Columbus McKinnon Corp (CMCO) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Columbus McKinnon Corporation First Quarter Fiscal Year 2018 Financial Results.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Columbus McKinnon Corporation.

Thank you, Ms. Pawlowski.

You may begin.

Thanks, Doug, and good morning, everyone.

We certainly appreciate your time today and your interest in Columbus McKinnon.

On the call with me are Mark Morelli, President and CEO; and Greg Rustowicz, our Chief Financial Officer.

You should have a copy of our first quarter fiscal 2018 financial results that were released earlier this morning.

And if not, you can access those at our website, cmworks.com.

You will also find there the slides that accompany today's conversation.

If you'll turn to Slide 2 of the slide deck, I will review the safe harbor statement.

As you are aware, we may make some forward-looking statements during the formal discussions as well as during the Q&A session.

These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today.

These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission.

These documents can be found on our website or at sec.gov.

During today's call, we will also discuss some non-GAAP financial measures.

We believe these will be useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided reconciliation of the non-GAAP measures to comparable GAAP measures in the tables that accompany today's release and slides for your information.

So with that, please turn to Slide 3, and I will turn it over to Mark to begin.

Mark?

Thank you, Deb.

We had a great quarter indicative of the strength and potential of our franchise.

Since our last call, we've been making progress on our near-term priorities, and we're gaining momentum with our efforts.

I will start by discussing our implementation of our new operating system as we credit a new cadence in the organization.

By putting structure and discipline around a regular review process and deep deployment in the organization, we've clarified our targets and developed road maps to achieve our goals.

This structure has led to more effective prioritization, better decision-making and improved execution.

Providing clear targets and expectations is also driving accountability, and our team has developed clarity around our progress.

The new operating system provides for more frequent checkpoints along the path, so we can monitor and manage both risks and opportunities.

I'm excited about how well the team has embraced this new approach.

They are fully engaged in the process and are really putting their backs into it.

I'm impressed with the professionalism of the team, and I believe our approach is sustainable.

I'm also encouraged that we're making significant progress improving the financials as the company has a significant runway of opportunities in front of us.

Secondly, as a company, we are accelerating evolution of Columbus McKinnon from a legacy industrial company into an industrial technology leader.

In our quarterly results, you can see that our businesses with more highly engineered products performed the best.

Recent acquisitions, such as STAHL and Magnetek increased our product portfolio engineered products and solutions.

For example, STAHL has a leading wire rope hoist design that is highly featured and customizable with important options such as explosion protection.

These are also very cost-effective designs contributing to stronger gross margins.

Magnetek's growth is driven by penetration into important end-user market segments such as the steel industry and automotive.

Here end-user customers specify Magnetek controls for their features, quality and reliability giving high uptime and outstanding technical and after-sales support.

Leading brands within our legacy products that offer technology and performance differentiators contributed to the growth in the quarter as well.

For example, our Lodestar holds a leading market position in the entertainment industry because of its technical functionality in a unique and demanding role.

Also the high-performance design in Unified rail systems provides higher yields and greater productivity for leading companies in the automotive industry.

Going forward, we'll continue to emphasize the industrial technology aspects of our business.

We will step up investments in R&D and pay for this through cutting back on our cost structure.

R&D is our engine for growth, and we will more effectively organize, introduce processes and energize this aspect of our business for greater growth.

We'll increase our spending on projects such as embedding controls in our hoists since we know that 2/3 of U.S. hoist customers see value in technologies that give them greater control of variable speed and features such as improved safety.

We will also spend more money on value engineering as we have the potential to have the most technically advanced products at lower cost.

Let we now provide some brief commentary on the financial results in the quarter.

Greg will follow with greater detail.

I will then provide some outlook on fiscal 2018 and further discuss our progress with our near-term priorities.

We started the year off with strong growth in the first quarter.

Sales for the quarter were $203.7 million.

While the addition of STAHL was the primary reason sales were up 36.7%, we also had strong organic volume growth.

Excluding acquisition, revenue was up 8%.

This marks the second consecutive quarter of organic volume increases since the fall of 2014.

The growth in the quarter similar to the trailing fourth quarter was from the U.S., Latin America and Asia.

This performance shows the importance of our product in relevant end markets and the penetration and capability of the organization to execute our road map.

In the U.S., our channel partners have stepped up purchasing to meet stronger demand.

While improving market conditions are certainly welcome, having product available for the customers when they needed it, was critical to our success in the quarter.

We increased inventory ahead of demand, and our channel partners were able to sell through this inventory to their customers.

Our utilities are active with repairs, relocations and additions.

The combination of summer storms, fires, infrastructure activity and housing starts led to higher demand for our tools truck packages.

These are bundled products specifically designed for different utility truck missions such as Line Work or Derrick diggers for pole setting.

Improved manufacturing conditions and stabilized commodity prices are helping the stale industry which has begun reinvesting in itself.

The retrofit activity and capacity additions continue to drive demand for Magnetek's digital controls used for crane systems.

Construction spending has improved as commercial development around the country is doing well, particularly in the Pacific North West, where Seattle has more tower cranes than any other city in the country.

There's a lot of activity in the Midwest too, where contractors are subbing our project as they are at capacity themselves.

For those of you in New York City, I'm sure you're well aware of the ongoing airport, bridge and train station construction.

Look for our products there too.

In the oil and gas industry, while the rig count and oil production has stabilized, natural gas production is at record levels.

This is leading to more pipeline work and encouraging the construction of LNG projects, which are also helpful to us.

The first quarter remained strong for our hoist and rigging entertainment business.

Typically, this end market will be softer in the second quarter as the equipment is deployed at events and won't come back for maintenance or replacement until later in the year.

In Latin America, general manufacturing and constructions are off to a good year-over-year start, particularly in Mexico.

Brazil is marginally improved.

In Asia Pacific, new investments in automotive, in China, are also helping results.

GAAP net income was $11.7 million or $0.51 per diluted share.

We generated about $14.4 million in cash from operations in the quarter, and used the cash to pay down $13.9 million in borrowings in the quarter.

Our business is a strong generator of cash and our plans call for us to strengthen that further through reductions in working capital requirements.

Now I'll turn the call over to Greg to walk you through the results of the quarter and the full fiscal year.

Thank you, Mark, and good morning, everyone.

Turning to Slide 5. Consolidated sales in the first quarter of $203.7 million were up 36.7% from the prior year.

STAHL added $42.7 million of sales in the quarter, which represented 28.7% of the quarter's sales growth.

We also grew organically $12 million or 8% despite a slight foreign currency headwind of minus 60 basis points.

Sales volume was up $12.3 million or 8.2%, and pricing was up by $600,000 or 40 basis points.

We expect positive pricing for the year to be approximately 50 basis points while certain promotions have ended, and we have also announced another price increase in the U.S. effective in July on select products.

Overall, we saw solid organic growth in the quarter, and STAHL was a strong contributor.

We saw markets improve in the U.S., Latin America and APAC, but EMEA and Canada were weak.

For the quarter, U.S. sales were up $16.8 million or 17.9% compared with the year-ago period.

STAHL contributed $3.6 million to our U.S. sales.

Sales outside of the U.S. were up $37.9 million or 68.8%.

STAHL contributed $39.1 million to our international sales.

Both Latin America and APAC saw double-digit organic growth, while organic sales in EMEA were down in the quarter as a result of 3 less shipping days in Germany, the company's largest European market and anticipated weakness in the U.K.

Sales into Canada were also down.

We are seeing signs that the business environment is improving with orders improving in Canada in June and July.

On Slide 6, our first quarter gross profit increased by $21.3 million or 44.3%.

Adjusted gross profit was $69.5 million, an increase of $21.4 million or 44.6% compared to the prior year.

Our adjusted gross margin was 34.1% compared to 32.2% in the prior year.

This represents a record gross margin for the company.

The STAHL acquisition added $16.1 million of gross profit, which represents a 37.6% adjusted gross margin.

Excluding the STAHL acquisition, our legacy business had a 33.2% gross margin.

We benefited from higher sales volumes, which contributed $4 million of gross profit.

We also saw positive productivity, net of other cost changes in our plants this quarter of $800,000, which increased gross profit.

Other items affecting our gross profit included the impact of higher pricing net of raw material inflation, which positively impacted gross profit by $400,000.

In addition, product liability costs were lower by $400,000 compared to 1 year ago.

Foreign currency translation and STAHL integration costs each negatively impacted gross profit by $200,000.

As shown on Slide 7, selling expense in the first quarter was higher than the prior year by $5 million.

STAHL added $5.3 million to selling costs, including integration cost.

Favorable foreign currency translation lowered selling cost by $100,000.

G&A expense increased $5.1 million from the prior year.

STAHL added $3.3 million to G&A expense this quarter.

STAHL integration cost added $700,000 to G&A as well.

The remainder of the increase is largely due to higher annual incentive plan cost expected in fiscal 2018 compared to fiscal 2017.

R&D costs were $2.9 million compared to $2.5 million in the prior-year quarter.

We will break out R&D expense on a go-forward basis as we see this as an important growth engine for the company.

With expected higher annual incentive plan costs, we are changing our quarterly forecast and our SG&A run rate to approximately $46 million per quarter, and once again, this excludes STAHL integration onetime cost.

Turning to Slide 8. Adjusted income from operations was $21.4 million or 10.5% of sales.

This compares to adjusted operating income of $11.4 million or 7.7% in the prior year.

STAHL added $5.6 million of adjusted operating income, which represents an adjusted operating margin of 13.1%.

STAHL amortization is estimated to be $8 million for the year at current FX rates.

The reconciliation for adjusted operating margin can be found on Page 18 of this presentation.

As you can see on Slide 9, GAAP earnings per diluted share were $0.51 per diluted share versus earnings of $0.32 per diluted share in the prior-year period.

Adjusted earnings per diluted share for the first quarter of fiscal 2018 were $0.55 per share compared to $0.37 per share in the previous year, an increase of $0.18 per share or 48.6%.

STAHL contributed $0.05 of accretion to adjusted EPS this quarter.

The reconciliation of GAAP earnings per share to adjusted earnings per share can be found on Page 19 of this presentation.

All adjustments are tax affected at a normalized tax rate of 22% on a GAAP basis.

Our effective tax rate in the current quarter was 21%.

We expect the full year effective tax rate to be in the range of 20% to 24%.

Turning to Slide 10.

Our working capital as a percent of sales was 19% compared to 22.4% at June 30, 2016, and 18.6% at March 31, 2017.

The sequential increase from March 31 was the result of higher receivables in the current quarter.

We typically see an increase in working capital percentage in the first quarter of the fiscal year, but this year, we were able to contain the increase.

Working capital as a percent of sales decreased 340 basis points from the prior-year quarter, reflecting improved inventory turns.

Inventory turns were 4 turns compared to 3.4 turns as of June 30, 2016.

We remain focused on further improving our inventory turns in fiscal 2018 and expect to improve from the current level as we look to generate higher cash flow to pay down debt.

On Slide 11, net cash from operating activities in the first quarter was strong, doubling to $14.4 million compared to $7.2 million in the prior year.

Free cash flow was also strong at $12.5 million, which was substantially higher than 1 year ago.

The hallmark of this company has always been its ability to generate cash, and we expect this to continue in fiscal 2018.

Our guidance for capital expenditures has been lowered to $20 million for fiscal 2018.

This is still higher than the previous year's combined CapEx, including STAHL.

Turning to Slide 12.

As a result of the STAHL acquisition, our total debt was $408 million and our net debt was $343.4 million as of June 30, 2017.

Our net debt to net total capitalization was 48.5%.

We repaid a total of $13.9 million of debt this quarter.

I'm confident that we will be able to delever very quickly to a more normal net debt to net total capital level of 30%.

We expect that we will repay approximately $50 million of debt in fiscal 2018 and are targeting a 3x net debt to EBITDA level by the end of fiscal 2018.

We believe a more comfortable leverage ratio for the company on an ongoing basis is 2 to 3x net debt to EBITDA.

As a reminder, we have a covenant-light term loan B, which has no leverage maintenance covenant as long as the revolver is undrawn.

With that, I will turn it over to Mark.

Thanks, Greg.

Turning to Page 13.

I'll provide some considerations as we look at fiscal 2018.

We had strong year-over-year order growth with double-digit improvements in all regions.

Sequentially, the fourth quarter was tough to match for our U.S. market and typically, we do expect that the first quarter is softer than the fourth.

Encouragingly, orders in Europe picked up for engineers' products.

Sequentially, backlog was up 12.2%, driven by a large increase at STAHL from a nearly 22% increase in longer-term project orders.

Year-over-year, excluding STAHL, backlog was up almost 14%.

As we look at fiscal 2018, with the strong start and solid backlog, we're expecting solid results for the year.

Our second quarter revenue, we believe, will be comparable with this quarter, although operating income will be negatively impacted by sales mix.

As a reminder, our third quarter is seasonally our weakest quarter, and we'd expect the fourth quarter to rebound from there.

However, it's difficult to tell how much Q4 will uptick given the uncertainty on the sustainability of this industrial recovery.

Turning to Slide 14.

Let me update you on the progress we're making with regard to our near-term priorities.

The STAHL integration is on track to provide $5 million in synergies in fiscal 2018.

There are several supply-chain initiatives that we will -- expect will support that goal along with other action items.

Among many actions in progress, we're busy carving the U.S. operations out of KONE, Springfield, Illinois facility under an accelerated deadline that KONE requested.

STAHL is also actively bidding on projects it could not under previous ownership, and we're excited about their competitive positioning.

Our tiger team for leveraging Magnetek technology has analyzed its market research.

We've determined that within our North American power hoist product line roughly 3/4 will be well suited for embedded controls.

This is up from our previous expectation of about 40%.

More important is the feedback we received from both purchasing decision-makers and end users.

Both audiences would prefer hoists that offer the benefits of the variable frequency drive.

And given our expectation on pricing, we should be cost-competitive with a higher value-added product.

A key component to strengthening our core is creating organic growth opportunities.

We are better segmenting our markets to understand where and how our products are used.

With this information, we can identify which products serve which markets best, simplify our product offering and streamline our supply chain.

We are working on having much better product availability and improve customer response in this, and many segments are having better lead times.

We're also seeing the opportunity to provide more bundled offerings to make it easier for customers to buy our products.

Greg spoke about the success we're having with our debt-reduction goal.

While we do generate strong cash, there is still potential for us to reduce our working capital requirements further.

I also believe that performance in the quarter include several aspects that are sustainable over the long term.

Our new operating system is sustainable with greater focus on accountability, clarity in selling targets and better prioritization of activities from approved execution.

We have a process in place for better management of opportunities and mitigation of risks.

Our business model emphasizes the industrial technology aspect of our new acquisitions as well as important legacy products and brands also support driving greater value.

We've improved teamwork, collaboration on shared goals with a clarity of purpose, and we are all pulling together.

We spent most of last week with our global leadership team, developing our longer-term goals and the strategies to get there.

While we are in early stages of the development of our long-term plan, I'm encouraged with the potential we have inherent in the runway for our business.

However, we are concerned, as many others are, regarding the geopolitical uncertainty and its potential impact on industrial markets globally.

Nevertheless, as we strengthen the balance sheet, we'll have greater financial flexibility to advance our efforts and become more industrial technology focused.

Doug, we can now open the line for questions.

(Operator Instructions) Our first question comes from the line of Mike Shlisky from Seaport Global Securities.

So it appears that you increased your SG&A guidance on a dollar basis, also it's mainly based on higher incentive comp.

So clearly, you had some kind of plan for that to start the year, so does the increased guidance mean that, that business is now tracking above your first expectations?

And I also want to ask as a quick follow-up to that, even though SG&A was actually below $46 million in Q1, did that include an accrual for higher incentive comp?

And what was the reason why the rest of the business may have been low on the SG&A side in the quarter?

Mike, this is Greg.

So you are correct that it is due to higher incentive costs that we expect for the year, and it is above what our budgeted levels are from a performance perspective, and the first quarter results did include a pro-rata share of the higher incentive costs.

So it does suggest that you feel better now about the business than you felt last quarter when you put out your original SG&A guidance?

Yes.

I would definitely say that we had a pretty strong quarter.

Okay.

I also wanted to perhaps turn to STAHL for a second.

The $0.05 accretion that you got in STAHL in the quarter, did that meet your expectations or perhaps exceed them?

And is this the right quarterly run rate to look at going forward?

Or are there any expected seasonal nuances for the rest of the fiscal year here?

Yes, Mike, last time on our last call we talked about, we expected accretion of $0.12 a share for the full year.

So having the first quarter come in at $0.05 accretion would indicate that we would expect accretion for the full year to be in the $0.15 to $0.20 range.

So up from the $0.12 per share guidance that we gave last -- on the last call.

Super.

I also want to ask.

You kind of said that Q2 will have similar sales to Q1, which is certainly above our expectations, but the mix might not be quite as robust.

Could you maybe give us a little more color as to what might be going on there?

And is it perhaps maybe a 10%-plus kind of decline in operating profit or perhaps a little bit more modest of a headwind in that in the second quarter?

Yes.

So the strength in the quarter really happened on North America.

And we get some pretty strong margins from our core business there.

And that obviously did quite well.

We don’t anticipate it to do as well in this next quarter or the quarter that we're currently in now.

And so we do anticipate that, that will have a sequential decrease on operating margins.

I think what you indicated seems to be a reasonable number.

So around the 10% range might be where you're looking, and we'll see how things turn out on currency, et cetera?

Yes.

Okay.

I'll just kind of squeeze one last one in here about your inventories.

So you got pretty strong orders.

Backlogs are up.

I just -- I was kind of curious how you're planning to reduce your inventory even though you might have quite a bit of sales to fill over the next few quarters.

Are there any targeted changes you're making in your operating system to better manage inventories?

Or kind of just more color as to how you plan to get the inventories down.

Yes.

One area that we focus on in terms of how do we make sure we have better sell-through, enhanced lead times as an example to working with our suppliers is a great way for us to continue to be responsive to our customer base.

We know that from working with customers through this time period, that availability has been one of our biggest issues.

So we purposefully took on about 10% more inventory at the beginning of this quarter.

And we are able to sell that through and also sold through the channel.

And so we will take on the appropriate amount of inventory that we need, but we think there is plenty of opportunities to be more responsive to our customers by working with our supply chain to reduce lead times to our customers.

So that's our predominant shift right now, and our management inventory is to reduce it in that way.

Our next question comes from the line of Joe Mondillo from Sidoti & Company.

Just, Mark, I was hoping to sort of take -- you started off with a lot of the sort of vision, changes that you've been making, you actually finished your prepared commentary with some of that.

I was hoping and thank you for that.

I appreciate that and the candid outlook there.

I was hoping though, if you could maybe take us back to the beginning of your tenure and maybe give us a little more context regarding some of the changes you're making.

In other words, how -- what are the most significant changes to what Columbus McKinnon was?

Or what are the most significant opportunities relative to the structure, the business, the company used to be or any -- if you could highlight the opportunities that you think really are the biggest things?

And what they used to be -- what was the structure in place before you got there, if you can give us a little context.

Sure, Joe.

Let me comment on that.

First of all, when I joined the company, I was very impressed with the level of penetration that it had with very relevant products and important end-user market verticals.

But the opportunity was really that kind of clarify our decision-making process on what was a priority.

It's a company that has an excellent runway of opportunities in front of it, but sometimes you get a little bogged down with digesting all those opportunities and perhaps chasing too many.

So we really identified and put in place an operating system that allowed us to focus on a critical few and execute much better on a critical few and then deploying this operating system within 12 to 6 businesses within our organization globally so that we really have a more solid identification of key metrics and how we intended to go attack the targets and goals.

And then the report outs and the cadence on that -- of that operating system deployment, I think, has really paid off and picked up some low-hanging fruit.

At the same time, we've identified really some key initiative in projects that we need to dive deeper on.

And I've discussed them quite a bit also in my prepared remarks, but I think they make a lot of sense that we spend money -- a lot of money on STAHL, essentially in the same month that I joined the company, how do we make sure we focus on that, make sure we do a really good job on that integration and get the synergies that we anticipate.

And I feel really good about that.

And then, of course, Magnetek was a sizable, really important acquisition for us.

And I think we can do better there.

So we've really focused on that as well.

Also you see Magnetek rebounding this quarter with about 10% increase over prior year.

So we -- while that's a lot more work that has to be done with embedding controls, we feel pretty good that we're on a good path.

And then the other aspect is strengthening our core business.

We've got some outstanding brands, and I've made some prepared remarks there as well that it's really indicative that our core can also perform a lot better.

And of course, we're going to focus on paying down debt.

So it's really, I think, focusing on what our clear priorities are with a really solid deployed process for the organization to go get it.

So hopefully that helps provide a little more color, Joe.

Yes.

No.

Definitely, I appreciate that.

In terms of timing on a couple of things: number one, integrating Magnetek with the core business and you've just acquired STAHL, so -- but I'm sure you're thinking about eventually integrating Magnetek with STAHL.

What's the timing on all of that?

Where are we?

How much more work do you have to do integrating Magnetek's technology?

How long is that going to take?

And then also in terms of STAHL, there was a lot of synergies related to bringing STAHL's strengths to the U.S. and also bringing Columbus' strengths to Europe.

I know these are all sort of long-term type of things.

But could you sort of put maybe a time line on how long we should expect and where we are in terms of progress with all these different things?

Joe, I think we're in early innings there.

Magnetek was a pretty significant acquisition for us because it really gave us some technologies and competencies that were not part of Columbus McKinnon.

So these things sometimes take time.

And as I also said, I think both these companies are outstanding examples of us being more of an industrial technology-focused company.

But it will take some more time both on Magnetek because we're -- about 75% of our product line in North America really pertains to us embedding controls, but we're fairly early innings.

I anticipate by the end of this calendar year to have about 30% of that penetrated, which means that we've got a lot more runway in the business to go with embedding those controls in relevant hoists where it makes sense.

So to answer your question, how long does it take for us to really get to the sort of the end of that?

We don't have a time line on because right now I'm just looking out how we can accelerate it.

But we'll be rolling that out as part of our strategic plan.

We have put Magnetek and our North American hoist and rigging business, actually, more of the hoist business into something called crane solutions group.

And we think this is going to add a lot of value to our customers because by selling side-by-side and working more in tandem, we can provide better solutions to customers, both Magnetek sales folks that have historically sold just the controls, can now sell more crane solutions and also vice versa.

So this is an example of bringing the companies closer together.

We launched that on April 1st of this year, and we've worked through some refinements this past quarter, but we feel really good about that approach.

In terms of how we further bring Magnetek and STAHL together, we have more discussions on how this is going to roll out globally.

And we're discussing that in our strategic plan.

I think we've got a lot of runway in front of us.

I think we're at early innings, but in terms of how that will play out over the next year or 2, we'll be in a better position to articulate that probably in our next earnings call and the following one when we fully digested the opportunities from our strategic plan.

Okay.

And relative to the competitive product offerings, where -- once you get Magnetek integrated with a lot of Columbus' and then eventually STAHL's, where does your -- where does that -- how far ahead does that put your product offering ahead of a lot of the competition?

Well, we think what really drives us being a leader is really 2 things, one of which is we've got some really solid IP on the way that products are being lifted.

And also the other aspect of this is how we're embedding it into our control systems is going to be a very cost-effective way to do it.

So we think by leveraging both of those, we will have a decent solid competitive offering in the marketplace and an advantage, but the issue is we need to make sure that we prosecute this in relatively short order that we get on with it.

And we bring these effective products to market and -- so that's going to be our focus right now is to make sure we do a really good job of that.

Okay.

And in terms of the STAHL synergies, I know you reiterated that you're anticipating the $5 million like you've guided to for this current fiscal year.

What exactly are you doing in terms of the cost synergies?

And do you still foresee, at this point in time, realizing the 11 -- the total $11 million over the fiscal '18 and '19?

So Joe, we focused a lot on this $5 million first.

And coming out of the gates, I must say we've had to revise a couple of things that we originally thought.

But as we've dug into it deeper, we really have found a lot of opportunity in the subsidiary consolidation into supply chain rationalization and also into rationalizing some of our product lines.

And this is where most of it is really coming from.

Also our integration cost from the carve out from KONE are a little bit less than we've thought as well.

So while we were surprised with some things, we also sort of dug in and found some other areas of opportunities.

So we -- the team has worked really hard on that.

And we feel very good about this $5 million of operating income synergies for this year.

I'm also pretty optimistic.

I think there is a lot of areas that we can also dive into that we should probably not get into on this phone call because we're still further exploring them.

But we feel pretty optimistic we'll be able to hit that number as well, although we don't have as much detail around that, clearly.

Okay.

And then just last one from me.

The core Columbus gross margin, if I'm doing the calculation correctly, it looks like they were flat year-over-year on the revenue -- the organic revenue volumes that you saw, just wondering, was that maybe Magnetek mix?

Or what was going on with the core gross margins?

Yes.

So the core gross margin for the business was 33.2% this quarter.

And a year ago, it was -- I believe it was slightly -- it was 32.2%.

So we picked up 100 basis points in margin.

And actually, the core business, Joe, the 33.2% would have been an all-time record gross margin as well for the company and it's even better than the average STAHL.

I guess I did that calculation.

Our next question comes from the line of Matt Koranda from Roth Capital.

Just wanted to start off with the outlook for Q2.

Is the U.S. outlook down sequentially because of demand?

Or is that just channel fill that happened in Q1?

Yes.

So the -- we think the channels did take inventory in our first quarter, but we also are pretty confident that, that inventory has flushed through.

But we think it's a little bit more some seasonality that's really crept in here and it's really due to some of these construction projects that are predominantly going to run mostly in the summer time.

We've also gotten some good orders in pipeline work and in transmission and distribution work.

And we think that folks are off and running on these projects, but we've also noticed the booking levels coming down sort of sequentially since April, May through June.

And we're not overly concerned by that.

Backlog obviously is nice and strong.

But we think that it's more just a seasonal adjustment through the summer.

Okay.

That's helpful.

And then just a little more color on the pricing increase you guys mentioned in July.

Was that specific to certain brands or products?

And then is that just driven on kind of recapturing some of the material cost input increases that you're seeing?

And how does that fit into your outlook here?

Yes.

So the price increase is effective in July.

It's on select products, mainly our wire rope hoist products.

One of our largest competitors has also raised prices as well, effective in July.

And we think in total that it's probably worth about 15 basis points of price for us, which will get us back to the 50 basis points guidance for the year.

Okay.

Got it.

That's helpful as well.

Mark, you mentioned kind of in your concluding remarks that 75% of your hoist products are essentially now addressable with the Magnetek drives.

Can you just give a little bit more clarity on what enables that large increase from the 40% you guys had provided prior?

Is that just lower-cost integration of the drives into the hoists?

What else is sort of bringing that addressable segment up?

Yes.

So the 75% we're talking to is really specific to our North American hoist product line, where we spent the most amount of time.

And it really goes to the change of how we're going to address, which product platforms that we're going to push forward with.

We've got as an example about 13 electric chain hoists in our offering, and it's really difficult with that fragmented volume across 13 very distinct platforms to be able to better control across that fragmented range.

So we've really identified it's a better way to rationalize our platforms there, so we can more cost effectively embed controls and then we can have these, obviously, features that we talked about that folks were really interested in buying.

Okay.

Is that brand rationalization that you're talking about?

Or just sort of rationalization across lifting the segments?

Or could you help out a little bit there?

Yes, sure.

I'm glad you asked that just to make sure we're very clear.

No, it's a platform consolidation, and it's going to drive back through supply chain.

And it will affect even how many spare parts people could carry going forward.

But it's not necessarily brand rationalization because we intend to keep the power of our brands in the marketplace with sufficient differentiation on why people buy.

But we need a better leverage of platforms internally to be able to get more effective use of this control as well as better supply chain cost savings.

Okay.

Got it.

And then could you just talk about, directionally, what that does to ASPs in those hoists that you are integrating the drive into?

Well, we anticipate to charge more for hoists with these kind of features in it.

But I think the real secret is to charge, not a whole lot more, but marginally more, so we can drive significant and disruptive volume into our products.

And that's what we're going to look to do.

Okay.

All right.

In the gross margin for the core business, I think you've been pretty clear in your commentary, Mark, about the core can do better here.

How sustainable is that 33% gross margin level from Q1?

Can we sustain that into the next several quarters?

And then longer term, could you help us understand sort of where you think the core of Columbus McKinnon should be in terms of a gross margin run rate?

I mean, it seems like it should be relatively higher just given some of the synergies you're getting from supply chain, the ASP increases here.

Could you help us understand that?

Yes.

I definitely think there is an opportunity for us to increase some of these gross margins because of the runway of opportunities that we have in the company.

And we're at a pretty decent level of gross margin now.

But when I look inside the company and the opportunity further, I do see like we start to rationalize some of the products, lever some of that volume across the supply chain.

We're on our lean journey, but I think we've got a long way to go to make some improvements there as well.

So I don’t want to give specific numbers in terms of guidance.

I think that will be better set for us to roll out our strategic plan.

But in terms of operating margins, we anticipate EBITDA margins of north of 15%.

I think that's absolutely achievable.

And I think there may be some fluctuations quarter-on-quarter on gross margins, but as we really dig in and get traction, we should certainly see some margin improvement.

Okay.

One for Greg really quickly on STAHL accretion.

I think you guys said $0.05.

My back of the envelope looks closer to $0.10 but I'm wondering if you guys are just tax affecting it at a higher rate here, what's the -- what are the puts and takes on that?

Yes.

So what you might be missing is the impact of dilution of the pipes -- of the shares we issued as a result of the pipe to our existing shareholders.

It's about a nickel negative.

So maybe that's what you're missing in the calculation.

Okay.

No, that makes sense.

I think that's the -- mostly exactly it, so, okay.

And then just lastly, R&D, now that you guys are kind of breaking it out and we can track it on a quarterly basis, should we be kind of thinking 1.5% of sales on an ongoing basis?

Or should we look for that to kind of uptick as a percent of sales as you kind of make a greater push on the product innovation front?

Yes.

We haven't really thought of giving some specific guidance there yet.

However, obviously, the reason why we split it out is we want to put more attention on this.

And as we get more into it, coming out of our strategic plan this week, we really just focused on generating our opportunity list to drive earnings growth, but we got to really rack and stack them better.

I gave one example about the embedded controls, when we think there may be some other ideas that certainly have merits here too.

So it's difficult for us to really pin that number down.

I can just tell you directionally what we intend to do.

And as we get more into it, Matt, we will probably give you the right kind of guidance to how we should think about it going forward.

But we're just kind of laying the tracks for you right now on market's scenario as we'd like to pay attention to.

(Operator Instructions) Our next question comes from the line of Robert Majek from CJS Securities.

You touched on it in your prepared remarks, but can you just kind of break down the organic growth in the U.S. a little bit more?

Is there any specific product group really standout here?

And -- or did you gain market share?

And then how did your view of your sales growth trend by month?

Yes.

So our North American core hoist and rigging business did quite well.

These tended to be a little bit more of the higher-featured products for entertainment as an example that I spoke about.

And entertainment really improved nicely.

We have a strong position in entertainment.

And we also, to the part of your question there, as we gained share in that overall, particularly because of our penetration and the use of -- that folks have in our -- of products in the entertainment industry.

It was a pretty strong uptick in sales, really, through April to May.

It was really the strong uptick.

And June dropped off a little bit.

But pretty strong mostly in May and June.

But we think we're on a good path there, and I think some of our penetrations in markets like I just talked about in entertainment really contribute us to gain some share in the market as well.

Looking at preliminary July results, are you seeing the strength continue?

And then maybe taking a step back, how indicative do you think this quarter is of perhaps more sustainable volume growth going forward?

Yes.

So Robert, we're just starting the closing process today being August 1. So we really don't have anything to say about the month of July at this point in time.

But we did talk about a weaker mix overall in the second quarter and we would see most of that weakness actually in the North American hoist and rigging business.

Our next question comes from the line of Christopher Hillary with Roubaix Capital.

Yes, I had a question, I guess, along kind of similar lines or maybe a little bit more medium term, you've had a number - a long period of kind of below trend volume growth.

And I just -- I wanted to see if you could speak to where you see kind of the most solid opportunities for volumes to recover?

Is it in your most kind of depressed areas?

Or do you think it's for certain new products or geographies?

Well, we think there's areas in oil and gas that used to represent a really strong percentage of our business, both in STAHL is about 80% of the business and it was in the low single digits in terms of total percentage -- excuse me, low single-teens in terms of percentage of our business in North America.

And I think oil and gas is in early innings, we're about 10% now.

And so I think if oil and gas were to continue to sort of stabilize, I think there's some pent-up demand there and that we're very sticky with some of our product lines such as Chester, some of our product offerings in STAHL with explosion protection.

So I think that really represents a pretty strong runway for us.

And as you know, commodity prices around that space have not necessarily driven a lot of demand there.

So I think there's a lot more runway.

Heavy equipment has begun to come back some.

Mining has been a sleeper for a long period of time, and we're now just beginning to see some volume pickup in mining as well.

And now entertainment like we've talked about, we think will continue to be a strong segment for us.

I think there is -- in the North American market, we're not really seeing much uptick for any infrastructure spending that has been passed or anything gotten through there.

So we would be looking for actually more help if that were to come to pass.

We're not actually counting on it, but if it were, that would be great and we would see projects going into next year and the following year where we could get better uptick from transmission and distribution build-outs as well as general, I mean, factoring improvements.

So hopefully, we'll see some likes of this.

We're encouraged about some of the uptick in volume that we've gotten.

And also, we haven't gotten a ton of volume off some of our new products, but we have some new products coming to market now that we'll be pushing further, and we can talk more about that as well.

But we're pretty excited about some that have variable speed that are coming out at the end of the year, and we hope to get some uplift there as well.

Okay.

And then maybe one more quick one.

If this recent weakness in the U.S. dollar persists, how would that affect your business next 12, 24 months?

Yes, that should be a positive for us given our presence in Europe, in particular.

We should see a positive translation impact.

And we'll have a much more significant impact on sales, but it will be also a positive impact on operating income as well.

Our next question is a follow-up question from the line of Joe Mondillo from Sidoti & Company.

I just have one quick one.

Mark, just wondering with the new sort of structured operating system that you talked above and everything else that you are sort of doing.

Do you anticipate efficiencies or cost management so that there's a resulting cost reduction at all in the cost structure?

Yes, absolutely.

It's a better management of both our opportunities and drive top line as well as a more effective spill down in management of our cost.

It's early innings for this.

So it's taking the team a lot of really hard work.

And I'm very impressed with the folks just embracing this and going forward on it.

So I think it's just kind of really getting deployed and really sort of sinking in.

In terms of how this plays out over time and what kind of things we can more effectively guide to, I think we can be more specific after we get to a strategic plan.

But absolutely, there should be opportunities to improve that, Joe.

There are no further questions in the queue.

I'd like to hand it back over to management for closing comments.

Well, thanks for joining on today's call.

I really appreciate the interest in our business and following our story.

And we look forward to updating you on our progress.

Have a good day.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.

And have a wonderful day.