I joined the company July 1st, so about to hit 90 days. I have been involved in a couple of different industrial manufacturing businesses as CFO and COO in my past, both public and private equity contexts, all sort of global, complex global industrial businesses. I feel very comfortable sliding into what is a very transformative time at Columbus McKinnon. For those of you who are newer to our name, I guess I can share my own experience of I just kind of went through the process of underwriting the decision to come join the company, looking at what had happened with the transformative acquisition and sort of the dislocation and the equity price, then what is the value creation from here? How do we create value?
I was able to really get excited and comfortable with what we are going to do from here to rerate the multiple, drive equity value creation. A lot of it is going to come through leverage reduction, but also delivering on what we said we would do from a synergy standpoint in the acquisition. Also trying to drive some more organic growth. Through my own due diligence process of joining the company, I saw a clear line of sight to some of those value creation levers that are going to hopefully move us forward from here and create the value for our stakeholders. It is great to be with you at my first Sidoti conference. I have two really quick slides just to recalibrate folks that are newer to the name, then we will move into Steve's list of questions that he has got for the fireside chat.
For anybody who is new, really quick, Columbus McKinnon recently acquired Kito Crosby in a transformative acquisition, which doubled the size of the business to approximately $2 billion of revenue on a pro forma basis. We are what we believe is the leader in intelligent motion solutions for material handling, serving a wide array of end markets. As you can see in the bottom right pie chart, our end markets are very diversified by a number of different demand channels. In general, anything industrial environment, manufacturing environment that requires lifting, motion control, conveyance, that is where we play. We also play very strongly when those highly engineered solutions are required. That is where Columbus McKinnon shows up and shows up well. On a pro forma basis, including the synergies we hope to achieve, EBITDA margins in the low 20s.
We have aspirations to get that into the mid-20s here over the next few years. You can see that a diversity of product mix and geographic mix. About 60% of our revenue is out of the Americas. Europe and Middle East would be the next largest. Asia Pacific would be the smallest of our sort of three geographic areas. We are a very global business. Long history in operation, both on the Columbus McKinnon side was 150 years, and the Kito Crosby side even had a history longer than that. This is a very well-established business with good brands in the marketplace. On the next slide, I will just speak very briefly to sort of how do we move forward from here? What are we doing to create value? I am sure some of this will come up in the Q&A as well.
First of all, on the revenue side, we see significant opportunity of the combination of these two businesses in terms of revenue synergies and opportunity to drive an acceleration in organic volume growth here. We have got two businesses that are brought together with not really a ton of customer overlap. We have got opportunity to cross-sell Columbus McKinnon product and the Kito Crosby customer bases and vice versa. We have got opportunities to improve our digital go-to-market tools for our customers to be easiest to do business with, and we are making investments there. We are bringing together the sales and service organization and harmonizing the sales incentive plans to make sure we are driving the right behaviors and driving the revenue synergies. We are also going to be reinvesting in sort of new product innovation under this new product portfolio.
That combined with some strategic pricing to try and stay ahead of inflation, we feel like we're well positioned to unlock some volume growth over the next few years and really see organic growth be a driver of value creation. In the middle of the slide there is really the margin drivers. We've publicly committed to a $70 million cost synergy target for the acquisition of Kito Crosby. We have said we expect to get 20% of that this fiscal year. We are in our fiscal year 2027 right now. As we talked about in our last earnings call, that is well on the way, and we feel good about our ability to achieve that target and hopefully exceed it this fiscal year. Beyond just the $70 million of cost synergies, there is a lot of opportunity in this business just to drive efficiency in our cost of goods sold.
If I look at our cost structure, we have got nearly $1.3 billion on a pro forma basis, about $1.3 billion of cost of goods sold here. I think about some of the tools we are implementing around Columbus McKinnon Business System and the 80/20 tools. We should really be able to drive out some year-in, year-out cross productivity out of our material cost, labor cost, overhead cost to drive some year-in, year-out savings and accrete to margins there. So, feeling very bullish about where margins can go over the next few years in the business. Finally, in order for us to really make this story work, we are going to have to de-lever, and de-lever very quickly. We took on a fair amount of debt to fund this acquisition. So our capital allocation priorities are 100% around debt paydown and debt reduction.
We are trying to drive free cash flow, optimize working capital, drive efficiencies in our cash flow conversion, and make sure that that EBITDA flows through to free cash flow. I think our Q1 print was a strong step in the right direction to show that we are executing on this. We know we need to do more of that, and we are going to hopefully continue to execute and deliver on expectations here over the next few quarters and build track record and credibility with the buy side on how this value creation is going to come to life. With that, Steve, I will hand it to you for sort of the fireside chat portion.
Excellent. Thanks, John. Really appreciate that quick overview. You noted the strong Q1 results in your closing comments. It wasn't just the revenue driven by the addition of Kito Crosby. We also saw really solid, I guess call it legacy CMCO growth.
How is that setting you up? As we think about this year, obviously we're all looking at higher crude oil prices, inflationary pressures, potential demand destruction. We certainly see two different markets, U.S. and Europe. I guess the starting point is, can you walk us through the differences you're seeing in the U.S. versus Europe, and are you seeing changes in demand in the current environment?
Yeah. In our Q1 prep, for those who are less familiar, we talked about really strong orders growth on a consolidated basis. That was highlighted by low teens orders growth in the Americas. A lot of that was short cycle driven, and partially offset by a bit of weakness, some year-over-year weakness in the Europe and Middle East side of our business. Maybe focusing on the Americas first, we continue to see good strength there. Q1 was strong. I would say that fiscal Q2 is pacing for more orders growth year-over-year, both whether you were to look at it on an as-reported basis for just Columbus McKinnon or even pro forma for the combined business. I would say we're pacing for good orders growth in Q2 as we're closing out the quarter this week.
Maybe not as strong as what we printed in Q1, but still good demand. On the Europe Middle East side of our business, obviously you've got uncertainty there with the macro. Some of our bigger countries in Europe just haven't been growing as much. You got Germany, which has been a bit sluggish, and then you've had sort of the uncertainty in the Middle East and some of the conflicts there on the geopolitical side. What that resulted in Q1 was we saw orders being down slightly year-over-year. Some of that was a comparability issue, some of it was just what we saw on the macro. I'd say, for Q2, again, what we're pacing here with a little bit to go in the quarter, we're seeing some improvements.
I would say on a year-over-year basis, I would hope that we're inflecting towards some orders growth in Q2.
Good.
That's hoping what we should deliver. The back half of the year, hopefully continued improvement out of that EMEA business. Overall, I'd say, relative to what we're seeing across the industrial landscapes, I think our story on orders and demand is fairly positive.
Excellent. Any variation? Can you talk about end markets where you're seeing particular strength or other ones that are softer? Some are obvious, I'm sure, but.
Yeah. No, I think that's fair. I'd say in the Americas, certainly some of the highlights right now are the defense industry, as the defense industry is investing to build out and sort of replenish after some of the conflicts we've been having. So that would be our lifting hardware and our hoist and crane product. We're seeing the conveyance business go big into the e-commerce and some of the distribution there and some of the pharma, with the GLP-1s. Then of course, like a lot of industries, yeah, we're seeing a little bit of tailwinds from the data center, build out battery production. I'd say if there was any area of relative weakness in the Americas, I would say it's more on the sort of consumer packaging side as just consumption is lower.
EMEA, clearly maybe the part that has gone a little dormant in EMEA is the EV build-out. There was a rush to sort of build out EV production capacity. That has gone quiet. Oil and gas, for example, that is an area of investment in EMEA that we are seeing, and that is going well.
Excellent. Short cycle versus project demand. Obviously short cycle, as you noted in the U.S. particularly, a driver. Are you seeing deferrals on the project side, or how is that playing out now?
No. I would say certainly the short cycle was stronger. With the acquisition of Kito Crosby, we are even more weighted towards the short cycle business.
Yeah.
Than we were as a standalone Columbus McKinnon. So that is good. Certainly the longer cycle project business, that is bigger ticket, it is CapEx related. Certainly some of our customers or end customers are having some hesitation as they see interest rates going the wrong direction. That can make people pause on investment decisions. For the most part, I think those are delays, not anything that is structurally changing there. Overall, I would say we are fortunate that this acquisition of Kito Crosby has helped us with the mix standpoint to give us more exposure to the short cycle side. We are benefiting from that here in the short term.
Speaking of that, when I talk to folks about Columbus McKinnon, they generally think about the time to own Columbus McKinnon is when we are seeing a real pickup in manufacturer activity, meaning plant expansions, new plants.
Maybe that is completely fair or not. But with Kito Crosby, there was a talk about more aftermarket, and you are talking about more short cycle. Does that provide a little bit more stabilization in terms of cycles, or at least somewhat?
Yeah. I would say the time to own a Columbus McKinnon is now, where [crosstalk] is. But I know that's what your rating says as well. Yes, look, we don't have a true aftermarket business in the same way that maybe aerospace and automotive do. But what we do have, and particularly with the addition of Kito Crosby, is a higher percentage of what we call consumables. So that would be.
Yeah.
Wear and tear items. So things like hooks or shackles or chain, things that can wear out. A lot of our products, as you're well aware, are safety related if we're lifting things. So there is a natural replenishment and replacement cycle here. Those are nice margin products for us. We like that business, and there's a limited lifespan, so our customers, our end customers, and some of our distribution customers have to stock that. But I'd say what we've tried to estimate for investors is on a pro forma basis for the acquisition. That consumable side of our business is somewhere in the 30%-35% of sales ballpark, is that sort of highly recurring sales. So I think that's going to make us a more resilient business through the cycle, that we have that now.
Okay. When you think about the combination, I know a lot of targets were put out there before you stepped into this role.
Yeah.
There's two big ones. Start with the first one, which is synergies and realization. The target is $70 million over three years post-close on a run rate.
Yeah.
20% in year one. What is your comfort level now, being there for a couple of months, with those targets?
It is good. The cost synergy target, I would say a high level of confidence on delivering that. I would say as we indicated in our last call, I think our ability to meet or exceed the year one target, our confidence level is increasing. Confidence level is increasing because early days, it is primarily SG&A reductions.
Yeah.
It is headcount reductions or it is eliminating redundant vendors. I can go point, and I know that our headcount is lower. I know that we have eliminated contracts. At this point, it is a matter of just seeing that run through the P&L. That is why the confidence level is high here in the short term. The bigger blocks, if you will, are more on the cost of goods sold side as we start to consolidate some of the rooftops and facilities. That is going to take a little bit more time. Also on material costs, as we consolidate vendors or freight vendors, it takes a bit more for that to run through the P&L. I would say the year one stuff, the low-hanging fruit, primarily SG&A, is going really well. But I see the building blocks to achieve the next few years as well.
It is just going to take a little bit more work to get there.
Okay. Let's flip over to the other big piece, which is sort of the deleveraging targets.
Yeah.
I think you and I have talked, and I am sure every investor I talk to views this as a deleveraging story, and that is the catalyst for the stock.
Yeah.
You have leveraging, deleveraging targets out there. The mix on this is you realize synergies, but there is going to be cash costs associated with that, which I am sure is really hard to model day one. It was before you sat in that chair. How are you thinking about those deleveraging targets in a macro that can shift?
Yeah. Look, I feel what we committed to was under 4x by fiscal 2028, and we showed a little bit of deleveraging in our first full quarter, which was our last fiscal quarter of 2026. We showed some cash flow generation, as well as in our fiscal Q1, some cash flow generation and deleveraging. So, the early green shoots are there that we are moving in the right direction. I would say that I am comfortable with the capital structure. Look, I worked for some private equity-owned businesses that had more leverage than this, but obviously that was in the private markets. This is in the public markets. I get the concern about the capital structure, but I would say it is a good capital structure with flexibility. From a covenant standpoint, it is flexible.
From an interest rate and prepayability standpoint, I think our cost of capital is attractive and our ability to prepaid debt. We've got a $1.4 billion term loan with no call protection preventing us from prepaying debt. We've got the ability to delever. I feel good about the targets that were set before I got here. I feel good about the capital structure. I'm obviously looking for ways to accelerate it. Clearly we all want to get there faster. I think working capital is an area that I'm going to be digging in on. Certainly as we look to optimize the business, I think there's some areas to improve, primarily on the payables and inventory side. Again, that's not going to happen overnight, but hopefully that can accelerate the delevering.
As some of you may have seen, this week we announced that we were able to reduce our interest rate on our term loan, which is about $1.4 billion , and we were able to get a 50 basis point reduction on the term loan by negotiating with our lenders and our repricing transaction. That's $7 million a year right there of additional delevering that'll help us get there a little faster.
That's a big step. In fairness, John, you may be underplaying it because we can see what your stock reacts when there's interest rate hike concerns go up. Your stock reacts.
Right.
The fact that you're taking out 50 basis points on a significant portion of it at least offsets a significant portion of what's now expected to be another interest rate hike. You can offset it because there's no doubt there are investors out there who are even if you're comfortable with the capital structure, there certainly are investors who are concerned about the debt load.
Sure. Yeah. Just to calibrate folks, for people that don't have the details, it's $1.4 billion of term loan that's SOFR-based floating rate, and then we have $900 million of fixed rate bonds at 7.125%. On that $1.4 billion of a term loan, we actually have about a billion of it where we have interest rate hedges in place to have SOFR locked. We're locked on SOFR at about 3.7%. You take the 3.7% lock and then add 300 basis points to it, which is the new spread that we've negotiated. That means there's about $400 million that's actually still floating. I think floating rate SOFR is around 3.9% now, so that'd be 3.9%+, the 300 basis points. Still, the cost of debt's relatively attractive.
Yeah.
We're trying to use tools to mitigate the risk management side of things from the Fed funds movements, which does influence SOFR. We won't feel the full brunt of the most recent interest rate hike, I guess is what I'm saying. Because we've got some of that hedged, and also we've got this interest rate margin reduction, which helps as well.
Before we launched the presentation, we were talking offline and we were saying, "I've been doing this for 20 years. I wish I could see these types of announcements more." I don't.
Why were you able to do this now?
Yeah, it's a combination of market technicals in the loan market. For those who don't play in the leverage loan market every day, the ability to do a transaction like this is highly correlated to supply, demand, money flows, where the monies are, the inflows are coming from. First of all, the technicals in the loan market were good. But in reality, what we saw is after our fiscal Q1 print, the trading levels on our term loan B traded up, which basically indicated that the lenders thought that they would. Sort of indicating a higher trading level implies a lower interest rate, similar to the way you think about bonds. That opened a window for us to talk to the investment banks around having a transaction like this to reduce the interest rate.
It was a combination of favorable markets as well as our own performance that enabled the transaction.
Excellent. We touched on this earlier with talking about crude oil prices. We're seeing it in diesel costs. We're seeing pricing pressures throughout, and obviously the interest rate hikes are targeting relatively higher levels of inflation. Can you talk about what you're seeing? In my knowledge of Columbus McKinnon, you've always had more pricing power than the market seems to understand. That being said, there's a lag.
Can you talk a little bit about how inflationary pressures might be affecting you in the near term, and then your ability to offset?
Yeah, so just a little bit of history here. We've always tried to use pricing to stay ahead of inflation. I think old Columbus McKinnon did a good job at that. Before the acquisition, we put through a fairly significant price increase on the Columbus McKinnon side in the summer of calendar year 2025 to offset both inflation as well as some of the Liberation Day tariffs that were announced. But even since then, we've seen the need to do more pricing, especially by region, to offset some of the factors that you called out, whether it's oil or freight rates or what have you. And so, we've done additional price increases globally, sort of at the end of our fiscal 2026, beginning of our fiscal 2027. So we've now anniversaried that, the bigger price increase in the Americas from the summer of 2025.
But we've layered on additional price increases targeted by region, targeted by product line.
Yeah.
Where we think it makes sense, to make sure that we're staying price cost favorable. We certainly want to make sure that we're passing through enough to keep that price cost relationship in a favorable spot. And we saw some good pricing realization in Q1. We were able to offset inflation. And I think as these additional prices increases roll through, we anniversary what we did last year. From where things sit today, I feel like we're in a good spot to continue to offset some of the inflationary pressures that we are seeing. And then we're always going to be trying to work with our supply chain sourcing teams to do better on the purchasing side, in the background to get the benefit of locking in prices or lower costs where we can.
Are you seeing any component shortage issues? Anything that's harder to get right now, given the Middle East conflict?
Nothing material.
Is there anything you count on from the Middle East?
Yeah, nothing material. We've always got.
Yeah.
Onesie, twosie suppliers that are challenging just here and there, but nothing that would impact our financial performance this year at this point. We're not seeing any of that at this point.
Got it. Coming out of Q1, it was your first full quarter with Kito. Blockbuster numbers. You raised the guidance. The stock's sitting back here. It's certainly well below our price target and most of the analysts on the street. What do you think the market's missing?
Yeah, look, we've got a limited track record as a combined new company, and we've got limited track record with this new capital structure. I think in the past, Columbus McKinnon has shown the ability to buy a business at delever.
Yeah.
This is clearly a much bigger transformative acquisition, so I can understand investors wanting to see more proof points before diving in. I'd say our goal, my goal is to build credibility as a business that hits their numbers and meets expectations, and hopefully is able to raise guidance along the way in doing so. I think you've got folks that are still in a bit of a wait and see mode about the capital structure, the leverage situation. But I'm hopeful that we execute here, put some more points on the board of consistent execution over the next few quarters, and start to build the credibility as a newly combined business, that we are going to achieve the synergy targets, that we are going to delever. And I think we got to earn our way into it, which I'm comfortable with.
But I think that's what we're seeing right now from my perspective and from what we're hearing from investors.
Yeah. We do have a question that goes to your commentary around certainly like to speed up deleveraging if you could, although those targets are pretty strong. The question is related to potential asset divestitures that you would consider. I would throw in on that how you are thinking about any potential consolidation of operations. I know those are tough to answer publicly.
Yeah, look, I would say we like the portfolio we have now with the combined business. We are all the time looking for things that might be non-core. Sitting here today, there is nothing that would be significantly material to call out that would be a divestiture candidate that would really move the needle. We are always going to be looking for that. Of course, if we are going to be smart about it, if someone came in and offered us an attractive multiple for part of the business, we will seriously consider it. Everything from me, I am looking at all the catalysts of sort of what could accelerate deleveraging.
Yeah.
Whether it is divestitures, whether it is sale-leasebacks. So far that has not made sense. To your point, are there other assets that we could unlock value for? I think working capital is another one, where I mentioned it already, but I think there is some opportunity there to get better on working capital. I think the other piece that would be a catalyst is we have tried to be a little conservative on the revenue synergy potential here, just because.
Yeah.
It takes a little longer to build those and achieve that. I would say currently, there is not much really of revenue synergies in our outlook for this year or even in the Wall Street consensus numbers. I would say as we get our confidence level up and start to see some proof points there, that could be a catalyst that could help accelerate growth and perhaps accelerate the delevering a bit.
Excellent. Anything else we didn't touch on? I know we're starting to run out of time. Anything we didn't touch on or any closing comments?
No, I think you hit the salient points that are important for us, and we look forward to wrapping up the quarter here this week and have earnings here in the near term. Hopefully be talking about more good news on the go forward and what we see for the future.
John Linker, CFO of Columbus McKinnon, thanks. Hopefully your first time at a Sidoti conference is going reasonably well. Hope to have you back.
Absolutely. I had a good day.
In the future.
Yeah. Thanks for hosting.
Excellent. John and Alexandre Eldredge, thanks so much for being here.
You bet.
Hope everyone enjoys the remainder of the conference.
Thanks.
Thank you.
Yeah.