Q4 2022 Kadant Inc Earnings Call
The conference will begin shortly to raise and lower Johan 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 fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
I ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising your hands raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Michael Mckenney Executive Vice President and Chief Financial Officer. Please go.
Sir.
Thank you Norma.
Good morning, everyone and welcome to cadence fourth quarter and full year 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.
Paresh 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.
Our annual report on 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 the webcast represent our views and estimates only as of today.
We may elect to update forward looking statements at some point for future, we specifically disclaim any obligation to do so.
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 measures is contained in our fourth quarter and full year earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the investors section of our website at www Dot 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 <unk> business and future prospects.
Pulling Jeff's remarks, I'll give an overview of our financial results for the quarter and the year and we will then have a Q&A session. Jeff. Thanks, Mike Hello, everyone and thank you for joining US. This morning to review, our fourth quarter and full year results and discuss our business outlook for 2023.
I'm pleased to report the fourth quarter was a strong finish to a record setting year for cadence.
Despite the challenges brought about by macroeconomic headwinds and lingering supply chain constraints, we had another well executed quarter, we generated record adjusted EBITDA, which contributed to solid cash flow in the fourth quarter.
Strong capital project activity in the first half of the year and robust aftermarket demand led to record revenue in the fourth quarter and full year.
We continued to deliver on our mission to provide technology to engineered solutions that help our customers advance their operational performance with product innovations that reduce waste or generate more yield with fewer inputs.
At the end of 2022, we were honored to be named by Newsweek magazine as one of America's most responsible companies for the third consecutive year.
It's rewarding to be recognized for our efforts in this area.
Next I'd like to review, our Q4 financial performance.
Q4 revenue was up 6% compared to the fourth quarter of 2021 to a record $232 million.
Panic revenue, which excludes acquisitions and the impact of foreign currency translation was up 13% compared to the same period last year.
Despite a larger portion of our Q4 revenue being capital shipments excellent execution drove our EBITDA margin to a record 21, 3%.
This record setting performance was led by our flow control segment and I'll provide more detail on our operating segments in a few minutes.
Our strong quarterly earnings performance contributed to exceptional full year performance, which I'll review next on slide seven.
Strong demand we experienced in the first half of 2022 moderated in the second half the central bank's fiscal policies began to soften demand in some sectors that said our full year revenue increased 15% to a record $905 million, which included $41 million negative impact from FX.
Adjusted diluted EPS increased to $9 24 per share.
Exceeding the prior record set last year at $7 83 per share. Despite a negative currency translation effect of <unk> 46 per share.
Our full year, adjusted EBITDA was up 19% to a record $189 million or 29% of revenue.
This record margin performance surpasses our prior record set last year, when we achieved 23%.
We have had a strong strategic focus on improving our margin performance and we're pleased to see these results.
As we have previously discussed a number of our businesses have been implementing our <unk> thousand 20 program, which is designed to serve our customers even better while strengthening our financial performance.
The collective results have been very encouraging and we look forward to continuing to pursue these customer focused initiatives to create even more value in the coming years.
Next I'd like to review our performance in our three operating segments.
Our flow control segment continued to show strength in the fourth quarter with revenue up 17% to a record $91 million.
The unfavorable impact of FX revenue was up 24%.
Aftermarket parts revenue made up 66% of total revenue.
Help boost adjusted EBITDA to a record $26 million in the fourth quarter.
We believe the fundamental drivers of our end markets remain healthy, though business activity continues to be influenced by geopolitical and macroeconomic challenges around the globe.
Turning now to our industrial processing segment, our performance in the fourth quarter was solid despite the softening in some of our core end markets.
Organic revenue performance was slightly higher than last year's record Q4 revenue performance.
Adjusted EBITA margin declined 130 basis points compared.
Compared to the prior year, but remained strong at 24, 9% of revenue. This decline was largely attributed to market mix and the timing of shipments in our wood processing product line.
Looking ahead to 2023, we expect demand in this segment to soften compared to the record demand we experienced over the last couple of years, particularly in our wood processing product line.
In our material handling segment demand was solid across all product lines and project activity was relatively strong revenue.
Revenue increased 12% to $51 million in parts revenue in the fourth quarter made up 53% of total revenue.
Capital shipments were strong in the quarter and benefited from record demand in the first half of the year.
Organic bookings in our material handling segment increased 5% due largely to strong demand for our bulk material handling equipment in our markets.
Looking ahead to 2023.
This segment will continue to see good business activity, particularly as new infrastructure projects executed following the passage of the infrastructure Bill in the U S.
Inquiries from our construction aggregate producers for our bulk material handling equipment are increasing as infrastructure projects begin to gain traction.
As we look ahead to the first quarter of 2023 and the full year.
Ongoing project activity is healthy and demand has been solid as we entered the year.
However, economic headwinds are building, which makes the second half of the year lesser.
Our backlog and strong balance sheet have us well positioned to capitalize on opportunities that may emerge as the year unfolds and we expect to deliver solid financial performance for the year.
With that I'd like to pass the call over to Mike now for his review of our financial performance and outlook for 2023.
Mike.
Thank you Jeff.
I'll start with some key financial metrics from our fourth quarter, which includes some notable records.
Yes.
Gross margin increased 70 basis points to 43, 1% in the fourth quarter 2000 <unk>.
Compared to 42, 4% in the fourth quarter of 'twenty one.
Our gross margin in the fourth quarter 21 was negatively affected by the amortization of acquired profit and inventory, which lowered gross margin by 90 basis points.
Excluding this impact in the prior year's quarter gross margin was down 20 basis points due to a higher mix of capital revenue.
Our overall percentage of parts and consumables revenue decreased to 60% of total revenue in the fourth quarter 22 compared.
Compared to 63% in the fourth quarter of 'twenty, one due to significantly higher capital revenue at our flow control segment.
As a percentage of revenue.
G&A expenses decreased to 24, 5% in the fourth quarter 22, compared to 26, 4% in the prior year period.
SG&A expense decreased $1 million to $56 8 million in the fourth quarter of 'twenty, two compared to $57 8 million in the fourth quarter 'twenty one.
The fourth quarter 22 included a $3 3 million favorable foreign currency translation effect and a $1 5 million decrease in acquisition related costs compared to the fourth quarter of 'twenty one.
Partially offsetting these favorable FX was <unk> 7 million of expense from an indemnification asset reversal related to the release of tax reserves.
Excluding all these items SG&A expense increased $3 1 million.
Due to additional head count within selling and increased travel cost related to sales and service.
Our effective tax rate in the fourth quarter was 29, 2%.
Slightly higher than our forecasted rate of 28%.
Due to the timing of certain incentive compensation payments.
Our GAAP diluted EPS increased 8% to $2 23 in the fourth quarter compared to $2 <unk> in the fourth quarter 'twenty, one and our adjusted diluted EPS was up 1% to $2 33.
Our fourth quarter 22, adjusted diluted EPS of $2 33 <unk>.
Exceeded the high end of our guidance range by <unk> 26.
Due to higher than anticipated revenue.
Specially at our flow control segment and to a lesser extent higher gross margins.
For the full year 'twenty two.
Gross margin was 43, 1% compared to 42, 9% in 'twenty one.
Excluding the amortization of profit in inventory in both periods and government assistance benefits in 'twenty one.
<unk> margin was down 30 basis points to 43% compared to 43, 3% in the prior year due to a higher mix of capital revenue.
Our percentage of parts and consumables revenue was 63% and 22 compared to 65% and 21.
As a percentage of revenue SG&A expenses decreased to 24, 8% and 22 compared to 26, 8% or excuse me 26, 5% in 'twenty one.
SG&A expenses were $224 4 million and 22, an increase of $15 6 million or 7% compared to $208 $8 million in 'twenty one.
We had a favorable foreign currency translation effect of $9 8 million and a $3 6 million reduction in acquisition related cost, which lowered SG&A expenses in 'twenty two.
This was offset by $11 7 million of SG&A from our acquisitions.
A reduction in government assistance benefits of $1 4 million and.
And a $1 3 million of expense from indemnification asset reversals, which are offset by a corresponding tax benefit within provisions for income taxes.
Excluding all these items SG&A expenses were up $14 5 million or 7% compared to 21, primarily due to increased compensation expense related to wages and additional head count as well as increased travel related costs.
Our GAAP diluted EPS was a record $10 35, and 22 up 44% compared to $7 21 to 'twenty one.
Our adjusted diluted EPS was also a record at.
At $9 24.
Up 18% compared to $7 83 last year.
In the fourth quarter of 'twenty, two adjusted EBITDA increased 10% to a record $49 5 million or 21, 3% of revenue.
<unk> to $44 8 million or 25% of revenue in the fourth quarter of 'twenty, one led by our <unk> controls segment.
For the full year adjusted EBITDA was a record.
$189.
$1 million.
And a record 29% of revenue compared to adjusted EBITDA of $159 4 million or 23% of revenue in 'twenty one.
Due to strong performance in our flow control and material handling segment.
Operating cash flow was $35 2 million in the fourth quarter 2000 to.
Up 41% sequentially, but down 42% compared to $61 million in the fourth quarter of 'twenty one.
For the full year operating cash flow was $102 6 million down 37% from 21 due to the timing of working capital increases.
Operating cash flow was a record in 'twenty one due in part to a $44 5 million benefit from working capital as customer deposits and accounts payable growth outpaced the growth in inventory and accounts receivable.
In 2022, our operating cash flow was impacted by a $50 6 million use of cash for working capital.
<unk> in large part to inventory purchases to support our record backlog and an increase in accounts receivable as a result of revenue growth.
I would add here that considering our guidance for 2023.
We do not anticipate continued growth and working capital requirements.
We had several notable non operating uses of cash in the fourth quarter 'twenty two.
We repaid $15 5 million.
And paid $12 million for capital expenditures.
Which included $5 million for our facility project in China.
And paid a 3 million dividend on our common stock.
In addition, we paid $3 6 million for the acquisition of our material handling business in Canada, and a $1 3 million related to the renewal of our credit facility, which I will discuss in more detail as part of my liquidity review.
For the full year, we repaid $63 $5 million of our debt and paid $28 2 million for capital expenditures, which included $10 4 million for our facility project in China.
Construction for this project is well underway with remaining estimated construction cost of $8 million to $9 million and our projected move date in the middle of 'twenty three.
I wanted to mention on the Capex front in regards to the facility project in China that as you may recall, the local government had asked us to relocate they purchased our existing facility and we received a down payment of 31% in the first quarter of 'twenty two with the remaining proceeds from the sale of.
Facility due the earlier when the government sells the property or.
For the first quarter of 'twenty four.
Proceeds from selling the facility will pay for the new facility and the relocation cost that will be incurred.
Let me turn to our EPS results for the quarter and.
In the fourth quarter trying to GAAP diluted earnings per share was $2 and 23.
And our adjusted diluted EPS was $2 33.
The Tencent difference relates to nine tons of impairment and restructuring costs and.
And one and one set of acquisition costs.
<unk> set an impairment and restructuring costs as two components. The first component relates to additional restructuring costs associated with the consolidation of our ceramic blade manufacturing in Europe into our recently acquired <unk> business.
The second component relates to an asset impairment charge and other costs associated with exiting our business in Russia.
We have a small subsidiary in Russia with a few employees, which was part of our NII acquisition in 2017.
Local business transactions by foreign owned companies had been severely restricted due to Russian sanctions and as a result, we have been winding down this small operation.
In the fourth quarter of 'twenty, one GAAP diluted earnings per share was $2 seven and adjusted diluted EPS was $2 31.
24, <unk> difference relates to <unk> 23 of acquisition related costs, <unk> <unk> of impairment and restructuring costs.
<unk> <unk> discrete tax benefit and a <unk> <unk> gain on the sale of adult.
The increase of <unk> <unk> and adjusted EPS in the fourth quarter 22, compared to the fourth quarter 'twenty one consisted of Phi.
For <unk> due to higher revenue, partially offset by 29.
Due to a higher recurring tax rate.
<unk> due to higher interest expense and <unk> <unk>.
Due to lower gross margins.
The 29.
Impact from the increase in our recurring tax rate was primarily due to a lower tax rate in the fourth quarter 'twenty one do.
Due to tax benefits related to a reversal of tax reserves associated with uncertain tax positions and the exercise of previous award employee stock options.
Collectively included in all the categories I just mentioned.
Unfavorable foreign currency translation effect of <unk> 16 in the fourth quarter 22, compared to the fourth quarter of last year due to the strengthening 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 $10 35, and 22 and our adjusted diluted EPS was $9 24.
The dollar and <unk> 11 difference relates to a $1 30 gain on sale related to one of our Chinese facilities and.
Impairment and restructuring costs of 11.
And acquisition related costs of 7%.
We reported GAAP diluted earnings per share of $7 21, and 'twenty, one and our adjusted diluted EPS was $7 83.
The 62 difference relates to acquisition related costs of 60.
Impairment and restructuring costs of eight.
A discreet tax benefit of <unk> and a gain on sale of <unk>.
The increase of $1 41, and adjusted diluted EPS from 'twenty, one to 'twenty two consists of the following.
$2 19 from higher revenue.
And 36 cents from the operating results of our acquisitions.
These increases were partially offset by 39 from higher operating expenses 30.
<unk> 33.
From a higher recurring tax rate 22 from lower gross margins.
<unk> 16 from a reduction in benefits from government assistance programs.
<unk> due to higher weighted average shares outstanding and <unk> <unk>.
From higher interest expense.
Collectively included in all the categories I, just mentioned was unfavorable foreign currency translation effect of <unk> 46.
And <unk> 22 compared to 21.
Now, let's turn to our liquidity metrics on slide 18.
Our cash conversion days measure calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 126 at the end of the fourth quarter 22 down from 130 at the end of the third quarter 'twenty, two but up from 106 days at the end of 'twenty one.
The increase in conversion days from the prior year was principally driven by a higher number of days in inventory as we have purchased material to support our record backlog.
Working capital as a percentage of revenue increased to 13, 9% in the fourth quarter 22, compared to 12, 8% in the third quarter of 2002, and nine 4% in the fourth quarter 'twenty one.
Net debt that is debt less cash at the end of 'twenty. Two was $121 4 million a decrease of $54 million compared to $175 4 million at the end of 'twenty one.
Our interest expense increased 34% to $6 5 million and 22 compared to $4 8 million or 21.
Due to the increase in borrowing rates in the second half of 'twenty two.
Our leverage ratio calculated as defined in our credit agreement decreased to <unk> 74 at the end of 'twenty two from $1 three four at the end of 'twenty one.
We renewed our $400 million credit facility in November for another five year term and increased our incremental uncommitted borrowing facility from $150 million to $200 million.
Our low leverage ratio and increased borrowing capacity has us well positioned to act on future investment opportunities.
Now I'll review our guidance for 'twenty three.
Our revenue guidance for the first quarter 'twenty, three is $217 million to $223 million and our adjusted diluted EPS guidance for the first quarter is $2 eight to $2 20.
For the full year, our revenue guidance is $900 million to $925 million and our adjusted diluted EPS guidance is $8 80.
To $9.05 and excludes eight and estimated moving costs associated with the relocation of the facility in China, which should occur in the middle of 'twenty three.
I should caution here that there could be some variability in our quarter quarterly results due to several factors, including the variability of order flow and the timing of capital shipments.
In addition, other risks that could impact our guidance include central bank policy responses to inflation.
Zero geopolitical tensions strengthening of the U S dollar and lingering supply chain issues.
The 2023 guidance includes an unfavorable foreign currency translation impact of approximately $6 7 million in revenue and 11.
And adjusted diluted EPS due to the strength of the U S dollar.
We anticipate gross margins for 'twenty, three will be approximately 42% to 43%.
As a percentage of revenue, we anticipate SG&A will be approximately 24% to 25% and.
And R&D expense will be approximately one 5% of revenue was 23.
We anticipate net interest expense of approximately $9 million.
And we expect our recurring tax rate will be approximately 27% to 28% and 23.
We expect depreciation and amortization will be approximately $34 million to $35 million in 'twenty, three and we anticipate capex spending in 'twenty three will be approximately $32 million to $34 million, which include $8 to $9 million related to our facility project in China.
Excluding the facility project, where a little bit above our normal capex as a percent of revenue metric due to our facility expansion project or a product.
Approximately $5 million related to our wood processing product line.
That concludes my review of the financials and I'll now turn the call back over to the operator for our Q&A session operator.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
Yeah.
One moment for your first question.
And I have a quick first question comes from Kurt.
<unk> with D. A Davidson your line is now open.
Great. Thank you and good morning, Mike Jeff.
Good morning, Kurt Kurt.
I just wanted to start out on an aftermarket demand, which looks like it continued to perform pretty well in Q4, and if I look at North America, you have the containerboard guys taken some pretty significant market related downtime with demand challenge on the wood product side, it's kind of a similar story, including a growing list of.
Curtailment, So would just love to hear your thoughts as to why that Hasnt seemed to have much impact on the aftermarket business recognizing you service a lot more customers than those I just mentioned.
Yes, I mean, you are right that there has been some softening and theres been some.
Lower utilization rates, but.
As you're also aware the last couple of years many of those customers were running full out.
Not taking.
Normal scheduled downtime or outages.
And they ran the equipment pretty hard and there were a lot of it out so I think what we're seeing a little bit right. Now is they've made a lot of money during those periods of time, they ran equipment hard and cut back on some of the typical maintenance and now they're taking the opportunity with a little bit.
Slow down to two.
Repair and maintain their equipment and get ready for the for the next big increase that when you are likely to come as the interest rates top out and start to drop off again. So I think we're just seeing a little bit of.
Neglected repair and maintenance during the very busy time and theyre trying to catch up now.
Right, Okay that makes sense.
Ties into my next question then.
You look at Capex budgets at least here in North America, and they are still at relatively high levels, which I suspect.
Suspect gives you some confidence.
Do you think Thats, a testament to the windfall that some of your customers have seen in the past few years and their financial strength or did you get the sense that you.
Your customers expect this downturn in demand to be pretty short lived and if that doesn't come to fruition that may look to reassess.
So as I mentioned and then to go they ran the equivalent pretty hard they've made a lot of money.
I do think that they.
Most people expect this recession to be.
Sure and maybe not as severe as certainly the crisis that we've had in the past.
The underlying fundamentals of their business and of our business are strong if you look out the next many years.
The fundamentals in the forecast are for good good activity levels. So I think.
They are getting prepared for that.
And yes, you are right if the recession is longer or deeper than there could be some further slowdown, but as you know these projects tend to be large and they take a while and so they're not quick to shut these things down once they get started.
Think if you look at most of the companies that are indicating their outlook over the next say five years.
Pretty positive.
Alright, Okay, and then just lastly from me.
You touched on.
80, 20, and some of the success you are having there I was hoping you could just give a few examples of maybe.
Where that's been particularly successful in different divisions and beyond <unk> are there any other kind of notable margin initiatives.
Youre looking at here in 2023.
Well I'd say right now.
We have about if you look at it on a revenue basis about half of our revenue is in the program and.
Some of course are in the earlier stages and some in the.
<unk>.
<unk> had it in place for a few years and we've seen very good benefits I'd say.
In particular, when I look across the segments.
One of the first operations was in flow control and we've had a few more in flow control that have already that have also joined in so we've seen some very good <unk>.
<unk> on the <unk>.
Flow control.
And also we're starting to see some nice traction in industrial processes.
Got it okay, yes, other part the other programs. We've always we always have kind of ongoing continuous improvement lean lean is a big focus of ours that you'll never kind of finished there. So we always have other programs going on trying to optimize.
Our operations by 80 20 has certainly been the.
Probably the biggest investment and probably we've seen the most.
Encouraging results from that over the last few years.
Got it thanks for all the details.
Thank you as a reminder to ask a question you will need to press star one one.
And at this time I would like to turn the conference back over to Mr. Paul for any closing remarks.
Thank you Norma before we wrap up the call today I just wanted to leave you with a few takeaways.
2022 was a record setting year for cadence and our employees deserve a lot of credit for achieving these excellent results I really want to thank our employees around the world and the dedicated efforts to serve our customers' needs and.
In 2023, we will continue to seek new opportunities to create value as we focus on meeting our customers' needs with innovative technologies and solutions that drive sustainable industrial processing.
Our financial health is excellent and our ability to generate strong free cash flow remains a cornerstone of our business model, we expect to deliver exceptional value for our stakeholders again in 2023.
Thank you for joining the call today and stay safe.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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