Kadant Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q4 2023 Cadence Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael McKenney, Executive Vice President and CFO.

Operator

Please go ahead.

Speaker 1

Thank you, Victor. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 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 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 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 GAAP measures is contained in our 4th quarter and full year 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 at www.cadent.com. Finally, I wanted 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 will give you an update on Kate's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year, and 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 Q4 and full year results and discuss our business outlook for 24. I'm pleased to report the 4th quarter was a solid finish to a record setting near Acadian.

Speaker 2

Despite the slowdown in overall manufacturing activity and continued macroeconomic headwinds in many regions, We had another well executed quarter. This led to solid adjusted EBITDA performance and excellent cash flow in the 4th quarter. Organic bookings were steady in the Q4 with solid demand as we delivered on our mission to provide technologies and engineered solutions that help our customers operate more efficiently. At the end of 2023, we were honored to once again be named by Newsweek Magazine as one of America's Most Responsible Companies. This marks the 4th consecutive year of being included on this list and it is rewarding to be recognized for our efforts in this area.

Speaker 2

With that, I would like to review our Q4 financial performance. 4th quarter performance overall was solid and better than expected in several areas. Q4 revenue and adjusted EPS were both up 3% compared to the same period last year, while bookings were comparable with the prior year period. Although a large portion of our Q4 revenue was from capital shipments, excellent execution resulted an adjusted EBITDA margin of 20.3%. I'm particularly pleased with our operating cash flow, which was the 2nd highest in our company history at $59,000,000 Our 4th quarter earnings performance contributed to exceptional full year financial results, which I will review next on Slide 7.

Speaker 2

The record demand we experienced in the Q1 of 2023 provide an excellent start to the year and contributed to our record setting revenue performance for the full year. Adjusted EPS increased 9% to a record $10.04 exceeding the prior record set last year at $9.24 per share. Our full year adjusted EBITDA was a record $201,000,000 and a record 21% of revenue. Our strategic focus on improving our margin performance continues to deliver results and we are pleased with the progress of ongoing initiatives to grow our businesses. Our workforce around the globe deserve tremendous credit for these results as they performed exceptionally well throughout the year.

Speaker 2

I'm extremely proud of our employees for the innovative work they have done and continue to do to serve our customers. Next, I'd like to review our performance in our 3 operating segments. I'll begin with our Flow Control segment. Q4 revenue declined 4% to $87,000,000 compared to the then record Q4 of 2022. Aftermarket parts revenue was up slightly compared to the prior period and made up 68% of total revenue.

Speaker 2

Product mix within both parts and capital negatively affected gross margin and this led to an adjusted EBITDA margin of 27% in the 4th quarter. Bookings were up 8% compared to the same period last year. This strong finish to the year positions us well entering 2024. We believe the fundamental drivers of end markets remain healthy, The business activity continues to be influenced by geopolitical and macroeconomic challenges around the globe. Turning now to our Industrial Processing segment.

Speaker 2

Our performance in the 4th quarter was solid despite the softening in some of our core end markets. Revenue declined 3% compared to the same period last year due largely to fewer capital shipments of our stock prep equipment used to process recycled fiber. Aftermarket parts revenue, however, was up 5% and represented 64% of total revenue in the 4th quarter. Adjusted EBITDA margin declined 110 basis points compared to the prior year, but remained strong at 23.8 percent of revenue. This decline was largely attributed to a decrease in operating leverage associated with lower capital revenue.

Speaker 2

Looking ahead to 2024, we expect demand in this segment to shift towards aftermarket parts versus capital, particularly with the addition of our recently announced acquisition of KeyKnife. KeyKnife is a manufacturer of engineered knife systems used in various wood processing applications. More than 90% of its revenue is aftermarket parts. In addition of Key Knife to our industrial processing segment is expected to further strengthen our aftermarket position in this segment. In our Material Handling segment, revenue increased 27% in the 4th quarter to a record $64,000,000 Strong bookings in the first half of the year contributed to this record setting performance.

Speaker 2

Capital equipment revenue was exceptionally strong represented 55% of total revenue in the quarter, led by our conveying product line. Despite the large portion of revenue attributed to capital business, We achieved excellent operating leverage and adjusted EBITDA margin increased 3 50 basis points to 22.1% in the 4th quarter. The integration of KWS Manufacturing acquired a few weeks ago is underway and progressing well. We are pleased to have this leading manufacturer Screw conveyors and related equipment, a part of Cadence. Looking ahead to 2024, we believe this segment will continue to see good business activity, particularly as new infrastructure projects are executed and demand for KMA equipment remains strong.

Speaker 2

As we look ahead to the Q1 of 2024 and the full year, ongoing project activity is healthy and demand has been solid as we entered the year. That said, we are seeing continuing economic uncertainty around the globe and expect demand in 2024 to be similar to 2023. Our strong backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds we expect to deliver solid financial performance again this year. I'd now like to pass the call over to Mike for his review of our financial performance and outlook for 2024.

Speaker 1

Thank you, Jeff. I'll start with some key financial metrics from our 4th quarter. Gross margin decreased 40 basis points to 42.7 percent in the Q4 of 'twenty 3 compared to 43.1% in the Q4 of 'twenty 2, due primarily to lower margins achieved on capital projects at our Industrial Processing and Flow Control segments. Our overall percentage of parts and consumables revenue was 60% of total revenue in both the 4th quarters of 2023 and 2022. As a percentage of revenue, SG and A expenses increased to 25.1% in the Q4 of 2023 compared to 24.5% in the prior year period.

Speaker 1

SG and A expenses were $59,800,000 in the Q4 of 'twenty 3, increasing $3,000,000 or 5 percent compared to $56,800,000 in the Q4 of 'twenty 2. The Q4 of 2023 included a $900,000 unfavorable foreign currency translation effect and an increase of $1,300,000 of acquisition costs and a decrease of $800,000 in indemnification asset reversals compared to the Q4 of 'twenty two. Excluding these items, SG and A expense increased $1,600,000 or 3%, primarily due to increased selling related costs. Our GAAP EPS increased 4% to $2.33 in the 4th quarter compared to $2.23 in the 4th quarter of 'twenty 2 and our adjusted EPS was up 3% to $2.41 from 2.33 dollars Our Q4 'twenty three adjusted EPS of $2.41 exceeded the high end of our guidance range by $0.29 due to higher than anticipated aftermarket revenue, especially at our Industrial Processing and Flow Control segments. We had record operating cash flow and adjusted EBITDA in 2023, which I will cover on the next slide.

Speaker 1

For the full year 2023, gross margins increased 40 basis points to 43.5% compared to 43.1% in 2022 due to higher margins achieved on our aftermarket products, especially at our Material Handling segment. Our percentage of parts and consumable revenue was 62% in 2023 compared to 63% in 2022. As a percentage of revenue, SG and A expenses decreased to 24.7% in 'twenty 3 compared to 24.8% in 2022. SG and A expenses were $236,300,000 in 2023, increasing $11,900,000 or 5 percent compared to $224,000,000 in 2022. Excluding a decrease of $1,200,000 of expense from indemnification asset reversals, SG and A expenses were up $13,100,000 or 6% compared to $22,000,000 primarily due to annual wage increases as well as incremental travel and consulting costs.

Speaker 1

Our GAAP EPS was $9.90.23 down 4% compared to $10.35 in $0.22 which included a $1.30 gain on the of a Chinese facility. Our adjusted EPS was a record $10.04 up 9% compared to $9.24 last year. Aside from being a record, our adjusted EPS also exceeded the 5 year target of $8 to $9 a share we set back at the beginning of 2019. In the Q4 of 2023, adjusted EBITDA decreased 2% to 48,500,000 or 20.3 percent of revenue compared to $49,500,000 or 21.3 percent of revenue in the Q4 of 2022. Our Material Handling segment had a record adjusted EBITDA in the Q4 of 2023 and a notable 350 basis point improvement in adjusted EBITDA margins compared to the prior year.

Speaker 1

This was offset by the performance in our other segments. As you can see on the slide, our annual adjusted EBITDA has grown significantly compared to 2019, up 58%. For the full year, adjusted EBITDA was a record 201,300,000 and a record 21% of revenue in 2023 compared to adjusted EBITDA of $189,100,000 or 20.9 percent of revenue in 2022. Our Material Handling segment had record adjusted EBITDA of $53,600,000 in $23,000,000 and a 2 10 basis point improvement in adjusted EBITDA margins compared to the prior year. Our Flow Control segment also had record adjusted EBITDA of $105,000,000 in 2023 and a record 28.9 percent adjusted EBITDA margin.

Speaker 1

Adjusted EBITDA is an important metric for us. We set a 5 year target for adjusted EBITDA margin of 20% back at the beginning of 2019, and I'm happy to see that we've exceeded this target with a record 21% in 23%. Our adjusted EBITDA margin has increased 300 basis points since 2019 due in large part to contributions from subsidiaries participating in our Eightytwenty program. This program provides revenue growth through a highly focused sales approach and profitability improvements as a result of dynamic pricing and streamlining product offerings. Once adopted, subsidiaries continue to follow the eightytwenty program, yielding incremental benefits the longer they have followed the tenants of the program.

Speaker 1

Average adjusted EBITDA margin for subsidiaries under the program have consistently exceeded our other subsidiaries. Over 50% of our revenue is from subsidiaries currently under or starting our eightytwenty program. One of the highlights for the Q4 and full year was our operating cash flow, which increased 68% to $59,200,000 in the Q4 of 'twenty 3 compared to 35 $200,000 in the Q4 of 'twenty two. For the full year, operating cash flow was a record $165,500,000 up $62,900,000 or 61 percent from 'twenty two. We also had strong free cash increasing 114 percent to $49,500,000 in the Q4 of 'twenty three and increasing 80% to $133,700,000 for full year 2023.

Speaker 1

We had several notable non operating uses of cash in the Q4 'twenty three. We repaid $22,100,000 of debt and paid $9,800,000 for capital expenditures and a 3 point $4,000,000 dividend on our common stock. For the full year, we repaid $94,000,000 of our debt and paid $31,900,000 for capital expenditures, which included a $7,400,000 for our facility project in China. Let me turn to our EPS results for the quarter. In the Q4 of 2023, GAAP earnings per share was $2.33 and adjusted EPS was $2.41 The $0.08 difference relates to $0.10 of acquisition costs, $0.05 of other income and $0.01 of relocation costs, both related to the facility project in China and $0.02 of restructuring costs.

Speaker 1

Dollars 0.05 of other income is associated with cash received for remaining assets at the old facility. In the Q4 of 'twenty two, GAAP earnings per share was $2.23 and adjusted EPS was $2.33 The $0.10 difference relates to $0.09 of impairment and restructuring costs and $0.01 of acquisition costs. The increase of $0.08 in adjusted EPS in the Q4 'twenty three compared to the Q4 'twenty two consists of the following: $0.17 due to higher revenue, dollars 0.09 due to a lower recurring tax rate and $0.05 due to lower interest expense. These increases were partially offset by $0.17 in higher operating expenses, dollars 0.05 due to lower gross margin and $0.01 due to higher weighted average shares outstanding. The $0.09 impact And the lower recurring tax rate was due to slightly higher tax rate in 2022 related to the timing of certain incentive compensation payments.

Speaker 1

Collectively, including all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the Q4 of 'twenty 3 compared to the Q4 of last year due to the weakening in the U. S. Dollar. Now turning to our EPS results for the full year on Slide 17. We reported GAAP earnings per share of $9.90.23 and our adjusted EPS was 10.04 $0.14 difference relates to $0.10 of acquisition costs, dollars 0.05 of other income and $0.05 of relocation costs, both related to the facility project in China and $0.04 of restructuring costs.

Speaker 1

We reported GAAP earnings per share of $10.35 in $0.22 and our adjusted EPS was $9.24 $1.11 difference relates to $1.30 gain on sale related to one of our Chinese facilities, impairment and restructuring costs of $0.11 and acquisition related costs of 0 point 0 $8 The increase of $0.80 in adjusted EPS from $0.22 to $0.23 consists of the following: $1.41 from higher revenue, dollars 0.26 from higher gross margins, $0.08 from the lower recurring tax rate and $0.01 from lower non controlling interest. These increases were partially offset by $0.86 from higher operating expenses, dollars 0.07 from higher interest expense $0.03 due to higher weighted average shares outstanding. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.09 compared to $0.22 Now let's turn to our liquidity metrics on Slide 18. Our cash conversion days calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 130 at the end of the Q4 of 2023, down from 138 at the end of the 3rd quarter of 2023, but up 126 days at the end of 22. The sequential decrease in cash conversion days was principally driven by a lower number of

Speaker 3

days in

Speaker 1

inventory. Working capital as a percentage of revenue decreased to 12.8% in the Q4 of 'twenty 3 compared to 15.4% in the Q3 of 'twenty three and 13.9% in the Q4 of 'twenty two. Net debt, that is debt less cash at the end of 2023 was $4,400,000 the lowest level since 2017, representing a decrease of $117,000,000 compared to net debt of $121,400,000 at the end of 'twenty two. Our interest expense increased 30% to $8,400,000 in 'twenty three compared to $6,500,000 in 'twenty two due to an increase in borrowing rates. Our leverage ratio calculated as defined in our credit agreement decreased to a very low 0.27 at the end of 2023 compared to 0.74 at the end of 20 22.

Speaker 1

After our recent acquisitions, our borrowing capacity is $71,000,000 available under our revolving credit facility an additional $200,000,000 of uncommitted borrowing capacity. Now I'll review our guidance for 2024. We expect to achieve records in a number of key metrics in 2024, including revenue, cash flow and adjusted EBITDA. Our earnings performance in 2024 will be affected by increased borrowing costs and non cash intangible amortization expense associated with our recently announced acquisitions. As we look beyond 2024, The increased borrowing costs will continue to decrease as we have demonstrated our proven track record of paying down debt.

Speaker 1

For the full year, our revenue guidance is $1,040,000,000 to 1,065,000,000,000 That is $1,040,000,000 to $1,065,000,000 and our adjusted diluted EPS guidance is $9.75 to $10.05 which excludes $0.20 related to the amortization of acquired profit and inventory and backlog. Looking at our quarterly revenue and EPS performance for $24,000,000 we expect the Q1 will be the weakest quarter of the year due to the timing of capital projects and the second half of the year will be stronger than the first half as a result. Our revenue guidance for the Q1 of 'twenty four is $238,000,000 to $246,000,000 and our adjusted diluted EPS guidance for the first quarter is $1.90 to $2 which excludes $0.14 related to the amortization of acquired profit and inventory and backlog. I should 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. Guidance includes our acquisitions of Kenai from KWS, which we completed in January.

Speaker 1

Aside from the impact of intangible amortization, there is a negative impact in the initial post acquisition period associated with the amortization of profit and inventory and acquired backlog as these amounts are reflected in the income statement when the underlying order is fulfilled and inventory is shipped to the customer. Our GAAP and adjusted EPS guidance include our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for these acquisitions. I'd like to give some additional metrics on our EPS guidance. We borrowed $230,000,000 in January for the acquisitions of key knife and KWS. We'll work diligently throughout 2024 to pay down that debt.

Speaker 1

As a result of the borrowings, We project our interest expense will increase by approximately $0.70 over $0.23 In addition, Key Knife and KWS transactions have significant amounts of recurring non cash intangible amortization expense, which is reducing our EPS guidance by approximately $0.50 While the non cash intangible amortization does have a significant impact on EPS, it will not impact our cash flow or EBITDA for 2024. 2024 guidance includes a favorable foreign currency translation impact of approximately $11,600,000 on revenue and $0.15 on adjusted EPS due to the weakening of the U. S. Dollar. We anticipate Gross margins for 2024 will be approximately 43.5 percent to 44.5 percent.

Speaker 1

As a percentage of revenue, we anticipate SG and A will be approximately 25.5 percent to 26.2 percent and R and D expense will be approximately 1.3% to 1.4% of revenue in 24. We anticipate net interest expense of approximately $18,000,000 to $18,500,000 and we expect Our recurring tax rate will be approximately 26.5 percent to 27.5 percent in 2024. We expect depreciation and amortization will be approximately $46,000,000 to $48,000,000 in $24,000,000 and we anticipate CapEx spending in 2024 will be approximately $29,000,000 to $31,000,000 which includes $2,000,000 related to the final payments on our facility project in China. Approximately 15% of the CapEx spending in 2024 relates to final payments for CapEx projects approved in 2023. We are a little bit above our normal CapEx as a percent of revenue metric as we continue to invest in automation projects and upgrades to our manufacturing capabilities.

Speaker 1

That concludes my review of the financials,

Operator

At this time, we'll conduct a question and answer session. Our first question comes from the line of Gary Prestopino from Barrington Research. Your line is open.

Speaker 4

Hey, good morning, everyone. Hi, Gary. Just want to go over Some of the puts and takes on your outlook in 2024. What you're basically saying is that the capital part of your business will be sluggish in the first half and then you're anticipating that to come back in the second half. Is that a good read Yes, sorry, Gary.

Speaker 1

No, yes, that's a good read. We expect capital activity to pick up here in the second quarter and be stronger in the back half.

Speaker 4

And what's driving that thought SSO or you're seeing any empirical evidence in terms of orders or anything that back half of the year we're going to see that pickup?

Speaker 2

Yes, I think there's a fairly strong kind of activity, quoting. These projects tend to be take a little longer to develop. And so there's a lot of back and forth between our engineers and our customers. And there's a fair amount of discussion that's going on. I would just say the time from quote to booking the order is a little longer than normal.

Speaker 2

And I think that's essentially because of the kind of the general economic uncertainties out there. People are really trying to guess when the Fed is going to start reducing rates. There's a lot of pent up demand in many of our markets and so our customers are trying to get ready for that. And it's really just bit of a guessing game on how quickly they pull the trigger to start making investments to get ready for what they expect to be an increase in demand. So fair amount of a lot of project activity, a lot of quoting, a lot going on.

Speaker 2

It's just that people are a little slower to actually book the order as they're trying to gauge kind of the pace of the recovery.

Speaker 4

Right. So as I look at your guidance, I mean the 2 acquisitions, I think What did they add about on an annualized basis $110,000,000 of sales? Is that about right, if you get a full year run rate?

Speaker 1

Yes. I think that's a decent marker, Gary. The caveat to that is I mentioned, The KWS transaction didn't close until 3 weeks into the Q1 here.

Speaker 4

Right. No, I understand that. And you can get puts and takes there. But I mean, if you add that number into what you actually did, we're looking at rather de minimis growth in sales this year and I just want to make sure I'm understanding this right that that's really more or less a function on the capital side of the business?

Speaker 1

Yes, yes. That's correct. Yes, organically, When we take out the $11,600,000 of FX in revenue, we'd be down about 2% in revenue organic. Okay.

Speaker 4

And I just wanted to just real quick sorry, go ahead, Jeff. I'm sorry.

Speaker 2

I was just going to say, the challenge we have and This is it's more challenging, obviously, the 1st of the year and kind of forecasting what's going to happen than as the quarters progress. But I would say this year, It's particularly challenging because there is a lot of uncertainty, right? Everybody is trying even the Fed from it seems like from week to week, their position on the economy changes. And so For us, as you know, Gary, we're a fairly conservative organization and certainly beginning the year, we try to be pretty cautious. And we're just trying to get a little to get better visibility on kind of the timing of some of this activity.

Speaker 2

It's just challenging when when you're coming out of a slower period.

Speaker 4

No, and I get that. I just wanted to make sure I was confirming it. And then just some of the other figures that you guys talked about, especially Mike, you said $18,000,000 to $18,500,000 of net interest expense for this year?

Speaker 1

Yes. Well, just interest expense, purely interest expense.

Speaker 4

Okay. So that's $18,000,000 to $18,500,000 of interest. And then you said D and A is going to run to $46,000,000 to $48,000,000 right?

Speaker 1

Yes, that's correct, Gary.

Speaker 4

And what was your CapEx this year? I didn't see that in And any of the releases or maybe I missed it. Did you mention that?

Speaker 1

Yes. One second. We're at essentially $32,000,000

Speaker 5

Okay. Thank you very much. Appreciate it. You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Kurt Yinger from D. A. Davidson.

Operator

Your line is open.

Speaker 3

Great. Thanks and good morning everyone. I just wanted to follow-up on one of the prior questions in terms of the Strengthening in the back half of the year. And is that a situation where you feel like you need to see improving capital equipment bookings over the next couple of quarters in order for that kind of sales improvement to materialize or based on the bookings activity that you've in Q4 and what you're expecting for Q1, any further improvements could actually be a source of upside to what you're Kind of assuming for the full year, how should we kind of think about those booking trends and what that means to the back half performance?

Speaker 1

Yes. You were right on your first assumption, Kurt. It really is predicated on us seeing strengthening in the capital bookings as we go forward.

Speaker 3

Okay, got it. And then one of kind of the bright spots this year I think has been parts and consumables and It's had a steady performance despite some choppiness in some of the end markets, containerboard being kind of a big one. I mean, We haven't yet seen a lot of those trends really improve very much. Is there any concern that that could catch up and start to weigh on parts and consumables going forward or do you expect the solid performance in 2023 sets you up pretty well for 2024 as well?

Speaker 2

It's interesting. When you think of our parts, of course, it's soothing. All of our businesses have it. But in particular, We're expecting a big recovery on the containerboard side this year. So they think containerboard was probably flat Last year, it was down for the first time demand, I'm talking about, was down for the first time in a very long time in 2022.

Speaker 2

But they're forecasting containerboard demand increased 4.3% this year, tissue to be up 4% this year and then even 25%, 3.8% for tissue and 3.7% for containerboard. So we're really expecting to see a recovery on that side of the business. And I would say also on the wood processing side, things have slowed down, of course, housing starts were, I think, about 1.46 last month, But permits were about 1.5, so we are starting to see some improvement there. And certainly if interest rates start to come down, There's tremendous pent up demand for housing and we have a lot of activity going on with our customers, a lot of discussions about projects. They're really trying to get ready for what they think will be a pretty robust improvement in the market demand once interest rates start to decline.

Speaker 2

So I think it's our beliefs that the parts business actually could continue to strengthen throughout the year assuming things go as most economists are currently forecasting.

Speaker 3

Right. Okay. And I guess sticking with the wood piece, I mean, there

Operator

was a

Speaker 3

lot of capacity added. And to your point, I think there's a lot of optimism that Demand is going to continue to improve, but at the same time some of that new capacity is being absorbed. I guess as you think about your capital equipment, how important is new greenfield facilities and new capacity versus just better utilization at existing facilities in terms of the overall kind of sales and demand picture for wood processing?

Speaker 2

Yes, I think there's both. And of course, because we're global and we have the extremely high market share globally, it varies. So if you look at North America, It may be more just upgrading tired equipment. The average age of a lot of equipment out there is pretty old. And so there's just upgrading.

Speaker 2

But then there's a lot of green new greenfields going on. In Asia, in particular, our stranding guys are very busy in Asia, A lot of projects, a lot of activity. We booked another order in China a few weeks ago. And then you've got the Russia, a lot of product came out of Russia and of course that's got to be replaced now. So we're seeing activity in Europe and in particularly Scandinavia area as they start to invest to offset the lost supply out of Russia.

Speaker 2

So the Woodside, it really depends on the region you're looking at. I would say the activity level right now is as high as it was before the pandemic for us, with all the tired equipment out there. And frankly, more and more, In particular, on the stranding side, more and more products using stranded material, that's held up extremely well for us and demand still looks quite good.

Speaker 1

Got it. Thanks for that, Jeff.

Speaker 3

And then just my last one, I guess, bigger picture, you're coming off 2 of kind of your strongest organic growth years in 2021 2022. This past year was still very solid as well. Where do you think your business is from kind of a cyclical standpoint entering 2024? And I guess is there anything that's changed in terms of how you think about the organic growth profile of the business longer term relative to what you've kind of outlined in the past?

Speaker 2

Well, we had as you know, we had tremendous organic growth from say kind of 2018, 2019 on. It was We were, I think, what, 7.5 percent? Yes. About 7.5 percent organic growth for several years, which is substantially higher than global GDP. So We would never budget and assume that was going to be the case say for the next 5 years.

Speaker 2

But I would tell you when I look at our 3 sectors, the material handling side, I think is in a good position. The money that's to be spent on both the infrastructure bill and the CHIPS Act is just starting to flow. And so we think that our material handling sector will benefit from that. The bailing side has been quite strong in Europe and in the U. S.

Speaker 2

From recycling standpoint. On the paper side, we just talked about the fact that operating rates from operating rates Really bottomed out, we think in 2023. Globally, running at about 79% is forecasted to get back into the mid-80s over the next couple of years. So we expect kind of some recovery growth in that market. And the flow control has always been very steady.

Speaker 2

It is a very stable steady business. The guys always do a great job in finding new end markets. Our biggest market, right, our biggest sector right now is our industrial sector. It's bigger than all of our others. So I mean there's a lot of industrial markets out there that we're taking our products to.

Speaker 2

So we think the next few years assuming that something doesn't happen, a Black Swan event doesn't happen. We think that growth actually should be pretty solid in the next few years. But we've got to see that start to materialize, I think, this year as the year progresses.

Speaker 1

Got it.

Speaker 5

Okay. Well, appreciate all the color guys. Thank you.

Speaker 1

You're welcome.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Larry De Maria from William Blair. Your line is open. Thanks.

Operator

Good morning, everybody.

Speaker 5

Hey, just a few quick sort of clarifications. I know it's not unusual to have a little bit bigger of a second half than first half. You give us kind of order of magnitude second half, first half? And secondly, maybe you could talk to the financial flexibilities You have after the recent deals and just the M and A pipeline if we're out of the market for a while or if it's still relatively healthy?

Speaker 1

On the split first half, second half, Larry, I'd say there's about a 5% delta there.

Speaker 2

And then on the I would say on the activity side, We're still quite busy. There's still our corporate development people, I think, have said that still a tremendous amount of deal flow out there. Our balance sheet, even though we took on a little bit of debt for these most recent acquisitions, our balance sheet is still pretty strong. We think we have good capacity left. So we're full speed ahead.

Speaker 2

We won't be slowing down even though we just did a couple of transactions. As you know, we're always looking for opportunities that are good strategic fits at a fair value And that can be challenging from time to time. But our corporate, we were very busy and we've got the capacity. And frankly, our current debt agreements were put in place when we were smaller. So if we needed to We up those at higher levels, we could easily do that and we'll do that, if needed as we go out and pursue opportunities.

Speaker 2

So we're full speed ahead on looking at opportunities.

Speaker 5

Okay, sounds good. Thanks. And then now shifting gears a little bit. I know you obviously talked about this a bit already, but curious about kind of the order expectations from here and how we've done so far. It's a little bit odd to talk about, I don't know, the strength in capital equipment store and it will get orders you're sure in 4Q and solid demand, but uncertainty keeping the outlook down seems overly conservative.

Speaker 5

So can you discuss why this isn't overly conservative Considering the comments and the print you just did, maybe what areas and markets are showing you the weakness and order expectations from here, which They could stay flattish or not.

Speaker 1

Yes, I would say, Gary.

Speaker 2

I pointed to Mike and said you can handle this one, Mike.

Speaker 1

The biggest thing that we're looking at is capital order flow and seeing that we get some traction and get some firmness That's the biggest thing that we're waiting to get some clarity on.

Speaker 2

Our guys are very busy. As I mentioned, project discussions and activities are actually pretty strong, but the time to close has lengthened, I think, as our customers are Again, trying to gauge how quickly rates come down and demand starts to pick up. And so because those discussions are taking longer than normal, It obviously introduces added degree of caution on our part.

Speaker 5

And anything on the order expectations from here and how we've done so far this year? I assume obviously capital has been slow.

Speaker 2

Yes. I mean, I think right now things are as expected. Right now, as we look through last week, demand is kind of on track with where we would expect it to be.

Speaker 5

Is it safe to say that given the comments in the pipeline and the time to close, it's a little longer, I think those Potential orders don't go away, right? They either hit in the second half or they get pushed out to next year. Is that fair to say?

Speaker 2

Yes. Yes. Ultimately, it's very, very Exactly. It's very, very seldom that a project gets canceled. We had one canceled, a big project canceled, I think back in 2022, I think it was, we had a project canceled.

Speaker 2

But it's very unusual for that. You're exactly right. They typically just get delayed. These big projects are quite lengthy from a board review standpoint anyway. And so once they get to that point, they normally don't disappear forever.

Speaker 2

It's just a question of timing on them. And so and that's what has introduced the level of caution that we have is we just don't know whether the timing is going to be Next quarter or Q3 or Q4, the customers just aren't quite sure yet.

Speaker 5

Okay, fair enough. Last quick question. Parts and consumables and flow and industrial process given the mothballing that we've seen, is it like does it matter if it's just around overall volume and Parts and consumables are more or less guided up whereas capital is guided down. Is that the fair way to think about it?

Speaker 2

Yes. I mean, what happens is, as you know, we operate in almost every paper in every paper mill in the world. I know some people get hung up when they hear about a closure And we never like to hear about closures, but I just mentioned overall demand is forecasted. If you look at total paper demand in 2024 globally, supposed to be up 3.3% and it grows every year. So what happens is they just shift that to other more efficient mills And we're there too.

Speaker 2

So we just pick the business up in 1 mill versus the other. And so we don't get nearly as hung up on a mill closure announcement here or there as long overall demand continues to grow, we're going to be there to get our fair share

Speaker 4

of that.

Speaker 5

Okay, very good. Thank you and good luck this year. Thank

Operator

you. Our next question will come from the line of Walter Liptak from Seaport Research. Your line is open.

Speaker 6

Hey, good morning guys and good end to your year.

Speaker 2

Thanks, Walt.

Speaker 6

I wanted to try one on the flow control bookings, the plus 8.4%, I wonder if you could just give us some incremental color. Was that parts related? Was that capital projects? Maybe regionally, where the orders were coming from?

Speaker 1

I'm looking for my schedule here

Operator

on that.

Speaker 1

It was really We had it was both in parts and capital, but capital and flow control was quite strong in the 4th quarter. Actually in December, we closed some nice projects. So I'd say that bookings beat was really led by capital and flow control.

Speaker 6

Okay, great. And is you think that's a start of a trend? Is there some follow through? Or people were drawing down inventory, I think, and being cautious into the end of the year. It sounds like this bucked the trend a little bit.

Speaker 1

Yes, it did, Walt, but I happen to know that we had our the projects that came through those capital projects, They were on our board for 2024. So the orders were a little bit early. Okay.

Speaker 6

Okay, thanks. That helps. And then I wonder, you kind of alluded to this in some of the other questions. Last year, this time you were getting that big 42 mile conveyor project in material handling. And That probably has already shipped now.

Speaker 6

That's probably already through your process. But I wonder if it sounds like you've got more in the funnel are some of these bigger material handling projects. Is that right?

Speaker 1

Well, on the large project that we booked in the Q1, Walt, you're correct. Most of that shipped of that $12,000,000 There's still I think about $2,000,000 to go. And A good chunk of that actually went in the 4th quarter, which is why you saw their revenue and Other metrics, margin and EBITDA were so good because we had excellent on the EBITDA front, we had excellent operating leverage there.

Speaker 6

Okay. That's great. And it sounds like you've got there's a potential for some more of these big conveyor projects in the funnel?

Speaker 2

Yes. That was the 2nd longest in the world. So we don't we wouldn't expect although there are discussions for projects, we wouldn't expect anything soon of that magnitude. That's a pretty rare project. But generally speaking, the group has been strengthening over over the last, I would say, year and a half.

Speaker 2

And the prospects, look good if housing picks up, certainly that's going to help them. The CHIPS Act is really a very large construction act, if you look at it. It's mainly building plants. So that's good for them as well as infrastructure. And then The recycling side, the baler business in the U.

Speaker 2

S. Continues to be very strong as well as Europe and other parts of the world. All other segments have, I think, have had nice steady demand and we expect that they'll They'll continue to be in good shape throughout this year.

Speaker 6

Okay, great. And maybe I'll try 1 or 2 on the eightytwenty. Congratulations with the profit improvement that you guys have been seeing. And I thought that you might be further along than 50% of the plants started. I wonder if you could just refresh us how many P and Ls do you have?

Speaker 6

How many P and Ls And half of it, half the P and Ls I guess have started, but how many P and Ls do you have? And for 2024, do you have more that will be starting the eightytwenty process?

Speaker 2

Yes. So we have around, I think about 24 kind of companies with P and Ls and I would say kind of half of them are in it. The thing that's impacting it now, which frankly is a little frustrating for us is that you really can't have an ERP project going on same time as eightytwenty because they're both So significant in scope and the resources they require. And so as it turns out, what's controlling our of our eightytwenty implementation now is companies that are either in or getting ready to start ERP projects. It just has Luck would have it.

Speaker 2

We've got companies that are end of life with the current ERP systems where we were forced to implement new ones and that really has delayed implementing eightytwenty in some of those businesses. And so that's been something we've been wrestling with, I would say, over the last kind of 18 months, trying to decide, okay, which ones can we delay the ERP project until eightytwenty is finished and which ones are we going to have to delay eightytwenty. And so That's really controlling some of the pace. The other thing, of course, is we continue to build up our internal team, the expertise, But it also has some limitations, just the available expertise to implement projects. So we still have I've been saying for some time, I think we still have probably another say 3 years to 4 years for this to run out and that's of course not including new acquisitions.

Speaker 2

Every time you acquire a new company, then you take on a new future project. And so we have a couple of new future projects, which we just added this year. So it will never stop, but I think we will, I think, in 3 to 4 years have almost all of our businesses that we currently have kind of coming out of the back end of the process.

Speaker 6

Okay, good. Okay, good. Maybe one last one for me, just switching gears to the pricing environment. And in 2020 I don't remember that there was ever any issues because of your niche markets with selling price, but are you taking up prices again? Are you still seeing inflation?

Speaker 2

Well, I would say that a lot of the inflationary pressures we've seen on raw materials have subsided, they've improved. I would also say that with demand down somewhat, customers are very reluctant to except big price increases. As we mentioned before, back in 2021, 2022, we were all just trying to get the materials from a supply chain standpoint to provide. And so it was more, can you get me something and what's it going to cost us to do it? That was the thing for us buying our raw materials.

Speaker 2

So things have stabilized there. And so I think we're returning back to a more normal environment from a pricing standpoint. And as you know, if you look at our improvement that we've made, it's almost all been on our SGA side. Our margins have held very steady, which is an indication of our pricing. So what we've really worked hard on is reducing are kind of our operating cost and that's really where we've gotten the improvement from is reducing our internal expenses.

Speaker 6

Okay, great. Okay, thank you.

Operator

Thank you. I'm not showing any further questions in the queue. I would now like to turn it back to Jeff Powell for any closing remarks.

Speaker 2

Thank you, Victor. So before wrapping up the call today, I just want to leave you with a few takeaways. 2023 was another record setting year for Cadent And our employees deserve a lot of credit for achieving these results. I want to thank all our employees around the world for their commitment to serving our customers' needs. I also want to welcome our newest employees from both Kenai and KWS Manufacturing.

Speaker 2

We're excited about the value you add to Kadant the opportunity to build upon the successes you have achieved. In 2024, we will continue to seek new opportunity to create value as we focus on meeting our customers' needs with innovative technologies and solutions that drive sustainable industrial processing. Lastly, our financial health is excellent and our market positions remain strong. We look forward to delivering exceptional value for all our stakeholders again in 2024. With that, I want to thank you for joining the call today.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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Earnings Conference Call
Kadant Q4 2023
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