Columbus McKinnon Corporation ($CMCO)

My name is James Kirby. I cover the industrials equities at JPMorgan. We're really happy to have Columbus McKinnon here. We have CEO, Dave Wilson; CFO, Greg Rustowicz; and Alex Eldredge on the IR team. It was at this conference -- I think we were the first conference last year after the announcement. And I think we are now the first conference post close. So excited for that. I think Dave has a few remarks, but we'll hop into Q&A after. And please, if you have any questions, just raise your hand, and Michael will be run over.

Perfect. Thank you, James, for hosting us, and thanks, everybody, for your interest in Columbus McKinnon. Before we get into the Q&A session, I wanted to share a little bit about Columbus McKinnon in terms of opening comments. Obviously, we have a safe harbor statement. And as I think about the company today, it's important to comment on the investment thesis. We really believe that we're going to deliver outsized revenue growth. We have a portfolio of products that includes faster-growing precision conveyance automation and linear motion products. We also have a core lifting business that's really well positioned, not only with, I think, good megatrends and macro developments that will enable it to grow at GDP plus. But also we have a mix of business with our low ASP lifting securement portfolio that will drive more of a recurring nature of business for our portfolio. We also have what I think is going to be a really great runway of margin expansion. We are going to deliver $70 million of net cost synergies. We're also coming out of a period where we had headwinds tied to tariffs over the last year. And we're also in a position where fixed cost absorption and other improvements from operational efficiencies should really enable us to unlock further margin expansion. And then finally, as you think about the cash generation properties of our business and the additional business that we brought into the portfolio with Kito Crosby, we historically drive cash in excess of net income in terms of cash conversion. We expect to expand that via synergy attainment. We also expect to pay down debt on an accelerated basis and expect to exit fiscal '28, which is 2 years from now at a debt-to-EBITDA ratio that is below 4x. And certainly have a longer-term target of being 2x and our #1 priority from a capital allocation prioritization standpoint is on debt reduction. So just a little bit more about the company. We're a leading global lifting and automation company, providing professional-grade solutions for solving customers' critical material handling requirements. We participate in these markets all over the world. We have a very diverse set of end markets that we serve. We're operating in 70-plus countries. We've been in business for over 260 years. Now we have 7,000 employees plus and a total addressable market of $35 billion. And I think as you consider the portfolio and the way that it's evolved through this acquisition, you can see that the investment thesis really does stand in terms of growth potential, margin expansion potential. A lot of that within our own control as a self-help story and as a control what you control -- can control kind of a story. And the ability to accelerate debt repayment is not only something that we talk about, but something that we do and we have done repeatedly with other deals that we've taken on in the past. So the products in our portfolio address customers' unique motion control needs within what we consider to be 5 attractive product platforms. You can see on the left-hand side of the page, the largest portion of our business is in lifting hardware. This is securement. These are the low ASP products that tend to act more as consumables in the market. Hoists and cranes would be the next largest segment. The 2 of those combining to make up what we would call our core lifting portfolio. Then you can see precision conveyance, also a large market, north of $6 billion. Obviously, a lot of runway there in terms of additional market share opportunities for us. Then you can see automation and linear motion. All 3 of those last reference business platforms are growing faster than the rest of the entire portfolio and serve really attractive niche markets. Here on this page, this is a bit of a repeat if you've been paying attention to the company for some time. On the left-hand side, you can see our Columbus McKinnon business system framework with people and values right at the center of that framework. And then that's surrounded by being market-led, customer-centric and operationally excellent, 3 key tenets of our Columbus McKinnon Business system and then wrapped up in innovation. This is the foundation of how we operate. We're leveraging the core principles of that platform, not only in our core business but across now the Kito Crosby organization and benefiting from the experience that they have and the strengths that they have as we add those capabilities into the way that we approach this business system. To the right of that, you see our growth framework, which is very complementary, kind of operating on the foundation of the business system. The growth framework allows us to focus on strengthening the core, growing the core, expanding the core and reimagining the core. This is not only supportive of organic initiatives that we characterize in these vectors, but also in terms of the way we think about M&A growth. Recently, with the acquisitions we've done before Kito Crosby, we focused on reimagining our core and developing a platform of precision conveyance products, which we're very proud of, and we think has tremendous runway. But most recently, with this acquisition, you can see on the right-hand side how we would characterize the work that we've done to acquire Kito Crosby and what that enables us to do. And you can see clearly, it solidifies our leading position in the lifting solutions space, but it also enables us over time to really expand and reimagine the core with the combination of the 2 businesses and what that will unlock as we move forward. Just a quick summary of the combination and the real benefits here, the strategic rationale. We increased the scale of the business. We achieved top-tier financial performance and the cash generation that thereafter follows, enables delevering. We have tremendous amount of self-help through the value creation initiatives and synergy realization. And then below that, a lot of opportunities for revenue growth before I emphasize the long-term vision that we have, which is backed by a proven leadership team. And this leadership team that we've assembled is now what I would consider to be a blended state of exceptional talent from both companies. On the foundation of our Columbus McKinnon Business System, which you can see at the center of this page, you can see that we're really focused on 3 simple things as a company. There are 4 boxes here, but I'm going to summarize it with 3 simple statements. One, we're going to make sure we drive business continuity. We have to protect core customers. We have to protect the core business. And we've added a fully staffed integration management office to enable the IMO to operate independent of the business operational teams so that the business operational teams can deliver on execution while the integration management teams deliver on the value creation and other integration objectives. Clearly, that leads us to driving synergy value, and we're targeting $70 million of net cost synergies with additional upside on the cost profile as well as with revenue potential. And you can see on the upper left, the reference to the revenue synergies that we're targeting and ultimately leading to integration that we'll deliver through the business. And then the final point I'll make is that all of that work is geared towards driving cash flow and taking that cash flow and delevering with it. And so number one is business continuity. Number two is value capture and synergy realization, both on cost and revenue. And number three is cash generation and debt repayment. You can see a summary here of the levers that will enable the cost synergy targets that we're driving to. It's really freight and procurement cost synergies, you can see facility consolidation and footprint rationalization as well as SG&A and third-party targets. We have a well vetted, well-defined set of plans that are being led within the company and work streams that are operating on track, and we're very confident in our ability to achieve the targets that we've outlined here. And on the right side, we start to tease out a little bit more of the conversation around the revenue synergies. We haven't been specific about those for competitive reasons. We don't want to go to the market to talk specifically about what we're targeting from a revenue synergies perspective. But rest assured, there are well-defined plans that we're executing on to deliver revenue synergies for the business. This chart simply highlights that we've done this before in terms of raising -- putting together a capital structure, raising debt and then accelerating the repayment of debt. You can see the examples for Dorner and Garvey when we acquired that company or those companies, I should say, and then montratec. But this is something we did before that even still with the acquisition of montratec -- not montratec, Magnetek previously. And then finally, we'll end where we began with the investment thesis. And you can see that we really do believe this company will deliver outsized growth, margin expansion as well as enable us to accelerate debt repayment. And we think that it's a very attractive investment opportunity. So I'm going to go back to the table and take questions. I hope you have some.

Yes. Of course. If anyone has questions, raise your hands or you can just shout them out. David, thanks for that. I'm sure that most of the conversation we're going to have is around the acquisition, but maybe before we get into that, just on the macro front, demand seemed pretty strong at start of the year, pretty good ISM data. You guys had double-digit short-cycle sales and product-related sales last quarter. Barring the last 3 weeks, what are you seeing on the demand front? And has that changed going forward in the pipeline?

Yes. Demand remains encouraging is the way that I would characterize the business today. Although the world is watching what's happening geopolitically and in the Middle East, notably. We continue to see a robust pipeline of opportunities. We've had very meaningful conversations with our customers, both on the short cycle as well as longer cycle project in those areas, and we feel that the pipeline remains robust. There's no notable change to any demand dynamics or within our supply chain at this stage. We are shipping into the Middle East. We have about $50 million of sales, EUR 50 million of sales into the Middle East on an annualized basis. And with flight disruptions as well as strait interruptions, if you will, we haven't been in a position where you can access that as readily. So there might be some modest impact to the quarter's execution in that delivery environment. But from a supply chain standpoint, we don't have any notable materials that would come out of that region or the supplier requirements. And so we feel like we're reasonably well positioned. The bigger impact that could come out of that environment is just simply elevated oil prices for a longer period of time and what that might mean to a broader economy. And so we would be negatively impacted by what might be a slowdown tied to that, but we, I think we'd be positively impacted by the fact that we provide the world's best explosion-proof products for the markets that we serve and the oil and gas space demands those at a time like this where additional drilling and additional investment in global capacity oil products would increase.

Right. That was going to your next question in terms of the exposure to oil and gas business mix. I think it's about 10% pro forma.

Yes.

Okay. And move on from that another macro. Tariffs, you're lapping, still plan to be margin neutral by fiscal '27. Is there -- when you think about the pricing, you were able to pass through pricing that you happened last July. Are there future pricing increases baked in? And when you're looking at the combined company, what should we think about in terms of the tariff impact going forward?

Yes. Greg, if you want to go ahead and take this one, I can certainly jump in.

So from a pricing perspective, we did raise prices roughly 7% back in July, and that fully covered the cost of the tariffs that we were seeing. But we've seen also with some of the -- with the Supreme Court ruling that there's the likelihood that the IEEPA tariffs are going to -- they've been obviously impacted and to our benefit. And we would expect that overall tariffs will become less of a headwind going forward. Some of the tariffs are going to remain, the ones that were in country, the Japan, European Union, et cetera. But -- and then even the Section 201 tariffs only have 150-day shelf life. And so we'll see what happens with that. And so we're now in the process of actually determining when we'll be able to get tariff refunds back, and that could be a sizable number for us.

And so we think that would accelerate the path to neutrality. And we do see price increases that would continue in the normal course as we go throughout this year on a combined business basis. And what I'd say is that Kito Crosby, we took similar actions to the actions that we took relative to working to achieve cost neutrality, certainly in the last fiscal year. And so we start to lap that, as you indicated, James, and we're going to anticipate that we'll get benefits as we head into next year tied to offsetting tariff costs as well as the potential for something like what Greg referred to in terms of the relief that might come from that.

A quick follow-up on that one. Also from a customer behavior standpoint, is there -- I remember second half of last year, calendar year, you guys were saying a lot of customers were waiting to see the tariff picture be resolved. Is that -- are you seeing any customer hesitation now given tariffs or the Middle East conflict really?

No, nothing at this stage. But as we talked about before, to the extent this is prolonged, certainly that could evolve and change. But we haven't seen any delays or change in demand patterns tied to either tariff evolution or volatility or the Middle East conflict. And we're encouraged by what we see as stronger demand and we think over a longer cycle, given what's happening in the country relative to reshoring and other investments that we see happening.

Got it. I guess moving on to the acquisition. You've had a year to plan. I guess in that year, maybe what has been the biggest surprise to either the upside or biggest challenge that has -- is new incremental from the original announcement? And I guess on the synergy side, has there been any early wins? So kind of a 2-part question.

Okay. Yes. I would say we've had a lot of time, as you indicated, to get ahead of this with both sides of this team now that we've assembled. And while we had some restrictions tied to antitrust concerns that you would understand and that we were careful about making sure we were thoughtful and responsible about. We've learned a lot about the business. We've learned a lot about the opportunities. We've done a tremendous amount of preplanning. We stood up an integration management office that's fully staffed. We've established all the work streams defined by all the categories of opportunity. We've been able to do a lot of analysis and do prework around freight, logistics, material spend, RFQ proposals and getting ready and frankly, launching them immediately following close in many cases. And so I think in terms of surprises, I think nothing that's notable, I would say, to the downside. And I would say perhaps just more positive opportunities as you peel back the layers of the onion, there's just more and more areas where we think we can collectively create more value. So feeling encouraged about where we stand and what we can deliver in this year and the full targets that we'll ultimately deliver on as we execute through the next 3 years. And then in terms of synergies.

Yes, early wins, yes.

Early wins. I don't want to comment on specifics, but we've had some early wins commercially and from a revenue perspective that are encouraging that don't necessarily translate into sales in this month, but are encouraging conversations with customers and upside opportunities. And then on the cost side, we've obviously executed on a new leadership team. We've done work around third-party spend, insurance costs, other related overlapping costs. We have launched RFQs with vendors and are looking at synergy savings that will start flowing through in the P&L from a material cost perspective. And there's just more to come. We've got multiple waves of actions that are planned, and we're executing on those.

Got it. On the divestiture of the powertrain, obviously, was a necessary step for the close. Are you able to disclose any color on Kito Crosby's powertrain business? Is it a similar sized business to what Columbus McKinnon had? And then another 2-parter, and I hopefully won't have too many 2-part questions. But on the revenue synergy side, I know there's things you can't disclose there, but are there -- with the powertrain hoist divestiture, I would assume there's some revenue synergies opportunities that you can execute on.

Sure. Absolutely. We're really pleased with the competitive position that we have in the wake of the divestiture. Obviously, the legacy Columbus McKinnon power chain and chain businesses were very important to us as a stand-alone company. And the team was an important part of our team. We're excited that they've gone to a new owner who is going to help them to compete. But we're in the wake of the acquisition, very pleased with the acquisition properties with what we're acquiring, the capabilities of the team, the capabilities of the products, the competitive positioning, what they have in their development pipeline from a new product perspective. And in many cases, our products sell through the same channel partners, the same customers. Our reach is similar. And so that business is a larger business than ours. You asked the question about size. That business is larger than our businesses and frankly, is very well positioned to compete. And in the wake of the disposition, we're in a position where under kind of fair non-intervening or we can compete without disrupting or the word is escaping me, I apologize, but we're in a position where we can compete effectively, and our team is stepping up to compete effectively.

Got it. We've got a question here.

Is there a natural complement inside of the existing client base in both organizations for cross-selling?

There is -- yes, absolutely.

What degree is that sort of like -- first quarter of that or effort versus [indiscernible] attacking new market...

Yes. So the question was, is there a complementary cross-selling opportunity across the channels, the customers with the teams that we have brought together. And would that be a more natural first call to order versus attacking new markets? And the answer is yes to both of those. It's lower-hanging fruit. It's a more straightforward set of opportunities. We're working with customers to introduce products that we had available perhaps on the Kito Crosby side that weren't available on the Columbus McKinnon side or vice versa, and we're cross-selling those. We're also in a position where when we have a broader portfolio to offer because of our scale and the ability to be a more significant player in the market, we're able to bring a better solution and a better value to the customers, which we intend to improve upon. We're doing work operationally. We're doing work from a lead time perspective. We're making investments in digital capabilities to assist the customer in the way that they interact with us to make our portfolio and our experience for the customers better.

[indiscernible].

The question was, do the pieces of equipment communicate to one another and are there opportunities for a digitized fleet of assets that might be employed in a facility. And the short answer to that is yes, but not in all cases. And so where we do have equipment that communicates machine to machine and with one another and also has IoT capabilities and the ability to provide analytics and data to an operator as well as to our channel partners so that they can look at a cockpit of the installed base and see cycles, wear parts, opportunities, service needs. It's something that we're empowering our channel partners with to enable them to be better able to respond to customer demand, but also as an advantage for us because that visibility translates to our visibility as well to us, and we're able to provide those channel partners with better support so that they can service the customers more readily.

This is sort of novel inside the organization now that you brought the 2 organizations together. Is there something that's being done to make this more of a discipline versus to say sort of -- hopefully, it's going to happen and be done efficiently in terms of the commercialization of this opportunity?

Yes, absolutely. We have very well-defined commercial objectives. We've put a leader of the commercial strategy and the commercial synergies full time on the IMO, that person and within our framework of establishing key metrics, breaking down the projects into phases and specific deliverables with work streams defined around those. Geographic contributions, prioritization, as you indicated, the lowest hanging fruit, the kind of first call to order versus second, third, fourth. All of that is built in. And then that's being addressed through the framework of our Columbus McKinnon Business System. And so without a doubt, we're trying to take a thoughtful approach to this that not only is going to get the results for this acquisition and over the next few years as we execute on our debt repayment and acceleration of our deleveraging. But also over time, as we are improving Columbus McKinnon's ability to be advantaged as we think about further opportunities to scale.

Good segue actually to my next question. You mentioned CMBS. You had on the slide, the new slide on the margin improvement in the free cash flow slide, lifting growing at GDP plus. I remember back in your Investor Day when that -- when was that, 2022, I think. And correct me if I'm wrong, you mentioned it was kind of a GDP plus/minus grower. Can you talk about how the lifting profile or the portfolio has changed since then using 80/20, CMBS? And what is embedded in that lift? Is that the assumption that is embedded in the 3-year outlook to meet those deleveraging targets?

Yes. So through the use of 80/20 and our CMBS approach, we've taken a hard look at that portfolio and have done work around pricing. as well as work around product make, buy, product plant locations and consolidation opportunities. And we've positioned the portfolio to be, we think, more competitive. Also, at the time that we went to the market with that presentation, we were struggling with some supply chain delivery execution challenges. We've also rationalized SKUs and simplified the product portfolio from a design standpoint that enables us to have more control over our supply chains and overall performance from a lead time and delivery perspective. So we're working to improve the customer experience by doing a better job of executing to meet their needs. We think that the combination of our 2 businesses together give us an advantage as it relates to value creation with customers. And so we think we can grow faster. We also think there are market dynamics around safety, productivity, uptime as well as just in general, reshoring or repositioning of manufacturing assets around the world, not only in the Americas, but around the world in region for region. And so as capacity levels change and demand changes in those regions around how they buy, where they buy from, we think that's going to increase the need for the equipment and services that we can provide within the lifting segment. And then the final point I'd make is now we have this low ASP lifting procurement portion of the portfolio, which is a bit more stable and predictable, and I think provides a really nice base of business, not only from an absorption and profitability standpoint, but from a launching point to seek growth opportunities that might be more project based from that.

Got it. And you've used the term, I think, in the presentation before, a one-stop shop for lifting. The customer base, is that -- and again, it kind of goes to the revenue synergy question, but that one-stop shop, are you -- how confident are you in gaining that traction, the current Columbus McKinnon customer base, how -- what's the opportunity of the current customer base that would be potential Kito Crosby product users, if that makes sense?

Yes. We both have the legacy Columbus McKinnon portion of the business that we exited, the new Kito Crosby business that we've acquired, as an example, serves a -- in large part, very similar customers. And the opportunity that we have to potentially win some of that business from them as a more of a one-stop shop is something that we're going to have to earn the opportunity to be awarded. And we work with our customers, talk to our customers all the time. They have a balance of needs that they're balancing out across a number of vendors. And I think by bringing that one-stop approach to being able to offer a more vertically integrated set of solutions, a broader set of automation capabilities to bring our balance sheet to bear in a way that can support their development and growth and executing from a lead time and cost and just delivery perspective, I think we'll open up those doors, and we'll have an opportunity to -- with that digitization wrapper we're putting around it, really make it easier for them to do business and put more demand into our business. And so I think there is really an opportunity to leverage that and grow the company.

Got it. Maybe -- and Greg, I want to get to you on the walk through the free cash flow. But just going off David's question first or answer to that question. I get asked as analysts from -- people who are generally new to the story, what is the value proposition of Columbus McKinnon? Why would a customer go to Columbus McKinnon over maybe a cheaper alternative abroad? What is your answer to that in terms of why you're able to maintain the customer base you have and the leadership position you have in North America?

Any time you're lifting, positioning, moving assets in a factory, it's your asset that tends to be high value and important. And safety is critical when you're lifting things above someone's head. When you're moving vaccines at high volumes or other very important products at high volumes on a conveyance solution or you're positioning a defense system, anti-missile system with one of our linear actuators. These are critical applications that you don't want to go to someone who doesn't have the experience, the capabilities, the engineering prowess that we do. And being able to bring that to a customer today in a more comprehensive way with automation, digitization, lead time, scale, broader capabilities is something that I just -- I think at the end of the day, you don't want to take a chance on. You don't want to walk away from a proven leader that's scaling and becoming even more capable to take a chance on something that might save you $1 on the purchase price, but could cost you a whole lot more as it relates to quality, reliability, total cost of ownership.

Got you. To be fair, that actually is how I usually answer that question. So that is -- I'm glad there. I'm getting it right. Probably for 1 or 2 more questions. If anyone has a question, feel free to raise your hand. Greg, on the free cash flow levered profile year 1, you've mentioned numbers back in this conference last year, actually, obviously, that's moved around with divestiture and other moving pieces. Maybe just a high-level walk, and I know I don't -- I'm not asking for guidance for year 1, but just a high-level walk of the moving pieces to get to where you think end of full year 1 free cash flow is.

Yes. So a year ago, as James mentioned, we have a page in a deck from this conference a year ago that had roughly $200 million of free cash flow. And if you think about what's changed, so we had the divestiture and that probably impacted free cash flow by roughly $45 million when you take EBITDA and CapEx and taxes into account there. So that would essentially put you at about $155 million. But then since we're a year further along. We did give Kito Crosby 12/31 numbers. Their EBITDA, it was what we disclosed, was expected to be in a range of $273 million to $283 million. So call it $278 million at the midpoint. That's about $15 million higher than what was assumed a year ago. So you put that on top of the $155 million and you're in the roughly $170 million range with just those 2 items. And also with the potential to outperform on year 1 synergies.

Right. Got you. That's helpful. Last question. And maybe I'll just give an open one from the equity side. Again, a question I get asked a lot, and we'd like to hear both your answers on is the proper peer set for Columbus McKinnon and where -- we were just talking about it before you opted in on the valuation side of it. But what's your perspective on that in terms of the proper peer set? You have a slide in your lender presentation that shows other lifting peers and how you have a stronger margin profile than them for traditional lifting peers. But maybe just comment on maybe why your equity is not getting the multiple that those guys are getting.

Yes. So 2 parts to that question. So the first...

I only asked 2-part questions.

Even when they're not. So the first part in terms of peers, there really aren't any peers similar to this company. And so what I -- what we do is we look at industrials that are roughly in the $2 billion top line range with 20% plus EBITDA margins. And there's people like Regal Rexnord. I think who else is in that group. But we've published a number of those in previous slide decks. And when you look at those companies, they're typically in the 12 to 13x EBITDA multiple range. And so what we think the overhang on the stock is clearly, it's the it's about putting points on the board, right? So this has going on for a year now. It's really the leverage that I think caused a pretty substantial turnover in our shareholder base. And so we've got a whole new set of investors who are comfortable with 5x leverage, which is essentially what we are when we closed, both the divestiture and the acquisition. Once again, we expect to delever to the point of under 4x within 2 years, so in the 3s. And I think once we get into the July quarter and have our first full quarter of the new company, that will be one proof point to start, and we'll be able to report on the success we have with synergy realization. And I think a quarter or 2 in a row and all of a sudden, the market is going to get a lot more confidence in what we've been saying for the past year plus.

Great. We're out of time. Thank you so much, Columbus McKinnon. Appreciate it.

Thanks, James.