Q3 2022 Kadant Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day, and thank you for standing by and welcome to the Q3 2022.
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 one on your telephone please.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Michael Mckenney Executive Vice President and Chief Financial Officer, Sir. Please go ahead.
Thank you Michelle.
Good morning, everyone and welcome to cadence third quarter 2022 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.
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And Form 10-K for the fiscal year ended January one 2022, and subsequent filings with the Securities and Exchange Commission.
In addition, any forward looking statements we make during this web cast 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 are.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available on the investors section of our website at www dot cadence 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.
With that I'll turn the call over to Jeff Powell, who will 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 third quarter result.
<unk> and discuss our outlook for the remainder of the year.
I'll begin by reviewing our operational highlights for the third quarter.
I am pleased to report, we had a solid quarter with strong revenue performance and excellent execution.
All our operating segments. This led to record adjusted EPS and adjusted EBITDA in the third quarter.
We had strong demand for aftermarket parts, while new capital order activity moderated as expected from the record setting pace in the first half of the year.
We continue to successfully navigate through an increasingly complex market conditions fueled by inflationary pressures.
Strength in U S dollar Chinese zero, Covid policy and lingering global supply chain constraints among other factors.
As I've commented many times before operations teams around the globe continues to do an excellent job proactively managing these challenges and executing well in this quarter was no different.
You can see on slide six.
Q3 financial performance with notably higher across most key metrics compared to Q3 of last year, despite significantly affected by currency translation.
Q3 revenue was up 12% compared to the third quarter of 2000 $21 million to $225 million and benefited from record record capital shipments.
Excluding acquisitions.
Unfavorable impact of FX revenue was up 19% compared to the same period last year.
Solid execution contributed to our record adjusted EBITDA of $48 million and a record EBITDA margin of 21, 3%.
All of our operating segments delivered excellent adjusted EBITA margin performance, despite continuing inflationary pressures in.
And ongoing supply chain constraints.
As anticipated bookings softened from the record setting pace in the first half of the year as capital activity slowed while demand for aftermarket parts increased compared to the prior period.
I'll review the performance of operating segments next beginning with our flow control segment.
Flow control segment achieved solid growth in both revenue and bookings activity with revenue a record $87 million in the third quarter.
Up 14% compared to Q3 of last year.
<unk> were $85 million up 11% compared to last year organic.
Organic bookings, which excludes acquisitions and FX were up 19% compared to the same period last year.
Strong performance in our fluid handling product line in North America led our bookings growth in Q3.
Improved operating leverage led to record adjusted EBITDA and an adjusted EBITDA margin of 29, 4%.
High energy prices and a focus on de carbonization, particularly in Europe continue to drive project activity in our flow control segment as our customers seek to optimize energy utilization.
Our end markets remained strong despite the growing uncertainty in the macroeconomic environment.
Said, we do expect spending to moderate in the months ahead as central banks continued to take actions designed to reduce inflation.
Our industrial processing segment revenue increased 5% to $86 million.
<unk> been affected by an unfavorable foreign currency translation.
Adding the impact of FX.
Revenue growth was 7% compared to the same period last year.
Adjusted EBITDA was up 6%.
Our adjusted EBITDA margin was excellent at 24%.
As anticipated demand for capital equipment slowed in Q3 in response to the major capacity additions completed over the past several years, even as demand for aftermarket parts continued at a robust pace.
Our wood processing businesses, which have experienced significant demand for capital equipment. During the past few years and contributed significantly to our financial results. During that period are expected to shift towards a more aftermarket based product mix as demand for lumber and OSB softens in the focus for manufacturers.
<unk> from capacity additions to plant optimization and operating efficiencies.
In our material handling segment, we experienced healthy demand for our bulk material handling equipment and aftermarket parts.
Revenue was up 23% to $52 million with parts revenue, making up 57% of total revenue in the quarter.
Bookings in this segment were down 2% compared to the same period last year at $48 million.
Q3, excluding.
Excluding the negative effect of currency translation bookings were up 3%.
Solid execution helped boost adjusted EBITDA by 40% and adjusted EBITDA margin by 240 basis points compared to the same period last year.
As expected demand moderation in our building business has impacted the results in our material handling segment.
That said, we are experiencing growing business activity for our bulk material handling equipment across various sectors.
Yes.
As we look ahead to remainder of 2022, we are well positioned to finish the year with record results.
We have a significant number of capital projects to deliver in the upcoming quarter and our backlog remains at a near record level.
As global economic challenges continue to Mount we expect new order activity to moderate.
In uncertain times like these that our organizational strength stands out and I am confident our racing operations teams around the world will continue to deliver outstanding results and a record year.
I'd like to pass the call over to Mike now for his review of our Q3 financial performance.
Thank you, Jeff I'll start with some key financial metrics from our third quarter.
Consolidated gross margins were 42, 5% in the third quarter of 2022 compared to 41, 9% in the third quarter of 2021.
Which included a 110 basis point negative impact from the amortization of acquired profit and inventory.
Parts and consumables revenue represented 63% of revenue in the third quarter of 2022.
Compared to 66% in the prior period.
SG&A expenses were $53 2 million in the third quarter of 'twenty two.
An increase of <unk> 8 million compared to $52 3 million in the third quarter of 'twenty one.
There was a favorable foreign currency translation effect of $3 4 million in the quarter and a reduction in government assistance benefit of $3 million.
We also incurred acquisition related costs of <unk> 4 million and $1 3 million in the third quarter of 2022 and 2021, respectively.
The remaining increase in SG&A expense was primarily associated with increased incentive compensation and travel related costs due to improved business conditions.
As a percentage of revenue SG&A expenses decreased to 23, 7% in the third quarter of <unk> 22, compared to 26, 2% in the prior year period.
Our effective tax rate was 26% in the third quarter 'twenty two.
Slower than we anticipated due in part to tax benefits from the reversal of tax reserves associated with uncertain tax positions.
Our GAAP diluted EPS was $2 35 in the third quarter.
Up 34% compared to $1 75 in the third quarter of 2021.
And our adjusted diluted EPS increased 21% to a record $2 38.
Our third quarter 2022, adjusted diluted EPS exceeded the high end of our guidance range by 2009.
Due primarily to higher revenue and our wood processing and doctor cleaning and filtration product lines and a lower effective tax rate.
Adjusted EBITDA increased 17% to a record $47 8 million compared to $40 9 million in the third quarter of 2021.
Due to strong performance in our flow control segment.
Which had record revenue and adjusted EBITDA in the quarter.
Adjusted EBITDA as a percentage of revenue was a record 21, 3% in the third quarter of 22% compared to 25% in the prior period.
Operating cash flow decreased 34% to $24 9 million in the third quarter 'twenty to <unk>.
<unk> to $37 9 million in the third quarter 'twenty one.
Free cash flow decreased 46% to $18 5 million of third quarter 'twenty, two compared to $34 6 million in the third quarter 'twenty one.
The decreases in operating cash flow and free cash flow were principally due to an increase in working capital in the third quarter of 'twenty two of $13 6 million compared to a decrease in working capital in the third quarter 'twenty, one of $6 3 million.
A change of $19 9 million.
We had several notable non operating uses of cash in the third quarter 'twenty two.
<unk> paid down debt by $11 5 million in the quarter and paid $6 4 million for capital expenditures, which included $2 2 million for our facility project in China.
We also paid a $3 million dividend in our common stock and $2 7 million to buy a facility in Germany at the end of its lease.
Let me turn next to our EPS results for the quarter.
In the third quarter 2022, our GAAP diluted EPS was $2 35, and after adding back <unk> <unk> of acquisition costs and <unk> of restructuring costs, our adjusted diluted EPS was $2.38.
In the third quarter of 'twenty, one our GAAP diluted EPS was $1 75, and after adding back acquisition related costs of 22, our adjusted diluted EPS was $1 97.
As shown in the chart the increase of 41 and adjusted diluted EPS in the third quarter 'twenty two compared to the third quarter 'twenty. One consists of the following.
68, <unk> due to higher revenue, partially offset by 13th.
Due to higher operating expenses.
Due to lower gross margins <unk> from a higher tax rate <unk>.
<unk> due to a decrease in amounts received from government assistance programs and <unk> from higher net interest expense.
Collectively included in all the categories I, just mentioned was an unfavorable foreign currency translation effect of <unk> 15 in the third quarter of 22% compared to the third quarter of last year due to the strengthening of the U S. Dollar.
Yes.
Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable increase.
Increased to 130 at the end of the third quarter 'twenty two compared to 113 at the end of the third quarter 'twenty one.
This increase was primarily driven by a higher number of days in inventory.
Working capital as a percentage of revenue was 12, 8% in the third quarter 'twenty, two compared to 13, 5% in the third quarter 'twenty one.
Our net debt that is debt less cash decreased $16 million sequentially to $135 million at the end of the third quarter 'twenty two.
Our leverage ratio calculated in accordance with our credit agreement was <unk> 94 at the end of the third quarter 'twenty two compared to one five at the end of the second quarter of 'twenty two.
Our net interest expense increased $2 million to $1 5 million in the third quarter 'twenty, two compared to $1 3 million in the third quarter of 'twenty one.
At the end of the third quarter 'twenty two.
At $205 million of borrowing capacity available under our revolving credit facility, which matures in December of 'twenty three.
Now turning to our guidance for the fourth quarter and full year of 2022.
We are narrowing our revenue guidance for 2022 to $890 million to $896 million revised from $890 million to $905 million.
Due to approximately $10 million in capital shipments moving into the first half of 2023 as a result of customer requested delivery changes and supply chain delays.
In addition, we are narrowing our adjusted EPS guidance to $8 80.
Two $8 97.
From $8 80 to $9.
For the fourth quarter, we now anticipate revenue of $217 million to $223 million and adjusted EPS of $1 90 to $2 seven.
I want to outline some of the potential risks impacting our guidance.
In the last month of the third quarter, our largest subsidiary in China was impacted by China's zero Covid policy, requiring them to shut down for a short period of time, and then gradually reopening again to full capacity.
This only had a modest impact on the quarter as a subsidiary was able to increase capacity once reopened.
However, there continues to be a potential risk for further government mandated shutdowns in this region.
In addition, other risks that could impact our guidance include supply chain challenges.
The strengthening of the U S dollar geopolitical tensions and inflation.
Yes.
We continue to anticipate gross margins for the full year of 'twenty two will be 42, 5%.
243%.
Gross margins in the fourth quarter will be approximately 70 to 80 basis points lower than the third quarter as a result of the mix shifting towards more capital.
As a percentage of revenue we continue to anticipate SG&A will be approximately 24, 5% to 25% for the year.
We expect our tax rate for the fourth quarter will be approximately 28%.
We hope these guidance comments are helpful.
That concludes my review of the financials and I will now turn the call back over to the operator for our Q&A session Michelle.
As a reminder to ask a question. Please press star one one on your phone. Please standby, while we compile the Q&A roster.
Yes.
Our first question comes.
Comes from Kurt Yinger with D. A Davidson your line is now open.
Great. Thank you and good morning, everyone.
Alright.
Good morning by my Math, you know capital bookings were down maybe 35% to 40% versus Q2 and you touched on it right Q2 was a very good quarter, so not an easy comp, but when you talk to your customers do you get the sense that's just.
Sure.
Kind of a knee jerk reaction to some of the changes we've seen in the macro and just pushing some projects out what do you think it's more reflective.
A new baseline on the capital side, whether that's.
Digestion phase coming in or really a sustained pullback with the current environment.
Yes, I think it's.
It's a little bit of all of the above depending on the market.
And the geographic region, but certainly we have certain markets that have just been an amazing kind of investment.
Program over the last couple of years and they need to.
Take delivery of that equipment and get installed up and operating and we still have businesses that.
We're going to deliver product to our 2024, and so that are fully booked for the year and customers don't like placing orders for things that are going to be delivered two years from now not knowing what the economic conditions might be then so a little bit.
Talking about this all year that we expected things to moderate in the back half of the year because they were just so strong really for the prior four quarters.
Very strong.
Some of the business as you saw the on the flow control side bookings were up substantially and.
That's being driven in part by by energy prices, because not all those projects.
<unk> by saving energy.
So it really varies quite a bit around the world.
China of course as everybody knows has been impacted by by their zero carbon policy.
There is some hope that maybe around the March timeframe. They are going to start to the rethinking that now they may change that program and maybe our open things back up a little bit there. So I think it's a little bit of all the above really I don't think its a new baseline globally.
Going forward.
Very much be a function of the market and the geographic region.
But the feds are clearly trying to talk down the economy right now and I think people are some people were taking a wait and see attitude to just what that means.
Right, Okay that makes sense and just going off the comment you made on some of your subsidiaries being built.
Booked out more than a year do you feel like the bookings you've seen over the last couple of quarters on the capital side.
Give you better visibility in the past.
In terms of how quickly those might turn over or do you think.
2023 is still very much kind of TBD, depending on bookings activity over the next call. It two to three quarters.
Yes, I mean, we haven't really started focusing hard on 'twenty, three where right now we're principally focused on finishing the year and we have an awful lot of projects that we have to get completed and shipped that's a big big challenge for everybody.
Obviously, we will during the.
The call for the fourth quarter will be giving our outlook and guidance for next year, but I don't think right now that we have a formed opinion on exactly what next year is going to look like.
And we know we have strong strong backlog going into the year. So we know we're going to be quite big.
Fulfilling the existing orders.
Okay, Alright, that's fair I appreciate the details and good luck here in Q4 guys.
Thanks Kurt.
Please standby for our next question.
Our next question comes from William Hyler with WG D. H capital. Your line is now open.
Yeah, Hi, guys I appreciate the call.
Alright.
Yeah, Hi, a question.
<unk> has been a big beneficiary of the large number of <unk>.
Recycled containerboard conversions announced.
Past five years or so.
It's been a powerful trend.
So when they start seeing a slowdown in this.
Going forward.
Remind us what divisions with the biggest beneficiaries of the trend and what isn't.
Markets do you see as maybe best positioned to offset this if we do start seeing a slowdown of new capital in the containerboard.
Containerboard conversions.
So.
We tend to look at the paper side at the market.
The developed countries in the developing countries and as you know the developed countries are growing at a slower rate less greenfields less new plants and more conversions were in the developing world where still see most of the projects are still new capacity new greenfields.
Youre right and certainly in North America. There was there's been a fair number of conversions over the last many years.
And I think the market's kind of taking right now a wait and see attitude to what what the.
What the dynamics look like when those all come online and many of them will be coming online here over the next six months or so.
We're seeing strong activity and interesting markets I would say, India the middle East.
Eastern Europe , and that's kind of where youre seeing new new projects, new development, so that will and.
And we expect that to continue so that will offset.
<unk>.
Maybe a little bit of a slowdown in the moderation of the developed world here over the next year or so.
If you think of markets outside of the developing world.
I think.
China is still a major market.
And they've really got a story I think through this COVID-19 policy, because thats really slowed down there where industrial production has been fairly disruptive I don't think thats sustainable over a long period of time. So we're expecting sometime in 'twenty three they sort through that get back to a more for more.
Our normal growth rate and investment.
Nickel.
So that's what I would expect as you know kind of middle East Eastern Europe , and Asia, India, and India is the biggest market fastest growing market for us, although it's a small base right now.
You might recall, we made an acquisition there.
To start a managed to manufacturing there.
Put more boots on the ground there. So that's a market that we think is going to continue to show strength, but really it's I think it's the China market that really needs to sort itself out here.
Got it.
So you think that the conversions will continue to be.
Or or Greenfield will be continue to be a positive factor for number of years to come.
So right now.
This estimate pricing bill say that they expect that kind of that packaging the packaging paper business to grow at about globally to grow at about four 8% a year for the next 10 years. So that's actually that's actually a little faster than global GDP is forecasted to grow and as you know that's principally driven by a couple of things one of course is.
As the retail.
Around the world that continues to grow.
At a faster pace than overall retail and then the second is the migration to more sustainable kind of environmentally friendly low carbon materials migration away from plastics and other things, particularly in the food food side of it. So those two drivers I think are driving kind of the forecast that show a growing a fab.
After than the GDP over the next 10 years.
Alright.
Flow control was probably the biggest beneficiary of that trend.
Yes, it would be the industrial processing segment Bill.
That's where our stock preparation product now flow control does benefit.
But the biggest beneficiaries and industrial processing via our stock preparation product line.
Okay, I appreciate that and.
Just real quick I know you used to break down your China revenues and you don't do that anymore, but can you just give us a little color on how revenues in Asia.
They have shifted and changed over the last three or four years go ahead, and that'll Vietnam got a little bigger and rest of Asia are you a little less reliant on China.
China than you used to be.
As a percentage of total Asian revenues or is it still pretty much the major <unk>.
<unk>.
It's still really pretty much in a major source.
Okay, alright, Okay I appreciate it.
Please standby for our next question.
Our next question comes from John brands ramp with Sidoti. Your line is now open.
Good morning, guys and thanks for taking the questions.
Morning, John .
In your prepared remarks, you mentioned capital projects shifting.
Fourth quarter and into the first half of 2023.
What's the magnitude of the size of those projects in total and which segments are most impacted.
Well overall aggregated to.
Approximately $10 million.
And projects that were shifted out and I would say it's really it's.
It's predominantly in the industrial processing.
Segment in both we had movement both in some in the stock prep product line and wood processing product line.
I'd say most in the wood processing product line, where customers are a little behind.
Their projects and just requested delivery of equipment either in the first or second quarter of 'twenty three.
Yes, Jonathan these projects ship. They go into a mill that's got a lot of civil work that has to be done and of course, everybody is everybody is it's.
As filling the.
The supply chain constraints and so.
Labor shortages and everything else. So if they are slower in getting all the civil work done. They are just not ready to accept and install the equipment and thats really kind of what what.
And of course being the last quarter of the year. If it is a delay delivery by two weeks at the end of the year that shifted into next year. So that's.
That's really I think what we're experiencing.
Okay. So you would expect most of this to be delivered in the first quarter or am I, putting words in the amount.
I would say first half there'll be there'll be a good chunk in the first quarter, but it's all been.
Shifting to the first half of 'twenty three.
Alright fair enough and then just what are your thoughts on commodity prices.
Metal prices have been coming down since peaking in spring, but we're not seeing a lot of.
Real traction from that and a lot of companies reported results yet.
Have you been any kind of a beneficiary of lower metal prices, we expect to be.
Anytime in the near future what are your thoughts about input costs.
Yes, so youre right I mean, our biggest single purchase cost of stainless steel and it had dropped nicely I would say through August but in September and October it's kind of flattened out actually in October actually.
Increased a little bit and if we look at the kind of the peak.
You look at the future prices through say mid next year, they've got declining a little bit more but not dropping precipitously.
I would say if you look at our gross margins they've been very steady and exactly what we expected. So I would say we have not benefited from it and we have not been hurt by it we've kind of stayed.
Stayed on top of it our guidance around the world have stayed on top of it and done a good job. So we've neither really benefited northern been hurt by it.
We certainly welcome the prices moderating and if these if the central banks are successful and slowing slowing the economy down we would expect prices to continue to drop.
Later next year.
Okay fair enough.
One quick question I guess, you talked about the shift may be from capital equipment.
Maybe more of a maintaining the facilities.
Aftermarket sales in industrial processing.
How would that process.
No.
Hi al.
Is that like a one two quarter set.
Went to year set.
I don't know that.
Honestly, we don't know I know that if you look at for instance on the housing side.
If you look at kind of the consensus for next year, they're predicting somewhere around I think 1.35 million starts a month.
Which is which is clearly down.
From from certainly 'twenty.
One in 'twenty two.
So it's really I think it will be a function of what the feds do with interest rates because the demand the underlying demand for housing in particular is still there very strong millennials are still in the private house buying years.
Just an issue with interest rates going up and availability down so I don't know I mean.
Underlying fundamentals over the next many years of very strong. It's just a question of what what interest rates do.
Okay, Alright, guys. Thanks for taking my questions I appreciate it.
Okay.
As a reminder to ask a question. Please press star one one on your telephone.
At this time there are no further questions I would now like to turn the conference back to Jeff Powell for closing remarks.
Thank you Michele so before wrapping up today I just wanted to leave you with a few takeaways of 2022 is shaping up to be the best year in our history across a wide range of metrics. We made solid progress this year on our efforts to accelerate revenue growth and boost our profitability. Despite the challenging macroeconomic environment and lastly as.
We work through our backlog, we expect to deliver excellent cash flows.
We want to thank you for joining the call today and stay safe.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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