With that, I'm so happy to be joined by Columbus McKinnon, the ticker is CMCO. We're joined this morning by CEO David Wilson and CFO Greg Rustowicz. With that, let me turn it over to you, David.
Thanks, Steve. Good morning, and good morning to everyone on the call. For those of you who are not familiar with Columbus McKinnon, we'll start with a brief opening set of remarks and give an overview of the business, and then we'll jump into questions, as Steve indicated. Before we get started, I do want to point out that we do have a safe harbor statement on page two of the presentation, and we'll also be referring to some non-GAAP financial measures today. Columbus McKinnon was founded in 1875, and we're a global leader in intelligent motion solutions, and we're celebrating our 150th anniversary this year, which is an exciting milestone for us. We provide professional-grade solutions to solve customers' high-value problems, enabling them to improve safety, efficiency, and uptime through lifting, moving, and positioning materials.
Five years ago, we set out on a journey to scale our business and create platforms for growth with a reimagined portfolio of solutions to differentiate our business and deliver improved financial results overall. We've grown to about $1 billion in annual sales and at about 15% to 16% adjusted EBITDA margin. Our industry has a $20 billion total addressable market that's growing larger and remains highly fragmented. We generate strong cash flow, providing dry powder to reinvest in growth with attractive cash-on-cash returns, driving further scale, and have a proven track record of successfully completing M&A transactions and delevering quickly to our targeted leverage ratio of approximately two times. Whether customers need a hoist, a linear actuator, or a conveyance solution, we can simplify and automate their material handling and interlogistics processes.
Our business operates across four product categories, serving the intelligent motion needs of our customers in a broad array of industries. Our lifting solutions platform is our largest platform and consists of solutions that lift and position materials from above through a portfolio of established and widely recognized hoist and rigging brands. This portfolio includes wire rope hoists, electric chain hoists, and manual chain hoists with a broad range of capabilities ranging from one eighth of a ton to 140 tons. Rigging materials include products like chain, hooks, and shackles, among many more. Our precision conveyance platform is our newest platform, supporting the precise movement of materials and enabling complex automation processes like robotics and the real-world application of AI.
We entered this category in April of 2021 with the acquisition of Dorner and have been servicing vertical end markets with secular growth trends like battery production, food and beverage, life sciences, and e-commerce through that platform. Our linear motion and specialty actuation products include linear actuators, screw jacks, rotary unions, and super cylinders. Generally, these products push or pull up to 50 tons in a straight line. We offer sophisticated automation solutions for our product portfolio that add to our value proposition by improving customer safety, enhancing productivity, and increasing uptime. Given the scarcity of labor and a need to improve efficiency and ensure uptime is only growing, we believe there is no one better positioned to help our customers automate and streamline their facilities and processes.
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 the physical worlds. We're unlocking the potential of Columbus McKinnon through our strategic model that defines our disciplined approach to strategic planning. The Columbus McKinnon business system is our foundation. You see that on the left side of this chart here, and it's embedded in our global team culture, comprised of change management capabilities, good governance practices, talent development initiatives, and organizational structure. Complementing that business system is a growth framework to scale our business on a variety of fronts, including strengthening and growing our core platforms and building up to reimagining our core by bringing on new platforms with outsized growth potential.
Acquisitions have been a significant part of Columbus McKinnon's growth story over time, as we leverage our cash flow to reinvest in businesses that deliver strong cash-on-cash returns. Earlier this year, we announced our agreement to acquire Kito Crosby, a highly complementary acquisition that we believe will enhance our scale and market position and deliver top-tier financial performance. We'll bring together the best of our collective businesses, including strengths in 80/20 from CMCO and advanced lean expertise from Kito Crosby. This will significantly advance our company's growth framework, specifically strengthening and growing our core through an expanded breadth and depth of product offerings, reinforcing CMCO's leadership position in lifting hardware and consumables, and reimagining our core by positioning CMCO to continue its value creation journey by evolving product offerings and advancing intelligent motion solutions over time.
We're excited to bring these two customer-centric and performance-oriented cultures together, combining a shared heritage of innovation focused on safety, productivity, and uptime. For those not familiar with Kito Crosby, they're a leader in lifting and procurement products, including hardware and consumables with globally recognized brands and a manufacturing footprint spanning 50+ countries. We know the company well and have great respect for Kito Crosby's portfolio, and we look forward to welcoming the entire organization to our team. Through this strategic combination, we're bringing together a complementary portfolio of assets focused on safety, productivity, and uptime. We are well positioned to deliver comprehensive solutions for our customers given this combination. Kito Crosby is a much larger player than we are in lifting procurement and consumables, which are products with a low average selling price and consistent replacement demand and relied upon in mission-critical applications.
There is an increase in sustainability for business in that segment. The combination will expand our breadth of offerings as well as allow us to become a one-stop shop for our current customer base with a higher percentage of these more resilient procurement and consumables products. When KKR decided to bring Kito Crosby to the market, it created a unique opportunity to align two highly complementary and synergistic businesses that are significantly more valuable together than apart. This combination will meaningfully improve our scale, expanding our geographic reach and combining the significant capabilities of both businesses to deliver an enhanced value prop, all while spreading our fixed costs over a larger business, improving our resilience through cycles. Additionally, the combination enhances our ability to capitalize on tailwinds from industry megatrends, including reshoring, scarcity of labor, and infrastructure investments that are occurring globally.
It's likely that these megatrends will accelerate in the current policy environment. On a combined basis, we're creating a highly attractive financial profile with strong cash flow generation characteristics, with Kito Crosby already performing at 23% adjusted EBITDA. This is all enhanced by about $70 million in net cost synergies and a highly complementary business that we know well, focusing on procurement, facility optimization, and reducing overlapping SG&A and third-party costs. Finally, our business is naturally cash flow generative, and that strong cash flow will enable us to swiftly delever over the next few years. Acquiring Kito Crosby will enable Columbus McKinnon to accelerate the realization of our strategy and growth framework, supported by top-tier financial performance, strong free cash flow generation, and rapid deleveraging.
After successful deleveraging, we'll have a fortified balance sheet with a significant cash flow generation profile to more impactfully advance our intelligent motion strategy across what remains a fragmented landscape. While we're navigating some market volatility in the immediate term, Kito Crosby's business is a business that we know very well. It is a complementary portfolio, will serve many of the same customers, leverage similar supply chains, and operate in similar manufacturing processes. Importantly, this is one that we've been watching carefully for years, all the way back to prior to KKR's purchase of Crosby in 2012, where we competed for this asset. This, combined with the fact that our synergies are cost-focused with revenue synergies as upside, gives us a high degree of confidence that we will successfully integrate and deliver on our synergies.
The business combination is expected to achieve significant cash flow, driven by the cash flow of both businesses. This will increase over time with synergy achievement. Both today and for the foreseeable future, our primary focus for cash flow is to pay down debt, reducing leverage, and therefore further accelerating cash flow generation. Debt reduction, the execution of our growth and margin expansion plans, and realization of our targeted synergies will collectively increase EBITDA and cash flow, further reducing net leverage. We have a history of delevering after acquisitions, as shown in this chart. In following the prior acquisition, we deleveraged to below 2.5 times within a short time, demonstrating our track record, and that highlights our conviction regarding deleveraging as we quickly integrate the Kito Crosby acquisition.
In closing, our team remains focused on meeting our customers' needs and delivering long-term value to shareholders, regardless of uncertainty in the macro environment. Over time, we're well positioned to navigate the developments in trade policy, although there may be some volatility from period to period, including sales and margin impacts in our first half of this year. We're continuing to make progress towards closing the Kito Crosby acquisition, and through this complementary combination, our attractive portfolio across diverse and attractive end markets only becomes more resilient with increased exposure to resilient lifting procurement consumables from Kito Crosby.
We'll also be better positioned than ever to deliver a superior customer value proposition with an expanded product offering across broader geographies, generating enhanced results and long-term value, and we remain focused on the execution of our strategy today, simultaneously positioning ourselves to take advantage of opportunities that arise as technology evolves and when we see favorable windows in the macro environment. Thanks so much for the opportunity to provide that introduction, Steve.
Thanks so much, David. Very useful overview and sort of current recap of where Columbus McKinnon stands today. Quite clearly, you and Greg have been very busy, and you have a very busy few months ahead of you, without doubt. We have quite a few questions already, and I'll incorporate them as we begin the chat. Certainly, we have a couple of questions around current trends. I would like to break that down into a couple of pieces because you often talk about short cycle versus project. We know post-Liberation Day, the economic uncertainty, trade uncertainty, like a lot of industrials, seem to be impacting your short-cycle business. As we get more clarity around those issues, have you or do you expect to see some pickup in short cycle?
We do. We talked about that in the last quarter's prepared remarks during our earnings call and in the Q&A session. As anticipated, we have begun to see order recovery in the U.S. short-cycle business this quarter as tariff uncertainty has been easing, we've experienced less policy volatility, and we're benefiting from tariff-related price increases.
Okay. On the project side, which despite the economic uncertainty, for multiple quarters, we've seen backlog growing. Can you tell us, your business isn't necessarily GDP dependent, but it's certainly correlated. Why have your orders in terms of projects been growing during this period of slow economic growth?
Yeah, we feel like we're really well positioned with the portfolio. We've been cultivating relationships with customers in attractive end markets for some time. We had a record backlog at the end of last quarter of $360 million, which was up $67 million or 23% year over year, driven by outsized growth in that project business. We're really pleased with the traction we've gained there. The reality is, we have a very attractive and encouraging funnel of demand across multiple attractive end markets on a project basis. As you know, those projects can be lumpy, right? While we don't control the timing of project orders, we continue to be optimistic as we look at the overall funnel. We're encouraged by quotation activity, the health of the demand overall. Outside of the U.S., there has been some weakness, notably in the German markets where we see some slowdown in order conversion.
There's no reduction in overall need and demand. These are real opportunities and real projects, but we have seen some recent slowing in decision making as people are navigating what has been a bit of a choppy macro.
Any specific areas you've seen on the project side? Any specific markets we should be thinking about that maybe have outsized growth potential over the next two or three years?
Yeah, we continue to see growth in areas including e-commerce, food and beverage, aerospace, oil and gas, in the rail projects business, as well as in defense markets. In aerospace, there are some significant opportunities with existing customers that we're pursuing, as well as attracting new customers. Oil and gas has been reflective of significant investments in the Middle East. In defense, clearly we're seeing spending with the U.S. Department of Defense, but also increased defense investments globally.
Okay, great. I'm sure every management team is going to be asked this over the next two days. We have a pending Fed rate decision. Historically, Columbus McKinnon, do you see what kind of demand do you and what kind of demand shifts do you see in an easing environment?
Generally, an easing environment is something that drives demand for us. When we see interest rates come down, they become a tailwind for the business, and, you know, customers and end users invest more in CapEx at attractive rates. Generally, a lowering rate helps. Also, with the big beautiful bill, bonus depreciation will be a tailwind to investments. We feel like there's a couple of factors here, and I think just the elimination of some uncertainty and a trigger that stimulates the market will drive more demand. There's certainly a need for shifting investments, and I think that a rate cut will start to spur that.
Fair. Let's touch on tariffs a little bit, which did impact you, and you're not immune from it. It did impact you in the previous quarter. Your expectation is the biggest impact would be in your fiscal first half, offsets helping pass that.
That's right.
Can you talk about where you are with instituting offsets, whether it's pricing or supply chain optimization, and how you're feeling about, given that we don't know what tariffs could shift next, where you are with those efforts?
Given current visibility, we maintain our view that the half will be impacted by approximately $10 million. In the second half, we expect to fully mitigate the tariff impacts through those mitigation actions that we've taken already, and we expect to be margin neutral in this coming fiscal year. In the current year, we expect to offset costs. We're making strong progress on the mitigation plans. As you mentioned, we had price increases that went into effect at multiple points throughout the year. We're also working to offset costs through compliance actions, and finally, we're working to leverage the supply chain in various ways. Over time, everyone is going to get better clarity on that trade environment and how things settle out. Candidly, there could be opportunities for cost mitigation actions and in pricing that ends up sticking. Over time, we'll see how that plays out.
Right now, we're focused on ensuring that we deliver on that cost neutrality this year in the second half and then margin neutrality as we execute through next year.
How did the market receive your price increases? Typically, you've been a company that has had pricing power. In a weak economic environment, has that been more challenging?
We've had good success with implementing our price increases. As is typical when you have a tariff surcharge, there's some debate over whether or not those should apply. With a price increase, that's a pretty sticky scenario, and we quote at those levels. There is value in the product line that we offer, in reliability, performance, and quality. We feel like we're able to pass on price and to maintain price leadership in an environment like this. We're obviously focused on improving the customer experience overall, and we're working to do that through improvements in delivery, on-time lead times, and overall customer experience improvements. Those are the things that we think we can focus on, continue to focus on to enable us to kind of maintain that pricing leadership position.
Fantastic. Obviously, the tariffs were enacted with the goal of onshoring, reshoring. We've seen certainly a number of announcements. The semiconductor industry, obviously, with half a trillion dollars, but we've seen announcements. Have you actually seen, are we still in a wait-and-see mode right now, or are you actually seeing some of it now? If you could talk a little bit about how manufacturing reshoring can benefit Columbus McKinnon.
Absolutely. I think it's a significant driver, and I think it gets underestimated because of the reality that it takes some time to see shifts. You've seen major announcements from global economies, leadership of global countries coming in and saying, "We're going to invest here, we're going to invest there, we're going to do this in the U.S." Over time, that's going to drive demand for sure. Even in those announcements that came in the past, we're starting to see the effects of this. As an example, this would be Caterpillar expanding their Lafayette, Indiana facility. That was announced 18 months ago. We're late in the cycle of those investments, and we're starting to quote on that activity now.
I think there's this whole kind of flow of investment, whether it's in the metals markets, the heavy equipment industry, or other investments that have either been announced or are pending that will ultimately drive demand for our business. We think we're well positioned to take advantage of this trend. One thing's for sure, there's a labor scarcity element that exists, and then there is a need for more onshore manufacturing capabilities. Where the two of those intersect, there's a terrific opportunity for Columbus McKinnon, not only to help with existing offerings, but as we've been advancing our ability to take advantage of AI inputs and allow automation in a way that creates this bridge between the digital and the physical world. I think we're going to see more and more productivity demand needs from customers that we can help them with.
Great. We have about 10 minutes left, and now this won't surprise you, a bulk of the questions I'm seeing are related to the Kito Crosby deal.
Makes sense.
Yes. David, if we can start just briefly on any changes in the timing and the approval process.
No, I mean, we continue to execute in a way where we're readying ourselves to complete this transaction at the end of the year. We're having constructive discussions with the regulatory authorities. We've provided all of the information that they've requested, and substantial compliance has been achieved. We continue to expect, as I said, the transaction to, or prepare for the transaction to close at the end of the year. We don't control the process, as you'd imagine. We're clearly using the time that's available to us to be as constructive as we can be. We fully expect this to close. We fully expect when it closes, we're going to be day one ready to begin integration and to deliver the value that this transaction has the potential to deliver. We're super excited about it. We're looking forward.
We're working closely with the leadership team on their side to the extent we can, obviously within the restrictions that we have, but we're moving in the right direction and excited about what the future holds.
Is there, and as you noted, there are certain limits you have in what you can do prior to close, but I'm sure you can start looking at early stages of potential integration, synergies, cost reductions. Have you started doing much progress in those areas?
Absolutely. Absolutely. As you know, we identified synergies through our diligence, and we know this company well. We've known it well for years. It's very similar to ours. The ability to quickly ascend the learning curve and understand the cost construction, the overlapping areas, the synergy realization potential, both on the cost and on the market and revenue side, was there. We leveraged that through diligence to come to the position where we were successful at winning through a process that they were running to acquire the company. Ultimately, between now and then, what we've been doing is validation work, advancing the plans that position us to be day one ready with phasing of those implementations over our integration time horizon. Just being in a position to really think through talent needs and execution requirements.
We've set up an integration management office that will have dedicated leadership at my executive staff, a governance structure over that that involves our board and a board subcommittee, a steering committee within the company, and then the integration management office with dedicated personnel. Clearly, you have to run a business while you integrate. We are making sure that we're really clear on division of responsibilities, that we are laser focused on execution in the core business while we work to realize the benefits that the combination will enable. Handling or delivering for customers is the most important focus area in the immediate term, and we want to make sure that we're doing that well so that we maintain the core and drive the opportunities where they exist.
You announced the deal a few months back, and the market reaction was fairly negative. When I've talked to investors, there were no issues around what you were buying. Kito Crosby is clearly a positive business. I've heard nothing negative around that. The questions were primarily around capital structure.
Yes.
The leverage levels, your ability to deleverage. You have a history of this, but this is a $2.7 billion deal. This is a different level. Not surprising, a lot of the questions around your ability to deleverage, particularly in this type of, and we don't know what the economic environment will look like in January, but in this current economic environment, how you are positioned, one, where you think you'll be with leverage, if you can touch on that, and your ability to cash flow that down.
Yeah, absolutely. Greg, certainly comment as you would like to. Maybe why don't you jump in and I'll jump in after you.
Steve, we do have a history of deleveraging with some larger acquisitions that we've had in the past very quickly. As we looked at the combination of the two companies, we're very confident that we'll be able to continue that history of deleveraging very rapidly. We expect roughly $200 million of free cash flow out of the gates, which we'll be able to apply to debt repayment. We're roughly going to be around five times leverage at close, and we would expect to be able to get down to roughly three times within a couple of years very quickly. With the synergies that we expect to realize and with the earnings power of both Columbus McKinnon and Kito Crosby, we're really confident that we can delever quickly.
Yeah. We also believe that there are some cash project opportunities that could help us to accelerate that. We're focused on self-help, laser focused on what it takes to make sure that we can delever appropriately. I think we've got a team that has a proven track record. As you indicated, this is a larger deal. It's not lost on us. I don't want anyone to be confused that we're thinking that this is all same old, same old. We're very much focused on taking advantage of these two very similar businesses. This is not even in the same fairway, or on the same course, it's right in the same fairway. This is a business we know very well, and there's an opportunity for us to leverage synergies and get value.
For investors who maybe are looking at, and I've talked to a lot of investors who were like, I remember Columbus McKinnon five years ago, eight years ago, given the current valuation, which I think on any metric would say the stock is significantly below any kind of historic or peer group, we see investors starting to look again. If you can sort of frame up for them who maybe are revisiting the name, what's positive for investors in just now with future consolidated Columbus McKinnon Kito Crosby?
Yeah, we are like you, if you're interested in paying attention, super excited about the opportunities to create a scaled global company with robust intelligent motion solutions. This is a combined company that will have increased breadth and depth of product offerings. We're going to be able to provide our customers with increased geographic scale, attract new customers with this enhanced scale and combined capabilities. We expect to capture a greater share of wallet by streamlining and improving the customer experience across geographies and product portfolios. We're combining two proven companies with great teams from the top down. We're going to have a best-in-class organization across multiple groups.
This is a business that at scale will have a top-tier financial profile, great cash generation properties, a more sustainable business that can weather cycles better because of the increased portion of the business that is, you know, based on more of a regular demand in lifting procurement. We believe that the cash generation, the accelerated debt repayment, the top-tier financial profile, and the 80/20 methodology that we're going to bring across the enterprise will enable investors to get really healthy and attractive returns. As we look to the future, we still play in a very fragmented landscape. Over time, there will be additional opportunities to continue to look at how we could strategically develop the business.
Excellent. We are just about running out of time. If you could, if you have any closing comments before we wrap up this morning's session.
I guess in a sense, I kind of offered my closing comments there with the train, but I would just say I hope you can sense in our voices as leadership in the company, we remain very encouraged, very optimistic. We're grounded in the reality of a heavy lift ahead. We're very laser-focused on that. We're going to roll our sleeves up even more than they already are and continue to execute. We're hoping you see it the same way. We look forward to continuing the dialogue over time.
David Wilson and Greg Rustowicz from Columbus McKinnon, I think it's a great way to start off Sidoti's Virtual Investor Conference for September. I know everyone's waiting for the Fed rate decision, but hopefully they had the half hour this morning. Greg, David, thanks so much for joining us. Really appreciate it today.
Absolutely, Steve. Thank you. Thanks, everyone.