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Columbus Mckinnon Corp (CMCO) Q2 2020 Earnings Call Transcript

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Columbus Mckinnon Corp (NASDAQ: CMCO)
Q2 2020 Earnings Call
Nov 7, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Columbus McKinnon Corporation Second Quarter Fiscal Year 2020 Financial Results Call. [Operator Instructions].

I would now like to turn the conference over to your host Ms. Deb Pawlowski, Investor Relations for Columbus McKinnon. Thank you. You may begin.

Ms. Deb Pawlowski -- Investor Relations

Thanks, Melissa, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me on the call are Mark Morelli, our President and CEO and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the second quarter fiscal 2020 financial results, which we released this morning before the market. And if not, you can access the release as well as the slides that will accompany our conversation today at our website cmworks.com.

If you'll turn to slide two in the deck, I will first review the safe harbor statement. You should be aware that 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 www.sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe those will be useful in evaluating our performance. You should not consider the presentation of additional information in isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information.

So with that, if you would turn to slide three, I will turn it over to Mark to begin. Mark?

Mark D. Morelli -- President and Chief Executive Officer

Thank you, Deb. We deployed our blueprint for growth strategy over two-and-a-half years now, and we continue to demonstrate its effectiveness with our results this quarter. We're improving our margin and earnings even in the face of significant industrial market headwinds. After adjusting for divested businesses and foreign currency exchange rates, revenue in our second quarter of fiscal 2020 was up 2%. The impact of our the 80:20 process provided more than $3 million in revenue, driven by strategic pricing and our priority customer account program. We saw strong growth in our Projects business, which overcame the decline in demand from our short cycle business. In total our 80:20 process contributed $5.2 million in operating margin, including incremental revenue and 2.1 million in savings from overhead cost reduction.

This benefit is more than offsetting industry market headwinds, as well as enabling us to invest in growth initiatives. As a result, net income grew 4% year-over-year and outpaced revenue growth. Adjusted net income was up over 8%. Our strategy and execution is keeping us on track, as we continue to achieve our target. Adjusted EBITDA margin expanded 80 basis points to 16.2% and ROIC was up 180 basis points to 11.7%. A hallmark of Columbus McKinnon is our strong cash generation through economic cycles. As we execute our strategy and improve our business model, we are strengthening this tradition. We generated $40 million in cash from operations this quarter. We use the cash to further reduce debt, our leverage ratio is now just 1.5 times adjusted EBITDA ahead of target.

The changes we've made to our business model have improved our performance as global industrial markets have weakened. After a year of decline in industrial capacity utilization, and six months of ISM manufacturing declines in the U.S., we continue to make progress. We've grown organic revenue and consistently expanded margins and ROIC, while investing for innovation and strengthening our balance sheet. Please turn the slide four. We're doubling down on phase two of our strategy and are now raising our target for 80:20 process benefit this fiscal year. Through the first half of this year, we achieved $9 million in contribution to operating income. This was higher than the total benefits to earnings in the prior year. And our performance year-to-date gives us confidence to raise our full year guidance to $18 million, up from a previous target of $12 million.

Our self help strategy shed unprofitable revenue and focused on areas of growth with our customers. It also provides the resources to strengthen our business. The 80/20 process gives us the lines to reduce indirect overhead costs and improve material productivity, driven by simplification of our product lines. We're shedding footprint with our first factory closure in Ohio, and one in China. I should note that China factory closure is on track to be complete by the end of this fiscal year. And we announced yesterday, we're closing a second facility in Ohio, enabling us to consolidate operations in Wadesboro, North Carolina, which is our North American manufacturing center for wire rope products, and Damascus, Virginia, which is our North American manufacturing center for chain hoist. This removes overhead cost and allows us to fund initiatives to improve our competitiveness.

The true value of our strategy is demonstrated through the success we're having by funding our investments. This fiscal year, we hired nearly 30 people focused on product innovation, marketing and digital initiatives. We also offset headwinds from the global macro economic and industrial markets. We more than offset declines in our short cycle business, higher care and higher medical costs. Our year-over-year comparisons in the quarter were also better despite the loss of income from an intentional divesture of less profitable businesses. Please turn to next slide. Let me give you a couple of examples of how we're realizing innovation in our business as a result of solving high value customer problems. First, we're building on our legacy of listing specialist by creating solutions for intelligent motion. This quarter we launched several new products that strengthened our business through innovation.

One of these is our revolutionary ProPath automated workstation crane, which increases productivity and improves worker safety. The ProPath provides an auto dispatch mode that enables preprogram movement. It powers the bridge, trolley and hoist motions, or in other words, provides multi-access automated movement to enable the line worker to be more productive. The automated workstation crane travels the designated location with its load, leading the operator free to work on other more critical tasks. This intelligent workstation that fits operators to be more productive and improved safety. Without our unique solution, the worker manually guides the crane and its load to the next location an inefficient use of valuable labor.

Another example of our innovation solutions providing intelligent motion is an enhancement of our smart hoist electric chain offering, now with fully integrated load sensing technology. Operators can remotely measure the real time. This solution improves headroom compared with external solutions. We improve equipment uptime because less equipment and wiring is exposed. For applications such as in the entertainment industry, integrated load sensor also eliminates extra shipping cases, simplifying transportation and setup. We are also creating ways to leverage in scale critical automation solutions for wire rope hoist cranes. We recently launched the No-Fly Zone control module. We standardized hardware and software options now we are making them available in our new and improved online crane configurator. Operators can easily program a crane to avoid obstacles and high traffic areas to improve productivity and safety. We've more projects in the pipeline as well, and I look forward to discussing more about innovation and growth through our intelligent motion team.

With that let me turn it over to Greg and he'll review the financials in greater detail.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Thank you, Mark. Good morning, everyone. slide six net sales in the second quarter was $207.6 million. As you know, we completed three divestures last fiscal year, which reduced our sales in the quarter by $9.2 million. Foreign currency continues to be a headwind, which also reduced our sales by 4 million compared to the prior year. This headwind will continue in our fiscal third quarter and negatively impact sales by approximately 1.5% of today's foreign exchange rates. Adjusted for FX and the divestitures, we saw good organic growth of 1.8%. Our pricing power was evident as we saw pricing improved by 1.6%. As a result of our 80/20 strategic pricing initiatives. Sales volume was up 20 basis points in a difficult industrial environment. We saw double-digit organic growth in our project businesses but a slowdown in our short cycle businesses globally. The channel continues to manage inventory levels given this uncertainty.

This quarter we saw organic growth in the U.S. of 80 basis points adjusted for divestitures. This is largely due to strategic pricing initiatives from our 80/20 process. Volumes were down 80 basis points. Sales outside of the U.S. were up 2.9% adjusted for the FX of divestitures and effects. We saw the benefits from strategic pricing as well as higher volumes. Sales volume was up in EMEA but down in Canada and the APAC region. The higher volume we saw in EMEA was primarily in the Middle East and Germany. This was the result of strong sales in our project business for stalled branded product along with a large rail project delivered into Germany, it's more than offset weakness in our European short cycle business.

Overall, we've encouraged organic growth of approximately 2% in the quarter. Given the industrial market headwinds that exists in our 80/20 simplification efforts that eliminates bad revenue. This reflects the progress we continue to make with customer responsiveness and ramping the growth engine. We are introducing new products that will expand our addressable market and grow share in key markets. On slide seven, our gross margin was 35.4% in the quarter. This is a 40 basis point expansion in gross margin from a year ago and our 10th consecutive quarter of year-over-year margin expansion on a GAAP basis.

As Mark mentioned earlier, we benefited from the 80/20 process, which drove 5.2 million of gross profit expansion from strategic pricing, indirect overhead reductions and certain volume gains at our targeted accounts. This benefit was more than offset by the impact of the divestitures, FX, tariffs and higher medical costs which we saw this quarter. Let's now review the quarters gross profit bridge. Second quarter gross profit of 73.5 million was flat compared to the prior year adjusted for the divestitures. We did see gross profit expansion from pricing on a material costs inflation and productivity which was directly attributable to the 80/20 process. Pricing net of material costs inflation contributed 2.6 million and productivity contributed 400,000 of gross profit more than offsetting the higher medical costs that I mentioned previously.

Foreign currency translation reduce gross profit by 1.5 million and tariffs at a negative impact of $800,000 in the quarter. We also incurred 200,000 of costs for the Ohio factory closure, which we announced yesterday. As shown on slideeight8, RSG&A was 45 million in the quarter or 21.7% of sales. This is a reduction in RSG&A of 2.3 million in an improvement of 10 basis points from the previous year. The reduction in RSG&A is largely from the impact of the divestitures which reduced RSG&A by 900,000 and FX, which was a benefit in the current year of approximately 800,000. In addition, we reduce selling costs by consolidating several warehouses in the U.S. last year -- selling costs by 400,000. While we are controlling RSG&A costs as macroeconomic conditions create headwinds, we're also actively investing for growth and key initiatives. In fact, we made approximately $1 million of investments in product development, marketing and digital projects in the quarter. Our strategy will continue to drive a net reduction in our SG&A cost this year even while we invest in growth. We are forecasting our third quarter RSG&A to be in a range of $45 million to $45.5 million.

Turning to slide nine, adjusted operating income grew 3.4%. When you normalize for the divestitures, adjusted operating income grew 9.6% to 26.3 million. Adjusted operating margin was 12.7% of sales, a 100 basis point improvement over the prior year. Our Blueprint for Growth strategy and specifically our 80/20 process, we were able to grow adjusted operating income despite an overall 4.4% year-over-year decline in revenue, partially driven by divestitures and FX, which is outstanding operating leverage. As you can see on slide 10 GAAP earnings per diluted share for the quarter was $0.69. Adjusted earnings per diluted share was $074 compared with $0.70 in the previous year, an increase of $0.4 per share or about 6%. On a GAAP basis, our effective tax rate for the quarter was 23.6%. We expect the full year tax rate to be approximately 22% to 23% in fiscal 2020.

On slide 11, we continue to expand our adjusted EBITDA margin. For the quarter, our adjusted EBITDA margin was 16.2%, an increase of 80 basis points over last year. We're also making progress on driving our ROIC higher and are now at 11.7%, an increase of 180 basis points from last year second quarter. This progress demonstrates that we are tracking our Blueprint for Growth strategic goals to achieve a 19% adjusted EBITDA margin in fiscal 2022, and achieve an adjusted ROIC in the mid teens. Moving to slide 12, net cash from operating activities for the quarter doubled to $40 million on a year-over-year basis. Year-to-date, we have generated $33 million of free cash flow. We are on track to deliver $70 million to $75 million of free cash flow in this fiscal year. One of the hallmarks of promise Buchanan is its ability to generate cash throughout the business cycle. We expect to grow our free cash flow by approximately $10 million per year over the next several years.

Turning to slide 13, our total debt this quarter is approximately $271 million and our net that is $199 million. Our net debt-to-net total capitalization is now approximately 30%. We repaid $20 million of that in the second quarter and reduce our term loan debt by nearly $165 million since acquiring STAHL in January of 2017. We made excellent progress de-levering and have achieved a net debt-to-adjusted EBITDA leverage ratio of 1.5 times. This provides us the financial flexibility to advance in the Phase III of our strategy. Let me reiterate on page 14, our thoughts on capital allocation, we will continue to use our financial flexibility to invest in growth initiatives. We will also invest in capex projects with good cost savings, as these will be accretive to our overall financial objectives. While we have achieved our net leverage target, we will continue to use our surplus cash to pay down debt and de-lever the balance sheet for the remainder of this fiscal year. We plan to deploy capital for smart M&A as we move into Phase III of our Blueprint for Growth strategy. We also plan to pay dividends that is consistent and grows over time. The final priority will be share repurchases that we would consider opportunistically as we weigh our other capital allocation priorities.

Please turn the slide 15 and I will turn it back over to Mark.

Mark D. Morelli -- President and Chief Executive Officer

Thanks, Greg. Our Blueprint for Growth strategy is improving our performance even as industrial market headwinds persist into the third quarter. Our self funded strategy will continue to be a key enabler for us to make investments for innovation and growth. We expect the Q3 organic revenue to decline approximately 2% year-over-year. About a point of this decline is related to $1.7 million in rail projects that won't repeat in the quarter because of timing of project flows.

Overall, our global rail business pipeline is growing. However, it is uneven from quarter-to-quarter. Our expectations for the quarter wouldn't be worse if not for the benefit of the focus on growth segments Authority Customer Accounts program and strategic pricing. As we look further out, we believe we will deliver solid earnings growth as we gain more benefits from Phase II of our strategy to restructurings and cost reductions we are implementing are driven by our strategy and validate that we're on track to achieve our targets for fiscal 2022. A key enabler is the simplification of our product lines, which has allowed us to make measurable realignments in our business and improve our competitiveness. As I mentioned earlier, we now have the visibility to initiate another round of rationalization. That will include another facility closure. We announced yesterday that we will close our second manufacturing site in Ohio located in Lisbon, which we expect to complete in the first half of fiscal 2021. With the Lisbon, Ohio consolidation, we expect to realize that $5 million on annualized savings. With that, we will have rationalized six facilities since we initiated our blueprint strategy. And we are now down to 16. In addition, we've been making investments in including capital and key suppliers to drive innovation, and ramp our growth engine.

These investments have been self funded even as we expand margins. We continue to make progress and we're narrowing the gap to achieve 19% EBITDA margins and mid-teen ROIC in fiscal 2022. This represents top quartile performance among very well respected Industrial Technology names. Please turn to the next slide. We put in slide 16 as a reminder of the phases and elements of our blueprint for growth strategies, and how these phases layer upon each other, we're making excellent progress and their significant run way improvement had. We're furthering our efforts in Phase 2 and initiating Phase 3. We continue pivoting our business to a growth oriented industrial technology company. We expect to discuss with you our intelligent motion theme in further detail sometime in the first half of next calendar year.

So with that, Melissa will now open the line for questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from lines of Mike Shlisky with Dougherty & Company. Please proceed with your question.

Mike Shlisky -- Dougherty & Company -- Analyst

Good morning, guys. Can you hear me? Okay?

Mark D. Morelli -- President and Chief Executive Officer

Yes, we can hear you fine, Mike.

Mike Shlisky -- Dougherty & Company -- Analyst

All right. Great. So, historically, we've seen your fiscal Q3 gross margins to take step down from Q2, that might be due to having fewer shipping days and I guess some customers holidays maybe even -- you've done so well recently on your gross margin, is there a chance that you can actually see a seasonal decline that's close to zero this year?

Mark D. Morelli -- President and Chief Executive Officer

Yeah. I'll start the answer, and I'll let Greg follow-up. So, you're absolutely right. We do see a seasonal decline in the December quarter. Folks, particularly in the short cycle business, they try to manage their inventory for the year calendar year-end. And I think this seasonal activity as well reported. But directionally, we are seeing more improvement in our margins, because they are already 20 short in the results. And so I'll turn it over to Greg to see if he wants to add any additional color.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Hey, Mike. So, if you look at last year's gross margins, if you adjust for the divestitures and some of the non-GAAP adjustments we've had. We were at about 34.4% gross margin. So we are seeing good progress from a margin perspective with at 80-20, but there's been headwind's in the quarter -- this current quarter, which are likely to continue, tariffs are going to continue. We also saw a significant increase in medical costs this quarter, well over a $1 million, which we expect to continue into the coming quarter. And then as you know, or can see we have also been reducing our inventory levels. And so it, it puts it -- it's a lot tougher from a manufacturing perspective to absorb those fixed costs and our 80-20 process has been taking indirect overhead out. But it's you know, it's a continue challenge when the volume -- the production volumes drop at our facilities.

Mike Shlisky -- Dougherty & Company -- Analyst

Okay. Great. That's great color. I also want to ask about some of the -- some of the sort of volumes in the quarter, I was actually surprised the volume wasn't down at least, you know, 1% or 2% in the quarter, maybe share with us a few other puts and takes, you know, between your key end markets and whether you probably gain any kind of share in the quarter perhaps?

Mark D. Morelli -- President and Chief Executive Officer

Sure, let me start-off a little bit high level, and I'll break it down for you. So first of all, we've been really encouraged with our project related businesses, they were off double digit, no more than 10% in the quarter, which I think it shows some, some outstanding traction in some of the verticals that we've been serving there. And it's more than offset some of the decline in the shorter cycle business that we saw down for the mid single digits, I think, mostly due to some of that macro industrial headwinds and everybody's reporting on. So some of the verticals that are really driving our strength are retrofits in the steel industry. There have been some really good projects there.

We've seen good demand in aerospace. Entertainment has been strong for us as well. New construction and also utilities have been quite good as we're selling into infrastructure projects on the utility side.

Mike Shlisky -- Dougherty & Company -- Analyst

Great, that's great color, Mark. If I could just throw one more in here, about the announcement last night for your Salem, Ohio closure. That was press release separately on a different day of course. I mean, can you guys just a sense of the timing of the upfront cost and the benefits. As you have mentioned there was going to be completed in the first half of fiscal 2021.

But as any of it going to take place, if any of the cost of benefits actually takes place in fiscal 2020. And if any of that part of the change in the benefits from H1 you've got that went from 12 million to 18 million.

Mark D. Morelli -- President and Chief Executive Officer

Yeah, hey, Mike. This is Greg. I'll take that one. So, the additional benefit on the 8020 side, I'll take the back half of your question first, going from a target of 12 million to 18 million is largely due to the success we've had in the first half of the year. We've generated over $9 million of benefit through the first half of the year. And that, run rate that we're on lets say we should be able to double that in the second half of the year. So nothing really to do with this program, although it does have the benefit of the Salem, Ohio consolidation that took place at the beginning of this fiscal year. So with regards to the Lisbon, Ohio facility, because remember, we had two facilities in Ohio, there's the Salem and then there was the Lisbon.

One, that one that we expected to take seven to 10 months to complete there's -- it's a complex move. It's a sizable factory that the works in the product lines have to be switched to The Waynesboro, North Carolina facility in Damascus facility. We don't really see any benefits, showing up this fiscal year. In fact, we think it's really more likely that we're going to start to see the full benefits in the second half of next fiscal year. Given the timing that it takes to do this, but we will start to inquire, enhance started modestly to improve some of the one time cost associated with them all.

Mike Shlisky -- Dougherty & Company -- Analyst

Okay. Is that planning there has been a leased plant or an own plant, is there any asset to be sold there? And I'm asking it because, I'm curious about it if you're going to have a change to your outlook for ROIC. If you have a bit lower asset base or there are some also cash chunk coming in at some point?

Mark D. Morelli -- President and Chief Executive Officer

Good questions. So we do put that into our 10-K every year or we have a schedule on all of our facilities that is an owned facility. I think, it's some going off the on the line, it's about a 77,000 square foot facility, roughly. And so at the right time, we will work with our brokers to put that property up for sale. The book value of the facility isn't as large as you might expect. It's an older facility. So in total, it's a couple of million dollars from a size perspective.

So, yes, it will have an impact on ROIC but I think more importantly, it's the benefit of taking out $5 million of overhead. It also gives us a chance to reduce inventory, because it's really streamlining our operations. What's driving it is, is the product line simplification. And so I think what we're seeing also some pretty big benefits in ROIC that you've seen some great traction on for the 80:20 processes. So I think that's kind of the length that we're dealing with. And I think there should be some commensurate benefits as well.

Mike Shlisky -- Dougherty & Company -- Analyst

Perfect. Guys, thanks so much, I will hop back in a queue. I appreciate it.

Operator

Thank you. Our next question comes from line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Thank you. Good morning guys and congrats on the results here, pretty impressive stuff given the macro.

Mark D. Morelli -- President and Chief Executive Officer

Yeah, thanks, Greg.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

So, maybe just starting with some of these new products size that you highlighted a few on the call. Again, I mean, whether that's crane kids smart movement, etc. what are you most excited about? And I guess more importantly, what's the initial feedback or reception that you're getting from either the distributed based or end customers?

Mark D. Morelli -- President and Chief Executive Officer

Yes. You know there are a couple things I'm excited about. And these we are more talking about now for the first time is intelligent motion. And under that theme, we're gaining traction in a number of areas. They sell workstation crane. We just announced it's kind of new to the market. When you think of us providing some automation, typically, in the larger stuff, it's large wire rope hoist overhead crane, we're talking about here on the path is a workstation. And this is used as our unified light rail. So you can really enable a worker in a workstation to be more productive and say, so we're very excited about that. It's interesting because each one of these examples that we're showing were driven by interactions with our customers. So it's not like we're in the lab inventing these things. We're literally out working with customers trying to figure out, how can we solve their higher value problems and then these ideas come up and then the traction is there, so already getting demand for some of these products.

Another great example was the load sell-in I talk about this integrated into the voice first line of read real time from the load-sell have an integrated brings all those benefits that we talked about. So I'm really excited about those two new offerings. We also have more to come on the wire rope hoist side that we talked about and providing more automation there. We're actually forming a dedicated group on that automation side for those larger wire rope hoist cranes. And there's, I think, a lot of runway that can be divided there. So I think you're beginning to see that some of these investments are beginning to pay off and we're actually beginning to see some volume come through, its kind of trickling through, but we'll probably see about a point of revenue growth due to this -- these initiatives, this fiscal year, which offsets the point of negative takeout that we get from the 80/20 process. So I think you'll be seeing us moving to the next fiscal year where we can get even more traction.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Got it. That's really helpful. As it relates to the business that goes through distribution, I'm curious, how you feel inventories are positioned in the current environment, and I guess in terms of your guidance for the December quarter, does it assume consistent destocking, any increase in destocking? Just curious the thought process into how you arrived at the guidance?

Yeah. So we're trying to figure that out carefully given that market, particularly in that short cycle side is a week. And we do believe that people will continue to destock and manage inventory levels down for the end of the fiscal year and we're trying to fight that through a number of growth initiatives. But that's what we're anticipating will happen. Obviously, we watch those orders on a daily, weekly basis. So it'll unfold as we go forward toward the holiday season. And of course, you got some downtime there too with folks taking time off, so we anticipate there'll be some weakness there.

What offset that weakness and we're counting on is we have some good projects. And not only that our manly tech brand business actually ramps up this time of year, because folks are getting ready for this holiday maintenance shutdown period. So they want product where they can actually do retrofits. And so that demand is running up. And we're -- we've got some really good traction with some of the initiatives we've been working on there. So we think that that's going to be offsetting that. So hopefully in the wash, it'll come out to what we're guiding to and I think we've got some confidence around that.

Mark D. Morelli -- President and Chief Executive Officer

Yeah, Greg, so I'll just add on and market highlight that we do have a lumpy rail business. And a year ago, we had particularly strong revenue in the quarter. So about a point of that revenue decline is really related to the rail business.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yeah, that's right. Thanks for the reminder. And last one for me, really impressive cash flow here in the quarter. I mean, in addition to debt pay down, I'm just curious, what would you highlight is your near-term capital allocation priorities? Would you accelerate the M&A timeline at all just given the environment we're in, and some of the valuations coming in -- coming down or not?

Mark D. Morelli -- President and Chief Executive Officer

Yeah, let me take that first. And I'll turn it over to Greg. So the -- I did talk about on the phone that we are initiating our Phase III, but we're not running out to accelerate any M&A there. What we're really meaning by those comments is that if we're initiating an outreach program, it's very different than the type of things we've worked at before in the past, because it's sort of programmatic in nature where we developed pipelines and targets, and it's once again on this intelligent motion theme.

So we're going to talk more about that in the next calendar year. So we want to go into detail here, but we're not going to rush out in buying anything right away, just to hopefully get that out there. And I'll turn it over to Greg about the priorities and also on the capital allocation.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Yes, so maybe just add a little more color to slide 14, which I covered in my prepared remarks. So, for the balance of this fiscal year, we do intend to pay down another $35 million of debt. That's going to put our leverage ratio at about 1.1 times, 1.2 times. Adjusted EBITDA, our target is two times, so clearly well underneath that. So that'll give us a lot of dry powder as we move into phase three. Our reminder on our capital structure, we have a term loan B which matures in 2024 and our revolver matures in 2020, January of 2022. So, it's likely that sometime next summer will be looking to recapitalize the balance sheet because when we recapitalize the revolver, the turmoil and we'll have to go along with that. So, those are in the short term, once again, pay down debt. Like we said, we were doing what we said we were going to do. And then next year, we'll see how things progress with our face through the strategy and determine what makes sense.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

That makes sense. Good luck going forward. Thanks.

Operator

Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng -- CJS Securities -- Analyst

Hey, good morning, guys. Thank you for taking my questions. Maybe to start with, given the uncertainty in end markets and the visibility you have in the short cycle side of the business. What is the sensitivity from an even a margin standpoint to present or dollar decline in your revenue? I know, you've a lot of cost and efficiency programs going on that are going to take up the present, but just purely from a revenue standpoint, what's the detrimental sort of profitability?

Mark D. Morelli -- President and Chief Executive Officer

Yeah, so, good question, John. So, historically, Columbus McKinnon has been in the 35% to 40% operating leverage range when volume goes up. And we've been outperforming that. Last year we -- our operating leverage was 59%. This year, it's actually not meaningful can't be calculated because our revenues gone down. And yet our operating income has gone up as part of the self help strategy, the benefits of our 80:20 process.

So, on the downside, we would certainly expect to do better. And our historical 30 to 40% maybe in the 25 to 30% range on the way down, but once again, we've got so much improvement opportunities that we can look at going forward that we're going to try and obviously dampen the negative impacts the volume.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Great. Thank you. And then just to go back on the use of cash, barring any acquisitions in the near medium term, would you consider share buybacks as you pay down debt, get below one times net debt to EBITDA?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Yeah, good question. We do that every year with our board in the March timeframe. We'll clearly have discussions around that as a potential use of cash going forward. I think it's a great problem that we have and that we are a very strong cash generator throughout the cycle, throughout the business cycle. I think what's more important to us; we clearly want to fund our growth initiatives for sure. The balance sheet from a leverage perspective is going to be in really good shape, which gives us the flexibility to as we talked about earlier, move into the M&A side of things. And we clearly want to maintain our dividend and grow it regularly over time. So, the share repurchase opportunity is, we do have an off right share buyback, which is available to us.

But we look at it opportunistically because one other factor to consider is that, our flow is actually quite low. And we have a lot of our holders maintain positions for a long period of time. So, we're mindful of that dynamic as well.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Fair enough. And just to point out that you could buy your own shares at a discount, maybe what you might be looking at in terms of industrial technology standpoint just purely from evaluation base?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Something we'll obviously consider.

Jon Tanwanteng -- CJS Securities -- Analyst

Last question from me. You've done a great job with consolidation and then enabled by the consolidation of the product line, there is simplification. Is there more room to rationalize your asset base as you go through that process? Or are you kind of out where you want to be in terms of capacity and data footprint?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

No, I think we have more runway there. I think what we sort of announced on this call, what we released yesterday is sort of another kind of round of rationalization. What happens is, you're looking at it through this 80:20 lens, we're sort of figured out your product lines, you take a pretty good squat at it, and then you kind of step back and you do some more analysis and you sort of figured out what we kind of announced yesterday, but I think there are certainly more runway here. And as we have more clarity, will announce it to the markets as well.

I think it's also kind of good timing, because as we do that, and markets have softened and I think that will give us greater visibility into our next fiscal year on how we're going to generate the earning. So we're very encouraged by that. We're very encouraged by not only what we're doing, but also the potential of what we see.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. I just want follow-up to that. What percentage of the waste through are you in terms of products and simplification and rationalizing in your supply and design footprint?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Well, I think just on an any day basis, we're saying about in the third, fourth inning of this initiative, generally speaking. And you see us generating more it to the bottom line than we did last year. I think that's also been demonstrated, but a lot more work to do here and a lot more runway to go.

Mark D. Morelli -- President and Chief Executive Officer

Yeah. We're excited, Jon, about the possibilities. We haven't run out of ideas. The teams have done really well. And as reminder, we had about half of the company started a year ago, and the other half of the company started this year. So we do expect a pretty good runway of opportunities moving forward for the next several years.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti and Company. Please proceed with your question.

Joe Mondillo -- Sidoti and Company -- Analyst

Hi. Good morning guys.

Mark D. Morelli -- President and Chief Executive Officer

Hey, Joe.

Joe Mondillo -- Sidoti and Company -- Analyst

So, I just wanted to ask the question on the backlog and sort of your order trends to the backlog excluding the divestitures, was that on quite a bit year-over-year and the order trends obviously implied that things have weakened a little bit. Just wondering what your -- what you've seen in your order trends in October and how things have progressed, I guess, throughout the quarter and October, just wondering how that sort of has trended?

Mark D. Morelli -- President and Chief Executive Officer

Yeah, let me give you some color on that. So, first of all, let's just roll back a little bit. If you may remember, we saw orders down kind of April actually through the July period. They rebounded a bit in August and then decline again in September. I think the orders also declined for us in October.

But keep in mind that rail is also pretty lumpy. And it's not really indicative of health as a pipeline. I know. It's something that we obviously watched a lot too, but there's a lot of ebb and flow with us on rail. And our industrial products for cycle business improved in August and September. And also through the summer, it was quite encouraging, but as you seen that that's weekend as well. And the project business is a bit lumpy, so a trend in orders is not necessarily meaningful there as well. But we're encouraged by the quoting activity and also the pipelines, which we're getting a lot better at measuring terms of the health of the pipeline in quoting. And we're seeing the quoting activity going up.

So it's obviously something that we're looking at. Greg, do you want to maybe do a walk through to the size of the pipeline for both.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Sure. So the backlog and a year-over-year basis is down about $23 million, 40%. But it's $4 million of is just to FX rates. So in local currency, it's down about $19 million, and about $13 million of that rail. So as we've talked about, rail our larger projects. It's lumpy. We had a really strong order in take a year ago on a couple of projects. The pipeline is still very strong for rail. It's just really more of a timing issue.

So the remainder of the decline is really in our short cycle business. And that's down about $6 million. Our project business backlog, it's about the same. Now, when you look at it sequentially, we're down about $5 million in September from the June levels, currency really isn't a factor in that. And that's part of the reason why we guided down about 2% on revenue in the quarter. But in October, I can tell you, October backlog is about the same as it was in September.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. And then just in terms of the rail business, are you implying that timing wise on the third quarter is going to be a little bit of a tougher comp just given those trends that you saw there? And that thing potentially rebound on rail in the fourth quarter, or is this sort of a timing in terms of the next couple quarters, and that things hopefully start to rebound next year? Just trying to hash out what you mean by sort of the timing on what you're seeing in the rail side of things?

Mark D. Morelli -- President and Chief Executive Officer

Yeah, let's let me give you some color for sure. We're going to have headwind in the December quarter by about 1.7 million year-over-year on rail. And as you can see, the backlog is also decrease. But overall, the thing that you don't see on the rail side is that our project pipeline is increasing and if you think about what this is, this is infrastructures business globally, or folks are electrifying diesel trains, they're also doing more infrastructure projects on rail. And this is a global business and people have not cut off that spending, a lot of its driven by government spending and this is continuing to go forward.

So, while you're seeing some of that ebb and flow of that project business, we don't think that's on a long-term decline. We think that's actually longer term increasing and will guide it appropriately into the next calendar year. But we we're pretty happy with where our business was going and the potential that it has.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. And then just regarding the phasing that you announced by upping sort of the guidance in terms from 12 million, 18 million, I'm wondering how much of that you have realized thus far and is it more sort of fourth quarter weighted in terms of the rest of that you haven't realized? Or how does that sort of play out for the back half?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Yeah, so the way we look at it is we're looking for the year-over-year incremental impact of the initiative. So, as initiatives from the prior year hit the one year mark, they fall off so we see -- we're starting to see some of that -- those savings that were in the first half of this year start to tail off. But we've got new ideas and new actions that have taken.

So, in general, it's -- we should see pretty close to a 50/50 -- might be a little more 50/50 split between the additional $9 million in savings over the next two quarters, might be a little more heavily weighted toward Q4 because there is a volume element to it with our targeted accounts. But in terms of the actions taken today, we feel very comfortable that we can hit the $18 million number for the full year.

Joe Mondillo -- Sidoti and Company -- Analyst

And is there any way to have -- do you have an idea of how much of that you've already realized in the first half?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Yeah, that was the other $9 million.

Joe Mondillo -- Sidoti and Company -- Analyst

All right.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

So it's really kind of double that run rate, but once again, there's -- our actions that are grandfathered in off at the one year mark in Q3, current Q4, we actually we have fully grandfathered off items.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. And, Greg, I don't know, if you have this at your fingertips, I can follow-up with you. But if you don't, I'm just wondering what the gross margin for the fourth quarter was last year?

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Yeah, 35.4% -- 34.4%, I'm sorry.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay, great. And then last question I'm not sure if I heard this in the prepared commentary and any of the questions. Just regarding Phase III and M&A, we're pretty healthily in the midst of all the restructuring and such and your debt has come down quite a bit. So, you've done a really good job with that. Just wondering where we are with Phase III and M&A and sort of that part of the strategy.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Sure. So, we've initiated Phase III in terms of thinking through how we want to approach that. And it's quite different than what Columbus McKinnon has done in the past. It's much more of an outreach program based on strategic view. We're calling that team intelligent motion.

We'll talk more about that in the next calendar year. But we're pretty excited about it. And we think that it's going to have a lot of benefits. But it's too early to really say that we're going to be doing anything near-term. We're not going to be doing transactions clearly this fiscal year. But the fact that we get started on it is great and because it's going to take some time to put it in place.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay, and then last question for me just regarding sort of the some of the growth initiatives that you've been taken in terms of new products, R&D, the tinkering opportunity -- some of the growth initiatives that you've been taken in terms of new products R&D the kit crane opportunity, some of the opportunities are engineer products. Where are we would you say, Mark in terms of seeing some of the benefits from that, is it still really early and we haven't seen a whole lot. And maybe next year, we see a lot more. How would you describe and how the progression is with trying to take care and drive more growth?

Mark D. Morelli -- President and Chief Executive Officer

Sure. So I think it is early. If you think about Phase II, one of the elements of Phase II was ramping the growth engine and we're still planting those seeds in kind of nurturing, they come up. But we are beginning to see some pretty measurable tractions from that. And so I think it is early innings, we are seeing some results hitting our revenue line, we think that it's offsetting some of the negative attributes of the 80/20 rationalization on the top line too. So I think you'll see into the next fiscal year that this will certainly build. So we're very encouraged by this. The teams are spending a lot more time. As you can see, we're building out our teams on this. We're making the necessary investments. We're super happy about that. Because even though times are not great from an industrial market perspective, we're beginning to see the benefits.

One thing I do want to throw out is that last time that this business saw sort of contraction that below 50, it's kind of hard for us to compare, but when we look back on that in December of 2015, this business saw organic revenue declined to about 4%. It saw adjusted operating margin decline about hardly 20 basis points. And we had operating margins around 8% and that's if you were to compare to this past quarter is pretty big difference where we're growing 2%, 100 basis point margin improvement, and we're 13% operating margin. So I think, the country combination of us rationalize and also ramping the seeds for golf is a really good strategy. And I think we're executing right on plan and we're very encouraged by it.

Joe Mondillo -- Sidoti and Company -- Analyst

Right. Great. Thanks. I appreciate you taking my question.

Operator

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global Securities. Please proceed with your question.

Walter Liptak -- Seaport Global Securities -- Analyst

Hi, good morning. Thanks for taking my question. And thanks for going through the backlog. I think we've got a lot of clarity and the decline. The question I get about the backlog was you mentioned the short cycle business being down, I think 6 million. And I wonder how much of that or if you can quantify how much is related to PLS, kind of your own action get rid of bad revenue as you described earlier, or how much is related to just distributors or are they short cycle customer?

Mark D. Morelli -- President and Chief Executive Officer

Yeah, so we see probably about a point take out at the top line in the business due to overall rationalization efforts from 80/20. But there is well reported slow down in the short cycle business people have really cut back on inventory levels a lot. They have what you know, are kind of waiting to see what's going to happen next on trade wars related to Brexit type things in Europe. Europe has been really hard hit by an industrial softness there that I think is also well reported. So I think that's clearly reflected there in our numbers.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, great. And with regard to your inventory levels, Greg, I think you mentioned that your inventories as you alluded to coming down again in the next quarter. What's the right inventory level for where we are with this industrial slowing?

Mark D. Morelli -- President and Chief Executive Officer

Yeah. So we're currently focused on bringing our inventory levels back down. We look at it on a tons basis, we are about 3.8 tons. In September we want that number 4 better sliding into fiscal year. Its -- as the operations team is focused on it. It's a lot of hard work to do that. But we're committed to driving working capital improvement. In fact, when you look at our overall working capital as a percent of sales, we are down to about 17.2%. And that compares to a year ago of 19.7%. So a lot of progress was made this quarter and just the working capital initiative.

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Then as we continue to move through the 80/20 Process, mix product lines simplification, that's going to help as well take inventory out of the system. And we would think that the total benefit of 80/20 from an inventory perspective, this is 10s of millions of dollars potential.

Walter Liptak -- Seaport Global Securities -- Analyst

Once it's going in break -- you know that 80/20 is really impressive. I'll state my questions on that, offline. You know just -- one that, you guys didn't comment on was, was pricing and I wonder if you could help us with, what are the pricing strategies, maybe the timing of pricing, given the way raw materials have moved around over the last six or nine months? How are you thinking about pricing?

Mark D. Morelli -- President and Chief Executive Officer

Yeah -- so, in terms of pricing, we've seen a great benefit and strategic pricing initiative to 80/20. I think overall in the quarter we stopped price of about 1.6% and 80/20 strategic pricing was a bit of that. Our normal price increases vary by region. Typically in the U.S., it's in the March timeframe in Europe. It's around January and fact it's in April, I think in Latin America is generally April timeframe. And so those are more or less market increases, based on what the competition is doing based on what raw material prices are doing, etcetera.

But what we're really bullish about are the strategic pricing initiatives coming out of 80/20 which are very sticky and very strategic in terms of what we're going after. And that's been very beneficial this year for us for sure.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, sounds great. Thank you.

Operator

Thank you. Our next question comes from the line of [Indecipherable] company. Please proceed with your question.

Unidentified Participant

Hey guys, thanks. It was like my question was actually answered. Appreciate it.

Operator

Thank you, ladies and gentlemen, this concludes our question and answer session and I'll turn the floor back to Mr. Morelli for any final comments.

Mark D. Morelli -- President and Chief Executive Officer

Great. Well, thanks, folks for your time and interest in Columbus McKinnon. Have a nice day.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Ms. Deb Pawlowski -- Investor Relations

Mark D. Morelli -- President and Chief Executive Officer

Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer

Mike Shlisky -- Dougherty & Company -- Analyst

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Jon Tanwanteng -- CJS Securities -- Analyst

Joe Mondillo -- Sidoti and Company -- Analyst

Walter Liptak -- Seaport Global Securities -- Analyst

Unidentified Participant

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