Good afternoon, everybody.
Welcome to the Columbus McKinnon presentation. My name is Pez, and I'm an industrial analyst here at RW Baird, covering flow and motion solutions. We are pleased to have the management of Columbus McKinnon with us here today and here to tell you a little bit more about the business. As we have Q&A, we have David Wilson, CEO; Greg Rustowicz, CFO; and Alex Eldridge is sitting up front here from IR. With that brief introduction, I know David just wanted to give a few words.
Yeah, perfect. Thanks, Pez. Great to see everybody. Thank you for joining us today. As Pez said, David Wilson, CEO; Greg Rustowicz, our CFO. Happy to be here to talk to you about our company. For those of you who might not be familiar with our story, Columbus McKinnon—before I jump in, I should say we have safe harbor statements up here. Got to be careful about that. We have a company that's a leader in the global intelligent motion solutions for material handling space. What we do is we provide solutions that increase the safety, productivity, and uptime for people who move materials as they either make or distribute products. If you think about the world that we operate in today and we're navigating, we have a rebalancing of supply chains. We have the need for productivity and automation to help offset labor scarcity.
We have a need for improved safety and uptime, and our products and solutions enable that, and we think they're going to be nice demand drivers for our business over time. We have grown over the last five years at about a 7% compound annual growth rate. We're about a billion dollars in revenue. We have EBITDA margins that are 15%-16%. We compete in a lot of very attractive end markets, some more industrial and kind of traditional manufacturing in nature, and some more secular growth-oriented. We're seeing really good demand profiles in the business. In the quarter we just completed, we grew revenue at 8% and expanded margins sequentially. Our backlog is near record levels. They were at record levels entering last quarter, and they're still continuing at high levels. We're really encouraged with the funnel of opportunities that we have ahead of us.
We recently announced a deal that is highlighted on the right-hand side of this screen. We're going to acquire a company called Kito Crosby. We are bringing together two leaders in intelligent motion for material handling in the lifting space. Their business has a portfolio of products that includes more resilient and consumable components for lifting and securement. That portion of the portfolio in their product offering represents 54% of their total portfolio. On a combined basis, going forward, we'll have roughly 30% of the portfolio in that space. The combination of our companies will be highly cash flow generative. We'll be about $2 billion in total revenue post-closing. We're targeting EBITDA margins on a post-synergized basis that are in the mid-20% range.
Top-tier industrial margins at scale with great cash flow characteristics, delevering quickly, and having an opportunity to participate in some really interesting markets as we go forward. With that, I'm going to pause and open the session up for some questions. I know Pez has some that are prepared, and you may have some in the audience as well.
Yeah, absolutely. Feel free to raise your hand. I can call on you. Or if you're feeling shy and bashful, feel free to email us at session4@rwbaird.com, and I can read them off the iPad here. Why don't we start with some of the recent performance? Obviously, you highlighted some fantastic growth in the recent quarter. Maybe talk a little bit about what you've seen from a short-cycle perspective and how is that contemplated in your forward expectations. How do you see that kind of developing through the back half?
Thanks, Pez. Yeah, so we saw short-cycle business deteriorate in our calendar first quarter and calendar second quarter, really tied to some uncertainty in the macroeconomy, some of the trade barrier discussions, some of the tariff policy discussions. We saw that stabilize in the second quarter and grow. We were pleased with that growth, in addition to a really encouraging funnel of project activity that exists in the portfolio and the business. We were able to deliver 8% sales growth, as I mentioned, on the back of that improving short-cycle business and execution of some projects that we pulled forward from Q3. As we look forward for the balance of the year, we expect the business to continue to run at rates that are comparable is sort of the short answer.
This quarter, the third quarter, does have a little bit of cyclicality with fewer working days with holidays and some companies being year-end in December, and they might run down inventory a little at the end of the year and then ramp up. In the second half of the year, for the next six months, I would say we'd be expecting similar performance to what we saw in the second quarter. On an order rate perspective, through the first month of this quarter, we've seen encouraging demand in that orders are up 7.5% year- over- year through the month of October.
Maybe just following up on that point, when you talk about orders, what is the type of conversion and timeline investors should expect? When you quote that order growth number, how should they think about the timing to conversion to revenue?
Yeah. The short-cycle portion of that, which tends to represent between 40% and 50%, would convert in a quarter. You should think about that being more within 90 days or so. When you think about the project activity in the funnel, that can be anywhere between that same quarter. I would say extending out a year is what I would say would be more typical for projects. Sometimes we do enter into contracts that are quite large. We recently announced that we entered into contracts with PowerCo for very large solutions for battery production. Those are being delivered over multiple years. Typically, an order would be delivered within a year on the outside and more often less than that.
Got it. That's super helpful. You mentioned tariffs and how that impacted demand in the first half of the calendar year. Maybe talk a little bit about the actions you've taken internally to mitigate the impact of tariffs. Obviously, that's the hot-button topic of the conference. Maybe just elaborate on what CMCO's approach has been to mitigating the impact.
Yeah. Day one, it was an inventory of where we have materials coming from, what are the impacts going to be, really trying to size the problem. For us, we sized the problem at about $40 million worth of operating income impact to our business on an annualized basis. We identified that we could mitigate about 3/4 of that with actions we were taking in the year that were driven by pricing, that were driven by some pricing, some surcharges, some supply chain adjustments, some tariff code adjustments, and substitutions. We ended up implementing a number of corrective actions that are taking hold. We communicated that we would be impacted by about $10 million in the first half of the year and that we would become tariff cost neutral in the second half of our year. We're a calendar April through March company.
We're now in our second half. We anticipated earlier that we would be cost neutral. With some of the 232 tariff adjustments going from 25% - 50% on some of the metal components that we have in our products, we're seeing some lingering effects that are impacting us in the third quarter. When we recently announced results, we communicated that the impact for the full year would still be $10 million because we're ahead of plan through the first two quarters, but the remaining portion of the $10 million would shift into the third quarter. You should think of that as approximately $3 million that would impact us in this current quarter.
Maybe on that front, how much pre-planning have you been able to do with regards to Kito Crosby? Do you have an understanding of how they've been mitigating costs from their perspective? Then maybe taking it a step further, what type of pre-planning have you been able to do ahead of what I believe you're expecting to be a relatively soon close?
Yes. Yeah. We're so excited about this opportunity. We're going to bring together two leaders in the space that have such a complementary nature, and there's going to be a lot of value to be created by bringing the companies together. It is something that is imminent. We communicated in our recent call that we expect the deal to close in our fourth calendar quarter or fourth.
Fiscal.
Fiscal quarter, the first calendar quarter of next year. From a tariff mitigation action standpoint, we can't comment specifically on what they're doing. What we can tell you is that we pay attention to how they're acting in the marketplace because we do see them and serve many of the same customers. We understand they've taken very similar actions to those that we have taken. I would expect that as we communicated about our business and what we're expecting for our independent business in Columbus McKinnon today, we should largely expect from them. I would say that I'd think about us and them similarly as it relates to tariffs. As it relates to the acquisition and the imminent timing and our readiness, we've taken a lot of actions to prepare ourselves. We've done a lot of diligence on the company.
We've partnered with experts in various fields to make sure that we're prepared for day one execution of synergy realization. We've got a fully staffed IMO with executive leadership that we've established. The person who leads that works directly for me, was a member of my team before we started the process and has shifted into that position, that will run in parallel with the groups that will lead the businesses on a sustainable basis to make sure that we can deliver on current commitments and current levels of performance while we drive the improvements through synergy. We've committed to $70 million of net synergies over three years. We've provided a schedule of when we expect those to be realized. We're preparing to deliver on those.
It's $80 million of gross, net of $10 million of disynergies that we're anticipating, and a total of $70 million on a net basis. We're working on more than that, as you can imagine. We've also not committed to revenue synergies, but we've identified and expect that we'll be able to realize revenue synergies with the deal.
Now, obviously, it's a sizable acquisition. Maybe talk about what you saw in the markets that gave you confidence to do a deal of this size and ultimately how you see this being 1 + 1 = 2.5 or more.
Yeah, for sure. These are companies that were meant to be together. We were not pursuing Kito Crosby in an acquisition. KKR came to the market and was selling Kito Crosby. We were invited to participate. We wanted to take a look and understand over the years, we've known Kito independently and Crosby independently very well as competitors as well as complementary companies. Greg had a chance to do due diligence on the Crosby business years ago when they were sold to KKR. I've had an opportunity since I joined the company to have many conversations with Yoshio Kito, who runs the Kito organization, and got to know their business well before they joined forces with Crosby. We like these businesses. These are very complementary businesses to us. This is a large deal, but it's a business that we know very well.
From the front end to the back end, or back end to the front end, depending upon how you're thinking about it, these businesses have so many overlapping elements that when you think about the risks associated with two companies coming together, and we're not going into this confused about the challenge that lies ahead, but we're also not going to just follow the general sense that, hey, big deals are always going to be complicated and create problems. This business coming together with Kito Crosby is an opportunity to take a look at suppliers, manufacturing facilities, engineering capacity, transactional actions, channels, and customers, and extract value from that entire value stream and deliver more value through that combination to customers that they should be willing to, over time, reward with more business.
Our view is that bringing these two companies together, while complicated and while the timing is never perfect, we had an opportunity to bring them together. We think, given the way that things have been developing in the macro environment, labor scarcity, the need for automation, the need for safety, productivity, and uptime, investments in infrastructure, there is going to continue to be a need for these products. We are going to be well situated to capitalize on those needs.
Yeah. So obviously, between both CMCO as a business, but also both of you individually having a little bit of background on the pieces, maybe talk a little bit about customer feedback, if you've gotten any, and what some of the receptivity of some of your customers have been about the transaction.
Yeah. I think the customer feedback has been, I would say, largely positive. There's always some level of mix in that feedback, as you would expect. Certain people more in favor than others. I would say the customers are excited about the opportunity for us to make their lives easier, to bring a better solution to bear in the combination of our teams. By the way, everyone should be thinking about what we'll do post-deal closure with these teams is we're going to create a blended state of exceptional, if you will, with our talent. We're really looking at developing a team, establishing a team that is a mix of talent from both sides that are going to be the best available athletes to do the jobs that we need to get done.
As we think about having the best team in the industry and we think about having a really complementary portfolio of offerings and the ability to then go serve customers with that broader portfolio and make their lives easier in terms of transactional experience, in terms of the ability to bring technology to bear to help them with configure, price, quote, other solutions that enable them to have single order to cash experiences and streamlined activity, I think we can and the feedback from them that is hopeful is that we can bring that kind of an experience to bear and earn more of their business. That is what we are going to be focused on.
Excellent. One of the questions emailed in, maybe talk about your confidence in deleveraging, how you think about the path of moving the net leverage down post-transaction and your confidence in that.
Yeah. When we close, it'll be roughly in the 4.8-5 times leverage range. We do expect to generate a couple hundred million dollars a year of free cash flow, and the bulk of that will go to delevering. We expect that we'll be able to get to roughly three turns in a couple of years and inside of two between years three and four, or at 2-2 times between years three and four. A lot of it is driven by clearly the EBITDA that we're buying, our performance, and then the cost synergies that David referenced.
Another question that got sent in, 80/20 has been a significant driver of value for CMCO. Maybe talk about how you think about the runway organically at CMCO, and then how does the 80/20 playbook change or accelerate in a post-Kito world?
Yeah. We've made good progress with 80/20 within the company, but we're nowhere near at the levels that we can be over time in terms of performance that we can deliver through the value creation potential of 80/20. I think we have runway organically within Columbus McKinnon to continue to drive value, leveraging that toolkit within our Columbus McKinnon business system, which we are doing and will continue to do. Within the broader landscape of the combined companies, there's a tremendous amount of runway. We delivered $50 million worth of value from the 80/20 initiatives that we've run independently within Columbus McKinnon to date. Their business is a bit larger than ours, a bit more far-flung, and hasn't driven those same principles within the company.
Likewise, or alternatively, within Kito Crosby, they have quite a good established culture of lean production and lean principles originating from the Yamanashi, Japan, facility for Kito. We believe they've started, we don't believe they have started to leverage those more broadly across the Kito Crosby landscape, excuse me. We will be learning from them and leveraging their strengths in that area across our broader base of business. Not to say that we don't have strength there, and we have advanced lean principles within our company. I think the combination can really be complementary in both those aspects.
In other words, you see an opportunity to have best athletes from not only a commercial and salesperson perspective, but also from an operational perspective as well.
Yes.
Maybe talk about how your competitive landscape is changing as a combined entity, right? You're bringing in a new product set. You're bringing in a little bit, like you said, some maybe further out applications. Maybe talk about how you're viewing the change in the competitive landscape and your ability to be a bigger player in the room as a joint entity.
Yeah. The competitive landscape is large and fragmented. There are a lot of regional players. There are some other global players. It is a disciplined competitive environment. We are bringing together two very complementary businesses. We are excited about being able to bring a better set of services to our customers, a better value to our customers through the combination of these businesses. We are hopeful that as we extend our reach globally, as we extend our ability to bring a better set of solutions to our customers, we will be successful at winning more of their available wallet share. We do not discount the competitiveness and the capabilities of the competitive landscape that exists and the emerging capabilities of some of the smaller players that are out there today that are trying to grow up in this industry. As you know, we have products that are serving multiple platforms.
We have lifting, we have automation, we have precision conveyance. What did I miss?
Linear motion.
Linear motion, excuse me. We have linear motion. In those key areas, we have a different set of competitors clearly. This lifting portion is overlapping, and the competitive landscape is changing with our combination in really the lifting space, but not in those other spaces per se. That answer really applies to that particular segment.
Maybe one more. As we think about kind of the course of the next cycle, what are some of the particular secular growth opportunities that have you most excited, particularly as a joint entity?
Yeah. I'm really excited about the opportunity to continue to serve some of those exciting new markets that we bought our way into with our precision conveyance assets. While the combination of the portfolios in the lifting space will bring more value to customers and I think a significant amount of post-acquisition organic growth on top of the combined businesses in lifting, I think the ability to leverage the footprint of the combined businesses to sell more of our precision conveyance solutions globally could be really impactful in high-growth secular markets.
In particular, I'm excited about the e-commerce space and investment in productivity and the way that they're working to address labor scarcity challenges in that environment, and also in the battery production space, where regardless of what's happening in the EV unit sales today, the demand and need for high-quality battery capacity for a number of end markets is going to be critical. Our leadership position in providing solutions in that space, I think, is going to be an exciting area for the company over time.
All right. We are going to wrap it up a little bit early. Management has a flight change that they need to catch. With that, we're going to wrap it up there. Please join me in thanking Columbus McKinnon for their time today.
Thank you.