Columbus McKinnon Corp (CMCO) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Columbus McKinnon Corporation Third Quarter Fiscal Year 2018 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Deborah Pawlowski, Investor Relations for Columbus McKinnon. Thank you. You may begin.

Thanks, Dana, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon.

On the call with me are Mark Morelli, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of our third quarter fiscal 2018 financial results, which were released earlier this morning. And if not, you can access it at our website, cmworks.com. On the website there, you will also find a slides that will accompany today's conversation.

If you turn to Slide 2 of the 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 that 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 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 the 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.

With that, let me turn to Slide 3, and I will turn it over to Mark to begin. Mark?

Thank you, Deb. We had another solid quarter with sales growth of 37% to $209 million. In fact, organic growth, which excludes STAHL and the benefit of foreign currency exchange, was up 6.6%, slightly ahead of our expectations based on the timing of shipments.

There are several internal drivers contributing to our performance, supported by the benefit of tailwinds in many of the markets we serve. We've executed Phase I of Blueprint 2021, our 3-year strategic plan, focused on building a better business model with stronger earnings power. Our strong market position, the relevancy of our products and our focused approach to serving customers better have all supported the successful execution of Phase I.

One result of our new direction is that we are improving availability of our industrial products for our U.S. market. We've developed an integrated delivery strategy that better ensures we have the -- what the customers want when they need it. We have taken a "no order left behind" approach, which includes extended terms, an expansion of the in-stock guarantee program and a "quote when you need it" program. We are zeroing in on the right inventory levels, and we've reduced response times for quotes, and we're improving on-time deliveries to customers.

All of these initiatives have contributed to our strong organic growth of 8% in the U.S. this past quarter. Our new operating system, or E-PAS, which stands for earnings power acceleration system, has also provided us the methodology to identify risks and take actions quickly to maximize our opportunities. In the past, we've spoken about how this allows for quicker decision-making based on key business metrics and deep deployment in the organization to help us take advantage of markets favorable for growth.

We're also looking to capitalize on opportunities. For example, in the entertainment market, direct control hoists are important to our customers. The industry is looking for more automation, and there are several projects we are working on with channel partners to develop solutions. There are also sometimes solutions that may seem simple but not necessarily easy, such as the development of black corrosion-resistant low chain to replace the Chinese zinc chain currently in use.

We've just passed the first year anniversary of the STAHL acquisition. They delivered another strong quarter as well. With the addition of STAHL, we've furthered our geographic diversity, and it now stands at half our sales coming from outside of the U.S. Although keep in mind that STAHL can have lumpier business as it is more custom-engineered and project-based, which is also why they've been shipping more from backlog.

Our objective is to outperform the market in any part of the cycle. We are taking advantage of favorable tailwinds. We've seen industrial capacity in both the U.S. and Europe trend upward toward the end of 2017, and several target verticals are seeing strong demands.

Construction in the U.S. has been a solid driver of sales, and we expect that to continue through calendar 2018. We have major construction projects in the U.S. being pursued in California, Texas, New York and Washington, D.C. In addition, permits for commercial and industrial construction projects are up nicely in Canada as the natural resource markets are improving. This has all led to solid demand from major global OEMs of construction and mining equipment.

Transportation has been strong in the U.S. and Europe, including aircraft manufacturing as well as train construction and maintenance. Of note, we saw improvement in APAC in the fourth quarter. While still small relative to EMEA and U.S., STAHL did improve our presence there, and we recognize the importance of this market for our future.

Adjusted operating income was $18.2 million or 8.7% of sales. This is more than double the $8.5 million in adjusted operating income in the prior year period when adjusted operating margin was just 5.5%.

On a pro forma basis, EPS was $0.44 compared with $0.25 in the fiscal 2017 third quarter. STAHL provided $0.02 accretion to the quarter. As is typical, we generated strong cash from operations. In fact, we generated $16.5 million in the quarter and over $50 million in the first 9 months of the fiscal year.

And as Greg will address, our debt repayment is well ahead of our original schedule. We paid down nearly $50 million in the quarter and about $45 million in the first 9 months of fiscal 2018.

Because of improved performance, strong cash generation and our focus on debt reduction, net debt to adjusted EBITDA was at 2.8x at the quarter end. We exceeded our stated goal to get under 3x by the close of our fiscal year ending March 31.

We introduced our Blueprint 2021 strategy in January. The strategy is designed to build profitability and create a solid platform from which we can further pivot to an industrial technology company. This month is my first year anniversary at Columbus McKinnon, and it's been exciting time. Every day, I get to see how the relevance of our products and our unique value propositions directly impact our customers.

I'm excited about the progress we're making. I thank my team for embracing our performance culture, excellent progress in a short period of time and dedication to make this a great company.

With that, let me turn the call over to Greg.

Thank you, Mark. Good morning, everyone. Turning to Slide 4, consolidated sales in the third quarter of $208.7 million were up 36.9% from the prior year. STAHL was a strong contributor in the quarter, adding $42.6 million of sales or 27.9%.

STAHL did see their backlog decline by $7.4 million due to the timing of projects. Excluding FX, we also grew organically $9.9 million or 6.6%. Sales volume was up $9.3 million or 6.2%, and pricing was up by $600,000 or 40 basis points.

Overall, we saw a solid organic growth in the quarter as the U.S. and EMEA regions showed strength, and the Asia Pacific region improved.

Foreign currency translation continued to be a tailwind and increased sales in the quarter by 2.4%, largely the result of a stronger euro and weaker U.S. dollar.

For the quarter, U.S. sales were up $10 million or 10.2% compared with the year-ago period. STAHL contributed $2.2 million to our U.S. sales. Sales outside of the U.S. were up $46.2 million or 84.9%. STAHL contributed $40.3 million to our international sales.

Asia Pacific saw double-digit organic growth off of a small base, and EMEA saw mid-single digit organic growth in the quarter as the business environment improved in these 2 regions.

On Slide 5, our third quarter gross profit increased by $24.2 million or 54%. Adjusted gross profit was $69.1 million, an increase of $24.3 million or 54.2% versus the prior year. Our adjusted gross margin was 33.1% compared to 29.4% in the prior year, an increase of 370 basis points.

STAHL was accretive to adjusted gross margin, posting an adjusted gross margin of 35.4%. The reconciliation for adjusted gross margin can be found on Page 15 of this presentation.

Let's now review the quarter's gross profit bridge. The STAHL acquisition added $15.1 million of adjusted gross profit. Higher sales volumes contributed $3 million of gross profit. We also saw positive productivity, net of other cost changes in our plants this quarter, of $2.7 million, which increased gross profit. This was partially due to lower benefit costs of $500,000 for medical, workers' comp and stock compensation costs compared to 1 year ago. We would not expect these costs to repeat in the fourth quarter as it is unusual for these costs to all be favorable in the same quarter.

Our product liability costs were also lower than the prior year by $2.2 million. Other items positively affecting our gross profit included foreign currency translation, which added $1 million of gross profit and the impact of higher pricing, net of raw material inflation, which positively impacted gross profit by $300,000. STAHL integration costs negatively impacted gross profit by $50,000, and is a pro forma item.

As shown on Slide 6, selling expense in the third quarter was higher than the prior year by $7.5 million. STAHL added $5.3 million to selling costs, excluding integration costs. Unfavorable foreign currency translation also increased selling costs by $500,000. The remaining increase was largely due to $700,000 of costs related to a warehouse consolidation in the U.S.

G&A expense increased $5 million from the prior year. STAHL added $2.7 million to G&A expense this quarter. G&A costs also included 2 pro forma items: $1 million in legal costs for an insurance recovery law suit as well as $3 million for STAHL integration cost. As a reminder, last year, we also recorded $3.1 million for STAHL deal costs that was a pro forma item in the prior year.

Unfavorable foreign currency translation added $200,000 to G&A. In addition, we have higher annual incentive plan costs in fiscal 2018 compared to fiscal 2017.

R&D costs were $3.3 million compared to $2.5 million in the prior year. STAHL added $500,000 to R&D expense. R&D expense represents 1.6% of sales, and we see this investment growing in the coming year as outlined in our Blueprint 2021 strategy.

Our quarterly forecasted RSG&A run rate remains unchanged and is expected to approximate $46 million in the fourth quarter, excluding STAHL integration cost and other pro forma items.

Turning to Slide 7. Adjusted income from operations was $18.2 million or 8.7% of sales. This compares to adjusted operating income of $8.5 million or 5.5% in the prior year. Adjusted operating margin improved 320 basis points over the prior year.

STAHL added $4.5 million of adjusted operating income, which represented an adjusted operating margin of 10.5%. STAHL amortization is estimated to be $8.5 million for the coming year at current exchange rates. The reconciliation for adjusted operating margin can be found on Page 16 of this presentation.

As you can see, on Slide 8, GAAP earnings per diluted share were a loss of $0.46 versus $0.02 per share in the prior year period. The loss in the current quarter was due to the impact of the Tax Cuts and Jobs Act, which added $18.6 million of tax expense to what we otherwise would have recorded. Of this amount, the cash tax impact is expected to be approximately $2.5 million.

Adjusted earnings per diluted share for the third quarter of fiscal 2018 were $0.44 compared to $0.25 in the previous year, an increase of $0.19 per share or 76%. STAHL contributed $0.02 of accretion to adjusted EPS this quarter, and year-to-date, has added $0.11 of accretion. The reconciliation of GAAP earnings per share to adjusted earnings per share can be found on Page 17 of this presentation.

All adjustments are tax effected at a normalized tax rate of 22%. On a GAAP basis, our effective tax rate in the current quarter was 213%. With the Tax Cuts and Jobs Act, we now expect the full year effective tax rate to be in the 51% to 55% range. While we are still working through the calculations, we are estimating an effective tax rate of between 20% and 22% in fiscal 2019, which is a slight benefit to our normalized rate of 22% to 24%.

Turning to Slide 9. Our working capital as a percent of sales decreased to 17.4% compared to 19.9% at December 31, 2016, and 18.6% at March 31, 2017. Working capital as a percent of sales decreased 250 basis points from the prior year quarter, reflecting higher DPOs and higher accrued liabilities, largely due to higher incentive comp accruals.

Inventory turns were 3.9 turns, unchanged from a year ago and down slightly from September levels. We are intentionally increasing inventory levels to improve our availability as part of our in-stock guarantee program.

On Slide 10, net cash from operating activities in the third quarter was $16.5 million, which was less than the prior year due to the timing of pension contributions and inventory increases this year compared to inventory decreases last year. Free cash flow was $13.2 million in the quarter. Year-to-date, free cash flow was $41.9 million. Our guidance for capital expenditures has been lowered to $15 million for fiscal 2018 as we continue to evaluate our priorities for the use of capital and focus on paying down debt.

Turning to Slide 11. As a result of the STAHL acquisition, our total debt was $377.9 million and our net debt was $313.3 million as of December 31, 2017. Our net debt to net total capitalization was 44.9%. We repaid a total of $14.9 million of debt this quarter. We continue to demonstrate our ability to delever very quickly. We expect that we will repay another $15 million of debt in the fourth quarter, bringing our total to $60 million of debt repayment in fiscal 2018, which has been increased from our original plan.

We achieved our target of less than 3x net debt-to-EBITDA by the end of fiscal 2018 as we currently are at 2.8x levered at an LTM-adjusted EBITDA basis, which reflects 11 months of adjusted EBITDA from STAHL. As a reminder, we have a covenant life Term Loan B, which has a no leverage maintenance covenant as long as the revolver is undrawn.

I will now turn it back over to Mark.

Thanks, Greg. Let me now review our expectations for the remainder of fiscal 2018. We had high double-digit growth in organic orders in the third quarter compared with the prior year. This was driven by exceptional expansion in EMEA and low double-digit expansion in North America.

Our organic backlog is healthy, up 12% over the prior year, while it is down 6% sequentially just due to seasonality.

In fact, organic backlog was up 4.4% at the end of January.

STAHL backlog was lower sequentially due to project timing. However, quoting activity is strong. Our hot offers pipeline for STAHL increased significantly through the quarter. Given these encouraging trends, we expect to see a solid fiscal 2018.

We believe Q4 organic sales will grow about 4% to 5% year-over-year, which will put us in a solid position for a good start for our fiscal 2019. While we are subject to economic conditions, on a relative basis, we are executing a plan that creates internal drivers for stronger operating performance.

Let me take a few moments to review our Blueprint 2021 plan to drive greater earnings power. Our objective is to pivot from a late-stage industrial company to a growth-oriented industrial technology company. We will continue to build upon our Phase I gains, and we are advancing to Phase II of the plan, which is focused on operational excellence and profitable growth.

In this stage, we expect to drive earnings power through simplification in the business structure and product platforms. We are deploying an organizational structure that is more customer-focused, simplified and responds more quickly. Our portfolio rationalization effort reinforces our key brands, brings out best of our products, in some cases, expands the range of our capabilities that we offer.

We will leverage these efforts to focus on the aspects of our business to drive profitable growth. This includes investments in innovation, such as advancing our smart hoist offerings with variable speed, precision lifting, automated system applications and better tools, by which our customers can select solutions.

Importantly, we are intent upon providing relevant solutions to solve high-value customer problems and capitalize on the automation mega trend. This creates a business model that can consistently deliver better than 15% EBITDA margins.

Dana, we can now open the call for questions.

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

Mike, are you there?

I'm sorry about that. Can I ask about some of the pretty strong growth that you saw during the last quarter here and what you might have ahead of you? Did you encounter any issues with getting freight availability on trucks to get things shipped to the -- out of the warehouse or the end user? And are there any issues you might be seeing here in the calendar first, second quarter as far as freight availability?

Yes. Thanks for the question, Mike. No, we're not really having a lot of problems with freight availability. Obviously, we're encouraged by the signs we've been seeing in our markets. And we do see, as we go forward, continuation of some of the strength in some of our verticals that we've been talking about. But we haven't had a significant amount of problems arranging freight. I think that's all gone pretty smoothly for us. We did have some problems during the hurricane, which you may remember, but I think that was very isolated. And obviously, I think freight is increasing. You see that when you travel on the roads and a lot of truck, but we have not had a significant amount of problems arranging that.

Okay. I also want to ask -- I'm not sure if I missed it. Can you put any kind of numbers behind your STAHL growth outlook over the next couple of quarters? I'm kind of curious if STAHL is going to outpace the rest of the company and if there's any kind of mix benefit that you might see either in this quarter or next one that we should be aware of?

So one of the things that's important to understand about STAHL that's different from our core Columbus McKinnon business is that it really doesn't have a seasonality associated with it. As you know, the core Columbus McKinnon business tends to be down in our Q3 and has a stronger Q4. The STAHL business is about 50% project-related. And as this is the case, it goes more on the tempo of the project and the timing of the projects and it can be a bit more lumpy. And we've looked back historically, and you sort of see the ebb and flow of orders, and it really has no seasonality to it. So as we sort of go into our next fiscal year, obviously, we're going through a period of time where we're able to ship a little bit ahead, which I think was great. But however, we ate into a bit of backlog based on the demands of customers, but we see -- coming into January, we see the orders increasing nicely, and we expect the markets to continue to be favorable. Greg, do you want to make any comments there?

Yes. So Joe -- or Mike, sorry, the other thing as well is we did mention in our comments that we would expect STAHL to be, in the fourth quarter, to have comparable sales to the third quarter.

Okay, okay. Last one for me. So I did see you guys are somewhat ahead of your debt pay down curve here as we go through fiscal 2018. I'm curious, did you pull forward any of the planned repayments that you have in fiscal 2019? Or is there no change for your dollars of pay down for next year as well?

Yes. So Mike, the way the term loan B works is there's scheduled principal amortization of $1.1 million a quarter. And then on top of it, we have excess cash flow requirements. But with what we've paid to date, we are well ahead of those requirements and are actually -- you're actually able to count any excess that you paid this year for next year. So our plan is next year to pay, I think it's $60 million to $65 million of debt, and that's well in excess of what's required. So no issues from that perspective.

Just to kind of clarify then. So what you've done so far in 2018 is not pull anything forward from '19. You'll still pay down what you had planned all along in 2019 on top of '18?

Correct, correct. And that does not reflect utilizing any offshore cash, which we're in the process of examining what we might want to do with that. So it's really all coming from free cash flow.

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

Just wanted to start off with a STAHL backlog question. So it's been dropping about $7 million each quarter this fiscal year. Was there a one -- like a onetime large order in backlog that you've been delivering on? Is that all project-based? And then you gave organic backlog at the end of January, I think, in your prepared remarks, but should we look for STAHL to also increase in backlog at sort of the same rate in January? Or what should we be expecting over the next quarter or so?

Yes. So the project backlog has been eaten down but it's not one specific order. If you look at the backlog itself, you do see a prominence of oil and gas in there. As you know, there's been some recovery on that. And I wouldn't say the markets are strong, but I'd definitely say the markets are recovering for oil and gas, so about 40% of our backlog there. And they're bite-sized chunks for sure, but not one specific one. Just to give you a little bit of color on that, we have a decent backlog for projects going into the North Sea right now for refurbishment for some offshore oil platforms. Nothing new, but when they do refurbishment and they have our equipment on, that's great business for us. And also, in Malaysia, there are some good oil and gas projects there as well. So we just sort of had a steady sort of working down that backlog to speed-type projects. And we do see, on a go-forward basis, that the order rate is improving in STAHL, and we do see an order uptick of our hot offers that have really doubled through the quarter. And these hot offers is something that we define as something 70% or more probability in the kind of categories that we're talking about. And as the quarter progressed, we did definitely see this order uptake. And so the pipeline is definitely growing. So I think to articulate how do we see them in January on a comparative basis, we definitely see them coming out of the chute in January. It was a little soft at the beginning, but it's been building. So the quote activity has been good, the pipeline has been growing and I think the order rate is now following in January. Hopefully, that clarifies it a bit.

Yes, that's helpful, Mark. I guess, what does that imply for STAHL growth next year in fiscal '19? I mean, should it be -- should we be considering STAHL's growth as diverging in any significant way from the core Columbus McKinnon outlook, which I would assume is relatively solid here, just given the growth in backlog?

No. I don't think there's really any divergence there. I think there is a very different ebb and flow of the business because it's more project-oriented. And as you know, the core Columbus McKinnon business is really not a project-oriented business. But I think some of the drivers that we've been talking about in these vertical market segments are pretty similar. And so I think we see the same thing, but I -- as you know, the core Columbus McKinnon business is a very short order cycle business. And since these projects can tend to be a little more lumpy, there's going to be a different rate by which it ebbs and flows. But I think you should take off the same cues that we're seeing for the overall business for STAHL as well.

Got it. And if I could ask one on the gross margin outlook for fiscal '19. I know you guys provided sort of next quarter. But if we start thinking about where blended gross margin should shake out, I guess I can immediately give you guys credit, or at least assume that you tackle sort of the $6 million in the incremental STAHL synergies, which I think mostly accrues to the gross margin line. And then you have some productivity gains that you highlighted this quarter that look relatively favorable. And if you continue executing on that, that seems like some upside potentially. But maybe you can help us just sort of in terms of how we should be factoring in gross margin improvement in the fiscal '19 with those elements. And then also, obviously, you guys highlighted sort of streamlining product platforms and that sort of thing. So how do those sort of layer in as we look at gross margin improvement in fiscal '19?

Matt, it's Greg. So when you look at the STAHL synergies, about 60% of STAHL synergies will end up in cost of goods sold and about 40% in the SG&A area. At these sorts of volume levels with some continued pricing inflation, though, is going to be perhaps a little bit higher next year than this year, we would expect to see incremental improvement in gross margins.

Got it. Okay. And then essentially in terms of offsetting raw material inflation, do you think that pricing essentially does that for you? Help us understand sort of where you are there.

Yes. Let me answer that, and I'll turn it over to Greg as well. Columbus McKinnon has a pretty solid process for managing the material cost inflations and also through -- both mitigating it and then passing on, in price increases. So if you look historically, they've done really well at being able to manage these. So I think the process has improved certainly since I've been here because it's something that we anticipated seeing at some point, is some increases in our material costs. But we're pretty comfortable with what we're seeing so far this year, and then sort of the outlook as we're building our plans right now. As you know, we're in our fourth quarter, so we're currently going through our budgets and plans for our next fiscal year. And this, obviously, is fairly prominent in terms of how we manage that, and I think we feel pretty confident about what we're seeing and how we would effectively manage it and also pass on price increases to our customers as well. Greg, do you want to?

Yes. So in the quarter, we saw about $300,000 of inflation. Year-to-date, it's only been about $800,000. So still relatively muted, but we're right now, we're in the process of determining what our pricing is going to be in a couple of our regions for fiscal year '19. So we would expect our pricing to exceed raw material inflation like it historically has.

Okay, very helpful, guys. Maybe just one last kind of bigger topical one for Mark on smart hoist development. I know you mentioned at the strategy update that although you have some Lodestar VS products in the markets today, the team has sort of identified a more cost-effective way to address embedding [VSDs] in hoists, but it's going to take some time to come out of the pipeline. So I just wanted to get a little bit more detail from you on why that's the case here? And I guess, are there gating items on the development and production side of the equation that would take you 3 years to get something out? Or are you guys just trying to be conservative on the demand side of the equation for factoring in smart hoists into your growth outlook?

I'm happy to give some color there, Matt. When I first started understanding where we are and where we need to go in the business, we found that one of the limiting factors was how you cost effectively deploy the controls platform into the product ranges. And one of the things that works against you there is when you have a lot of fragmented small-volume platforms, in other words, high mix, low volume, it's very difficult to cost justify putting in the controls. So one of the key enablers that we really uncovered is this rationalization that we're talking about. As we simplify some of our product platforming, that will enable us to drive greater volumes into those platforms and more cost effectively justify it. So it's not necessarily the development time or the cycle time for the development, we also have to front load that by doing this rationalization step. So as you know, we're at the beginning of our Phase II of Blueprint 2021, and this is why I started off by articulating that we have this simplification rationalization of platforming that is so important for us because it will enable us to drive the smart hoist more pervasively into our product line. Does that make sense?

Makes a lot of sense, and I'll leave it there guys.

(Operator Instructions) Our next question comes from the line of Joe Mondillo from Sidoti & Company.

My first question was really to the STAHL as well. Just wondering, could you provide a little more color on why the profitability in the quarter was weak relative to the first 2 quarters of the year? And sort of how you look at that going forward? I would've thought it would have been a little higher, especially with another quarter, the cost synergies, the lower interest rates. When you're looking at accretion anyways, it seems a little low for me. So is that a mix issue? And how do you look at that going forward?

Yes. Let me answer that at a high level, and I'll let Greg walk through it as well. Obviously, the revenue came down, so we had that issue. We also were working some mix issues in the pipeline. And some of the projects on a mix basis is, obviously, there are some differences there. And then keep in mind, too, that we shut down the STAHL facility in Germany, which is different than other times of the year. While maybe folks are on vacation, we don't do a full shut down. And we were fully shutdown, which obviously impacts the margins. So I don't think we were particularly surprised by that. But Greg, do you want to add some more color?

Yes. So when you look at -- based on the data that we provide, if I compare sequentially Q3 to Q2, we're down, from a sales perspective, about $3.3 million, and gross margin is down about $1.8 million. We actually saw SG&A drop a little bit. So it's really a top line issue, and it's a combination of the mix of projects. It was a heavier sales quarter for our Middle East business, which is more of a crane-building business than it is -- using the STAHL explosion-proofed hoist. But just kind of overall, a bit of a lower margin business. Now from a synergy perspective, Joe, in the quarter, STAHL realized -- or the company has realized about $1.7 million of synergies. So tracking towards and maybe slightly exceeding the $5 million that we had outlined at the beginning of the year for fiscal '18. But about half of that shows up on STAHL's books and the other half is actually in legacy Columbus McKinnon.

In terms of those synergies and when you're talking about the $0.02 of accretion, does that $0.02 of accretion account for all of the synergies? Or just the synergies that are sort of hitting the direct STAHL business?

All of -- it's actually all of the synergies. So we essentially, we're saying, here's what our EPS is as -- on an adjusted basis, and if we didn't have STAHL, what would it be in that delta? So it takes into account the incremental interest expense relative to what we would have had. It takes into account the pipe shares that were issued and the dilution impact on Columbus McKinnon as well.

Okay. And then just looking at the business going forward, how do we think of sort of the mix part of the business that we saw in the third quarter relative to sort of a normalized basis? And then what gives you so much confidence, Mark, when you were talking earlier regarding backlog declining and why expect this -- the business should recover really nicely starting in, it seems like you're indicating this current quarter? Are the orders really starting to come back that strong in January? Or any comment there would be great.

Yes. So let me start with the last part of that question first. We are looking at the order rates all the time. Obviously, we want to make sure that we don't short the market if it's going up more aggressively, than we might plan. And we obviously want to guide here appropriately as well. We are very encouraged by what happened in January. It seemed slowed down quite a bit in November and December. And obviously, we fed off the backlog, and there were some movements actually in the backlog. But coming out of the -- I guess you can say this way. Coming into the beginning of the calendar year, things started a little bit slow but built very nicely through January. And there was a pretty strong order intake level in January, up to probably what we saw towards the spring of the last calendar year. So a very nice uptick. Now obviously, this order rate goes back to the first part of your question and sort of what is the mix in the orders and how do they play out. And obviously, we're working through all of that, particularly as we continue to see how things are, going forward. But some of this can be fairly short cycle, and some of it can be fairly long cycles. So we'll have to think about how that mix plays out for us, but I think we're guiding here as about as responsibly as we can. And we do see a very strong order kind of -- excuse me, quoting activity that is continuing in the market. And this doesn't only go for STAHL, but as a general backdrop, is that there is a strong quoting activity right now, and we're trying to see how that converts further into orders.

Okay, great. And then last one for me. Just wondering if you could update us on the COO search? And then also sort of two-part question here. Regarding your 2021 strategy, just really wondering, it seems like some of this -- or a large part of maybe the benefits are going to be sort of more, I don't want to say back-end loaded, but maybe not seeing the benefits in fiscal '19 per se. I'm just wondering if you could provide maybe a little timing estimation on when we really start to see changes within the business, just so we can sort of have an expectation and sort of in terms of accountability and that kind of thing?

Sure. So I'll be more clear on the search we have outgoing. As we discussed in January 9, there's really 2 open positions. One is for our Vice President of operations to help us manage some of these operational excellence things, and the other is on the product development side. So we're pretty near term on the operations search, so we're going to be making announcements here, we think, pretty much in the short order, which I think is great. Really happy about that. The product development one, we're seeing some great candidates, but we're not as close on that search. So stay tuned on that, and we'll keep you posted as you see us make announcements. In terms of the timing issue and how we think -- see things play out, I think as we articulated, we should progress in our Phase II where I think we feel great about the successes in Phase I, and we're building on those strengths of Phase I. But as we progress in Phase II, it starts with this new organization structure we just pulled the trigger on it. It helps us simplify, takes out costs. That will -- clearly is in progress now but will roll out. And as we build strength in some of these rationalizations, and if you've been through these kinds of things before, you also know that takes a little bit to gain strength. But it could also take some edges off on the top line, too, because we're really focused on the bottom line improvements here, and sometimes that takes off the top line. So we're not looking at big revenue growth in our fiscal year, more on the operations and the drop through to the bottom line for EBITDA margins and total EBITDA. Greg, do you want to take a stab at that as well?

Yes. So I agree with Mark, Joe, in that in fiscal '19, there will be a lot of activities being worked on. Having the new VP of operations will help us from an operational excellence perspective. So what we articulated in the Blueprint 2021 was achieving north of a 15% EBITDA margin on a consistent basis. I think we'll see progress in that, but I think there's a number of activities and actions and costs that will have to be incurred to get to that, but I think we will see progress towards achieving that in fiscal '19.

Okay. And I just had one final one, and I'll hand it over. Just in terms of your target leverage, could you update us on what -- where sort of you feel comfortable in terms of the balance sheet? And with all that cash flow that you're going to be generating, you're -- if not close to that, are going to be close to that within a few quarters, and at that point, you're going to be generating probably even more cash flow at that point. So where -- how do you think about capital allocation once the balance sheet gets a little more delevered for shareholders?

Okay, so there's a lot in that, and so I'll take the first part, and I'll let Mark talk about the capital allocation. So we're currently at about 2.8x net-debt-to-LTM EBITDA. We beat our target for the year, which is great. The business has generated a tremendous amount of cash this year, and most of that free cash flow has been -- or all of it has been used to delever the balance sheet. We expect that by the end of March, we're going to either be 2.7 or 2.6 from a net leverage ratio. And when we spoke before, one of the -- and I've been asked a similar question. Ideally, we want to be between 2 and 2.5x on a net debt-to-EBITDA level basis. And at 2x, that puts you at about a 35% debt-to-total capital level, if you want to look at it that way. So you're exactly right with the rapid pay down of debt, we would expect that another 6 to 9 months, we'll have the balance sheet kind of where we want it.

Yes. Joe, I'm really happy for that question because that means the folks are less concerned about our leverage, and we anticipated these questions would start coming as we delever the balance sheet. In fact, we delevered it to a point where we are at the same leverage point now as we were when we acquired STAHL. That doesn't mean we're in the market to do an acquisition. I think we got more work to do on the STAHL side for sure, and we're continuing our path of deleverage. But I think, we -- as a management team, we want to pride ourselves on deploying capital in a way that preference is return on invested capital. And obviously, what we're discussing here is more of what we call a Phase III activity for Blueprint 2021, because we will be back in the market doing M&A around industrial technology themes where we think we can get some outside growth and we think we can get good margins from solving tough customer problems. We'll also look at the dividend, and we'll have conversations with the board as we do every board meeting. But as we go forward, this will be a more prominent subject.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Mark Morelli for closing remarks.

Well, folks, thank you for joining on today's call. I really appreciate your interest in Columbus McKinnon. I'm very excited about our path, and we will be creating more value through our Blueprint 2021 strategy. Thank you. Have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.