Good afternoon, everyone. My name is James Kirby. I cover industrial strategy at JPMorgan. Very excited to welcome the Columbus McKinnon team to the JPMorgan Industrials Conference. We have David Wilson, CEO; Greg Rustowicz, CFO; and Treasurer and Head of IR, Kristy Moser. I think Dave is going to kick it off with a presentation, and then we'll have plenty of time for Q&A. Thanks.
Thanks, James, and welcome, everyone. We appreciate you joining us this afternoon. For those of you who are not familiar with Columbus McKinnon, we're going to start with a brief overview of the business and our recently announced pending acquisition of Kito Crosby. Before we jump into Q&A, CMCO has been a leader in the material handling space for over 150 years. Building on this foundation, we've grown into a global leader in intelligent motion solutions with a carefully curated portfolio of assets that enable the precise movement and orientation of materials to solve our customers' critical material handling needs. Four years ago, we set out on a transformation journey to scale our business and create platforms for growth with a holistic portfolio of solutions, further differentiating our business and delivering improved financial results. Today, we operate in a $20 billion total addressable market.
Not only is our TAM growing and larger, but there are pockets that remain highly fragmented. We are generating significant free cash flow, which provides dry powder to reinvest in the growth and attractive cash-on-cash returns, where we have multiple levers to drive scale. Our free cash flow conversion in the business is typically around 100% annually, and we have a track record of investing in growth and deleveraging quickly to our targeted net leverage ratio of approximately two times. Our products are engineered to be professional grade and help our customers work smarter while improving the safety, uptime, and productivity of their operations. Our intelligent motion solutions combine equipment used to lift, move, and position materials with industry-leading controls and automation technology. Working together, this technology is helping our customers solve high-value problems that are critical to their business.
With scarcity of labor challenges, the need to improve productivity, and ensure continuous uptime, we believe there is no one better positioned to help our customers automate and streamline their material handling needs. That will be even more important as customers onshore in response to the impending tariff increases. As companies embrace AI to deal with scarcity of labor and optimize efficiency, we are positioning ourselves to be the connective tissue that links the digital and physical worlds, the virtual and physical worlds, by precisely positioning materials to enable fully automated intralogistics. Whether customers need a hoist, a linear actuator, or a conveyance solution, we can simplify and automate their material handling and intralogistics processes. As we lean into vertical market selling strategies, we're able to bring a more holistic suite of solutions customized to the needs of that end market.
Our business operates across four product categories, serving the intelligent motion needs of our customers across industries. First, our lifting solutions business consists of products that lift and orient materials from above. This area includes our hoist and rigging products, which are very well-known established brands with a broad range of lifting capacities, from one-eighth of a ton to 140 tons, where we have a leadership position across key categories. Our precision conveyance business is our newest platform that supports the precise movement of materials and enables complex automation processes like robotics and the real-world application of AI. We entered this category in 2021 with the acquisitions of Dorner and followed this with the acquisitions of Garvey and montratec This category provides exposure to vertical end markets with secular growth trends.
Our linear motion and specialty actuation solutions that push or lift and position materials up to 50 tons round out our product portfolio, serving the intelligent motion needs of our customers. Finally, all of those product categories are wrapped up in automation solutions for our product portfolio that increase uptime, enhance productivity, and improve customer safety while enabling precise movement of customer materials throughout their facilities. As a small publicly traded company, we have a strong track record of M&A and are realizing benefits from improved scale. As part of our 80/20 process, we regularly review our portfolio. This has led to our few divestitures and is an ongoing assessment we regularly complete on our portfolio. We have a proven track record of successfully integrating acquisitions and exceeding our original cost synergy estimates.
Our previous acquisitions have been integrated into our base business, and we're excited about the long-term potential of these businesses, adding incremental value for our customers. Most recently, we announced our agreement to acquire Kito Crosby, a highly complementary deal that we believe will enhance our scale, market position, and deliver top-tier financial performance. For those of you who are not familiar with Kito Crosby, they are a leader in lifting and securement products, including hardware and consumables with globally recognized brands and a manufacturing footprint across 50-plus countries. We have a long and great respect for Kito Crosby's strong portfolio of offerings, and we look forward to welcoming them to the Columbus McKinnon team. Bringing together a complementary portfolio of assets focused on safety, productivity, and uptime, we're well-positioned to deliver solutions for our customers.
54% of the portfolio is lifting, securement, and consumables, which are low-ASP products that drive consistent replacement demand and are relied upon in mission-critical applications where safety is paramount and failure is not an option. Bringing our two businesses together, we are affecting a meaningful improvement in our scale. This is critical. That not only gives us a broader reach, but also combines the significant capabilities of both businesses to deliver and enhance the value proposition to our customers, thus creating a scaled intelligent motion platform with over $2 billion in sales, enhancing our holistic offering and material handling solutions, and increasing the resilience of our portfolio through geographic diversification and adding lifting, securement, and consumables to our portfolio in a meaningful way.
We will be positioned to benefit from growth tailwinds developing from industry megatrends, including companies reshoring to reduce risks, stabilize supply chains, and enhance logistics efficiency, workforce gaps, and accelerating automation adoption across manufacturing and logistics, aging U.S. facilities, modernizing to stay competitive and meet rising demand, government spending driving automation in transportation logistics and smart infrastructure, government spending, market growth driven by key secular trends, including nearshoring, labor shortages, infrastructure investment, and a focus on sustainability. It's likely that these megatrends will accelerate in the current policy environment, and we are positioned to capitalize on the opportunities with great people, a more fulsome portfolio across a broader set of geographies. With this combination, we're creating a highly attractive financial profile, underscored by a doubling of our revenue, a tripling of our adjusted EBITDA, and strong free cash flow generation.
This financial profile is enhanced by approximately $70 million worth of net cost synergies enabled by operational efficiencies and long-term value creation that best positions us to capture a broader share of customer wallet. Finally, it's important to drive home the point that our business is naturally cash flow generative and that strong cash flow will enable swift de-leveraging over the next few years, which will be our focus for capital allocation in the near term. Over the long run, this cash flow also gives us the financial flexibility to reinvest in our flywheel of growth. Acquiring Kito Crosby will enable Columbus McKinnon to accelerate the realization of our intelligent motion solution strategy faster than on a standalone basis. Given the top-tier financial performance, strong free cash flow generation, and rapid de-leveraging, we anticipate following the completion of this transaction.
After we've successfully de-leveraged, we will have a fortified balance sheet with significant free cash flow generation to move to more impactfully advance our intelligent motion strategy across a fragmented landscape of opportunities. When KKR decided to bring Kito Crosby to the market, it created a very unique opportunity to bring together two highly complementary and synergistic businesses that are much more valuable together than they are apart. The Kito Crosby business is a business that we know very well. While it's a complementary portfolio, we serve many of the same customers, leveraging similar supply chains and operating similar manufacturing processes on much of the same machinery. This gives us a high degree of confidence that we will successfully integrate the businesses and deliver on our synergy expectations.
Together, we will be better positioned than ever to deliver a superior offering with our new products across a broader set of geographies underpinned by a synergistic combination that will deliver customer value and significant financial results. We will also participate meaningfully in the lifting, securement, and consumables business, which is a more resilient segment of the market. This strategic business combination positions us to create value for our stakeholders. Industrial companies with similar profiles command higher valuations for their shareholders over time. As we execute on our near-term objectives, delivering synergies and paying down debt, we expect to achieve attractive financial results and believe that there will be meaningful upside to our valuation over time.
Looking more closely at our net cost synergies, we expect to achieve $80 million of synergies on a gross basis before adjusting for $10 million of dissynergies, given that we need to bring Kito Crosby to public company standards and expect some reinvestment will be required, given they were owned and operated in a private equity environment for over a decade. In addition to our own analysis, we engaged a top-tier consulting firm who specializes in synergy and integration work to independently validate our assumptions and findings. Cost synergies will come in three areas: procurement, where synergies will come through improved input prices, giving greater economies of scale and price harmonization; facility optimization, realized through optimizing supply chain and factory logistics; higher volume on standard runs with less machine changeover times; footprint simplification, resulting in reduced facility overhead; and optimized distribution and warehousing, resulting in improved customer experience.
Finally, SG&A savings, which includes the elimination of redundancies, overlapping technologies, and third-party spending. We expect to achieve the $70 million in net annual run rate synergies over a three-year period, with 20% expected in year one, 60% in year two, and 100% in year three. While not included in our modeling, we expect incremental benefits realized through revenue synergies, given the complementary nature of our business combination, including bringing a more fulsome product portfolio to existing customers, attracting new customers with a broader integrated one-stop-shop portfolio, geographic expansion opportunities, for example, Kito Crosby's APAC footprint leveraged by Columbus McKinnon and Columbus McKinnon's Latin America and EMEA footprint leveraged by Kito Crosby, among others. In the first year alone, the business combination is expected to achieve approximately $200 million of free cash flow.
Our primary focus for that cash flow will be to pay down debt on a quarterly basis to reduce leverage and accelerate free cash flow generation. Debt reduction, the execution of our growth and margin expansion plans, and realizing our targeted synergies will collectively increase adjusted EBITDA and free cash flow, further reducing net leverage. This is consistent with the approach we have successfully taken with prior acquisitions. As you can see, following the Dorner and Garvey acquisitions, as well as our most recent montratec acquisition, we have successfully de-leveraged to below two and a half times within a short period of time. This demonstrates our track record and highlights our conviction regarding our de-leveraging plans and our plans to de-leverage quickly as we integrate the Kito Crosby acquisition.
We remain on track to close the Kito Crosby acquisition as expeditiously as possible from a financing and regulatory standpoint. We have secured fully committed financing and completed the syndication of that credit facility with the $500 million revolver. We expect to pursue permanent financing in the coming months, but that process would not delay or prevent closing. We expect to submit our HSR filing in the coming weeks and to begin moving through the next stage gates to closing. Our combination with Kito Crosby is a highly complementary deal that we expect will drive compelling value creation for all of our stakeholders. This acquisition enhances our scale, market positioning, and will deliver top-tier financial performance. Bringing our two businesses together creates a $2.1 billion intelligent motion solutions platform with enhanced scale and leadership in material handling.
It increases the resilience of our portfolio through geographic diversification and adding lifting, securement, and consumables. Collectively, not only will we have scale, we will also have a top-tier margin profile with adjusted EBITDA margin on a pro forma basis in the mid-20% range, supported by strong standalone financial performance and approximately $70 million of cost synergies expected by the end of year three. This business combination produces strong free cash flow, which will enable significant debt reduction following the transaction. On a post-synergized basis, the trailing 12-month adjusted EBITDA multiple is approximately 8x on a synergized basis. The acquisition of Kito Crosby will create significant value, strengthening our core business, which will allow for greater flexibility in the future to accelerate our strategy to grow in the intelligent motion category.
We are focused on working towards closing and integration with an expected strong de-leveraging as we capture cost and revenue synergies from the deal, as well as an enhanced financial profile for Columbus McKinnon. Thank you for your attention. I'm going to turn it back over to James.
I wasn't counting, but you said scale a lot in that. Columbus McKinnon was the number one market share of hoist in North America before the deal. Kito was one of your biggest competitive peers. Maybe any more color you can provide in terms of the consolidated market positioning in the lifting landscape.
Yeah. You saw in my reference to the TAM for lifting, it's an $8 billion category. $8 billion of market.
On a combined basis, when you look at the two businesses combined, I think in the pie charts in the appendix of the document that we produced, it shows that roughly 76%, around 80% of $2 billion on a combined basis, $1.6 billion roughly, is going to be our position in lifting, which approximates 20% of that $8 billion in TAM. We think on a combined basis where kind of across different categories depends on how you slice and dice it, but we might be approximately 20%.
Got it. That's helpful. I guess, David, since you've been CEO in 2020, the company was on a business transformation path away from a cyclical industrial legacy company. You oversaw the Garvey and montratec acquisition. Maybe just in terms of timing of this acquisition, from a strategic standpoint, why is now the right time for this?
Yeah. Thanks, James.
I'm going to talk about this first, I think, to address the first point you made, which is, yes, I joined the company in 2020, and we very quickly looked at the portfolio and assessed opportunities for the portfolio. We developed a strategy that said we were going to strengthen the core, grow the core, expand the core, and reimagine the core. That core includes lifting as a very substantial, the largest part of our total business. We focused our early efforts as we looked to diversify the portfolio and participate more in secular growth-oriented markets in areas of precision conveyance after dissecting the landscape and looking for areas where we had a right to play. We identified those areas as key, and we're very excited about those deals. They're great deals, and they're adding value to the portfolio and will continue to over time.
We made the decisions to invest in Dorner first, then Garvey, then montratec , diversified the portfolio, provided some new faster-growing access. We were looking and developing the core part of the portfolio, the lifting portion of the portfolio, more from an organic perspective. KKR came to market with the asset. We've known this business for a very long time. We looked at Crosby when it went to market 10 years ago. When I joined the company, I had conversations with Yoshio Kito, who is one of the family members of the original founders who runs and was the CEO of Kito before its acquisition by Kito Crosby. These are businesses we had interest in, we knew of all along. Their combination in Kito Crosby and then their proposed sale by KKR was something that was of interest to us to understand at a minimum.
As we learned more, it became very compelling from a value creation opportunity potential. From a timing perspective, that transaction sale timing kind of leads to why now. It was available. It's kind of a once-in-a-lifetime opportunity to put two companies together that are very complementary, very synergistic, create a leading position from a scale standpoint, as we've talked about. I've mentioned it a bunch of times from a scale standpoint, and a top-tier financial profile. That combination, in combination with the cash flow generation properties of the business, will enable us to de-lever rapidly and have a business that is very well positioned from an intelligent motion solution strategy perspective. This wasn't so much a deviation from strategy.
This was in line with strategy, but a way to scale that core, strengthen and grow that core as part of the strategy that we've articulated for a very long time, create a very valuable portfolio in doing so, de-lever rapidly, and have a more impactful potential to pursue that intelligent motion solution strategy over time in a highly fragmented set of landscapes once we get beyond that phase of de-levering. Got it. Makes sense. Are there any questions? I'll keep going if not.
If you maybe could just turn back to the slide. I don't know if you have the power to just the first pro forma, I guess, cash flow source and uses, which is really helpful. I think you want to go more.
Yeah. Thank you. That is year one, right, in terms of free cash generation of the $202 million.
I think it was the other slide, maybe. Sorry. Sorry. I do not want to keep making you play around with the slides. Yeah. Thank you. That year one, $202 million. Maybe how does that look for year two and year three? Are there any, in terms of maintaining CapEx number for year two, given what you see as the synergies with facility overlap, is that number going to come down, or how should we think about any of the moving pieces there for free cash flow in year two and year three to hit your delivering targets?
Yeah. We believe free cash flow will expand from year one to year two and then to year three.
There are specific drivers for that that include this realization of synergies, the de-levering, which reduces interest expense, the growth of the core business, and increase of EBITDA translating to the bottom line from that. We're a CapEx-like business. Their business is a CapEx-like business. There are certainly opportunities for synergies through facility capacity leverage, but they have like equipment, like facilities. There is an opportunity to leverage existing footprint, existing facility and machinery to get benefit from the combination. We believe that those numbers will expand over time. Greg, if you wanted to enumerate a little further, I'll hand it over to you.
Yeah. In the $202 million, you can see on the third line where we've got synergies to be achieved.
As those synergies are going to be recognized, that extra $56 million, that's going to show up in free cash flow by the end of year three. In addition, as we pay down debt, we're going to see our cash interest go down. That will further drive it along with the EBITDA margin expansion from our existing programs. For instance, we've got a major program underway now to consolidate facilities where there's going to be probably additional opportunities with the combined companies just given the overlap that we have. Yes, we would expect this to grow over time.
Got it. I think it's worth noting in your assumptions, there's no revenue synergies. Given the product overlap, which is a lot in terms of maybe Kito Crosby makes more shackles, but you guys are hoist and also make shackles.
It should be in terms of revenue synergies, how do we think about how much can be realized?
Yeah. You know it's interesting. We haven't quantified that, so we've not gone out with a number. There is a material level of opportunity when you think about the global reach of the company. Just looking at geographic footprint, Columbus McKinnon has roughly $50 million of business that we sell into Asia. A large portion of that is shipped in. It is not manufactured in region for region. The infrastructure does not really exist in region as fulsomely as we'd like it to. Kito Crosby, on the other hand, has a business that approximates a quarter of a billion dollars in that region. That is in region for region.
An infrastructure, a team, reach, capabilities, and our ability to tap into that team's strong capabilities and reach with product portfolio that is not represented in Asia for either company today is a terrific opportunity for us on a combined basis to grow the Columbus McKinnon portfolio. Likewise, we have reach into certain geographies in Europe as well as in Latin America, including in Europe, the Middle East, where we could combine and strengthen the Kito Crosby business, leveraging our roofline and reach and capabilities. That is something that provides a nice opportunity for both businesses on a combined basis. You also think about where we serve customers today together. Both companies serve the same customer. Our ability to create an increased value proposition for customers because we can become a more one-stop shop, if you will, for that customer.
We can create easier transactions, one invoice, a simpler method of ordering today from two companies and in the future from one company. I think that ease of doing business, value proposition opportunity is material. I also think as you look at areas where we in the same geography where we both operate, each of us have access to different channels or different customer segments, the opportunity to bring products that aren't yet represented in those categories is something that exists there too. We have not put a number on that, but we think it could be material. What we wanted to focus on was what's in our four walls, what we can control, and what we've demonstrated historically a strong ability to deliver on and frankly exceed with other acquisitions is where we sign up to deliver net cost synergies.
We're going to go deliver those, and we're going to pursue these opportunities that we know will be incremental and accretive over time.
Got it. Thanks. Thanks. As we think about the 30% pro forma consumables as a percentage of sales, what's the margin profile difference, or is there one between consumables and the balance of the business?
Yeah. The average ASP on those products, and just to back up to the 30%, so the portion of Kito Crosby's business that is in this category is 54%. That's also in the prepared materials. We have a business that's about 8% in the same category. On a pro forma basis or a combined basis, it approximates 30% or a little more than 30%. That portion of the business has a resiliency and an average ASP that's $500 or less.
These are shackles, hooks, other mechanical or manual-related elements, mostly forged items that have risk of being shock-loaded or worn or subject to exposure to either humidity or some moisture, saltwater, and freezing temperatures, changes in temperatures that can change their characteristics and render them less capable of managing loads under stress. The potential is that those end up being replaced because they're low cost and they're used in a very critical application. That, by its very definition, high criticality, low price gives an opportunity from a margin performance perspective for that to be a high-margin product. That is the case in this product category.
It's an opportunity to build up the Columbus McKinnon portfolio with a more resilient piece of business that is more of a consumable-type business, less CapEx intensive, more MRO or simple low-cost spend that has a resiliency and a margin profile that's very attractive. Just to try to quantify it a little bit, are we talking 1,500 basis points better margin? Yeah. We haven't disclosed the different margin profiles of the businesses. I don't want to, at this stage, get into a process of doing that. It's an attractive portion of the portfolio with a nice margin profile. When you look at the two businesses, what you see is that Kito Crosby's business as a total business has a higher gross margin profile than Columbus McKinnon's business does. Fifty-four percent of its portfolio is driven by that portion of the business.
Great.
Just in terms of market share, I know you said about 20% of the overall lifting market. As we think about the consumables portion of that market share, is the market share higher within consumables within that subsegment?
I mean, the competitive landscape is pretty fragmented in all cases. There is a large degree of competitors that are local and regional. It is an evolving landscape with global competitors that have been entering the market. It is hard for me to specifically quantify that break in this session. I would say that it is probably consistent, perhaps a little bit more.
The one thing I would point out is while there was a really strong consumables and hardware component of the Kito Crosby business, it was a fairly small part relative to the Columbus McKinnon business, under 10%, so rounds out in aggregate to about 30%, which is highly attractive. It is a business that we, frankly, really like, and we have been making inroads in. This just really accelerates the journey, bringing it together, given the resilience and the superior kind of return profile of that product category. It is a business that we very much like. It brings us to scale, but I do not think in an outsized way, given that our original core business was in the single digits.
Great. Thank you.
Thank you.
Thanks. We have about three minutes left. We can go over since this is the last, but I will not keep you guys here long.
I guess how long today? Maybe not to shift away from the acquisition, but you guys did not have a chance during your earnings call really to talk on the macro outlook. That was about three weeks ago. Short-cycle orders were down. How are customer conversations going now that there is not some clarity, but maybe some guardrails in terms of what a tariff environment would look like? Greg, I know you were CFO during Trump 1.0. Any lessons learned there for the business?
Yeah. First, as it relates to tariffs, we have a page in the doc that actually quantifies what the exposures are. We have done a really good job of offsetting the impact of cost increases, whether they are tariffs or just general material increases with price.
We have a long history of having price in excess of material inflation that goes back to when I started with the company. With the initial tariffs with China, we obviously passed through those tariffs, but we also looked to resource where we could and where it made sense, product to other regions of the world. Our strategy is really around in region for region. We will take the same approach. We will look to pass through pricing where we can, but we are also sensitive to what we charge our customers. We want to make sure that we make the best decisions with the highest quality subcomponents to protect our brand.
Yeah. James, just relative to customer sentiment, conversations are encouraging. There is real commercial demand, even if there is some financial markets disruption right now.
A lot of news that's coming out every five minutes, it seems, relative to what's on and what's off and how to react to that is something that people are trying to figure out. What I would say is that when we entered this quarter and reported on Q3, we talked about how we saw softness in November and December, and we anticipated that that would continue through the first half of January, like we typically do seasonally as we enter the first calendar quarter, and that things would accelerate, business demand would pick up from there. What I would say is that we see that demand continuing as expected and that the conversations we're having with customers regarding real short-term and mid to long-term opportunities, both on the more build-to-order product as well as configured and project-related activity, is encouraging.
Our partners see a good opportunity that's resulting in our funnels, our opportunity funnels being at near record levels across each one of our product categories. We're seeing conversion on those funnels begin to gain traction, which is encouraging.
Got it. I think that is just at the time. Thank you, Columbus McKinnon, for coming. Appreciate it. Thank you, everyone. We're really excited about this opportunity and know that it'll be a compelling transaction for the company and for everybody who's invested.