers are telling you the same thing, that they expect their own demand to be strong for that same time period.
Yeah. Jon, this is David. I would say we're really seeing strong indication that orders are gonna continue to be robust. We've got a leading indicator with quotation activity that's trending up across the business. We've got input from our customers. We've got input from our sales channel, our own sales leaders that would suggest the same. We're encouraged that demand remains robust. We're watching all the leading indicators that everyone's looking at as it relates to recession. In fact, we've updated our recession playbook and made sure that it's well understood across the enterprise so that as we watch those leading indicators, we're ready to take action swiftly and decisively should we need to. At this point, we don't see indications that that's necessary, certainly not at this point.
Okay. Great. Second, what is your appetite for acquisition today? I know you used cash in the quarter. You expect that to reverse as you go forward. Is that a priority for cash flow, or is it more paying down debt at this point? Kinda, how does that sort against the pipeline that you're seeing?
Yeah. We have really a great pipeline of opportunities that we continue to have discussions with the other parties on. We are very disciplined about the way that we're thinking about deploying our capital in this environment. Candidly, as I've said numerous times on these calls, we're laser focused on execution. We're, you know, applying our resources in a way that are focused on executing to meet our organic commitments within the business, but with a mindset that we are going to be programmatic with M&A over time. You don't start and stop discussions in pipeline and so forth. We've got, you know, some really interesting, nice right-sized opportunities that, you know, could be really interesting opportunities for Columbus McKinnon and for our investors as we go forward and think about that pipeline.
Yeah. Just to add, Jon, onto David's comments. You know, clearly with rising interest rates and where our stock price is today, we're truly looking at bolt-on opportunities, which are gonna be much smaller and, you know, purchase price matters. We're gonna take, you know, continue to be very disciplined in how we evaluate opportunities and how quickly we can delever if we were to, you know, buy a bolt-on opportunity.
Yeah. Absolutely.
Okay, great. One final one, if I could. Your gross margins are about two or three quarters ahead of where I thought you would be. Does that imply you might get to that old EBITDA margin target of 19% maybe a little bit faster than expected, sometime in this fiscal year?
Yeah, I would say, Jon, that, you know, we've talked in the past about, you know, getting to that 19%, and it requires a gross margin of 39%-40%. At 37.5%, we did have the one-time goodies I mentioned, but, you know, we should start to see similar, albeit smaller or a little bit lower gross margins in the upcoming quarter. Nonetheless, that's another, you know, call it 300 basis points, 200-300 basis points from where we are. That's. You know, with two quarters to go, that's a pretty significant increase. I would say that, you know, we're gonna continue to make progress.
You know, there's still a lot of uncertainty, especially with what's going on in Europe with, you know, energy supply, the Ukraine situation. Hard to say today where we're actually gonna finish the year with gross margins.
Okay. Fair enough. Thank you very much.
Jon, let me just add quickly to that as you think about the path to getting to that outcome, we've got, as we said at our Investor Day, we've got a backlog of $352 million. As we start to see that flow through and get better fixed cost leverage in our factories, and you think about the price increases we've already put in place, and then you think about the SG&A that we're taking out, as we gain scale through the shipment of that backlog, that is the key to getting to that 19%. We're controlling what we can control. We're executing our management plan to get to those levels.
As the market supports, the supply chain supports the execution of that backlog at rates that enable that scale, we'll deliver those margins.
Got it. Thanks, David.
You bet.
Thank you. Ladies, and gentlemen, just another reminder. If you'd like to ask a question, please press star then one. If you'd like to ask a question, please press star then one. The next question comes from Steve Ferrazzani from Sidoti & Company. Please go ahead, Steve.
Morning, David. Morning, Greg.
Hi, Steve.
I wanted to ask a little bit about cash flow. You touched on it a little bit in your expectation we start seeing positive cash flow. I'm trying to think of how quickly that working capital comes down even as your volume goes up. Obviously, you're carrying much higher inventory levels right now. How can we think about that?
Yeah. The easiest way to think about it, Steve, is, you know, overall our working capital as percent of sales. We were elevated at 19.9%, this quarter, largely driven by the incremental $22 million of inventory that we added to the system. As supply chains start to improve, we will start working that balance down. We would expect, revenue to increase as well. You know, we still are targeting roughly the mid-teens, you know, 15%-16% as working capital percent of sales. That is, gonna be a big driver of the free cash flow. We did have the one-time items, which we have every first quarter. Last year in the first quarter, we had negative, free cash flow as well. It wasn't unexpected. You know, we budgeted for that to happen.
We do think, you know, we're gonna end with a nice free cash flow balance at the end of the year.
Okay. Is there a certain level of cash you need on the balance sheet for operations? Just thinking about kind of timing the $10 million in debt repayments.
Yeah.
How comfortable you are right now?
Yeah. We need about $40 million-$50 million, and ideally, you know, a good bulk of it in the U.S. because the interest and the principal is paid out of the U.S. You know, today we're carrying $86 million, I think was the reported balance at the end of the quarter. Sometimes, you know, a big slug, multiple millions of dollars come in on the last day of the quarter, so there's not much you can do. We have to make our decision on how much debt we're gonna repay a couple of days prior to the end of the quarter. We're confident and comfortable that, you know, we can get to the $40 million number this year of total-
Fair enough.
cash flow or principal repayments.
Yep. Okay. I did just one last one. You've previewed that R&D would be going up. I just wanna ask a little bit about where the R&D focus is and how product development efforts are going and how much that sort of contributes to the margin improvement beyond just obviously having Dorner and Garvey.
Sure. Yeah, Steve. We're very focused on our core growth framework and the strategic growth initiatives we're driving within that framework. Product development is a key area of focus. We've invested in building that team, building our competencies around product development, doing the market outreach and customer voice of the customer work in advance of that, and making sure they're driving next generation platformed products that enable PLS, or it's an 80/20 principle focused on product line simplification.
And, so, as we drive product line simplification across the portfolio, we're able to offer better fit for purpose, more modern designed product that actually enables access to a broader set of markets, because we can modularize the design and offer a, you know, a product that's fit for use in Asia as well as Latin America, in addition to our European and American markets. We're really focusing attention in those areas, and I'm really pleased with the work that we're doing. We've been able to outpace growth expectations. As we wrapped up the fiscal 2022 period with those new product investments, and you know, we're investing to ensure that continues in fiscal 2023.
Great. Thanks, David. Thanks, Greg.
You bet.
Thanks, Steve.
Thank you.
Thank you. The next question comes from Patrick Bowman from JPMorgan. Please proceed, Patrick.
Thanks for taking my questions. First one is on the orders number. What do you think was the impact of buying ahead of price increases? Then also in the 11% that you booked this quarter, should I just assume that the price reflected in that was similar to the price you booked in the revenue line, which is about 5%?
Yeah. When we look at orders by month, you know, April, May, June, we saw about a $10 million increase in the month of June from May levels that was really related to, I'd say, people buying in advance of the June price increase.
Yeah, that's a good way to summarize it, Greg. I think you do see for standard products that are, you know, stockable items, demand that has increased as we went into the latter part of the quarter in advance of that price increase that was going up. I think that's a reasonable way to summarize.
On the price. Well, I was just trying to understand the price increase in the orders. Is that about 5%, which is kinda like what you're seeing in the revenue line from price?
Yeah. We implemented our price increase in March, and we had price that was in the backlog that fall, you know, that came, you know, carried over from prior year price increases that longer cycle shipments. It's difficult as you think about the phasing of shipments to directly attribute the price that was in each one of those in an aggregated sense. I'm gonna let Greg comment a little further because I know he's done some better analysis around.
Yeah. Pat, we saw in the quarter 4.5% of pricing. Because of the way we calculate pricing, it's on a like SKU for SKU basis. Because about half of our business is project-related, it's really double. You know, we went out with essentially 10% price increases.
That's right. Yeah.
We'll realize that on half of the business, because the other half has, you know, the pricing is embedded in the configurators. You know, we can update those real time for cost changes and, you know, margin expectations. And that's also quoted too. Tends to be more of a competitive situation. For a standard product, it's up 10%, essentially.
Understood. The pricing that you're in reality realizing in your revenue is probably greater than the amount that's reported through the revenue line, as you guys report it only on a part of your business.
Yeah.
Correct.
Yes, because in order to measure price, it's on an exact SKU by SKU basis. I sold this SKU last year at this price. I sold it this year at this price. What's that delta times the number of SKUs?
It's about 50% of the business.
Yes
That fits that profile.
Got it. That's helpful. Did you say at the beginning which end markets you're seeing improving demand still? Are there any that you're seeing demand, you know, fall off a little bit? Have you commented specifically on end markets? I guess, you know, e-commerce is one that is obviously under the microscope a little bit, but, I'm sure you're seeing increases in other end markets like oil and gas, et cetera. Just curious if you give any color in the vertical markets.
Yeah. We have seen the vertical markets more generally doing well. As you think about our broader end markets, I'd say a general statement would be we see demand being robust across all. As I think about notable markets with increases, I think about utilities, I think about defense, I think about entertainment, energy. As I think about your comment around e-commerce, we've made good inroads with new e-commerce customers. We're continuing to invest in the future of that landscape. Notably, you know, there's a large customer that has shifted priorities, and that's resulting in a rephasing of their demand in the current environment.
Helpful. If I could squeeze one more in. Did you say what drove positive mix in the first quarter? What exactly was that? I might have missed that at the beginning. I know, I apologize if you're repeating yourself.
Yeah, no, we didn't disclose it, but it's gonna be more of our high value-added hoist products, I would say, as opposed to our forged products.
Mm-hmm.
Yeah. I would add it's, you know, products that are typically shorter cycle, standard products that have attractive margin profiles where we saw an increase in mix in the first quarter.
Legacy.
The other part too is our rail business, which has lower gross margins but a lot lower SG&A. We had less volume there as we did have some projects that got delayed because of COVID.
Got it. Very helpful. Thanks. Thanks so much for the time. Appreciate it.
Thanks, Pat.
Thank you. The next question is a follow-up question from Chris Howe from Barrington Research. Please proceed, Chris.
Follow-up on just a brief comment that was made in some of the prepared remarks in Q&A, just about the backlog. You mentioned the different phases of pricing, some backlog having more recent pricing, some having relatively older pricing. Can you talk about the maturation of this backlog as we think about Jon's question about gross margin that 39%-40% level. As this matures over time, what type of opportunity does this open up for gross margin? In other words, there's likely a higher gross margin underneath the numbers once we move forward in this environment.
Yeah. We believe that's the case based on, you know, the moves we've made as we've advanced over the last 12 months with the backlog phases. As you can see, we've got a backlog that is, from a short-term perspective, pretty healthy at $889 million of the $351 million. So that represents 54% of the total backlog, and that's expected to ship really over the next quarter. That's the short term backlog that should have the benefit of the March price increase, but only partially would have the benefit of any increases thereafter.
As we think about that longer-term backlog at $163 million, that would have a phasing of pricing based on, you know, the way that we increase price both in the fourth quarter of last year and then through this first half of the calendar year. Our belief is exactly what you said, that, you know, as you move forward, the pricing impact improves, and that starts to give us an opportunity to expand price to cost ratios and expand gross margins.
Great. Thanks for taking my question.
Thanks, Chris.
Thank you. The next question is another follow-up as well from Jon Tanwanteng from CJS Securities. Please proceed, Jon.
Hi. Thanks for the follow-up. I apologize if you said this before, but, can you just clarify, did you mention where gross margins will be directionally in Q2?
Yes, we did. We said that they'll be similar, but likely to be a little bit lower.
Got it. Thanks, Greg.
Thank you. The next question is also a follow-up from Matt Summerville from D.A. Davidson. Please proceed, Matt.
This is Will Jellison again. Thanks for taking the follow-up. I was wondering, with the $3 million CapEx spend in the fiscal first quarter turning below what you would need to spend to reach that $25 million-$30 million target to make those plant improvements, I was just wondering if that was a reflection of a normal business cadence you would expect given your plans, or if you're also seeing supply chain challenges in capital equipment as well.
It's a fair question, Will. I would say that it's more the former at this stage. We are planning to execute on some, you know, meaningful investments to increase productivity and to drive the next leg of margin expansion, as Greg indicated. Those investments are a bit lumpy, and they phase later in the fiscal year. I'm not worried about the $3 million trend versus the overall annual target. But, you know, I think following up on the second part of your question or your point, we are planning for longer lead times associated with capital spending and the delivery of that equipment. There will be deposits on a number of these large capital projects that we'll have to make.
Understood. Thank you.
You bet. Thanks, Will.
Thank you. Ladies, and gentlemen, we have reached the end of the question- and- answer session, and I would like to turn the call back to David Wilson for closing remarks. Thank you.
Thank you, Claudia. The first quarter was a strong start to fiscal 2023 as we advance our strategic transformation. We delivered terrific results, including record gross margin, robust order intake, and 112% growth in operating income. We remain laser-focused on execution and improving our customers' experience. We're taking further actions to improve the business and our performance while executing to address increasing customer demand. We are truly creating a better, more scalable, and more profitable business model as we evolve into the global leader in intelligent motion solutions for material handling. Thank you for your time today. We appreciate your interest in Columbus McKinnon. Have a great day, everyone.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you very much for your participation.