Q4 2021 Kadant Inc Earnings Call
[music].
Thank you for standing by and welcome to the fourth quarter in 2021 kidney Inc.
Earnings Conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program may be recorded I would now like to introduce your host for today's program, Michael Mckenney Executive Vice.
President and Chief Financial Officer. Please go ahead.
Thank you Jonathan good morning, everyone and welcome to cadence fourth quarter and full year 2021 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 cadence 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 1095.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our annual report on Form 10-K for the fiscal year.
Ended January <unk> 2021, 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 a.
A reconciliation of the non-GAAP financial measures to most directly comparable GAAP measures is contained in our fourth quarter earnings press release and slides presented on the webcast and discussed in the conference call, which are available in the investors section of our website at Www Dot Cadent Dot 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.
Now I'll turn the call over to Jeff Powell.
To give you an update on cadence business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and we will then have a 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 2020.
Two.
The fourth quarter was a solid finish to an exceptional year. Despite the uncertainties brought about by the pandemic supply chain constraints and macroeconomic headwinds, we had another well executed quarter and generated record cash flow among several other financial records.
Good capital project activity across all of our operating segments and robust aftermarket demand that the strong bookings and record backlog.
I'll provide more details about this activity when I discuss the results of our operating segments.
Our balance sheet remains healthy and we finished the year well positioned to capitalize on new opportunities as they develop.
As many of you know our technologies play a pivotal role in helping our customers advance our sustainability initiatives with product innovations that reduce waste generate more yield with fewer inputs, particularly fiber energy and water.
Is what we refer to as sustainable industrial processing, producing more while consuming less and it is a major element of our strategic focus and value proposition.
At the end of 2021, we were honored to be named by Newsweek magazine.
As one of America's most responsible companies for a second consecutive year.
We were also selected as the winner of the 2021 steel business Sustainability award and the environmental initiatives category.
It's rewarding to be recognized for our sustainability efforts and work towards driving sustainable industrial processes.
Turning now to slide six and our Q4 financial performance you can see we had significant increases across all our key financial metrics and achieved new records in essentially every metrics shown in this slide.
Q4 revenue was up 30% compared to the fourth quarter of 2020 to a record $219 million.
Excluding acquisitions and the favorable impact of FX.
Revenue was up 18% compared to the same period last year.
Our aftermarket parts revenue was up 22% to a record $137 million.
Improved operating performance drove our adjusted EBITDA margin to 25%, which contributed to our record operating cash flow of $61 million in Q4.
All of our operating segments delivered excellent adjusted EBITDA margin performance, despite the continuing inflationary pressures material and ongoing supply chain constraints.
Our Q4, GAAP EPS and adjusted EPS were up 48% and 50% respectively.
Our record quarterly earnings performance contributed to an exceptional full year performance, which I'll review next slide seven.
Yes.
Our strong economic momentum at the beginning of the year continued throughout 2021.
While the challenge has shifted from primarily pandemic focused issues to supply chain labor availability and inflation.
We experienced solid demand from our customers and address general feeling of increasing optimism most regions of the world.
Full year four year record full year revenue increased 24% to a record $787 million, while our net income reached a new record at $84 million up 52% compared to the prior year.
As a result, adjusted diluted EPS increased to $7 83.
Exceeding the prior record set in 2019.
$5 36 per share.
As many of you will recall, we had an adjusted EBITDA margin goal of 20% at our Investor Day event in March 2019.
At that time, our adjusted EBITDA margin was around 18%.
Pleased to say we achieved this in 2021 with our full year adjusted EBITDA margin a record 23%.
This contributed to our record operating cash flow of $162 million free cash flow of $150 million.
Our workforce around the globe deserves tremendous credit for these results as they performed exceptionally well under challenging circumstances.
I am 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 three operating segments.
Our flow control segment continued its upward revenue trend with solid contributions from our recent acquisition revenue increased 30% to a record $78 million in the fourth quarter aftermarket parts revenue made up 74% of total revenue.
Organic revenue, which excludes acquisitions and FX increased 8% compared to the same period last year.
Our integration of <unk> business, which we acquired in the third quarter of 2021 is going as planned.
Their operating margins are currently lower than our other flow control companies.
Management is implementing margin improvement initiatives outlined at the time of the acquisition.
This includes among other items, our 80 20 initiatives, which we have launched at a number of our businesses across the operating segments. We are excited about the contributions. This acquisition is expected to make in the coming years.
Looking ahead, we expect the first half of 2022 showed solid demand for both capital and aftermarket parts.
We believe the fundamental drivers of our end markets remained strong.
Business activity continues to be influenced by challenges in the supply chain around as well.
Yes.
Turning now to our industrial processing segment, we continued to experience strong demand for our wood processing equipment, both for capital and parts.
Our reported bookings were $95 million, which included a booking reversal of $10 million associated with the stock preparation capital project that was booked in the third quarter.
The project has recently been put on hold in May not occur in 2022, So we thought it prudent to remove it from our current backlog.
New orders for Q4 were $105 million as our customers continue to add capacity.
And upgrading their operations.
Revenue in this segment increased 38% to $95 million year over year, the capital business driving the surge.
<unk> revenue was up 9% compared to the same period last year and made up 56% of total revenue in the fourth quarter.
Improved operating leverage and good execution led to a 270 basis point improvement in our adjusted EBITDA margin.
Looking ahead to 2022, we expect capital project activity to moderate as many of the new wood processing systems are or will be fully operational this year.
<unk> said, we expect this segment to continue to be active in terms of new projects and demand for aftermarket parts.
Yeah.
And our material handling segment, we achieved solid gains in our profitability. Despite the dramatic increases in steel costs and the unpredictability in the supply chain.
Demand for our high performance pillars was very strong as municipalities box plants and distribution centers continued to invest in their facilities or.
Our recent acquisition in this segment Bill Master significantly contributed to our fourth quarter results.
Revenue increased 15% to $45 million parts revenue in the fourth quarter made up 59% of total revenue.
Excluding our acquisition and FX Q4 revenue was flat due to lower capital revenue compared to a relatively strong prior year quarter.
Bookings in our material handling segment increased 31% to a record $52 million while.
This increase benefited from our recent acquisition organic bookings were up 12% with solid parts demand and capital project activity expected to continue.
Looking ahead to 2022, we believe this segment will strengthen as the year progresses and capital projects are executed.
<unk> and bulk material handling where we are already experiencing increased business activity associated with the U S infrastructure spending plans.
As we look ahead to the first quarter of 2022 and the full year ongoing project activity is healthy and we expect industrial production to maintain this momentum.
However, supply chain challenges and policy responses to inflationary pressure to introduce some uncertainty in the latter half of the year.
Our record backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds and we expect to deliver record financial performance again this year.
I'd like to pass the call over to Mike now for review of our financial performance and our outlook for 2022.
Thank you Jeff.
I'll start with some key financial metrics from our fourth quarter, which included some notable records.
Yes.
Consolidated gross margins were 42, 4% in the fourth quarter of 2021 compared to 44, 1% in the fourth quarter of 2020 down 170 basis points.
Our consolidated gross margins in the fourth quarter of 2021 were negatively affected by the amortization of acquired profit and inventory related to the clues and bandmaster acquisitions, which lowered consolidated gross margins by 90 basis points.
In the fourth quarter of 2020 government assistance benefits increased consolidated gross margins by 50 basis points.
Excluding the impact from both of these items consolidated gross margins were down 30 basis points due to a higher mix of capital revenue.
Our overall percentage of parts and consumables revenue decreased to 63% of total revenue in the fourth quarter 2021, compared to 67% in the fourth quarter of 2020 due to a significantly higher capital revenue at our industrial processing segment.
SG&A expenses were $57 8 million in the fourth quarter of 2021 and increased an increase of $10 4 million compared to 47.
$4 million in the fourth quarter of 2020.
Fourth quarter of 2021, SG&A includes $6 4 million in SG&A from our acquisitions and an increase of $1 5 million in acquisition related cost.
Which totaled $1 7 million in the fourth quarter 2021, compared to <unk> 2 million in the prior year.
The remaining increase in SG&A expense is primarily associated with increased incentive compensation due to improved business conditions.
As a percentage of revenue SG&A expenses decreased to 26, 4% in the fourth quarter of 2021 compared to 28, 1%.
In the prior year period.
For the first time in our history, our quarterly GAAP diluted EPS exceeded $2, reaching $2 seven in the fourth quarter 2021, compared to $1 40 in the fourth quarter of 2020.
Our GAAP diluted EPS in the fourth quarter include 23 and acquisition related costs.
<unk> <unk> of restructuring costs, a four discrete tax benefit and a <unk> <unk> gain on the sale of the building.
23, and acquisition related costs includes 13th of amortization of acquired profit and inventory for.
<unk> of backlog amortization, and <unk> <unk> of acquisition costs.
The amortization of acquired profit inventory related to the 2021 acquisitions has been completed and there is $1 7 million or <unk> <unk> of backlog amortization remaining which will turn in 2022.
The <unk> and restructuring costs.
<unk>, an asset impairment charge and other costs associated with the consolidation of our ceramic blade manufacturing in Europe into our recently acquired <unk> business.
Tax rate in the fourth quarter was 19, 5% and included approximately <unk> <unk> of tax benefits.
Related to a reversal of tax reserves associated with uncertain tax positions and the exercise of previously awarded employee stock options. Excluding these items our tax rate would have been 25, 9%.
For the full year 2021, gross margins were 42, 9% compared to 43, 7% in 2020.
Excluding the amortization of profit in inventory, which reduced 2021 gross margins by 50 basis points and.
And government assistance benefits in both periods gross margins were up 20 basis points to 43, 3% compared to 43, 1%.
Our percentage of parts and consumables revenue was 65% in 2021 compared to 66% in 2020.
SG&A expenses were $208 8 million in 2021, an increase of $26 9 million or 15% compared to $181 9 million in 2020.
As a percentage of revenue SG&A expenses decreased to 26, 5% in 2021 compared to 28, 6% in 2020.
We had $9 7 million of SG&A from our acquisitions in 2021 and incurred acquisition related costs of $5 million and $1 million in 2021 and 2020, respectively.
In addition, there was an unfavorable foreign currency translation effect of $5 1 million in 2021.
And we had a reduction in government assistance benefits of <unk> 8 million.
Excluding all these items SG&A expenses were up $7 3 million or 4% compared to 2020, primarily due to an increase in incentive compensation.
Our GAAP diluted EPS was a record $7 21, and 2021 up 51% compared to $4 77 in 2020.
Our GAAP diluted EPS in 2021 includes 60 and acquisition related costs <unk>.
<unk> <unk> of restructuring costs, a <unk> <unk> benefit from discrete tax items and a <unk> <unk> gain on sale of the building.
In addition.
Our 2021 results included pretax income of $2 4 million or 16 net of tax attributable to government employee retention assistance programs related to the pandemic compared to pretax income of $6 1 million or <unk> 39.
Net of tax in 2020.
In the fourth quarter of 2021, adjusted EBITDA increased 39% to a record $44 8 million or 25% of revenue compared to $32 1 million or 19, 1% of revenue in the fourth quarter of 2020 due to strong performance.
In our industrial processing segment led by our wood processing product line for.
For the full year adjusted EBITDA was a record $159 4 million or 23% of revenue compared to 2020, adjusted EBITDA of $115 9 million or 18, 3% of revenue.
Our operating and free cash flow performance was exceptional and demonstrates our continued strength in generating excellent cash flows from operations around the world.
Operating cash flows was a record $61 million in the fourth quarter of 2021 far exceeding our prior quarterly record of $44 4 million.
For the full year operating cash flow was a record 162.
$4 million up 75% from 2020 and up 67% compared to our prior record set in 2019.
Free cash flow was $55 9 million in the fourth quarter of 2021.
Increasing 47% compared to the fourth quarter of 2020.
For the full year free cash flow was $149 6 million up 75% from 2020, and 71% compared to our prior record set in 2019 of $87 5 million.
We had several notable non operating uses of cash in the fourth quarter of 2021.
We repaid $42 5 million of debt.
Paid $5 1 million for capital expenditures and paid a $2 9 million dollar dividend on our common stock.
We also paid $2 9 million for the acquisition of a small stock preparation manufacturer in India.
For the full year, we paid $144 million for acquisitions.
Net of cash acquired and repaid $104 million of our debt.
Let me turn to our EPS results for the quarter.
In the fourth quarter 2021, GAAP diluted earnings per share was $2 seven.
And adjusted diluted EPS was $2 31.
In the fourth quarter of 2020, GAAP diluted earnings per share was $1 40.
And adjusted diluted EPS was $1 54.
The 14th difference.
Relates to an intangible asset impairment charge of 12.
Restructuring costs of <unk> and amortization of acquired backlog of <unk>.
The increase of <unk> 77, and adjusted diluted EPS in the fourth quarter 2021 compared to the fourth quarter of 2020 consists of the following.
91, <unk> due to higher revenue 11 from acquisitions and <unk> due to lower interest expense.
These increases were partially offset by <unk> 13, due to higher operating expenses <unk>.
Due to government assistance programs received in the prior year.
<unk> due to lower gross margins to.
Due to higher weighted average shares outstanding and <unk> <unk> due to a lower recurring tax rate.
Collectively included in all the categories I, just mentioned was a favorable foreign currency translation effect of <unk> in the fourth quarter of 2021 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 $7 21, and 2021 and our adjusted diluted EPS was $7 83.
We reported GAAP diluted earnings per share of $4 77 from 2020, and our adjusted diluted EPS was $5.
The <unk> <unk> difference relates to an intangible asset impairment charge of 12.
Restructuring costs of <unk> <unk>.
Amortization of acquired backlog of <unk>.
Acquisition costs of <unk>, and a discrete tax benefit of <unk>.
The increase of $2 83, and adjusted diluted EPS from 2020 to 2021 consists of the following.
$3 33 from higher revenue 23 from lower interest expense 21 from.
From the operating results of our acquisitions 12.
From higher gross margins and <unk>.
From a lower recurring tax rate.
These increases were partially offset by 78 from higher operating expenses 23 from a reduction in benefits from government assistance programs six.
Due to higher weighted average shares outstanding and <unk> <unk> from higher Noncontrolling interest expense.
Collectively included in all the categories I, just mentioned was a favorable foreign currency translation effect of 33 in 2021 compared to 2020.
Now, let's turn to our liquidity metrics starting on slide 18.
Cash conversion days measure calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 106 at the end of the fourth quarter of 2021.
From 113 at the end of the third quarter of 2021, and 125 days at the end of 2020.
The decrease in cash conversion days from the prior year was principally driven by a higher number of days and accounts payable.
Yes.
Working capital as a percentage of revenue decreased to nine 4% in the fourth quarter of 2021 compared to 13, 5% in the third quarter of 2021, and 2014, 2% in the fourth quarter of 2020.
Net debt that is debt less cash at the end of 2021 was $175 4 million a decrease of $55 million sequentially and compares to a $166 8 million at the end of 2020.
Our interest expense decreased 35% or $2 6 million to $4 8 million in 2021 compared to $7 4 million in 2020.
Our leverage ratio calculated as defined in our credit agreement was 134 at the end of the fourth quarter of 2021 down from 161 in the fourth quarter of 2020.
Quite an accomplishment given that we paid $144 million net of cash acquired for acquisitions in 2021.
Yes.
Now I'll review our guidance for 2022.
Yes.
Our revenue guidance for the first quarter of 2022.
Is $212 million to $217 million and our adjusted diluted EPS guidance for the first quarter is $2 to $2 10.
This excludes <unk> from the amortization of acquired backlog.
For the full year, our revenue guidance is $870 to $890 million and our adjusted diluted EPS guidance for the full year is $8 55 to $8 75, and excludes <unk> from the amortization of acquired backlog.
Should caution here that there could be some choppiness and variability in our quarterly results.
Due to several factors, including the variability of order flow.
And the timing of capital shipments.
In addition, other risks that could impact our guidance include supply chain challenges strengthening of the U S dollar geopolitical tensions.
And China's zero Covid policy.
The 2022 guidance includes an unfavorable foreign currency translation impact of approximately $12 million on revenue and 15 on adjusted diluted EPS due to the strengthening of the U S dollar.
Excluding the amortization of profit in inventory and the benefit from government assistance programs. Our gross margins came in at 43, 3% in 2021 and.
And we anticipate gross margins for 2022 will be close to this level at 43 to 43, 5%.
As a percentage of revenue, we anticipate SG&A will be approximately 25% to 25, 5% and.
R&D expense will be approximately one 5% of revenue in 2022.
We anticipate net interest expense of approximately five five to $5 8 million.
And we expect our recurring tax rate will be approximately 28% in 2022.
Our recurring tax rate in the first quarter 'twenty, two maybe a little lower in the remaining quarters, which we anticipate receiving a tax benefit from the vesting of equity awards.
We expect depreciation and amortization will be approximately $36 million to $37 million in 2022.
And we anticipate Capex spending in 2022 will be approximately 2% of revenue.
In addition to the Capex guidance I, just provided I want to outline for you another project starting in 2022.
Yes.
In 2006, we acquired a business in China to help us grow our stock preparation product line.
As many of you are aware that business has performed very well.
When we acquired the business, we acquired its manufacturing facility at.
At the time the facility was in the commercial area.
As this city in which this business is located is growing the area around our facility has become more residential.
As a result, the local government has asked us to relocate our manufacturing operations.
We have been discussing and negotiating with the local government for several years and the fourth quarter of 2021, we reached an agreement, which we believe is likely to become effective in the first quarter of 2022.
The local government will buy our existing facility at an agreed upon price and over the next two years, we will build and move into our new facility in the same city.
Proceeds from selling the facility will pay for the new facility and the relocation costs that will be incurred.
We currently estimate the Capex for this project to be approximately $20 million.
With most of the capex costs being incurred over the next 18 months.
To date, the local government has paid a 25% downpayment on the agreed to sell price with an additional 6% payment anticipated in the first quarter of 2022.
The remaining proceeds from the sale of the facility will be due at the earlier of when the government sells the property or within two years of the effective date of the agreement.
The U S. GAAP accounting for this will result in a large gain on the sale of our existing facility when the final down payment is received.
And the agreement goes into effect.
We anticipate this will be in the first quarter of 2022.
When this occurs I will give all the numbers related to this transaction and the gain will be excluded from our adjusted diluted EPS results.
For U S GAAP purposes, the costs related to the new facility will be reflected in our capex numbers.
I'll also give color each quarter as we go forward on regular Capex and Capex related to this project.
The key point I want folks to be aware of is that on a cash basis at the end of the day. Once we received all the proceeds from selling the old facility.
Cost of the new facility.
We will be offset by the proceeds received from the old facility sale.
I also want to make it clear that our EPS and Capex guidance for 2022 does not include this transaction.
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.
Certainly.
Our first question comes from the line of John <unk> from Sidoti Your question. Please.
Good morning, and.
Congratulations on a great quarter.
Actually this is kind of dovetails into what you're just talking about a common theme emerging this reporting season is higher capital spending on projects.
These have been deferred by labor or equipment availability.
If you think that youre benefiting from this trend.
If so by about how much.
Well I think certainly there was a.
A slowdown in capital project activity.
The prior year.
The pandemic really was.
<unk>.
Raging through the globe.
And so that's something that has started back up again, so I think theres certainly has we are benefiting from that but I would also say.
In our particular markets that there have been.
Associated with the pandemic that are driving demand that are likely to remain.
Jimmy Eases in particular that home deliveries.
Which require a lot more packaging.
And the housing market.
The housing boom associated with people working from home using.
Different housing arrangements, which has driven a lot of our wood processing.
Businesses so.
I think probably it's a combination of both of those social shift that's taken place and the way we live and work.
And the way, we consume goods along with some activity on the capital project side, but.
I think it's.
We're in the early stages I would say of executing these capital projects have come in.
And so.
Now there is still a fair amount of runway I think left on catching up.
Yes.
Got it and Jeff you mentioned in your prepared remarks that you've achieved the 20%.
EBITDA target. This year, you said often support in your 2019 Investor day.
I am curious did you expect to achieve at this early or something happened that kind of.
Outperformed your original expectations.
Well.
This was our third kind of five year plan that we put we put out in 19 and I think the first one we achieved the metrics in three years and the second one we did it in four years. So it's not unusual for us to hit some of the targets or many of the targets before before the end of the five years.
Point out that we haven't met them, all yet where we met the EBITDA margin goal.
We're approaching the earnings per share goal, but our revenue is still we still have some further work to do there.
And so.
We tried to set ambitious goals, but also goals that we believe that our people can can drive towards achieving and we're quite pleased with this the 80 20 initiative, which we implemented started implementing years ago has really delivered some solid results for us and the divisions that have been in that program for a while and that's certainly helping us some of the acquisitions we've made have been.
<unk>.
Very extremely profitable acquisitions, so they've been accretive to that so it's really been a combination I think of.
Increased operating leverage internal cost initiatives through 2020.
And just some accretive acquisitions and so we're pleased with it and once we have achieved.
About two weeks and we think it's appropriate to issue a new five year plan of course, our EBITDA margin Global go up we will set a plan to increase that even further over the next.
So the next plan.
Got it got it and I guess, one last question I'll get back in the queue, just about with higher commodity costs and other input costs.
Affecting companies across the board I was just wondering if you could kind of review, how you manage higher input costs and pricing.
Of course, your three business segments.
Yes, well one of the great things about our decentralized structure and we believe there are many is that our teams out there are very focused on local conditions on the ground there.
Structured to respond very quickly to the changes take place so there's no corporate.
We'll procurement manager sourcing manager or Theyre trying to manage things globally. We have two major operating units around the world that are basically making changes and real time as they see.
Conditions on the ground changing so thats allowed us to move quickly on the sourcing side cost control side, and where required on the pricing side.
So they've done a very good job of staying ahead.
The issues and Thats, obviously shown by the fact that our our actual kind of on a same store sale gross margin actually was.
We were up 20 basis points basis points for the year since we were able to actually improve it a little bit just to the hard work of our people.
Like I said real time decisions really based on the conditions locally.
Through this pandemic that decentralized structure really served us well and we believe there is great great positive benefits from it generally speaking, but during times of crisis, that's where 'twenty really strong management teams, making local decisions in real time really really benefits us and this is just one example of it.
Okay.
So are you at price cost equilibrium right now or is there still a lag going on and if so how long.
Well you know it kind of depends on the commodity theres. Some commodities that are starting to that are starting to moderate a little bit but there are others that are still there I would say generally speaking the supply chain constraints are still there.
And what in the areas, where we've had to put some new pricing in.
That's working through the system some of that takes longer than others. Because you might have existing projects that you you signed before the inflation took over it took off and also we have some some supply agreements that kind of set prices for per year or more so I would say there is still some pricing to work through the system.
But the more important thing for US is we're really focused on our cost trying to keep our costs down as low as possible. So that we can minimize though.
The price increases to our customers.
Okay got it thanks for taking my questions I'll get back into queue.
Thank you. Our next question comes from the line of Chris Howe from Barrington Research. Your question. Please.
Good morning, Jeff and Mike.
Hi, Chris Good morning, Chris.
Good morning.
Well as it relates to the outlook you talked about the <unk>.
Any puts and takes that may influence that outlook.
As we take that.
And put it into context versus.
This past year.
There are certainly continuing uncertainty regarding the timing of capital shipments.
You talk about the puts and takes.
With gross margin and also leverage on the operating line.
Perhaps the first half and the.
Second half playing out versus last year.
Perhaps a reversal or a grid.
Too early to tell based on the timing of orders.
Well.
Chris I have a view as it stands today and of course that may that may change.
But I would say.
Just looking at the Big picture looking at our guidance.
If I kind of lay that out over the year.
Interestingly enough to me it looks like the first quarter and our last quarter the fourth quarter.
It will be relatively there is.
Equilibrium between those two which would lead you to believe.
That the middle of the year is where we will have our highest revenue numbers in the second and third quarter. If I do if I split that first half second half the revenue is about the same.
But to your point on different pressure points.
I would say the latter.
I expect in the latter half of the year, our margins will be better our operating performance will be better than in the first half and thats, primarily driven by Im looking at.
Capital shipments in the second quarter.
That will put some pressure on our margin performance and that will start to abate as we go into the latter half of the year So revenue.
Our revenue on the top line revenue relatively even split first half second half, but operating metrics and performance.
We will perform I believe better in the second half of the year compared to the first half.
Okay perfect. Thank you.
The real question here.
Yes.
You mentioned the potential.
For improvement initiatives as we consider the integration of <unk>.
And their margin in the context.
Of the business.
Sure.
Can you place kind of this opportunity.
And so further detail I think on the last call you had mentioned.
Just opportunities across the business for product development and sharing of best practices.
What type of synergistic opportunity, whether that's leverage or.
Growth you see.
For the combination.
Yes, Theres actually.
Several levers out there that are available for pooling.
One of them that were doing right now as we as you know we had a.
Our ceramic blade business that we're in.
Dustin in pretty heavily.
And starting to take some market share, but it's always.
Our pioneering work so it's always.
Challenging and these guys are very strong in that area. So one of the first things we did as well.
We moved our ceramics business over to them are in the process of doing that and shutting down our facilities. Mike mentioned some of the impairment charges that were taken associated with doing that so that's something that we're doing we did almost immediately which will benefit from.
And then.
The guys are going to get together, we have our global strategy meeting coming up here in a few weeks.
All the team members of senior management will be getting together here in a few weeks per week to start to really work through the details of the synergies that exist.
What we're going to tackle first and I would tell you that between.
Kind of consolidating the ceramics business rationalizing the product development and then importantly, the 80 20.
<unk>, which had a big impact on our on our Doctor cleaning and filtration business and we expect we'll have some benefits to them. This will these will take.
A couple of years two to three years before you will see the full benefits of those.
So.
Our amount of work to do but we think it is very achievable very doable.
And we expect we will see progress throughout this year and next year or two.
Okay.
Thanks for taking my questions.
Thank you. Our next question comes from the line of Kurt Yinger from D. A Davidson your question. Please.
Great Thanks, and good morning.
Good morning, Kurt Good morning, just two quick ones from me.
Wanted to start off on project timelines I mean, given what's going on in the supply chain, our customers coming back to you at all in kind of pushing orders out to later dates or do you expect that could be an issue at some stage this year.
Well there is clearly there is challenges everywhere and so thats always a possibility I would tell you. The project I mentioned that was put on hold really was not a supply chain issue.
Considerations I think that the customer is looking at.
That.
Packaged their decision to put this thing on hold right now let me do some work so we're seeing that and it could affect timing a little bit on projects.
It really I think will depend on which part of the world.
We have seeing shipping in any given quarter.
Obviously, it's tough that's produced and sold in the current market is that a little better shape and someone has got to be put on a ship to ship halfway around the world. So timing I'll be honest with you timing on capital shipments is always a challenge in our business shifts on a Friday in the quarter, if it slips to a Monday at the end of the quarter then it's into the next one so thats something that we manage.
Yes.
And watch closely so it's possible we've not had anything other than that one project I mentioned that has been delayed.
But is it possible some ill say, hey, I want to I want you to ship that three weeks from now or four weeks announcement of today because of this or that that is a possibility we have under good times.
It certainly can be accentuated during during these times, it's our it's our hope and our belief.
Some of these logistics in particular, the transportation side, we will start to improve a little bit as the year progresses.
With that.
Some of these backlog will start to.
We start to work itself out and it won't be as much of an issue in the latter half of the year as it is the beginning of the year.
Got it okay.
Helpful and then.
Sorry.
It seems like operating rates are still very healthy market environment. It seems very solid.
Do you foresee any challenges lapping some of these parts and consumables comps just given how strong 2021 was in.
It's not necessarily as lumpy as the capital side, but.
Sometimes.
That can be a challenge as well.
Jim.
Yes.
Funny thing our capital of course really is.
We installed new capital equipment, it starts to throw off consumables and parts and so.
Wow, there might've been some.
Some I would say pent up demand that we experienced last year as people restocked.
Their shelves.
We're putting an awful lot of capital equipment out and capital equipment over time.
Consumes.
Parts so.
There could be a little bit of.
I would say.
Moderation that may take place, but as long as the operating rates stay high because our cap over the long run our capital equipment as I said drives our consumables as operating rates stay high or parts of consumables kind of a function of that.
And as we're putting a lot of capital out right now we would expect to see the benefits of that over the next few years.
As as they consume.
<unk>.
So.
We used to joke that if we could sell parts without selling capital it would be an easier business, but it's really it's the capital that drives the parts.
Right. Okay. That's helpful reminder, and then just lastly in terms of.
Geographies I mean, North America market is very strong, but even looking at Europe and Asia revenue. This year grew very nicely rebounding off of 2020 as you look into 2022.
Any kind of directional commentary in terms of March do you think will be strongest or areas that.
Do you think might see momentum start to slow a bit.
I'd say I'd say it was 2021 was a very good year across all the geographies.
And we're.
We're really anticipating that we'll see that again in 2022.
Got it alright, well good to hear.
I appreciate the color and good luck here in the new year guys.
Thank you. Thank you.
Thank you. Our next question comes from the line of Walter Liptak from Seaport. Your question. Please.
Hi, Thanks, good morning, everybody.
Hi, good morning.
When the first maybe ask a follow on when you were talking about the seasonality for 2022 and <unk>.
More capital shipments in the second quarter.
I Wonder if you could just help us understand.
Your backlog.
How far out does your visibility go right now.
Is it that in the second half you just don't have the bookings yet.
Still come in.
Yes.
And just maybe talk a little bit more about what I'm hearing on the mix might be more capital projects. This year.
As opposed to parts orders.
Yes, well I'd.
Hey.
Walt our backlog right now is at $310 million.
There is a small piece of that that's actually going into 2023.
So it's spread throughout the year I won't say evenly.
But it is spread throughout the year I think.
Our visibility tends to be pretty good.
Two quarters out so the second half of the year is a little bit more of a challenge to predict what's going to happen on the capital front, but.
We have good visibility on first half and.
I would say to your question.
The margin front.
What.
<unk>, 243% to 43, and a half and I am looking at the what we have for capital shipments in the first half of the year and I think if I look at that margin range will pricey margins in the first half of the year towards the low end of that range towards 43, and then in the second half that average out.
Towards the higher end of the range.
Okay great.
Yes, thanks that helps.
In thinking about the gross margin that you guys just reported.
Understanding that crude.
Bill May Astra had some it sounded like there were some amortization expense flowing through.
I'm wondering is that an ongoing expense typically those are below the gross margin line. It sounds like you guys are putting it through.
Cost of goods sold is that going to be an ongoing headwind to the gross margin.
No.
Want to look.
For that wall and Youll see the pretax number and our EBITDA table.
Is the line called acquired profit and inventory.
That's what's going through cost of goods sold and in the margins and that we basically finished stat. So that's when you acquire a business you have to fair value of everything including the inventory and then that gets amortized as the inventory turns so that that is now behind us we.
We do understand those were those were purchase accounting costs okay.
And the other.
Amortization that actually goes through SG&A not through cost of goods sold.
Okay got it okay that makes more sense.
Okay.
And just on the sticking with this gross margin.
And I appreciate the guidance for 2022.
How does the.
The bookings that you've got right now can you adjust those if prices keep going up.
Or how are you dealing with.
With the inflation.
Or some of those orders have been booked.
Been able to cover the inflation thats already happened.
Yes, well.
Sure.
Of course, we've been talking about this essentially throughout 2021, it's much easier for us.
Parts and consumables front that those orders.
I have very quick cycle times, so we're able to react to.
Input cost changes.
Very currently.
The area, where you would have more risk is on capital that maybe in the backlog for an extended period of time.
On some larger projects.
We have.
Surcharge arrangement, so we can make adjustments, but I would say the majority there they're priced currently.
And what we've tried to do is.
Reduce the window that the quotation is good for.
So to limit the exposure of the customer.
The order.
And within a month or the quote expires.
Nonetheless.
It's.
We can get capital goods that will be in backlog in.
<unk>.
Material, our input costs can increase and we'll be we'll have to face into that.
Okay, Alright sounds good.
And then maybe.
Just the last one last quarter, you guys talked a little bit about China logistics in this call. We haven't heard too much about that I wonder if you can just give us an update on what's happening there or is it just.
<unk> there.
They are COVID-19 policies that have been shut down or how are things going.
Yes, China is still maintaining this zero COVID-19 policy, the only country really in the world, that's doing that and they've actually manage there.
The pandemic.
Action rate pretty well, but it does introduce some real challenges to getting things out of there now they haven't said imports down recently from an outbreak or things like that.
But it's still a challenge when containers are still hard to get ports are still congested. It's an ongoing challenge again I mentioned earlier were we are hoping.
And that we're going to see a little bit of relief as the year progresses on that but I think everybody is kind of adjusted we've adjusted our delivery schedules.
The best we can.
The risk of course is the unknown.
A major outbreak in a port city or something and they would shut things down for a month.
That's the.
The risks as of right now.
I would say that we are.
With that well.
Management reasonably well and were hoping that things will continue to improve as the year progresses.
Okay, Alright, great and maybe just one final final one for me.
A follow up you were talking a little bit about.
Sort of the funnel for capital projects.
That you are seeing and it sounded like they were still strong across the board.
I wonder if.
If you could talk a little bit just about the wood products.
Our wood processing Capex.
Projects then.
If we see this rising interest rate environment.
Do those projects keep on going forward or how are you thinking that the risk of.
Potential slowdown from higher rates.
Well, it's interesting housing starts were one 7% one 7% in November and December January there at 106 is still very high levels.
Blood pricing of course, the composite index is back up.
Again quite high not quite to the record that it was still quite high.
Our customers are still there's still good demand.
And they are making very good pricing on it so you need to keep in mind that in the early <unk> crash. There was some capacity that was taken offline and so the demand has come back to that level and in some cases even.
Stronger demand and back then it.
It was a little less capacity and so it doesn't take much.
To see prices go up Theres, a fair amount of new capacity coming online.
And so what I mentioned to see what that does to pricing.
Other thing to keep in mind is as part of this climate initiative globally, there's more and more.
Construction and migrating to the use of wood I mean, if you think of.
Houses that are built out of wood.
James to frame. This is really primarily North America, the rest of the world tradition, as I've done that well.
Based on Aerie as one of the highest greenhouse gas footprint highest carbon footprints of any of the industrials out there and so there is the beginning of a migration away.
We believe there will be a continual migration away from brick.
And concrete and May scenario construction to wood base, just because they.
They won't be able to meet our climate initiatives without it.
And we've seen estimates.
That could really drive demand for.
Wood products over the next many years, so it's going to be quite interesting to see.
See what happens around the world as people respond to these greenhouse gas.
Targets they have.
Just trying to be able to do it by continuing to put houses out of high high carbon footprint makes scenario products.
Okay, Alright fair enough. Thank you.
Thank you. Our next question comes from the line of Bobby Eubank from Chevy Chase to your question. Please.
Hi, guys. Thanks for taking my call two questions for you one might.
It might be able to split out the difference between volume and price in the 18% organic revenue for the quarter.
No.
<unk>.
As Jeff you heard Jeff said, we have 20 operating units and the price increases have been quite varied either units.
I Couldnt say that I could honestly give you a good split on that.
Okay, but it's fair to say that pricing is a meaningful contributor to organic revenue fair to say that price is a contributor.
Margins are kind of the same so it's obviously hasn't gone down, but it hasn't gone up.
Right.
And of course, the book to Bill stepped down even pulling out the $10 million from that one project as we look through the rest of 2022 and your discussions with customers across those 20 business units.
What's the kind of tone from them look like.
If you look at the market Theres a lot of expectations, we're hitting kind of a peak in the cycle and it feels a little early but how are your customers feeling order outlook for the second half of the year. If you can kind of just he is adopting customers. Thanks, so much and good luck.
I think as Mike mentioned.
When he was talking to them player. Prior questions visibility is always tough for us, particularly on capital projects for the back half of the year, we have decent visibility in the front half to back half that's a little harder.
And because were so geographically diverse it really varies quite a bit I would tell you that if we look for instance in Asia that are project activity level I would say is.
It was quite strong right now and it wouldn't surprise us to see.
That continue through the year and some solid bookings in Asia for this year I would say North America bookings were quite strong in and.
Last year, and so is it possible they might moderate some it's very possible in Europe I would say is kind of in the middle they improved last year, but they are having good activity now so.
It really I think if I had to guess I would say Asia is strong.
Europe kind of.
Steady and the question is in North America can we keep we keep going there and it's very difficult I think.
To forecast the back half of the year. All I can say is that our customers are making good money prices were up if you look at the prices of lumber as I mentioned itself. If you look at the prices of boxes.
Several price increases in.
There. So I think the customers are doing well and normally where our customers do well they invest in their businesses over time and that benefits us.
It makes a lot of sense, if I can do a follow up what does the acquisition pipeline look like not not a focus of this call, but congratulations on a strong free cash flow clearly have capacity to do so.
Yes.
I think we mentioned on the last couple of calls the activity level is as far as deal flow is quite strong.
So our corporate development group as is.
Quite busy with that.
No issue with US we always point out that we've tried to maintain our discipline.
And so finding something thats, a good strategic fit for us.
A price that we think we can create some value with is always really the challenge.
We passed on some things that weren't a good strategic fit we've also passed on some things that we think valuation wise just.
That makes sense.
It's always a challenge there is a lot of money out there right now we say money is kind of free and.
Unlimited and availability of its out there chasing deals and so.
Pricing is quite high in some cases, we typically buy privately owned companies and we often buy companies that we've known for a long time and had relationships or even negotiations with for many years. If you look at most of our acquisitions that they fall in that.
Under that strategy.
So any given time, we're talking to.
100, 200 companies were following a couple of hundred.
And.
If we can find something that.
Meet our criteria as you pointed out we've got the balance sheet to do it. So we're not constrained in any way from a financing our capital standpoint.
Our challenge is finding things that are good strategic fit and a good value and our people are working hard at it but its always hard to predict when they'll come.
A block.
Thank you.
Thank you once again, if you have a question. Please press Star then one.
And this does conclude the question and answer session of today's program I'd like to hand, the program back to Jeffrey Powell, President and Chief Executive Officer and director.
Thank you Jonathan so before wrapping up the call today I just wanted to leave a couple of takeaways.
121 was a record setting year for cadence and our employees deserve a lot of credit for achieving these results and I really want to thank all of our employees around the world.
Tireless effort.
To meet our customers' needs.
2022, we will continue to focus on meeting our customers' needs with innovative.
Technologies and solutions that really drive sustainable industrial processing.
Our financial health is excellent and our ability to generate strong free cash flow remains a cornerstone of cadence business model.
And we look forward to delivering exceptional value for our stakeholders in 2022.
I want to thank you for joining us today, and please take care and stay safe.
Yeah.
Thank you ladies and gentlemen, what's your participation in today's conference. This does conclude the program you may now disconnect good day.
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Yes.
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