Q1 2023 Kadant Inc Earnings Call
Cash flow in Q1, which is historically a weaker quarter increased 55% compared to the same period last year with $37 million, while free cash flow was $32 million.
Next I'd like to review our performance details on each of the operating segments I'll begin with our flow control segment.
Yes.
Flow control segment experienced a strong pickup in demand and set a new bookings record at $105 million.
Both capital business aftermarket parts demand boosted performance in the first quarter.
Organic bookings, which exclude the effects from foreign currency translation were up 8% compared to the same period last year.
Q1 revenue performance was outstanding despite the headwinds from FX aftermarket parts revenue was a record and made up 73% of total Q1 revenue.
Improved operating leverage led to an 11% increase in adjusted EBITDA compared to Q1 of 2022 and an adjusted EBITDA margin of 29, 6%.
As many of you know the first quarter of the year is historically, our strongest quarter in terms of bookings as our customers prepare for annual spring maintenance shutdowns.
As a result, we expect subsequent quarterly bookings to moderate as the year progresses.
Said, we do expect to deliver strong performance again this year in our flow control segment as our end markets remain healthy.
Okay.
Turning now to our industrial processing segment, we experienced softer yet still good demand for both capital and parts in the first quarter.
Q1 bookings were down 9% compared to the strong prior.
Prior year period, reflecting the more recent moderation of activity in the wood processing sector.
And for parts and capital for our recycling systems was robust across all regions of the world.
Revenue in this segment decreased 10% to 84 million in the first quarter compared to the same period last year excluding.
Excluding the negative impact of FX organic revenue decreased 6%.
Overall, we had a good start to the year with relatively strong activity in our wood processing product line.
We expected this activity and wood sector to moderate as the year progresses.
In our material handling segment, we achieved our best performance since creating this segment with strong demand for our bulk material handling equipment, leading to record bookings of $74 million in the first quarter.
Demand in both Europe , and North America for our high performance building systems was also notable in the first quarter.
Revenue increased 19% to a record $57 million with significant contribution from capital shipments.
Q1, organic revenue was up 21% compared to the same period last year.
Improved operating performance drove adjusted EBITDA up 29% and boost the adjusted EBITDA margin to 22% of revenue.
During the quarter, we booked a large capital order for north America's longest conveying line with a value of approximately $12 million.
The 42 mile long conveyor incorporates are either smart rose and is designed to eliminate the need for truck transport, thereby eliminating emissions associated with transport for the bulk materials.
Yes.
As we look to the second quarter of 2023, and the full year, our record backlog and ability to generate robust cash flows has us well positioned to capitalize on opportunities that may emerge as the year unfolds we.
We expect to deliver excellent financial performance again, this year and are raising our full year 2023 revenue and EPS guidance.
Mike will discuss this in more detail and with that I'll turn the call over to Mike.
Thank you Jeff.
I'll start with some key financial metrics from our first quarter.
Gross margins were 44, 4% in the first quarter 'twenty, three up 100 basis points compared to 43, 4% in the first quarter 'twenty two.
This increase was principally due to higher margins achieved on the mix of capital projects, especially in our industrial processing segment.
Also contributing to improved gross margin was a higher overall percentage of parts and consumables revenue, which represented 66% of revenue in the first quarter 2003 compared to 65% in the prior year.
SG&A expenses were $58 6 million in the first quarter 'twenty three a decrease of <unk> 6 million compared to $59 2 million in the first quarter 'twenty two.
We had a favorable foreign currency translation effect of $1 8 million, which lowered SG&A expenses in the first quarter 'twenty three.
In the first quarter of 'twenty, two we had $2 8 million in acquisition related costs, and a <unk> 6 million indemnification asset reversal.
Excluding these items SG&A expenses were up $2 6 million or 4% compared to the first quarter 'twenty to <unk>.
Primarily due to increased compensation expense as well as travel related costs.
As a percentage of revenue SG&A expense decreased to 25, 5% in the first quarter 'twenty three compared to 26, 1% in the prior year period.
Our effective tax rate in the first quarter was 25, 7%, which included tax benefits related to the vesting of equity awards, which lowered the effective tax rate by 90 basis points.
Our GAAP EPS decreased 32% to $2 40 in the first quarter compared to $3 53 in the first quarter 'twenty, two which included a $1 30 gain on the sale of one of our Chinese facilities related to our relocation plan.
Our adjusted EPS was up 5% to a record $2 40.
Which exceeded the high end of our guidance range by 20.
<unk> due to higher than anticipated revenue, especially in our material handling segment.
Yes.
Adjusted EBITDA increased 6% to $48 6 million compared to $45 8 million in the first quarter 'twenty two driven by strong performance in our flow control and material handling segments, which both had record adjusted EBITDA.
As a percentage of revenue adjusted EBITDA increased to 21, 1% compared to 22% in the first quarter of 'twenty two.
Both operating and free cash flow increased 55% in the first quarter of 23 to $36 9 million and $32 4 million respectively.
Our operating cash flow of $36 9 million in the first quarter of 'twenty three represents the highest quarterly cash flow since the fourth quarter of 'twenty one.
Historically, the first quarter has been a weak quarter for operating cash flows.
This represents a strong start for 'twenty three.
With both operating and free cash flow being our highest first quarter performance.
We had several notable non operating uses of cash in the first quarter of 'twenty three.
We paid down debt by $20 8 million pay.
Paid $4 5 million for capital expenditures paid a 3 million dividend on our common stock and paid $3 9 million in tax withholding payments related to divesting of stock Awards.
Yes.
Capital expenditures of $4 5 million in the first quarter of 'twenty. Three included <unk> 2 million related to our facility project in China.
We estimate this project will incur construction costs of $8 million to $9 million for the remainder of 'twenty three with a projected move to the new facility in the second half of the year.
Let me turn next to our EPS results for the quarter.
In the first quarter 'twenty, three both GAAP and adjusted EPS for $2 40.
In the first quarter 'twenty to <unk>.
GAAP EPS was $3 53.
And adjusted EPS was $2 28.
Our EPS in the first quarter 'twenty two included a $1 30 gain on the sale of one of our Chinese facilities related to our relocation plan.
<unk> acquisition related costs, and a <unk> impairment charge.
As shown in the chart the increase of 12 and adjusted EPS in the first quarter 'twenty three compared to the first quarter 'twenty. Two consists of the following.
17.
Due to higher gross margin percentage.
And <unk> <unk> due to higher revenue.
These increases were partially offset by <unk> <unk> due to higher interest expense <unk> due to a higher tax rate and <unk> <unk> due to higher operating expenses.
Collectively included in the other categories I, just mentioned was an unfavorable foreign currency translation effect of nine from the first quarter 'twenty three compared to the first quarter of last year due to the strengthening of the U S. Dollar.
Sure.
Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable increased.
<unk> increased to 136 at the end of the first quarter 'twenty three compared to 104 at the end of the first quarter 'twenty two.
Our average cash conversion days over the last eight quarters has been 118 days.
Our cash conversion days at the end of the first quarter 'twenty three is above average compared to the prior year period, which was below average.
32 day increase in cash conversion days was driven by a higher number of days in inventory, especially in our industrial processing segment.
Our businesses are working to fulfill orders from their record backlog.
Working capital as a percentage of revenue was 15, 6% in the first quarter of 2003 compared to 10, 8% in the first quarter 'twenty two.
The increase in this metric was driven by a $36 million increase in inventory to fulfill orders in our backlog.
And the reclassification of a $15 million note receivable related to our China relocation project from long term to short term.
Our net debt that is debt less cash decreased $25 million or 21% sequentially to $96 million at the end of the first quarter 'twenty three.
With our debt Paydown in the first quarter, we were able to further lower our leverage ratio calculated in accordance with our credit agreement to six four at the end of the first quarter 'twenty three compared to <unk> 74 at the end of 'twenty two.
At the end of the first quarter 'twenty, three we had $233 million of borrowing capacity available under our revolving credit facility, which matures in November of 27.
Our lower leverage ratio and increased borrowing capacity has us well positioned to act on future investment opportunities.
Now I'll turn to our guidance for 'twenty three.
As a result of our strong start to the year, we are increasing our full year revenue guidance to $910 million to $935 million from $900 million to $925 million and.
And we are increasing our adjusted EPS guidance for the full year to $8 90 to $9 15.
From $8 82.
To $9 five sites.
The adjusted EPS guidance excludes <unk> estimated relocation costs associated with one of our facilities in China.
Our revenue guidance for the second quarter of 'twenty, three is $230 million to $235 million and our adjusted EPS guidance is $2 <unk> to $2 15.
Which excludes <unk> <unk> of estimated relocation cost.
As always I'll 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 central Banks' policy responses to inflation.
Geopolitical tensions.
Strengthening of the U S dollar and lingering supply chain issues.
We continue to anticipate gross margins for 'twenty, three will be 42% to 43%.
This implies gross margins in the remaining quarters will be in the 42% range with the second quarter gross margin is projected to come in at the low end of the 42% range as the mix is expected to be more heavily weighted towards capital in the first quarter of 'twenty three.
As a percentage of revenue, we still anticipate SG&A will be approximately 24% to 25% and R&D expense will be approximately one 5% of revenue and 23.
We expect our tax rate for the remaining quarters will be approximately 27%.
We continue to expect depreciation and amortization to be approximately 34% to $35 million.
And we continue to anticipate Capex spending in 'twenty, three will be approximately $30 million to $34 million, which includes $8 9 million related to our facility project in China.
That concludes my review of the financials and I'll now turn the call back over to Gerald for our Q&A session Carol.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
These standby, while we compile our Q&A roster.
Okay.
Thank you one moment please.
Okay.
Our first question comes from the line of Gary <unk> from Barrington Research. Your line is now open.
Hey, good morning, everyone.
Good morning.
Quick question here on the flow control, you said, 73% of revenue.
Aftermarket parts is that correct in this quarter.
Yes.
How did that compare to last year do you have that handy.
See here.
Have that right in front of me Gary.
I'll come back to you on that one signed it.
Okay and I would also like you said it was $65 million for industrial I, just would like to see where that was last year at that time too at this time last year it.
It was 72%, Okay first lung and industrial.
This year were <unk> 65 last year it was 60.
Okay and then.
In the industrial processing side was the majority of that revenue decrease really due to what you do on the wood product side versus recycling paper and paperboard.
Yes, yes, it was but I'd also note there Gary I mean, we did.
First a couple of things.
It's a tough comp for us I think we're going to have that.
Emily, especially in wood for 'twenty, three but the other thing that happened, which is why I made that mentioned in my.
Call notes about capital the variability of wind capital ships as we had some projects that were scheduled to ship in the first quarter and those were moved to later quarters in the year. So had those shipped in the quarter, we would've been flat organically on revenue.
Yes.
Yes still have I mean, this is normal for things.
Actually most especially of course on capital projects, they can get pulled in or moved out.
If it happens Gary is the site, there's a lot of civil construction work on the site that has to be completed before they can start equipment customers, who often get behind on their on their project and so they're not ready for the equipment to be installed so that kind of dictates the delivery schedule.
Okay, and then lastly in that material handling.
Segment, you had some pretty good growth. There you said you booked a large.
Capital order for 42 mile conveyor.
Yes, thats a huge conveyor, but was there any revenue in the quarter from that was it all <unk>.
All of the revenue.
Well the majority well was there any revenue in the quarter from that.
Now Gary No no revenue in the first quarter related to that.
Thank you.
Yes.
Thank you one moment as I compile the Q&A roster.
Our next question comes from the line of adding Madden Ham D. A Davidson your line is now open.
Okay.
Hi, Good morning, you have added.
Morning.
We are adding here filling in for Doug and good day.
Hi, Ed.
And so first off congrats on a great quarter in this environment.
Three questions for you today.
The first one being in terms of the outlook for a moderation in activity in the second half.
Are you seeing tangible signs of general commentary from your customers or is that our more recent booking activity to lead you that view or is it just more of a potentially good bill good stat that given the kind of environment.
Yes.
Can say that bookings in the first quarter were incredibly strong.
There is even a big FX impact of that so the bookings are even stronger than in the $2 75 in reality so.
So we experience great activity, but we do I think we do have concerns in the back half of the year because as you know these the central banks and in particular are the Federal Reserve Bank is working very hard to try to crush demand.
And so I think we're being particularly cautious in the back half of the year, because we don't have good visibility and Theres, just a lot of noise and a lot of uncertainty out there and so we tend to be as you know a conservative organization anyway, and so we're just being cautious but.
Through the first quarter of course demand width was exceptionally strong.
Really all of our businesses all of our segments across the world. So it's more just being cautious because of the unknown I would say at this point.
Okay, Yeah that makes sense.
And another question about gross margin gross margins were quite strong relative to the full year guide in Q1 could you talk through how you expect that would trend over the balance of the year and some compression there primarily just related to your expectation around <unk>.
Capital going forward.
Yes.
You're exactly right.
Our first quarter for us.
Youll tend to see gross margins be.
Pretty strong because.
It tends to be more our first quarter tends to be more heavily weighted towards parts and consumables as you saw for <unk>.
First quarter of this year was 66% and you're exactly right as we go through the year that mix is going to <unk>.
<unk> towards more capital. So this will be our strongest quarter for parts and consumables as a percent of revenue and then that percentage will start to decrease as we ship more capital and that is what's creating the pressure now.
Gross margins and that's why.
I was careful to call that out in the <unk>.
Call to say, Hey, we started out with very strong gross margins we anticipated.
And it fit to guidance that we gave of 42 to 43 and as a result on the go forward quarters, Youll see margins kind of in that 42% range.
Okay, Yeah that makes sense and just lastly on capital allocation for the remainder of the year, how you're thinking about share repurchases versus dividend.
Maybe you can talk more about M&A, what kind of opportunities you're seeing out there are you more or less meaning we're willing to be active on that thank you and good luck next quarter.
Thank you, yes, so as you know we pay a dividend.
Our goal is to try to to increase that every year.
But.
It tends to be something that the board looks at every kind of every quarter.
As far as stock buybacks and while we have authorized buyback we haven't purchased any shares.
For several years.
We've found that they have been good acquisition opportunities out there that we thought were better returns for us.
And I would say that from an acquisition activity standpoint last year was quite slow I think many of the bankers would say their business was off about 50% last year.
Certainly saw that and but this year I think there is a lot more activity. There is a lot more discussions going on.
It does seem like deal flow is picking up this year. It's still early in the year of course, but at least through the first quarter I would say the activity level. The discussions the number of deals come to the market is up.
Quite a bit from last year so.
As you know we.
We tend to be opportunistic we don't buy companies every year, but when we find good strategic fits.
We will move on them and of course, we've got the balance sheet and the debt capacity to do that.
So Jeremy I think that was the last of his questions and if there is another another questioner.
We have one more question give me one moment as our content at this stage.
Our next question comes from Walter Liptak from Seaport Research. Your line is now open.
Hey, good morning, guys How're you doing.
Good work at Barnwell.
Sure.
Wanted to ask about.
A little bit more about the second quarter and <unk>.
Maybe the mix of business in the second quarter. The number the guidance on the EPS line was a little bit below where the consensus here I'm. Just wondering if you can just clarify I think you touched on a little bit but maybe.
Whats the mix looking like for the second quarter.
Yes.
Second here well.
The second quarter.
Were projecting.
Debt capital, we about 40% of the mix, so parts and consumables, 60%.
So as you can see where and that's as we move through the year, we're going to have that.
Kind of how it's going to play out we had our I think this will be our best quarter in terms of parts and consumable mix at 66% and then Youll see second third and fourth we are it will be much heavier on the capital side.
Okay.
And then another question for maybe later in the year in Canada.
Cautiousness because of monetary policy.
We've seen some.
OCC prices lumber OSB coming down.
Wonder what the project finance from your customers.
What kind of discussions are you having with them about.
Future capacity adds.
So I hope you saw the article in the Journal. This morning, there was talk about housing.
As bounce back up a little bit.
What we've experienced certainly what we experienced in the first quarter I would say was that.
For the last couple of years allow the mills a lot of our customers were running.
Full out and really didn't take their traditional downtime to do.
Maintenance upgrades refurbishments and so on the first quarter, we saw a fair amount of activity around that where they are now taking the opportunity because things are running at 100% of utilization in the way they were in the last couple of years.
There has been some softness I would say.
On the packaging side, we've seen some mill downtime announced.
And not only in the U S and China as well.
So I think they're kind of in the same position we're in everybody.
Trying to.
Two to discern what the back half of the year is going to look like and what.
Interest rates are going to do our bankers are going to do so I think it's a little unclear, although I do think.
Most people are expecting some moderation.
They've made a lot of money a lot of money in the last couple of years and so.
They're using that money to upgrade their facilities to get more production to become more efficient.
We benefited from that in the first quarter and there could still be more of that as the year goes on.
But I do think the overall economic activity level.
As forecasted two to slow down some and as you know.
When you've got two thirds of your business being parked consumables that are a function of the operating rates. So if operating rates slow down a little bit we will see a corresponding slowdown in our activity and that's that's really the question Thats why we are being somewhat cautious for the back half of the year.
Got it.
And then maybe a last one for me just about pricing strategies I know that.
You guys have handled.
The supply chains and price cost for my perspective, pretty well, but I wonder if you could just maybe refresh us on.
Pricing.
Last year, and what Youre thinking about for pricing to offset.
Any inflation for 2023.
Well first and foremost we always work very hard to try to lower our costs so that.
We manage those those cost increases are customers of course don't like us having to pass those on to them just like we don't like our vendors passing cost on to US. So we're always working hard to come up with ways to lower our input cost.
So that we can.
Maintain our competitive position in the marketplace, but there are instances where.
You just can't.
You can't get any more savings and in those cases, where sometimes required to pass those on to to our customers.
This year, I think youre going to see less by increases across the board in all industries.
Demand is going to be down a little bit.
And to be quite Frank last year people were more concerned about whether they could get something delivered to them and they were about the price and supply chain logistics has improved substantially. So you don't have kind of that mentality, where.
First and foremost I needed delivered.
I worry about the products.
Later, that's not the case anymore, and so I think theres a lot of scrutiny on pricing and therefore, we're working hard to to contain our cost to make sure we maintain our competitive position.
Okay. It makes sense, thanks very much.
Thank you again as a reminder, if you'd like to ask a question. Please press star one one on your telephone.
Give us just a moment to see if.
And when he was up.
It looks like there is no further question. So at this time I would like to turn it back to Jeff Powell for closing remarks.
Thank you Gerald.
Before wrapping up the call today I just wanted to leave you with a few takeaways first quarter with an excellent start to 2023.
With high demand for our parts and good capital project activity, which led to record bookings and record backlog.
Although there are continuing economic headwinds our employees around the globe continue to focus on meeting our customers' needs with innovative technologies and solutions that deliver long term value to our stakeholders, our financial health is excellent and our ability to generate strong free cash flow has us well positioned to capitalize on growth opportunities.
And we look forward to delivering exceptional value to our stakeholders again in 2023.
With that I want to thank you for joining the call today and we look forward to updating you again next quarter.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Okay.
[music].
Okay.
Yes.
Yes.
[music].