Q2 2023 Kadant Inc Earnings Call
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Yeah.
Good day, and thank you for standing by and welcome to the cadence second quarter 2023 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 the session you will need to press star one one on your telephone.
And you will then hear an automated message advising your hand is 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 ahead.
Thank you Abigail.
Good morning, everyone and welcome to cadence second quarter 2023 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 Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward looking statements as a result of <unk>.
Various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our.
Our annual report on Form 10-K for the fiscal year ended December 31, 2022, 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.
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 reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter 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 cadence dot com.
Finally.
I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS. On this calls 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.
We'll give you an update on cadence business and future prospects.
During Jeff's remarks, I'll give an overview of our financial results for the quarter and we will then have a Q&A session. Just thanks, Mike Hello, everyone. Thank you for joining US. This morning to review, our second quarter results and discuss our business outlook for the second half of 2023.
I'll begin by reviewing our operational highlights for the second quarter.
Im pleased to report we had another well executed quarter with solid aftermarket demand for parts combined with strong capital business, leading to record revenue record adjusted EBITDA and record adjusted EPS.
Our operations teams around the globe continue to deliver value for our customers and perform at a high level as shown by our strong financial performance.
Done a great job meeting our customers needs in a challenging environment and I want to thank them for their outstanding work and the results they generated.
Turning next to slide six I'd like to review, our Q2 financial performance.
We achieved a number of new financial records in the second quarter, driven by large capital shipments along with strong contribution from aftermarket parts.
Revenue increased 11% to a record $245 million with solid growth across all regions and all operating segments.
Strong execution contributed to our record adjusted EBITDA of $52 million up 12% compared to last year and representing 21% of revenue in the second quarter.
Our adjusted EPS was also a record at $2 54 a share.
As economic headwinds strengthen second quarter bookings decline from the record set in the first quarter of this year.
Capital project activity remains healthy.
As the scope of these projects is refined execution timeline has in some cases been pushed out to a later date.
While the general slowdown in industrial activity over the past few months as reflected in our second quarter New order activity.
We have a strong backlog and expect bookings in the second half of 2023 to be similar to the second half of last year.
I'll provide more details on that when I review, our operating segments.
Next I'd like to discuss our three operating segments beginning with flow control.
As you can see on slide seven our flow control segment had solid bookings coming off of a record first quarter in 2023.
Revenue in the second quarter increased 12% to a record $96 million with a strong contribution and capital projects.
Our aftermarkets parts revenue remained robust in the second quarter and made up 68% of total revenue.
Excellent operating performance led to record adjusted EBITDA and adjusted EBITDA margin of 29, 3%.
Our flow control segment bookings performance in the first half of 2023 provided a good start to the year.
We expect business to moderate in the second half, reflecting the overall softening in industrial production.
That said the fundamentals of our end markets remain healthy and we are well positioned to capitalize on new projects and opportunities.
Our industrial processes segments revenue in the second quarter grew 7% compared to the same period last year.
Relative to our other operating segments, our industrial process segment was more impacted by foreign currency translation in the second quarter and when excluding the impact of FX, our revenue was up 9%.
Strong operating leverage boosted EBITDA margin 40 basis points to 22, 2%.
As you can see on slide eight our year over year bookings comparisons challenging for the second quarter as we had historic demand in the prior year period.
The decline in capital business was largely in our wood processing product line, while demand for parts of the segment was comparable to the same period last year.
Yes.
And our material handling segment, we achieved our best revenue performance since creating this segment with strong contributions from our bulk material handling equipment, leading to record revenue of 50 $959 million in the quarter.
Aftermarket parts demand for our high performance billing systems, particularly in Europe was also notable.
Bookings in our material handling segment were down 19% compared to the same period last year large.
Largely due to reduced capital project activity in our billing product line.
Our record setting revenue volume combined with solid execution by our businesses. In this segment helped boost adjusted EBITDA margin to a record 22, 9% in the quarter.
We are encouraged by the number of infrastructure projects already underway and the additional projects being planned since the passage of the infrastructure build in the U S.
Inquiries for our material handling equipment continue to increase as infrastructure projects gained traction and we are well positioned to take advantage of this growing demand.
Yes.
As we look ahead to the second half of 2023.
Ongoing economic challenges lead us to believe demand for our products will be similar to that of the second half of last year.
Our operations teams around the globe executing well on our strategic initiatives and making positive strides to create and capture more value.
Our robust backlog and ability to generate strong cash flows continue to have us well positioned to capitalize on opportunities that may emerge as the year unfolds.
We expect to deliver record financial performance again, this year and are raising our full year 'twenty three revenue and EPS guidance.
With that I'll turn the call over to Mike for a review of our financial performance in Q2, and our guidance outlook for the remainder of the year.
Mike.
Jeff.
I'll start with some key financial metrics from our second quarter.
Yeah.
Solid gross margins were 43, 5% in the second quarter 23 up.
20 basis points compared to 43, 3% in the second quarter 2002.
This increase was principally due to higher margins achieved on capital projects, especially in our industrial processing segment.
Offset in part by a lower proportion of parts and consumables revenue, which represented 62% of revenue in.
In the second quarter of 'twenty, three compared to 66% in the prior year.
SG&A expenses increased $4 7 million to $60 million in the second quarter 23, compared to $55 3 million in the second quarter 2002, due to wage increases and incremental costs related to trade shows and travel.
As a percentage of revenue SG&A expense decreased to 24, 5% in the second quarter 23, compared to 25% in the prior year period.
Yes.
Our GAAP EPS increased 13%.
To $2 54 in the second quarter.
<unk> to $2 24 in the second quarter of 'twenty, two principally due to higher revenue.
Our adjusted EPS was a record $2 54 in the second quarter 'twenty three.
<unk> the prior record of $2 40.
Achieved in the first quarter of 'twenty three.
The second quarter 'twenty, three adjusted EPS exceeded the high end of our guidance range by <unk> 39.
Due to higher revenue and better gross margins than forecasted.
We had record revenue in the second quarter of 'twenty, three driven by our highest quarterly parts and consumable revenue.
Both our material handling and industrial processing segments exceeded their parts and consumables revenue forecast due in part to fulfilling additional orders from backlog.
Adjusted EBITDA increased 12% to a record $51 6 million compared to $46 million in the second quarter 'twenty two due to strong performance in our flow control and material handling segment.
As a percentage of revenue adjusted EBITDA was 21% compared to 27% in the second quarter 'twenty two.
Operating cash flow increased 20% to $22 5 million in the second quarter 23, compared to $18 8 million in the second quarter 'twenty two.
Free cash flow was up 16% to $13 7 million in the second quarter 23, compared to $11 $9 million in the second quarter 'twenty two.
Yes.
We had several notable non operating uses of cash in the second quarter 'twenty three.
Paid down debt by $25 1 million.
Paid $8 8 million for capital expenditures.
And paid $3 4 million dividend on our common stock.
I would also note that $3 $1 million of the $8 $8 million capital expansion amount related to the facility project in China.
The facility move has started and is expected to be completed in the third quarter with the remaining capital expenditure of approximately $5 million to be paid over the next two quarters.
Yes.
So let me turn next to our EPS results for the quarter.
Our GAAP and adjusted earnings per share were $2 54 in the second quarter of <unk> 23, compared to $2 24 in the second quarter 'twenty two.
As shown in the chart the increase of 30 and adjusted EPS in the second quarter 23, compared to the second quarter 'twenty. Two consists of the following.
63, <unk> due to higher revenue too.
<unk> due to a higher gross margin percentage and one.
Due to a lower tax rate.
These increases were partially offset by 30 <unk> due to higher operating expenses.
<unk> due to higher interest expense and <unk> due to higher weighted average shares outstanding.
Collectively included in all the categories I, just mentioned was an unfavorable foreign currency translation effect of <unk> in the second quarter 23, compared to the second quarter of last year due to the strengthening of the U S. Dollar.
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.
It was 138 at the end of the second quarter 23, compared to 136 last year.
Working capital as a percentage of revenue was 16, 7% in the second quarter 23, compared to 15, 6% last quarter.
Our net debt that is debt less cash decreased $10 million or 10% sequentially to $87 million.
This is the lowest net debt position we've had since 2017.
We were able to pay down $25 million revolving credit facility debt in the second quarter 'twenty three and as a result, our leverage ratio calculated in accordance with our credit agreement decreased to <unk> five one.
At the end of the second quarter 23 from <unk> 64 at the end of the first quarter 'twenty three.
We have a strong balance sheet and are well positioned to take advantage of investment opportunities with our current net debt position.
Current borrowing capacity of $257 million available under our revolving credit facility.
And an additional $200 million of uncommitted borrowing capacity.
Now I'll update our guidance for 'twenty three.
We are increasing our full year revenue guidance to $925 million to $940 million from $910 million to $935 million.
And we are increasing our adjusted EPS guidance for the full year to $9 15 to $9 35.
$8 92.
To $9 15 sacks.
The adjusted EPS guidance excludes <unk> and estimated relocation costs associated with one of our facilities in China.
Our revenue guidance for the third quarter of 'twenty, three is $229 million to $236 million and our adjusted EPS guidance is $2 19.
To $2 29, which excludes <unk> <unk> of estimated relocation costs.
As always our caution here that there could be some variability in our quarterly results due to several factors, including the variability of order flow and timing of capital.
Yes.
We now anticipate gross margins for 'twenty, three will be 43% to 43, 5%.
This implies gross margins in the remaining quarters will be slightly below 43% as the mix is expected to be more heavily weighted towards capital in the second half of 'twenty three.
As a percentage of revenue, we now anticipate SG&A will be approximately 25%.
We continue to anticipate our tax rate for the remaining quarters in 23 will be approximately 27%.
And we now anticipate capex spending in 'twenty, three will be approximately $38 million to $40 million up from $32 million to $34 million.
We were able to accelerate some investments originally planned for 24.
Our capex for 2023, Capex spending includes approximately $9 million related to our facility project in China.
That concludes my review of the preview of the financials and I will now turn the call back over to Abigail for our Q&A session. Abigail. 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.
One moment will be compile the Q&A roster.
Yeah.
Our first question comes from the line of Gary <unk> with Barrington Research. Your line is open.
Hey, good morning, Mike and Jeff.
Yes.
Good morning, Gary just go for my purposes is newness new.
Following the company could we just.
Maybe just go into some of the.
Puts and takes on the year over year bookings I mean, they're down.
Some somewhat dramatically I suppose so.
Is that just really a function of what you're seeing.
Economically of slowdown or it was last year, just a big year in terms of.
Bookings due to catch up from the pandemic.
Yes, so I think.
It's really a combination of two things last year at the time that was $2 66 was a record for us are quite strong.
And so and of course, the first quarter of this year was $2 75, a new record. So we kind of look at when we look at our bookings some of maybe what we thought would come in the second quarter moved in the first quarter. So we had a very strong $2 75 in the first quarter.
But there is I think there's no question that there is a little bit of an industrial slowdown if you look at the overall economy.
What we're seeing.
Is that the service side of the economy is doing.
Quite well and the industrial side is slowing down some so I think a little bit of is comparing to a record of at the time last year, a little bit of it is having such a phenomenal first quarter at the $2 75, combined with a little slowdown in industrial production.
It tends to be our capital equipment that shifts around our parts are pretty stable.
And they are pretty flat actually so it's really the timing of capital from one quarter to the next and a little bit of a slowdown.
Think people are just taking a little more of a wait and see approach.
I'm trying to see what the fed's going to do interest rates have gone up a core switch.
The increase in the cost of borrowing money and so I think it's a combination of all those factors.
Thank you.
Yes.
One moment for our next question.
Our next question comes from the line of Barnes Jamario with William Blair. Your line is open.
Thanks.
Good morning, Jeff and Mike.
Just as a follow up on the earnings sorry. The orders question can you just give an idea of.
How much worse.
<unk> compared to your expectations in the quarter and what gives you confidence that the second half bookings.
You may all come through at the levels. You said the word do you have the pipeline and the conversations and good visibility of that.
Yes.
Yes, Larry.
The orders came in on forecast that was the forecast for the quarter. So no disappointment there that is what we anticipated again as Jeff mentioned, we had an extraordinarily strong first quarter bookings performance as we as we noted so.
Youre looking at.
First quarter bookings, which were extraordinarily strong and also second quarter of last year at 266, we also indicated.
Normally strong.
Our order quarter for us, especially in both periods on the capital front.
Okay, and then the pipeline into the second half that gives you that confidence.
Yes, so I think.
No.
As Jeff said, our parts and consumable business is very stable.
We are seeing a little softness on the capital bookings front and that's what folks are forecast.
Okay.
And then.
We start to think about long term again through the second half and kind of the low orders that we're starting that we have to.
Now.
Give us some high level thoughts.
And you wanted to do it what it means into 'twenty four if we're looking at.
This is a trough year or is it do we sort of start off soft based on the orders and then look for Reacceleration in industrial from IHS and other things or can you.
You actually think about even growing margins and earnings next year because of 80 20 in positive price.
Any kind of high level puts and takes and how to start to frame next year based on where the orders are now would be really helpful.
Yes of course as you know it's always when you sit here.
<unk> closed in the second quarter, it's a little challenging to know exactly what's going to happen next year, and particularly because the fed is still it's still on a campaign to try to try to get control of inflation, but I think.
We're encouraged by the fact that the and particularly our wood group the builders are starting to see.
Improved demand.
A lot of the forest product companies have released earnings and had strong earnings and are somewhat optimistic so I.
Think that sector.
I think they're hoping that might come back a little bit next year, our material handling side in particular bulk equipment handling side, that's been ramping up with infrastructure Bill.
Bill that really is just now starting to be spent it takes a while for the government start spending that so our customers kind of tried to get ahead of that.
And then make some investments in their business. So they are prepared when that money starts to flow, but it really just hasnt.
It hasn't really hit the market yet.
But it's I.
I would say that it's still a bit early for us to predict.
The export sustain as I expect maybe things will.
<unk> will be slow in the first half of the year and that the second half things will start to pick back up there might even be some people even predict there might be some rate cuts the second half of the year.
No idea, whether that will be the case or not but I think we we believe that.
There will be some improvements as the year as the year progresses, I think we think that it's going to.
Going to be kind of flat and stable the rest of this year with last year.
Probably start out that way the first of the year, then we would expect to see.
Investments start to.
Start to be made as the year progresses, and our customers get a little more visibility on exactly where interest rates top out at.
Kind of what the fed's action might be but it's I would say these are more uncertain times because you do have the central banks I mean, China. The bankers are actually trying to spur growth because theyre growing theyre.
They're worried about disinflation on inflation, so they're trying to increase demand euro.
Europe of course is just essentially flat this quarter, maybe one or two tenths of a percent.
So yes, there is a fair amount of.
Variability around the world right now and what the different bankers are doing too.
To impact their economies, but we think generally speaking that.
Things should improve.
As the year goes on next year, Okay that makes sense I. Appreciate it's obviously, it's difficult to make those calls right now.
Question, you talked about obviously, M&A capacity et cetera and balance sheet.
At some point do you ever consider we consider share repo share repurchase and as are we at the point, where we're getting closer.
Actual M&A or is it just a good pipeline and still waiting for things to align.
So I would say Larry on the share repurchase, yes, we have a $50 million.
<unk> outstanding we always have an authorization available to utilize so that is always in the mix for capital deployment.
I would also say for US currently right now.
There is a lot of activity on the M&A front, we're seeing a lot of.
Companies come out so.
That is certainly always in play for US also I would say our deal flow. We talked about we have a corporate development group that focuses on that I would say the deal flow was surprisingly weak last year.
But as bounce back nicely. This year. So there's a lot of activity a lot of discussions a lot of companies out there that are that are.
Interested in being acquired so our groups quite quite busy right now looking to try to find.
Companies that are good strategic fits for us at the proper value.
Thank you very much and good luck.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone and wait very name to be announced to withdraw. Your question. Please press star one again.
One moment for our next question.
And our next question comes from the line of Adam <unk> with D. A Davidson your line is open.
Hey, good morning, everyone and filling in for good younger today and it's a couple of quick questions for me.
So could you give us more color on the backlog and like how would you characterize it when does it extend out into the cancellation rate or anything else, we should know about it.
Well Eddie.
Our back we ended the quarter with a backlog of $363 million.
So as you know we ended the first quarter with a record backlog of $3 93.
And just as a benchmark that $3 63.
Would be a very high backlog for us it it would be our third highest backlog only eclipsed by the first quarter of 'twenty four and then mid two.
<unk> 22, we had a higher backlog second quarter 'twenty two so.
So we have a very strong backlog.
And in regards to your question I think you were saying about cancellations.
That thats, a very rare for us.
We it does happen on occasion.
But.
Ah.
Good chunk of the backlog is capital it kind of breaks out 70%, 37% to 70% of the backlogs capital. So a majority of far and away in backlog is capital.
And our customer base when they commit to a capital project.
I tend not to back off of that so it does happen on occasion, but cancellations, but not much.
Got it got it yeah that makes sense.
And then you talked about.
What clients and so when it comes to mill digging downtime over the quarter, how did that trend and how do you expect that to be going forward maybe for the full year also if you could talk about it more broadly.
Yes, the first quarter the mills on the Woodside work for <unk>.
We're slow in demand was down but surprisingly picked up.
A bit in the second quarter prices firmed up.
And our parts our parts business was quite strong which tends to be an indicator of operating rates. So I would say on the on the wood side.
Things seem to be improving now it's very much function of interest rates.
<unk>.
Everybody is trying to adjust to the new rates, but.
There is almost no kind of used inventory coming out of the market everybody is locked into these very low interest rate loans. They don't want to they don't want to trade out of 3% mortgage for seven and so almost all of the home purchases now our new construction because of that and so of course that drives that drives.
A lot of our customers.
So.
I think.
If you look at the underlying fundamentals of <unk>.
<unk> in the housing sector, you look at the millennials, which theyre going to peak around 2030 as far as prime how spine.
Then also the average age of homes on the 20% to 40 year, which is when major remodeling takes place.
That's a quite high rate too so the underlying fundamentals for wood.
Quite good for the next several years.
And I think.
There has been this momentary challenge with the fed raising rates to try to crush crush inflation, but as rates start to come down whether its marrow next year. The end of next year.
I think youre going to see the wood sector come back very strongly.
Because there's just so much underlying demand it makes money.
Aren't going to live in their parents' basements forever, they want to get out and so there's just a lot of demand and we've under built for for 10 years now or more so.
I think youre starting to see some improvements now and we expect that will absolutely continue and will accelerate as soon as rates.
Top out and start to come down some.
Yes.
Right Yep.
Thank you for that and then just going back to capital allocation from your comments is it fair to say you're leaning more towards.
Sticking with the dividend and increasing that dividend relative to M&A.
I would say no that wouldn't be true.
We have a dividend and although we can't promise our goal is always to.
We strive to try to increase it every year. So in all likelihood we will be continuing with the dividend but that.
Really I would say is not.
Impacting what we choose to do an M&A at all.
Okay. Thank you so much and good luck next quarter.
Thank you.
Yes.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
That concludes the question and answer session. At this time I would like to turn it back to Jeff Powell for closing remarks.
Thank you Abigail and before wrapping up the call today I just wanted to leave you with a few takeaways.
Despite the slowing economies the second quarter was another record setting quarter.
And our operations teams deserve a lot of credit for producing these results.
We have strong market positions and expect stable demand during the second half of the year and finally, our balance sheet continues to strengthen and we are actively pursuing new growth opportunities with that I want to thank you for joining the call today and we look forward to updating you next quarter.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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