Q4 2020 Kadant Inc Earnings Call
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[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q for 2020 Cadence Inc. Earnings Conference call. At this time of all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session. You wanted the press star one on your telephone please be advised.
For today's conference is being recorded if you require any further assistance. Please press star zero and I would now like the on the conference over to your speaker of today, Mike Mckenney Executive and Vice President and CFO. Thank you. Please go ahead Sir.
Thank you Gigi good morning, everyone and welcome to cadence fourth quarter and full year 2020 earnings call.
With me on the call today is Jeff Palmer, our President and Chief Executive Officer before we begin let me read our safe Harbor statement.
Various remarks that we may make today about cadence future plans and expectations financial and operating results and prospects are forward looking statements for purposes of the safe Harbor provision under the private Securities Litigation Reform Act of 1995.
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 the.
<unk> discussed under the heading risk factors and our and.
And report on form 10-K for the fiscal year ended December 28, 2019, 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 and 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is contained in our fourth quarter and full year earnings press release, and the slides presented on the webcast.
Cost and discussed and the conference call, which are available and the investors section of our website at www Dot Cade and dotcom for.
And finally I wanted to note debt 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 cadence business and future prospects following the remarks.
I'll give an overview of our financial results for the quarter and the year and we will then have for Q&A session. Jeff. Thanks, Mike Hello, everyone. Thank you for joining US. This morning to review, our fourth quarter and full year results and discuss our business outlook for 2021 on.
Begin by discussing our operational highlights and our fourth quarter financial results.
For the fourth quarter was a solid finish to a challenging year. Despite the uncertainties brought about by the pandemic, we had a solid execution during the quarter and generated strong cash flow, while safeguarding our employees.
<unk> capital project activity across all of our operating segments and robust demand for our parts and consumables led to record bookings and cash flow and the fourth quarter.
I'll provide more details about this activity when I discuss the results of our operating segments.
Our balance sheet remains healthy and our liquidity position has strengthened throughout the year robust cash flows have always been the strength of cadence and we expect this will continue as economies recover from the effects of the pandemic.
Yeah.
Turning now to our Q4 performance, we achieved a notable turnaround from the prior quarter's weak business levels.
Our Q4 bookings were a record $197 million.
The 23% compared to the prior year with our industrial processing segment driving this growth.
Strong demand led to a 9% sequential increase and parts of consumables revenue, which made up 67% of total Q4 revenue.
Total revenue was down 8% compared to the fourth quarter of 2019.
We were particularly pleased that our adjusted EBITDA margin increased to 19, 1% and.
And our free cash flow was up 7% to a record $38 million and the fourth quarter.
Overall, the quarter was better than expected and I'm pleased with how our employees delivered the solid operating results.
Well of 2019 was a record year on many fronts and we began 2020 with positive momentum.
No one could have anticipated the full impact the pandemic would have on the world and the global economies.
Full year revenue declined 10% to $635 million or of Bottomline performance benefited from a favorable product mix.
Along with cost containment measures the government assistance programs.
Cash flow from operations strengthened throughout the year and.
And free cash flow was near a record $85 million and for the full year 2020.
Our diluted EPS was $4 77.
And on an adjusted basis declined 7% to $5 compared to a record of $5.36 per share and 2019.
And workforce around the globe deserves a tremendous amount of credit for these results as the.
Adapted to the new way of work and performed exceptionally well under very challenging circumstances I'm extremely.
I'm proud of our talented and dedicated employees for the work being done and continue to do to serve our customers.
Next I'd like to review the performance of our three operating segments.
Our flow control segment benefited from a rebound and capital project activity and the fourth quarter, which led the bookings increasing nearly 9% compared to the prior year period.
Our quarterly bookings performance moved and the right direction as the year progressed and positions us well for a solid start to 2021.
Our parts and consumables revenue was up 5% sequentially and made up 68% of total Q4 revenue.
As many of you know our aftermarket parts of business has a more favorable margin profile compared to capital business and the product mix combined with improved operating leverage led to a 13% increase and adjusted EBITDA compared to Q4 of 2019 and represented 26% of revenue.
Looking ahead, we expect the first quarter of 2021 to show stability in terms of both capital project bookings and demand for parts and consumables.
We believe market conditions are improving and will continue to strengthen as the COVID-19 vaccine becomes more widely available and businesses are permitted to fully reopen.
Turning now to our industrial processing segment, we continued to experience strong demand for our wood processing equipment and also for our stock prep equipment with capital bookings in the segment more than doubling compared to the prior year.
This demand was largely driven by two factors one was a robust U S housing market, which saw single family homebuilding the largest share of the housing market increased 12% and December.
The other with the significant increase and our stock prep capital project activity, and China, and North America, which more than doubled compared to the prior year.
Revenue in the segment declined 13% to $69 million year over year, but increased 11% sequentially.
Parts and consumables revenue was up 12% compared to the same period last year and made up 70% of total revenue and the fourth quarter.
The favorable product mix and good execution led to a 250 basis point improvement and our adjusted EBITDA margin.
While the government assistance programs for significantly reduced and the fourth quarter. We did have some remaining benefit that helped to allow us to retain our talented workforce.
And our material handling segment, we continue to see relatively stable yet moderate order activity.
Revenue was down 7% of $39 million and parts of consumables revenue and the fourth quarter made up 58% of total revenue.
Capital bookings and our material handling segment increased 23% compared to the same period last year and were up 18% sequentially.
We are encouraged to see our customers showing increased confidence and the economic outlook by awarding us these larger capital orders.
And and all other segments, we are seeing increasing market activity looking ahead to 2021, we believe the segment will continue to strengthen throughout the year.
As we look ahead to the first quarter of 2021 and the full year. We are seeing signs of increased project activity and expect industrial production to continue its modest rebound.
On cash flows combined with the strengthening balance sheet have us well positioned to capitalize on opportunities that may emerge with the improving global economy.
While we are hopeful the worst of the pandemic is behind US there is still a great amount of uncertainty, particularly in Europe regarding how economies will respond to the pandemic given the unevenness and the vaccine distribution.
This uncertainty limits, our ability to forecast the timing of orders and as the result, we will not be providing guidance at this time.
I would like to pass the call over to Mike for a review of our Q4 performance.
Thank you Jeff.
I'll start with some key financial metrics from our fourth quarter.
Consolidated gross margins were 44, 1% and the fourth quarter of 2020 compared to 49% and the fourth quarter of 2019 up 320 basis points.
The increase was primarily due to higher gross margins on parts and consumables and the quarter.
And of higher percentage of parts and consumables.
Our overall percentage of parts and consumables revenue increased to 67% of total revenue and the fourth quarter of 2020 compared to 60% and the fourth quarter 2019.
Also contributing to the increase in gross margins was approximately 50 basis points due to the receipt of government assistance benefits related to the pandemic.
SG&A expenses.
We're 47 4 million and the fourth quarter 2020 down $2 million and the fourth quarter 2019.
SG&A expense as a percentage of revenue was 28, 1% and the fourth quarter of 2020 compared to 26, 1% and the fourth quarter of 2019.
And there was an unfavorable foreign currency translation effect, which increased SG&A expenses by $1 1 million.
And we received government assistant benefits of <unk> 4 million in the fourth quarter 2020.
Excluding these items, along with backlog amortization and the SG&A from our acquisition S.
SG&A expenses for the fourth quarter, 2020 were down $1 3 million or 3% compared to the fourth quarter 2019, primarily due to reduced travel related expenses.
Our GAAP diluted EPS was $1 40, and in the fourth quarter compared to 76, and the fourth quarter of 2019.
Our GAAP diluted EPS and the fourth quarter includes 12 cents from and intangible asset impairment charge.
<unk> <unk> of restructuring costs, and one set of acquired backlog amortization.
In addition, our fourth quarter results included pre tax income of $1 2 million or seven and net of tax attributable to government employee retention of assistance programs.
Our tax rate and the fourth quarter was 24% and included approximately 12 of tax benefits related to the following items.
A reversal of tax reserves associated with uncertain tax positions.
The exercise of previously awarded employee stock options.
And return to provision adjustments.
<unk> these items our tax rate would have been 27%.
For the full year 2020.
Gross margins increased 200 basis points to 43, 7% compared to 41, 7% and 2019.
Excluding the government assistance benefits, which contributed approximately 60 basis points to the 2020 gross margins.
And the amortization of profit and inventory in 2019.
<unk> margins were up 90 basis points, primarily due to higher gross profit margins on parts and consumables and a higher overall percentage of parts and consumables.
Our percentage of parts and consumables revenue increased to 66% and 2020 compared to 63% and 2019.
SG&A expenses decreased $10 6 million or 6% to $181 $9 million and 2020 compared to $192 $5 million and 2019.
As a percentage of revenue SG&A expenses were 28, 6% and 2020 compared to 27, 3% and 2019.
We had $6 million of SG&A from our acquisitions, and 2020 and incurred acquisition related cost of $1 million and $2 2 million in 2020 and 2019, respectively.
In addition, there were.
The favorable foreign currency translation effect of <unk> 4 million and we received government assistance benefit of $2 2.002 million 20.
Excluding SG&A from our acquisition acquisition related costs, the impact of foreign currency translation and government assistance benefits SG&A expenses were down $7 4 million or 4% compared to 2019, primarily due to a day quiche and travel related cost.
Cash.
Our GAAP diluted EPS in 2020 was $4 77.
Up 5% compared to $4 54 and 2019.
Our GAAP diluted EPS in 2020 includes 12.
From an intangible asset impairment charge of seven <unk> of restructuring costs and <unk> of acquired backlog amortization <unk> of acquisition costs.
And <unk> from a discrete tax benefit.
In addition, our 2020 results included pretax income of $6 1 million or <unk> 39, net of tax attributable to government employee retention and assistance programs.
And the fourth quarter of 2020.
Adjusted EBITDA was $32 1 million or 19, 1% of revenue compared to $32 2 million or 17, 6% of revenue and the fourth quarter 2019.
On a sequential basis, adjusted EBITDA increased 7% due to increased profitability and our material handling segment.
For the full year adjusted EBITDA was $115 9 million or 18, 3% of revenue compared to the record set in 2019 of $127 1 million.
Or 18% of revenue.
And the fourth quarter of 2020 opt.
Operating cash flow was a record $40 3 million and included a positive impact of $12 8 million from working capital.
Paired to operating cash flows of $39 2 million and the fourth quarter of 2019, which included a positive impact from working capital of $17 9 million.
For the full year operating cash flow was $92 9 million down 5% compared to the record of $97 $4 million and 2019.
And we had several notable non operating uses of cash and the fourth quarter of 2020.
We repaid $31 million of debt.
Paid $2 8 million dividend on our common stock and paid $2 2 million for capital expenditures.
For the full year, we repaid $72 million of our debt.
Free cash flow was a record $38 $1 million and the fourth quarter of 2020, increasing 69% sequentially and 7% compared to the fourth quarter of 2019.
For the full year free cash flow was $85 3 million down $2 2 million or 2% compared to the record of $87 $5 million and 2019.
Let me turn to our EPS results for the quarter.
And the fourth quarter 2020, GAAP diluted earnings per share was $1 40, and adjusted diluted EPS was $1 54.
And the 14th difference relates to and intangible asset impairment charge of 12 <unk>.
Restructuring costs of <unk> and amortization of acquired backlog of one times.
The <unk> intangible asset impairment charge is associated with our timber harvesting product line, which is part of our wood processing systems business.
This isn't the ancillary product line that was part of our acquisition of of NII FPGA Forest products business, and 2017 and represents less than one and a 5% of our consolidated revenues and 2020.
We experienced the decrease in demand for these products and 2019, which continued into 2020 due to several factors, including a general softening and demand for equipment used and steep slope logging.
Due to the reduced availability of timber higher stumpage fees and the resulting closure of some saw mills and Western Canada.
We evaluated the recoverability of the intangible asset related to this business, which resulted in a pretax impairment charge of $1 9 million and the fourth quarter, 2020, and $2 3 million and in the fourth quarter 2019.
After these impairment charges and the remaining intangible asset for this product line is <unk> 5 million.
And the fourth quarter of 2019, GAAP diluted earnings per share was <unk> 76 and.
And adjusted diluted EPS was $1 32.
The 56 difference relates to of 55 charge for the settlement of a pension plan and.
And intangible asset impairment charge of <unk> 16.
And restructuring costs of one channel, which were partially offset by a 16 tax benefit associated with the exercise of previously awarded employee stock options.
The increase of 22, and adjusted diluted EPS and the fourth quarter of 2020 compared to the fourth quarter of 2019 consists of the following.
'twenty, one due to higher gross margins.
15, and from a lower recurring tax rate.
Seven cents due to government assistance programs for <unk> due to lower interest expense <unk>.
Due to lower operating expenses and <unk> from the operating results of our acquisition.
These increases were partially offset by 29.
Due to lower revenue and <unk> <unk> due to higher weighted average shares outstanding.
Collectively included in the other categories I, just mentioned was a favorable foreign currency translation effect of three and the fourth quarter of 2020 compared to last year's fourth quarter due to the weakening of the U S dollar.
Now turning to our EPS results for the full year on slide 17.
We reported GAAP diluted earnings per share of $4 77.
And 2020, and our adjusted diluted EPS was $5 the.
The 23 difference relates to and intangible asset impairment charge of 12 <unk>.
Restructuring costs of <unk> seven.
Amortization of acquired backlog of <unk>.
The acquisition costs of <unk>, and a discrete tax benefit of <unk>.
We reported GAAP diluted earnings per share of $4 54, and 2019 and our adjusted diluted EPS was $5 36.
The adjusted diluted EPS excludes 55.
From a pension settlement charge of 32.
For the amortization of acquired profit and inventory and backlog and intangible asset impairment charge of 16 and acquisition costs of <unk>.
The <unk> of restructuring costs, and 29 of tax benefits from the exercise of previously awarded and employee stock options.
Decrease of 36 and adjusted diluted EPS from 2019 to 2020 consists of the following.
And of $1 87 from lower revenue.
And <unk> <unk> from higher weighted average shares outstanding.
These decreases were partially offset by 45 from lower operating expenses 39.
From government assistance programs 35, due to lower interest expense 33.
From higher gross margins.
The <unk> from the operating results of our acquisition and <unk>.
From a lower recurring tax rate.
Collectively included in all of the categories I, just mentioned was and unfavorable foreign currency translation effect of <unk> and 2020 compared to 2019.
Now, let's turn to our liquidity metrics starting on slide 18.
Cash conversion days measure calculated by taking days and receivables plus days and inventory and subtracting days and accounts payable was 125 at the end of the fourth quarter of 2020 down from $140 at the end of the third quarter of 2020, but up from 104 days and the fourth quarter 2019.
The increase and cash conversion days from the prior year was driven by a higher number of days and inventory and lower number of days and accounts payable due to a number of factors, including delays in capital project deliveries weakness and capital project activity and delays and maintenance spending by our customers.
As I have noted on past calls this year, our subsidiaries manage their inventory supply to ensure that critical components are available for our customers as needed and the timing of these purchases has been difficult to predict and the current environment.
Working capital as a percentage of revenue was 14, 2% and the fourth quarter of 2020 compared to 15, 6% and the third quarter 2020, and 12, 2% and the fourth quarter 2019.
Net debt that is debt less cash at the end of 2020 was $166 8 million compared to $232 8 million at the end of 2019.
We were able to lower our net debt by $66 million due to the excellent free cash flow generated in 2020.
Our interest expense decreased 42% or $5 4 million to $7 49.
And 2020 compared to $12 8.002 million 19, due to our ability to successfully leverage cash generated around the world to pay down debt and and.
And lower interest rates.
Our leverage ratio calculated as defined in our credit agreement was 161 at the end of the fourth quarter of 2020 down from 2.3, and the fourth quarter 2019, as we continued to make excellent progress on paying down debt.
Regarding guidance.
Our current environment continues to make forecasting difficult.
Given the current uncertainty we will not be providing formal guidance at this time for 2021.
We will reevaluate providing guidance as we progress through the year.
We are not providing guidance I would like to provide a few directional comments on our outlook for 2020.
We had a significant increase and demand for our parts and consumables and especially our capital products and the fourth quarter and we anticipate an overall increase in bookings and 2021.
We currently anticipate and overall increase in revenue of 9% to 12% with stronger performance and the second half of the year.
We anticipate the first quarter will be our weakest quarter and the fourth quarter will be our strongest.
I would caution here that this is predicated on the COVID-19, vaccination rollout of improving business conditions and the second half of 2021.
We also anticipate the mix will be weighted more towards capital in 2020.
Excluding the government assistance programs, our gross margins came in at 43, 1% and 2020.
For 2021, despite the heavier mix towards capital, we anticipate gross margins will be close to this level.
As a percentage of revenue, we anticipate SG&A will be approximately 27% to 28%.
While the percentage of R&D expense will be the same as 2020.
Overall, we expect minimal benefit from government assistance programs and 2021 compared to the 39, we received in 2020.
We expect our recurring tax rate will be approximately 27% to 28% and 2021 of.
Our recurring tax rate and the first quarter of 2021 may be lower and the remaining quarters as we anticipate receiving of tax benefit from the vesting of equity awards.
We anticipate.
Capex spending in 2021 will be approximately two percentage of revenue.
In addition, we expect depreciation and amortization will be approximately 30 to 31.002 million 21.
We hope these directional comments will help provide insight into how we see our current business environment.
That concludes my review of the financials and I will now turn the call back over to the operator for our Q&A session operator.
As a reminder to ask the question you will need the press star one on your telephone and withdraw your question press the pound King please standby, while we compile the Q&A roster.
Our first question comes from the line of John Brian Drab with Sidoti. Your line is now open.
Good morning, guys.
Thank you for the color.
I'd like to start industrial process.
Good morning.
Talk a little bit about it on a relative basis, maybe back to the 2018 timeframe when things are strong and the housing market and how it look.
Today on the comparative basis, and maybe the sustainability that youre hearing from the customer base on for the balance of the year.
Yeah. So.
As Youll recall, John 18 was a record year for us and.
And that segment and we really expected.
And as to quiet down a little bit of 19, and 20 as the industry's kind of absorbed all of the new.
The new equipment and the new capacity that they were.
And we're bringing online and of course of the pandemic really changed.
The.
The way, we look at our our homes and now they've become.
More than just the home and they become our workplace, our entertainment place of dining and everything else. So.
And obviously housing has been quite strong and our business has experienced.
Very very strong demand as the year progressed and I would say thats continued into the first several weeks of the new year here very strong and that market.
If you look at the what the experts are forecasting and it.
Additionally, the social shift associated with the pandemic. The millennials are really now starting to hit that age where they are buying homes and on the millennials of very very large group and so most of the experts predict that for the next several years I mean, there certainly will be I think some.
Some ups and downs, but assuming interest rates day at a reasonable level I think experts are predicting the next several years housing demand were very strong and the problem, we're really facing as a lack of lack of availability of lack of supply.
On land is hard to get in many parts of the country and frankly labor it's hard to get.
For building homes, So I think the big challenges is supply not demand.
Got it got it and.
And just the shifts a little bit.
We didn't make every day.
So a lot of talk a little bit about raw materials.
And how it could cause.
On the commodity side and looking for you and then maybe if you want to think about it also as far as the materials segments concern.
The outlook for that business finally kind of turned the corner with the better commodity environment and the data back and skip here.
Yes.
Broke up a little bit there, but I think you were asking about how our maybe our input cost to be and affected by commodities and our principle.
Bob.
Commodity that we buyer sheet steel.
Primarily stainless some carbon steel, but mainly sheep still and certainly that's gone up and price.
And if you look at that as a person.
Sales of our overall costs. So it's still not it's not huge.
And so we do implement price increases as need be to offset the cost of of our raw materials, but we manufacturer of very large percentage of the content that we supply is manufactured for.
We don't have a tremendous amount of buyouts and so.
The when we get and an increase and.
And the price of steel.
Of course, the pass it onto our customers and we typically do that.
I think I think the second question, maybe it was around the material handling segment, but I wasn't sure because you were breaking up all of it there, but yes that segment probably was impacted the most from the pandemic and that some of the our customers were not deemed as essential and so they were shut down and so that market I would say has been a little slower to two.
And to recover and certainly did not benefit from the pandemic the way many of the markets did.
That being said and.
Infrastructure needs are still obviously.
And there and Theres a lot of talk I know certainly with the New administration about the next stimulus Bill being a and then infrastructure Bill I think they met with the head of many of the labor unions actually yesterday and the President did.
Talk about the need for infrastructure. So we certainly built.
And believe and expect that there will be increased investment and infrastructure going forward along with of course, the the demand thats associated with the housing and increase and the us and we do think that the.
The market conditions will improve for that segment going forward.
Yep.
Thank you very much.
Thank you. Our next question comes from the line of Chris Howe from Barrington Research. Your line is now open.
Good morning, Jeff and Mike.
Alright, and correct Chris.
Good morning Zone.
And a great quarter from a free cash flow perspective, and grew the pandemic and this fiscal year.
And you were able to post adjusted EBITDA improvements over the prior fiscal year.
You mentioned some directional comments on outlook about Q4 being the strongest quarter.
As we get closer to that time, whether it's Q4 or another quarter can you talk about.
Your.
Expectations for margin improvement as revenues and the top line increase back towards normal and better than normal level.
Yes, Chris.
Chris I think.
Our expectation is is as we get growth and the top line, we're going to be are going to be able to leverage our operating costs, specifically SG&A better and that will contribute to improving EBITDA margins.
Okay.
On that day topic, if we look at the different segments.
Adjusted EBITDA for material handling came in at 18, 3% most heavily impacted by the pandemic I would assume on the.
As the infrastructure spending gets underway.
Sure of the dynamics or the certainty of how that will impact the segment, but it should be of benefit Nonetheless.
And the pandemic being put behind US I would assume there is some opportunity for segments specific margin accretion and material handling.
Yes, we would agree with net correct.
Okay.
And then lastly for.
Perhaps and update you mentioned stock prep capital equipment orders in China are going well.
Can you comment on.
Outside of China, and as it relates to your.
Our debt our dialogue our historical dialogue as it relates to the fiber shortage in that region and the current update on that would be helpful.
Sure. So I think obviously everybody's aware now that as of the first of the year. The import ban is in place. So there is no wastepaper being imported into China and so for the last few years.
Ben.
Working on other.
The supply options.
Including <unk>.
Processing, the waste paper and countries in southeast Asia, as well as processing and in the United States and bringing it in and they are also starting to make some investments and actually Virgin pulp mills in China to provide some some fiber there and I would say all three of those are still occurring and I don't think that they have yet sorted out.
And I think it is going to be a combination of all three and they are not sorted out which one will will emerge as the leader.
And as we've discussed before the southeast Asia countries are asking the same questions of China did why why would we want to bring all of that waste into our country and have you do mineral processing and ship the pulp to to mainland China and so.
I think they are continuing to negotiate and to evaluate.
And those countries of options there are companies and the us that are building.
All of these to process the waste paper and centered on the fiber to China and <unk>.
And to the Chinese companies of our Chinese customers actually making the investments here.
I think I've mentioned before that our customers have found our Chinese customers of found doing business and the U S is quite different from China and in the form of regulations and cost and timing to get things done. So they haven't been real pleased with that which is and some cases ordered some of their plans and theyre looking for some other alternatives. So it's one of these things.
They are still I think.
Ceremony with a lot of different sources to get the fiber in some cases are importing.
Fiber and other cases are actually importing.
Gainer Board. So it is still unclear and I think it will be I think I mentioned last year that we thought it would take a few years.
Really stabilize and I think that's probably still the case.
Thank you Scott and Michael upwards in the queue.
To give others the channel.
Thank you as a reminder to ask a question and you will need the press star one on your telephone to withdraw your question press the pound key.
Our next question comes from the line of work linger from D. A Davidson your line is now open.
Yes, great Thanks, and good morning, everyone.
Hi, Kurt.
I just wanted to start off on the strength and capital equipment bookings I mean, realizing it's impossible to quantify how do you think about the Q4 result in terms of pent up demand after a challenging year and as we look into the first part of 2021 I mean it sounds.
The markets are generally improving and activity is increasing.
Should we be looking at sequential improvements off the high watermark here in Q4, maybe year over year growth.
In terms of I guess registering that improvement.
Curt I would say we are definitely looking at year over year growth on.
And not sequential.
That was the fourth quarter was a record for us.
And number of large orders that we booked but we did see also very good kind of I would say base level of capital business starting to return.
I don't think we will see sequential improvement, but we are expecting year over year improvement.
And remember we announced a couple of quite large orders.
And that don't happen every quarter.
So I think that.
And we'll see those on occasion, but they won't be every every quarter and that's really helped the the Q4 was two very large projects.
Alright, great, Okay that makes sense and turning to the revenue outlook could you just talk a little bit about the underlying assumptions there in terms of growth and parts versus capital equipment.
And whether theres any.
FX tailwind is assumed in that 9% to 12% range.
Yes.
Yes.
And as you saw from what we've reported and probably many of the dollar weakened through 2020.
So we've factored that into our outlook for 2021, so I think that will be of tailwind.
And for Us.
And in regards to the.
The parts and capital I think.
And we're looking at really more capital strength, we actually the parts and consumables business was quite good for us and.
In 2019, so I think thats kind of.
And our excuse me 2000 2020 day.
So I think the growth on that will be lower it's really going to be and the.
Capital business, we will see the higher growth range.
Okay got it that's helpful.
And.
Obviously had the benefit from a higher proportion of parts revenue on the gross margin front, but you also talked about improving gross margins on that parts business and I was wondering what was really driving that.
And whether that was something that you could kind of of the sustained going forward.
Uh huh.
I do think those margins achieved on the parts and consumables are sustainable.
And.
The increase.
And it really has been driven by.
Price increases and product mix within the parts and consumable revenue.
The revenue stream.
Okay.
Also I think you remember we have a couple of internal initiatives going on and that we're trying to use to drive.
Drive of our cost down everywhere, so we improve our margin and our businesses.
And as we continue to roll out of programs and implement them and and additional divisions, we start to see some some some pick up on that.
Got it alright, and last one for me.
Touched on it a bit and the segment commentary, but I was hoping you could maybe walk us through and and.
Maybe you could rank from end market and geographic perspective of where youre seeing the most strength versus <unk>.
Activity is still subdued or youre, not seeing that same type of sequential improvement.
Well I think without question right now the.
The wood processing side and.
And the North America as well as Europe is really strong almost of it back at historic levels of or in some cases, maybe exceeding the historic levels.
And that's that's clearly are I would say our strongest piece.
We had nice growth really in all geographic areas and the fourth quarter.
And so we were sequentially as well as the year on year in many cases. So we were we were quite pleased with that.
So it's not one really doesn't stand out I think they are all improving with the with the.
The notable exception being that the the.
On the wood processing piece and in particular, I think supporting the North American housing market is really yet.
Getting back to and like I said historic levels.
A bit of a bit of a surprise I think to everybody and that's one of the reason that lumber prices are right now at record high So I think the.
And the forest products companies Didnt.
And we're unable to forecast this demand either and so and they really didn't have the.
They didn't really have the production.
Ready to meet this demand and so they are trying to play catch up now and bringing mills back up adding shifts hiring people to try to meet the demand.
And these record price is really I don't think for sustainable for that long.
And quite high.
And so we expect that we'll see.
More capacity being brought online two and.
With that Youll see price is probably start to moderate a little bit more although still probably remain at very strong levels, but the.
The housing one of every every business I think.
And it's been improving through the course of the year, but the wood.
The process of really stands out.
Got it alright, great I appreciate all the color and good luck here on Q1 guys.
Thank you.
Thank you. Our next question comes from the line of Walt Liptak from Seaport. Your line is now open.
Hi, Thanks, Good morning, guys.
Right.
And wanted to do a follow on on the last one about the.
And the strong housing market and wood process the.
Do you have a read on what amount of the capacities being added.
In 2021 and is there a funnel of projects.
Still are going to come up during this year.
Yes, I think.
And Theres still some idle few idle.
And what is out there.
We believe.
And we'll probably come online.
Some of them, we can't disclose what's going on but we do believe that there is some idle capacity will come online and we also believe there is the potential for actually some for some new for some new mills.
Sales to come on line on the on the.
On the lumber side dimensional lumber side Theres, a lot of fair amount of capacity Thats been ordered over the last few years and that is coming online and will continue to come online.
And on the OSB side.
And there hasnt been as many new.
The sites.
No.
Planned are brought online in the last couple of years, but OSB is at record levels right now and so I think whatever idle capacity is left out there. We think there's a good chance you'll see that start to come back online and.
And even possibly some some new facilities.
The demand kind of continues at the current level.
So we do expect to see that.
Some.
The additional capacity come on line.
Okay great.
In the.
On the other parts of the process.
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The OCC and paperboard prices are up.
In 2021 is there new capacity thats in the funnel or is it still too early for capacity need to get the added there.
Well in China, we are remember, we announced the big order and.
The fourth quarter were still surprised.
And how many projects and our and the discussion stages and China.
Just never cease to amaze us with the ability to bring more and more capacity on line and absorb it.
And then there's talk about some more conversions and North America. There is no question that the the pandemic and the the gross at the at home markets.
Yes.
Have they benefited and and grown quite a bit the retail is.
And that gross has accelerated this year and experts are forecasting is that something that will probably remain after the pandemic.
No.
Goes away so there's there's definitely.
The demand for packaging and.
And discussions about more conversions coming on.
Online to meet that demand.
Okay. Okay, great. Thank you.
Thank you. Our next question comes from the line of Bill Hyler from W. D. H capital. Your line is now open.
Yes, hi, good morning, everybody.
Good morning and building.
Yes also congrats for making that Newsweek responsible company lift for ESG performance and 2021 I thought that was good.
And we're actually quite we didn't discuss that today, but we got a couple of sustainability awards and the last the.
The last couple of months that we're quite pleased with the people are.
And the industry is starting to recognize kind of what we do and our focus yes.
Yes definitely.
Okay, great interest in the fourth quarter I know you addressed the strong the capital bookings, but I was hoping you can get a little more color on that.
$197 million, which I assume is a record.
For the company historically and.
It looks like 39% of $77 million.
Came from capital projects.
And that's important because of that fuels your parts and consumables growth long term. So it's a great thing to C could you provide any.
Regional color on the bookings it looks like a lot of the came from the industrial processing business, which I guess is mostly recycled paper and paperboard timber was there any specific areas of strength that you can.
Highlight.
Well I would say you're right bill.
The.
And the largest component of that of $1 97, and the growth.
And industrial processing and we had two.
And two product families and that of both of those product families were very strong.
Stock prep being the.
And the stronger the two in the fourth quarter and then wood also being a very strong for for capital bookings and stock for stock prep and our paper recycling piece.
And.
And then I would say.
Had good activity and our.
And our our flow control business also.
That was really predominantly driven on the parts and consumable side.
Okay.
Alrighty and.
And maybe one follow up on the different topic with the.
The balance sheet strength youre seeing in the last few years free cash flow growing maybe a little commentary on what the potential.
The acquisition market looks like out there I know multiples of very high or had been very high and it's always an issue but.
How is the at least the flow of are you guys seeing potential opportunities out there that the Alicia of investigating.
Yes, I would say our business development group that spends most of their time focusing on that.
Right now theyre, telling us that activity level of probably has the highest it's been in and recent memory. So as you would expect there is there was kind of essentially very little deal.
The transactions that occurred last year, so you've got the kind of that backlog, if you will and it didn't.
In addition to companies wanting disrupt the balance sheet and the company is just kind of refocusing the strategies and yes the deal activity level.
Very very strong right now.
And as you pointed out the challenge is always to find one that first fits our strategic.
Criteria, it's a good fit for cadence and then also one that we think is properly valued and so that's always the the ultimate the ultimate challenge, we have and looking at opportunities, but the the number of opportunities out there that we're looking at is that of very very high levels. Okay. Okay. I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Bobby Eubank from Savi. Your line is now open.
Morning, guys and congrats on a on a strong quarter, you mentioned kind of discussion around kind of bookings and I think the word discussion with clients or customers that came up several times, how would you characterize the momentum of bookings continue continuing into Q1 and kind of converting some of those discussions and to actual bookings. Thanks.
And I'll tell you.
Well you know.
Bobby on the fourth quarter.
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As we were happy to.
Reported at this point going into the first quarter debt.
We continue.
<unk> continued to see good strength and the order flow front.
Again, as we discussed earlier, we don't think sequentially, we're going to be up because we had some very large projects that don't tend to reoccur quarter to quarter, but we have seen very good activity and the first quarter thus far.
That's great and if I can follow up on on bills question on the M&A market and sorry.
Any particular segment that you would see more likely to see activity in 2021 and kind of converting some of the the things that you've been looking at for the last couple of years and actually signed contracts thanks and congrats.
So we tend to look at acquisitions and all three of our operating segments and I would say, we as we've said any given time, we might be having some type of discussions with a couple of hundred companies out there and that very quickly narrows down to to a select group that we think are a good strategic fit for us and that might be available.
I would say, we're looking at and normally are looking at opportunities and all three of our core segments. So.
Some of our some of our for instance, and our wood processing side, we have extremely high market share our businesses there have anywhere from 70% to 90% market share and so just by pure math you have fewer opportunities. There then you would say that wouldn't say the material handling sector, where maybe we've got 40% to 60% market share.
The numbers vary depending on house.
Kind of what the remaining competition looks like.
But that being said, we normally are looking at opportunities and all three of our core segments.
Thank you at this time on I'm showing no further questions I would like to turn the call back over to Jeff Powell, President and CEO for closing remarks.
Thank you.
Before wrapping up the call today I wanted to just to leave you with a few takeaways.
First of the health and wellbeing of our employees was our top priority and in 2020 and it will continue to be our top priority as we work through the pandemic.
As we look ahead beyond the immediate health crisis, we will focus on meeting our customers' needs as we seek to accelerate revenue growth and our core markets.
Our financial health is excellent and our liquidity position is stronger today than it was when the crisis began with the debt leverage ratio now at 161.
Our ability to generate strong free cash flow remains the cornerstone of our business model and.
And we expect of continuing to reopening of the economies around the world and look forward to a stronger 2021.
With that we want to thank you for joining us today and please stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Great.
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