Kadant Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Kadant Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer, please go ahead.

Speaker 1

Thank you, Amy. Good morning, everyone, and welcome to Kadant's Q3 2023 earnings call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our Safe Harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, Financial and operating results and prospects are forward looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Speaker 1

These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward looking statements As a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors In our annual report on Form 10 ks for the fiscal year ended December 31, 2022, and subsequent filings with the Securities and Exchange Commission. In addition, any forward looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward looking statements at some point in the future, We specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, We will refer to some non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles.

Speaker 1

A reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures is contained in our Q3 earnings Press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website atwww.cadent.com. Finally, I want to note that when we refer to GAAP earnings per share or EPS And adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who We'll give you an update on Cadence business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter We will then have a Q and A session.

Speaker 2

Jeff? Thanks, Mike. Hello, everyone. Thank you for joining us this morning To review our Q3 results and discuss our outlook for the remainder of the year, I'll begin by reviewing our operational highlights. The 3rd quarter was another record setting performance benefiting from a combination of excellent execution across our operating segments and stronger than expected aftermarket parts revenue.

Speaker 2

This led to near record revenue and record adjusted EBITDA, record adjusted EBITDA margin and record adjusted EPS in the Q3. As has been the case throughout 2023, our operations teams around the globe delivered Exceptional value for our customers in the most recent quarter, leading to excellent performance across our key financial metrics. I want to thank them for their outstanding work and the results they generated not only in the Q3, but throughout the year. Turning next to Slide 6, I'd like to review our Q3 financial performance. As you can see on the slide, Our Q3 performance was notably higher across most key metrics compared to Q3 of last year.

Speaker 2

Revenue was up 9% compared to the Q3 of 2022 to $244,000,000 and benefited from record capital shipments and strong aftermarket parts business. Solid execution contributed to our record adjusted EBITDA of $53,000,000 and a record EBITDA margin of 21.6%. All our operating segments delivered excellent adjusted EBITDA margin performance. Cash flows from operations and free cash flow We're outstanding in the Q3 at $47,000,000 $38,000,000 respectively, demonstrating the strength of our business model. As anticipated, bookings softened from the record setting pace earlier this year and were essentially flat compared to the prior period.

Speaker 2

I'll review the performance of our operating segments next, beginning with our Flow Control segment. Capital project activity and solid aftermarket demand contributed revenue growth in our Flow Control segment, up 5% compared to Q3 of last year. Bookings were $83,000,000 down 2% due to weaker capital bookings compared to the prior period. Aftermarket parts bookings were up slightly in the 3rd quarter and represented 71% of total revenue in this segment. Excellent execution in both the commercial and operational areas of the business Led to solid adjusted EBITDA and adjusted EBITDA margin of 29.7%.

Speaker 2

Many end markets in our Flow Control Segment remains strong despite the general sluggishness found in the manufacturing sector. We continue to see good levels of project activity and are well positioned to win new business as these projects move forward, although the timing is somewhat uncertain. In our Industrial Processing segment, revenues were up 9% to $94,000,000 led by record aftermarket parts business, which made up 60% of our total revenue in Q3. Adjusted EBITDA was up 9% and our adjusted EBITDA margin was excellent at 23.8%. As anticipated, demand slowed in Q3 in response to producers taking market related downtime.

Speaker 2

As was the case in our Flow Control segment, capital project activity and interest remain high across all product lines despite the economic headwinds. In our Material Handling segment, we experienced strong demand for both capital equipment and aftermarket parts. Revenue was up 15% to $59,000,000 due to record capital revenue in the Q3. All product lines in this segment contributed to this performance. Bookings in this segment were up 17% compared to the same period last year to $56,000,000 This growth was largely due to increased demand Solid execution helped boost adjusted EBITDA by 33% and adjusted EBITDA margin by 300 basis points compared to the same period last year.

Speaker 2

While we expect demand to moderate in the near term, we continue to see growing business activity for our bulk material handling equipment in our dealers, particularly in North America.

Speaker 1

As

Speaker 2

we look ahead to the remainder of 2023, we expect to finish the year with record results. We ended the Q3 with a large backlog and expect 4th quarter demand to be consistent with the prior quarter. Although we are seeing a lot of activity around capital projects, The timing of these projects is uncertain due to macroeconomic headwinds. And finally, our healthy balance sheet and strong cash flow have us well positioned to pursue With that, I'll pass the call over to Mike for his review of our Q3 financial performance.

Speaker 1

Thank you, Jeff. I'll start with some key financial metrics from our Q3. Consolidated gross margins were 43.3% In the Q3 of 2023, up 80 basis points compared to 42.5% in the Q3 of 20 22. All our segments contributed to the higher gross margins, especially our Material Handling segment, which was up 3.40 basis points compared to the Q3 of 2022. Parts and Consumables revenue represented 61% of revenue in the Q3 of 2023 compared to 63% in the prior year.

Speaker 1

SG and A expenses were $57,900,000 in the Q3 of 2023, An increase of $4,700,000 compared to $53,200,000 in the Q3 of 'twenty two and included a $1,100,000 increase from the unfavorable effect of foreign currency translation. The remaining increase in SG and A expense is primarily associated with increased compensation expense and outside consulting fees. As a percentage of revenue, SG and A expenses were 23.7 percent in the 3rd quarters of 2023 and 20 22. Our effective tax rate of 25.8% in the Q3 of 2023 was lower than we anticipated due to discrete tax items. Our GAAP EPS increased 12% to $2.63 in the Q3 compared to $2.35 in the Q3 of 'twenty two And our adjusted EPS increased 13% to a record $2.69 Our Q3 'twenty three adjusted EPS exceeded the high end of our guidance range by $0.40 due primarily to higher revenue in our stock preparation and material handling product lines.

Speaker 1

In addition, lower selling related costs and a lower tax rate also contributed to the guidance beat. Adjusted EBITDA increased 10% to a record $52,700,000 compared to $47,800,000 in the Q3 of 'twenty two Due to strong performance in all our segments, most notably in our Material Handling segment, which had near record revenue and adjusted EBITDA in the quarter. Adjusted EBITDA as a percentage of revenue was a record 21.6% in the Q3 of 2023 compared to 21.3% in the Q3 of 2022. We had our highest quarterly operating cash flow Since the Q4 of 2021 at $47,000,000 in the Q3 of 2023, up 89% compared to $24,900,000 in the Q3 of 'twenty two. We had cash outflows In the first half of the year related to working capital to support our record backlog.

Speaker 1

In the 3rd quarter, Projects were completed and shipped, resulting in a sequential decrease in inventory of $12,000,000 Overall, working capital Was a $5,800,000 source of cash in the Q3 of 'twenty three. Free cash flow increased 106 percent to $38,100,000 in the Q3 of 'twenty three compared to $18,500,000 in the Q3 of 'twenty two. We had several notable non operating use of cash in the Q3 of 2023. Paid down debt By $25,700,000 in the quarter, paid $8,800,000 for capital expenditures and paid a $3,400,000 dividend on our common stock. I'd also note that $2,500,000 of the $8,800,000 in capital expenditures related to the facility project in China.

Speaker 1

The facility move has been essentially completed with the remaining capital expenditure of approximately $2,000,000 to $3,000,000 Let me turn next to our EPS results for the quarter. In the Q3 of 'twenty three, our GAAP EPS was $2.63 and after adding back $0.03 of relocation costs And $0.03 of restructuring and impairment costs, our adjusted EPS was $2.69 The relocation costs relate to the facility project in China and the restructuring and impairment costs Relate to the consolidation of 1 of our smaller manufacturing facilities into a larger facility, both in Europe. In the Q3 of 2022, our GAAP EPS was $2.35 And after adding back $0.02 of acquisition costs and $0.01 of restructuring costs, our adjusted EPS was $2.38 As shown in the chart, the increase of $0.31 in adjusted EPS in the Q3 of 'twenty three compared to the Q3 of 'twenty two Consists of the following: $0.53 due to higher revenue $0.13 due to higher gross margins and 0 point 1 dollars due to lower tax rate. These increases were partially offset by $0.33 due to higher operating expenses, $0.02 from higher interest expense and $0.01 from higher weighted average shares outstanding. Collectively included in all the categories I just mentioned Was a favorable foreign currency translation effect of $0.03 in the Q3 of 'twenty three compared to the Q3 of last year.

Speaker 1

Looking at our liquidity metrics on Slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, We're 138 at the end of the Q3 'twenty three, unchanged from the prior quarter. Working capital as a percentage of revenue decreased to 15.4% in the Q3 of 'twenty 3 from 16.7% in the Q2 of 'twenty 3. Our net debt, that is debt less cash, decreased $36,000,000 or 42 percent sequentially to $50,000,000 at the end of the Q3 of 'twenty three. We've paid down $70,000,000 of our revolving credit facility debt In 'twenty three, helping to lower our leverage ratio calculated in accordance with our credit agreement to 0.38 at the end of the Q3 of 'twenty three compared to 0.74 at the end of 'twenty two. Our net interest expense increased $200,000 to $1,700,000 in the Q3 of 'twenty three compared to $1,500,000 in the Q3 of 'twenty two.

Speaker 1

We have a strong balance sheet and are well positioned to take advantage of investment opportunities with our current net debt position of 50,000,000 Current borrowing capacity of $285,000,000 available under our revolving credit facility and an additional $200,000,000 of uncommitted borrowing capacity. Now turning to our guidance for the Q4 and full year 2023. Due to our strong Q3 performance, we are increasing our full year revenue guidance to 941 to $949,000,000 from $925,000,000 to $940,000,000 And we are increasing our adjusted EPS guidance to $9.35 The adjusted EPS guidance excludes $0.03 of relocation costs and $0.03 of restructuring and impairment costs. Our revenue guidance for the Q4 of 2023 Is $222,000,000 to $230,000,000 and our adjusted EPS guidance is $2.02 to $2.12 As always, I'll caution here that there could be some variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital shipments. In addition, other risks that could impact our guidance include Central Bank's policy responses to inflation, Geopolitical Tensions and Softening Markets.

Speaker 1

We continue to anticipate gross margins for 2023 will be 43 to 43.5 percent with 4th quarter margins projected to be in the mid-forty 2 percent range as the mix is expected to be more heavily weighted towards capital. We expect our tax rate for the Q4 will be approximately 27%. We hope these guidance comments are helpful. And that concludes my review of the financials. And I will now turn the call back over to Amy for our Q and A session.

Speaker 1

Amy?

Operator

Our first question comes from Gary Prestopino with Barrington Research. Your line is open.

Speaker 3

Hey, good morning, Jeff and Mike.

Speaker 4

Good morning, Gary. Could

Speaker 3

you maybe I was trying to write this down as Quickly as possible, could we maybe delve a little bit into the strength that you saw in material handling? And I think you said you were going to see maybe Step down in demand in Q4. Could you help me out there?

Speaker 2

Sure. Well,

Speaker 1

We had very we've had very strong performance on the material handling front in regards to bookings and that continued In the Q3, and I would say, I remind you that in the Q1, we had a large order that we Booked for that conveying system, the 42 mile long conveying system. And that is You're seeing some of that in revenue in the Q3 and you're going to see a good portion of that in revenue in the Q4. So I think on the revenue front, Material Handling's performance will be pretty strong. But on the bookings front, I'd say, I'll just let me just take a peek here for the Q4. We usually don't get To granular on forecasting bookings, but when I look back to our performance in the Q4 of 'twenty two, we had quite a strong quarter on capital bookings and I would anticipate that we'll see that pull back a little bit.

Speaker 1

So That may cause overall that may make material handling kind of flattish or down a little bit on the bookings front.

Speaker 3

You also I wrote down here demand for balers, that was pretty strong too? Or do I have the right?

Speaker 1

Yes. We had very good strength in the Ballard business. Okay.

Speaker 3

And then, the Flow Control, you mentioned good levels of project activity within various segments of the business. Could you maybe elaborate on that a little bit?

Speaker 2

Yes. So, of course, we're particularly strong. They're particularly strong And the packaging and paper, but they've also done a great job. That product line probably has more applications Through the general industry than almost any other product we have and they've grown that industrial side nicely. So they're particularly strong in the metals.

Speaker 2

They have they're particularly strong in food, and tissue, which is a subset of paper, but a little more stable. And then just general industry, it's amazing how many industries there are out there that use our fluid handling products from Solar fields to windmills to just all kinds of applications out there. So there's a quite a mix of general industry that And they're continuing to make good progress in taking their products to new markets. And so in fact, I'd say that's true through all of Cadence Well, our largest segment now is what we call general industry. It's our biggest of all of our segments.

Speaker 2

So everybody works hard to try to take their products in new markets And the fluid handling in particular has a lot of broad applications there.

Speaker 5

Okay. Thank you.

Operator

One moment for our next question. Our next question comes from Laurence De Maria with William Blair. Your line is open.

Speaker 4

Hi, thanks. Good morning, everybody. First question, you said you expect, I believe, Flat backlog for the end of the year, obviously, you gave your sales guide implies orders pick up sequentially to the 220 to 230 range. So I guess first what's driving that uptick sequentially, especially if MH is maybe down a little bit, I guess the other 2 have to be up, but is there any specific

Speaker 1

Well, I'd say specific to the 4th quarter, Larry, I'm Not sure how you define that. Basically, the guidance we gave last quarter, we indicated that we expected Bookings in the 3rd Q4 to kind of be mirror what we saw last year in the 3rd Q4. So I think we think right now it looks like it's going

Speaker 2

to be relatively flat. I will tell you that when you're Dealing in the economy right now with all the puts and takes, it's particularly hard to figure out what demand is and particularly the timing on it, Larry. The customers are being cautious. They're looking for more visibility. The Fed today is going, I guess, making an announcement that may impact So thinking a little bit.

Speaker 2

So I would say these times are more uncertain than we normally see just because of where we are in this economic cycle and kind of the interest rate environment. Generally speaking, we think that it's going to be fairly flat with last quarter and really with last year.

Speaker 4

That's on the orders, right?

Speaker 2

That's on the orders side.

Speaker 4

Yes, exactly. And okay, that's very helpful. Thank you. And Bob, just to clarify there. And obviously, one would assume that there's much more price in these orders.

Speaker 4

So is it fair to say that More price and lower volume as we exit the year or maybe that's not in word discussion, but I think it is.

Speaker 2

Well, as you know, we really work hard to try to contain our cost, maximize our value to our customers. There are times and there were times during the last probably 18 months where we have had to pass some price increases on because the cost increases were just so significant. But we always work hard to really try to reduce our costs so that we maximize the value for our customers. Clearly, if you look at our margins, they've stayed pretty flat, which would tell you that our divisions did a good job of staying in front of the inflationary pressures And we're able to kind of maintain kind of a flat performance, which is what we were shooting for. And so there is some Certainly some price increases that have stuck.

Speaker 2

Some input costs have started to come down. But if you look at our margins, it would tell you that we just kind of stayed kind of even with what was going on from a cost standpoint.

Speaker 4

Perfect. Thank you.

Speaker 2

And then my other

Speaker 4

question, bigger picture, International Paper obviously shutting down large portion of the 10% of their installed base. So there's some pulp and paper multiple going on at closures. So can you speak to the direct impact to your business if you're seeing it yet, How material that could be for 2024, so just kind of help us contextualize some of those bigger events that are happening and drill down into what it means for your performance

Speaker 1

Well, I'll open up on that one, Larry, specific to the most I'd say most recent IP Announcement. When I look across the operations that they're going to be closing there, Cadent Isn't doing a lot of business in those mills. Some of that was on the pulp side, Not much in the way of activity for us there. The other on the containerboard side, those we do business in those mills, But they haven't been very big for us.

Speaker 2

So we don't and of course, some of that production will get shifted to their more Efficient mills. And so, we don't think that that particular announcement will show up in our numbers in any material way.

Speaker 4

Okay. So we should know really analyze those and think that's going to have a big impact.

Speaker 2

Well, what's going on is, If you look at the cost, the production cost to paper companies, especially in the Northwest, relative to the cost in other parts of the country and in particular Southeast, There's a significant difference in their cost. We're talking in some cases 100 of tons, 100 of dollars of $200, $300 a ton difference in production cost. And so when you see an announcement in these mills, it's often if it's a very old inefficient mill or more likely, it's just in a very high cost area And they've got the ability to move that production down into a low cost area. And so what you really need to look at is kind of what the total output is Paper products in the country because if it's just transitioning from one region to the next, we operate in every mill and so we're likely not to see a big impact from that. If you see tonnage dropping down, that's a different issue.

Speaker 2

I mean, for instance, I think packaging boxes this year are down about 7.3% over last year. So we felt that obviously our bookings slowed down in that area because of that. But when it's just shifting from a higher cost area to a lower cost area, That has less of an impact on us because we'll just as they pick up volume in another mill, we'll benefit in that.

Speaker 4

Well, so to that point, should we expect Are there further shutdowns in other areas or and how much do you have a view on tonnage next year as it relates to this specific end market?

Speaker 2

If you look at what the companies have announced already in the Q3, I would say the general tone is slightly Optimistic that things will are improving a little bit, not in a significant way because I think there's still not enough visibility. But I would just if you look at the color that they're giving on their earnings calls, they're Hoping they saw a little slight pickup in the Q3 in some cases and they're hoping that there'll be some continued improvement into next year. But I think it's still they'll caution that it's as I said earlier, still uncertain times visibility is not great, But there are, I would say slightly positive that things are going to strengthen a little bit.

Speaker 4

Okay. Thank you very much. Appreciate it.

Operator

One moment for our next question. Our next question comes from Aditya Madan with D. A. Davidson, your line is open.

Speaker 5

Hi, good morning, Jeff, Mike, and thank you for taking my question. I actually have a follow-up to that question. So we've seen the North America containerboard sector work through big destocking challenges And volume seem to be a better trajectory, but we've also seen curtailment announcements and we are far from a strong market. So how are you seeing those different elements impact parts and consumables demand versus capital equipment appetite And whether you think that potential inflection in the market could represent inflection for your activity levels with that customer base?

Speaker 2

Well, you're right that there's been 2 kind of trends or phenomenon happening this year. One is, of course, a slowdown in industrial Production, but also there has been a destocking effort going on both with Our customers and their customers, when there's uncertain times, and the Fed's trying to talk down the economy, everybody tends To destock and try to conserve capital. So there has been some of that. That can go on forever. Our experience in the past says that that happens for A number of quarters and then as visibility starts to get a little clearer, you'll start to see that these talking And then obviously ultimately reverses and they start to build inventory.

Speaker 2

And there's a little bit of that going on. I think I've seen some of the companies announced that they're starting To maybe build inventories a little bit, I think it's still too early to know if that's a trend that you're going to see throughout the industry. But maybe at a minimum, maybe the destocking has kind of hit its bottom. That's certainly our hope that It's talking to its bottom and we'll start to see inventory start to build a little bit. Most of our customers that we talk to think that The first half of next year is still going to be kind of sluggish and their hope is that the second half of the year is going to improve.

Speaker 2

Many of them are sitting on a lot of money. They made a lot of money the last few years. And frankly, many of them have equipment that It's run hard. They ran it very hard the last few years to meet demand. And they really need to make some investments, but they're just waiting to see Kind of when the economy starts to turn and industry start to drop.

Speaker 2

So that's kind of the what we're currently operating under is The belief that things will probably start out slowly next year and with a little hope will start to improve as the year goes on, certainly in the back half of the year.

Speaker 5

Great. Yes, that's good to hear. So as a follow-up, has the tone in your conversations with customers Change much relative to last quarter and have there been any additional indications regarding customers potentially looking to push out or 10 timelines on capital projects.

Speaker 2

Well, that's normally what happens. I think we normally say on most calls that It's unusual for projects to be canceled, terminated forever. They just get delayed. And I would say in all the discussions we've had With our customers and there's actually a fair amount of that that occurs once summer is over. We kind of there's trade shows, industry shows and so we get an opportunity to Spend more time with our customers and get a sense of their current thinking.

Speaker 2

And I would say what we're generally hearing, as I mentioned earlier, as well, We've got the cash to make investments. We have some older equipment that we know we need to make some investments in, but we just want To get a little better sense of where we are in this economic cycle, have we bottomed out, is there A recession is still to occur and what's going to go on with interest rates. So they're all taking a wait and see attitude, but obviously every quarter that goes by Without a downturn or without a technical recession and inflation continues to moderate, I think They become more and more hopeful that we're going to get through this without a true recession and things will start to turn around. But it's right now, it's a very challenging time. We'll see what Chairman Powell says today, I think.

Speaker 2

Yes.

Speaker 5

I think we are all looking forward to that. So let's see what he has to say. And just lastly on capital allocation, just I'm just curious on your M and A pipeline and how are you thinking about M and A versus share repurchases?

Speaker 2

So I mentioned, I think, through the last couple of quarters that our corporate development group is probably As busy as they've been in many years, there was clearly a slow period, kind of during the pandemic and But this year things have been very, very active. And of course, our balance sheet It's in very, very good shape. So we're well positioned to pursue these opportunities and we're hopeful that we're going to find some good fits For the organization, there's a fair amount of discussions and activities and opportunities out there in the marketplace right now. As far as stock buyback, we haven't done that for many years. We normally have found that we can create more value if we can find Good opportunities to bring companies into the family and the Canadian family.

Speaker 2

And so that tends to be where we first focus on capital allocation. Doesn't mean that we wouldn't buy stock back, but certainly as long as there's good opportunities to acquire companies out there, That's our first priority and focus.

Speaker 5

Got it. Makes sense. Good luck in the home stretch here, guys.

Speaker 2

Thank you. Thank you.

Operator

One moment for our next question. Our next question comes from John Franzreb with Sidoti and Company. Your line is open.

Speaker 6

Good morning, guys, and thanks for taking the questions. I'd like to circle back to what you said about the balers and maybe a little bit more discussion on the whole recycling market. Are you seeing differences in demand on a regional basis or not?

Speaker 2

Well, I think North America has been particularly strong, But we've also had good, I would say, really over the last several quarters, maybe a year and a half or so, Mike, good in Europe. There's been a lot of consolidation into larger and larger recycling facilities in Europe and our machines in Europe Are well suited to very large multi stream machines that are well suited for these big MRFs, these big recycling centers where you're recycling everything. And so we've had good success there. That's a product that gets a fair amount of development and R and D work From an investment standpoint, we've introduced some new products that have been quite successful in Europe. And also we've brought that product to the U.

Speaker 2

S. The acquisition of Bellmaster really has helped us start to penetrate the U. S. Market with our European technology because we now have the engineering and the service Network in America that our customers look for here. And so that's helped us a lot too.

Speaker 2

So we started to have some good success with that. So it's I would say it's broadly based, but in particular North America, our Bellmaster, which makes machines that go Into the packaging industry, the distribution centers, the corrugators, they've been quite busy with a lot of demand. And

Speaker 6

in Asia, there was once a major migration going there. Is that process Permanently over post COVID. Where did that end up relative to your expectations?

Speaker 2

You're talking about on the baler side or other aspects of the business?

Speaker 6

Other aspects of the recycling business, other aspects of that.

Speaker 2

So on the stock prep side, which is the technology that recycles packaging and paper, They started to build these facilities and I think you're referring to these countries in Southeast Asia that really ring China To get around the waste import ban. Yes, I would say that had, I would say mixed success. As we somewhat expected, A lot of those companies said those countries said, well, if you don't want the waste coming into your country, why would we want it coming into ours? And some of the economics didn't work out. And so I would say that's had mixed success.

Speaker 2

They've come to the U. S. And Bill took over facilities, refab facilities here and that's where they're getting some of the fiber. But there's also an emerging Recycled fiber market out there that they're able to just buy from and they're doing that too. And of course, they're also putting in some mechanical pulp mills into China To generate some fiber there.

Speaker 2

But, the I would say that the your question around where we are in that cycle on those countries that ring China, I would say that's slowed down quite a bit and probably will not be a major growth area going forward. Not going in China. It is a growth area for Southeast Asia because of course those countries are still growing well. And so we are booking orders in those countries that for a product that will stay in those countries. But as far as they being a fiber source For Mainland China, I think that's probably not going to be a major market.

Speaker 2

Great.

Speaker 6

And in your prepared remarks, it sounded like you were surprised by the strength of the parts business in the quarter. Did I misinterpret that? And if that was the case, how would you expect the 4th quarter to compare to the 3rd?

Speaker 1

Yes, John, we I would say, we are very happy with the parts performance. It was quite strong. And as I noted in my call notes, That was the lead driver of the revenue beat. So we're That helped us out in the quarter to produce the excellent results that we did produce. Looking at the 4th quarter In terms of the parts and consumables front, I think one Saying that's a little bit of a unique phenomenon for us is, as we go through the year, The parts bookings are usually they're strongest in the Q1 and then they just kind of slowly step down Throughout the year and I think we'll see that here in the 4th quarter is what I'm anticipating.

Speaker 1

So I think when you stack it up against The Q3, it will likely be a little bit weaker, but that would be, I'd say, normal course for us.

Speaker 6

Got it. And you had an excellent free cash flow quarter, in part due to the inventory drawdown. I guess two questions regarding that. Should we expect not as strong of a Operating cash flow quarter as you rebuild the inventory for future capital projects. And now that you've completed that Facility relocation, how should we think about CapEx in 2024 relative to 2023?

Speaker 1

Well, I'd say, my hope is we

Speaker 4

are not done

Speaker 1

producing Excellent cash flows. To your specific point on where we need to rebuild inventory, We had a significant backlog in capital, which we've been working down and that's why I made the comment Inventory finally has started to turn and has come down. So to that specific point, I don't think we'll that will be an issue for us until we see the next robust buying cycle and the backlog grows. So I don't think that that particular issue is going to be a headwind for us. And what we see CapEx next year.

Speaker 1

So Yes. The facility project this year, I give numbers on that every quarter and I think we're going to end up Of our overall CapEx, maybe $8,000,000 to $9,000,000 will have been for the facility in China. We have fairly robust demand for robotics from our sites. So I think you'll see us continue To make investments, if I back off the we had a facility project in China, we have a facility project And our Wood Group in Europe, if I take those out, our CapEx was projected to come in a little over 2%. So I'll say for next year, that's probably where we'll be in that to little over 2% range.

Speaker 6

Perfect. That's exactly what I was looking for. Appreciate the clarity, guys.

Speaker 1

You're welcome, John. Thanks, John.

Operator

And I'm showing no further questions at this time. I would now like to turn the conference back to Jeff Powell for closing remarks.

Speaker 2

Thank you, Amy. So before wrapping up the call today, I just wanted to leave you with a few takeaways. 1st, 2023 is shaping up to be the best year in our history across a wide range of metrics. We made solid progress this year on our efforts to accelerate revenue growth, win new business and boost our profitability despite the increasingly challenging macroeconomic environment. Our leverage ratio is 0.38, which positions us well to pursue new business opportunities.

Speaker 2

And as always, we expect to deliver excellent cash flows and optimize allocation of capital to maximize the value for our shareholders. With that, we'll conclude the call today and I want to thank you for joining us.

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Earnings Conference Call
Kadant Q3 2023
00:00 / 00:00