Q3 2023 Kadant Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Kate in third 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 this session you will need to press star one one on your telephone.
Phone.
And then here 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 Amy good morning, everyone and welcome to cadence third 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 the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1095.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our annual report on Form 10-K.
For the fiscal year ended 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, while we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our views or estimates change.
During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
A 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 in the investors section of our website at Www Dot Kt Dot com.
Finally, I want 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.
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 Jeff.
Thanks, Mike Hello, everyone. Thank you for joining us this morning to review, our third quarter results and discuss our outlook for the remainder of the year.
I'll begin by reviewing our operational highlights.
The third quarter with another record setting performance benefited from a combination of excellent execution across the operating segments and stronger than expected aftermarket parts revenue.
This led to near record revenue and record adjusted EBITDA record adjusted EBITDA margins and record adjusted EPS in the third quarter.
As has been the case throughout 2023, our operations teams around the globe delivered exceptional value for our customers in the most recent quarter, leading to excellent performance across our key financial metrics.
Want to thank them for their outstanding work and the results they generated not only in the third quarter, but throughout the year.
Turning next to slide six I'd like to review, our Q3 financial performance.
As you can see on the slide our Q3 performance was notably higher across most key metrics compared to Q3 of last year.
Revenue was up 9% compared to the third quarter of 2000 $22 million to $244 million at benefited from record capital shipments and strong aftermarket parts business.
Solid execution contributed to our record adjusted EBITDA of $53 million and a record EBITDA margin of 21, 6%.
All of our operating segments delivered excellent adjusted EBITDA margin performance.
Cash flows from operations and free cash flow were outstanding in the third quarter at $47 million and $38 million, respectively, demonstrating the strength of our business model.
As anticipated bookings softened from the record setting pace earlier, this year and were essentially flat compared to the prior period.
I'll review the performance of our operating segments next beginning with our flow control segment.
Capital project activity and solid aftermarket demand contributed revenue growth in our flow control segment up 5% compared to Q3 of last year.
Bookings were $83 million down, 2% due to weaker capital bookings compared to the prior period.
Aftermarket parts bookings were up slightly in the third quarter and represented 71% total revenue in this segment.
Excellent execution in both the commercial and operational areas of the business led to solid adjusted EBITDA.
Adjusted EBITDA margin of 29, 7%.
Many end markets and our flow control segment remained strong despite the general sluggishness found in the manufacturing sector.
We continue to see good levels of project activity and are well positioned to win new business as these projects move forward, although the timing somewhat uncertain.
In our industrial process segment revenues were up 9% to $94 million led by record aftermarket parts business, which made up 60% of our total revenue in Q3.
Adjusted EBITDA was up 9% and our adjusted EBITDA margin was excellent at 23, 8%.
As anticipated demand slowed in Q3 in response to producers taking market related downtime.
Yes.
As was the case in our flow control segment capital project activity and interest remain high across all product lines. Despite the economic headwinds.
In our material handling segment, we experienced strong demand for both capital equipment and aftermarket parts.
Revenue was up 15% to $59 million due to record capital revenue in the third quarter, our product lines. In this segment contributed to this performance bookings in this segment were up 17% compared to the same period last year to $56 million.
This growth was largely due to increased demand for our high performance balers used to prepare recycled materials and post consumer waste for secondary processing.
Solid execution helped boost adjusted EBITDA by 33% and.
And adjusted EBITDA margin by 300 basis points compared to the same period last year.
While we expect demand to moderate the near term, we continue to see growing business activity for our bulk material handling equipment and our dealers, particularly in North America.
As we look ahead to the remainder of 2023, we expect to finish the year with record results.
We ended the third quarter with a large backlog and expect fourth quarter demand to be consistent with the prior quarter.
Although we are seeing a lot of activity around capital projects. The timing of these projects is uncertain due to macroeconomic headwinds.
And finally, our healthy balance.
Cash flow have us well positioned to pursue new opportunities.
With that I will pass the call over to Mike 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 43, 3% in the third quarter of 2003 up 80 basis points compared to 42, 5% in the third quarter of 2002.
All of our segments contributed to the higher gross margins, especially our material handling segment, which was up 340 basis points compared to the third quarter of 'twenty two.
Parts and consumables revenue represented 61% of revenue in the third quarter of 23 compared to 63% in the prior year.
Yes.
SG&A expenses were $57 9 million in the third quarter 23, an increase of $4 7 million compared to $53 2 million in the third quarter 2002, and included a $1 1 million increase from the unfavorable effect of foreign currency translation.
The remaining increase in SG&A expenses, primarily associated with increased compensation expense and outside consulting fees.
As a percentage of revenue SG&A expenses were 23, 7% in the third quarters of 'twenty, three and 'twenty two.
Our effective tax rate of 25, 8% in the third quarter of 2003 was lower than we anticipated due to discrete tax items.
Our GAAP EPS increased 12% to $2 63 sites in the third quarter compared to $2 35 in the third quarter of 2002, and our adjusted EPS increased 13% to a record $2 69.
Our third quarter 'twenty three adjusted EPS exceeded the high end of our guidance range by 42.
Due primarily to higher revenue and our stock preparation and material handling product lines.
In addition, lower selling related costs and a lower tax rate also contributed to the guidance beat.
Adjusted EBITDA increased 10% to a record $52 7 million compared to $47 8 million in the third quarter of 22 due to strong performance in all our segments, most notably in our material handling segment, which had near <unk>.
<unk> revenue and adjusted EBITDA in the quarter.
Adjusted EBITDA as a percentage of revenue was a record 21, 6% in the third quarter of 23 compared to 21, 3% in the third quarter of 2002.
We had our highest quarterly operating cash flow since the fourth quarter of 'twenty, one at $47 million in the third quarter of 2003 up 89% compared to $24 9 million in the third quarter of 2002.
We had cash outflows in the first half of the year related to working capital to support our record backlog.
In the third quarter.
Projects were completed and shipped resulting in a sequential decrease in inventory of $12 million.
Overall, working capital was a $5 8 million source of cash in the third quarter of 2003.
Free cash flow increased 106% to $38 1 million in the third quarter of 2003 compared to $18 5 million in the third quarter of 2002.
We had several notable non operating uses of cash in the third quarter of 'twenty three.
<unk> paid down debt by $25 7 million in the quarter paid $8 8 million for capital expenditures and paid $3 4 million dividend.
Our common stock.
I'd also note that $2 5 million of the $8 8 million in capital expenditures related to the facility project in China.
The facility move has been essentially completed with the remaining capital expenditure of approximately $2 million to $3 million.
Let me turn next to our EPS results for the quarter.
In the third quarter 'twenty, three our GAAP EPS was $2 63 and.
And after adding back <unk> of relocation costs and <unk>.
Restructuring and impairment costs, our adjusted EPS was $2 69.
The relocation cost relate to the facility project in China.
And the restructuring and impairment costs related to the consolidation of one of our smaller manufacturing facilities into our larger facility both in Europe.
In the third quarter of 'twenty two.
Our GAAP EPS was $2 35.
And after adding back <unk> of acquisition costs, and one time restructuring costs, our adjusted EPS was $2 38.
As shown in the chart the increase of 31 and adjusted EPS in the third quarter 'twenty three compared to the third quarter 'twenty. Two consists of the following.
53, <unk> due to higher revenue.
13 cents due to higher gross margins and <unk> due to a lower tax rate.
These increases were partially offset by 33 due to higher operating expenses.
<unk> <unk> from higher interest expense and one from higher weighted average shares outstanding.
Collectively included in all the categories I, just mentioned was a favorable foreign currency translation effect of <unk> and.
In the third quarter of <unk> 23, compared to the third quarter of last year.
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.
We're 138 at the end of the third quarter 'twenty three unchanged from the prior quarter.
Working capital as a percentage of revenue decreased to 15, 4% in the third quarter of 23 from 16, 7% in the second quarter of 2003.
Our net debt that is debt less cash decreased $36 million or 42% sequentially.
$50 million at the end of the third quarter 'twenty three.
We've paid down $70 million of our revolving credit facility debt and 23, helping to lower our leverage ratio calculated in accordance with our credit agreement to 0.38 at the end of the third quarter 23, compared to <unk> 74 at the end of 'twenty two.
Our net interest expense increased $2 million to $1 7 million in the third quarter 'twenty three compared to $1 5 million in the third quarter 'twenty two.
We have a strong balance sheet and are well positioned to take advantage of investment opportunities with our current net debt position of $50 million.
Current borrowing capacity of $285 million available under our revolving credit facility.
And an additional $200 million of uncommitted borrowing capacity.
Now turning to our guidance for the fourth quarter and full year 2003.
Due to our strong third quarter performance, we are increasing our full year revenue guidance to $941 million to $949 million from $925 million to $940 million.
And we are increasing our adjusted EPS guidance for the full year to $9 65.
To $9 75.
$9 15 to.
To $9 35.
The adjusted EPS guidance excludes <unk> <unk> of relocation costs, and three a restructuring and impairment costs.
Our revenue guidance for the fourth quarter of 'twenty, three is $222 million to $230 million and our adjusted EPS guidance is $2 <unk> to $2 12.
As always I'll caution here that there could be some variability in our quarterly results due to several factors, including the variability.
Of order flow and the timing of capital shipments in.
In addition, other risks that could impact our guidance include central Banks' policy responses to inflation.
Geopolitical tensions and softening markets.
We continue to anticipate gross margins for 'twenty three will be 43 to 43, 5% with.
With fourth quarter margins projected to be in the mid 42% range as the mix is expected to be more heavily weighted towards capital.
We expect our tax rate for the fourth quarter will be approximately 27%.
We hope these guidance comments are helpful and that concludes my review of the financials and I will now turn the call back over to Amy for our Q&A session Amy.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Gary <unk> with Barrington Research Your line is open.
Hey, good morning, Jeff and Mike.
Good morning, Jeremy.
Could you maybe I was trying to write this down as quickly as possible because we maybe dwell a little bit into the strength that you saw in material handling and and I think you said you were going to see maybe a step down in demand in Q4 could you help me out there.
Sure well.
We had very we've had very strong performance on the material handling front on in regards to bookings and that continued in the third quarter and I would say.
Remind you that in the first quarter, we had a large order that we booked for the that conveying system 42 mile long rates campaigns instrument.
That is you're seeing some of that in revenue in the third quarter and youre going to see a good portion of that revenue in the fourth quarter. So I think on the revenue front.
Material handling performance will be.
Pretty strong.
On the bookings front.
I'd say I'll, just let me just take a.
Each year for the fourth quarter.
We usually don't give.
Net too granular on forecasting bookings, but when I look back to our performance in the fourth quarter of 'twenty. Two we had quite a strong quarter on capital bookings and I would anticipate that we'll see that pull back a little bit so that may cause.
Operator: Good day and thank you for standing by.
Operator: Welcome to the Kadant 3rd quarter, 2023 Earnings Conference Call. At this time, all participants are in a listen only mode.
Overall that may.
Make material handling kind of flattish or down a little bit on the bookings front.
Operator: 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again.
You also I wrote down here demand for Balers.
Was pretty strong too.
Do I have the right.
Yes, we had very.
Very good strengthening of valor business.
Okay.
Operator: Please be advised that today's conference is being recorded.
Yes.
And then.
Michael Mckenney: I would like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead. Thank you, Amy.
The flow control you mentioned good levels of project activity within various segments of the business could you maybe elaborate on that a little bit.
Michael Mckenney: Good morning, everyone and welcome to Kadant's 3rd 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, while Kadant's future plans and expectations, financial and operating results and prospects, are forward-looking statements for the purposes of the safe harbor provisions under the private security delegation reform act of 1995.
Yes so.
Of course, we're particularly strong they're particularly strong in the end.
The packaging and paper.
But they've also done a great job that product line probably has.
More applications through the general industry than almost any other product, we have and they've grown that side that industrial side nicely. So they are particularly strong in the metals.
They have they are particularly strong in food.
And tissue, which is a subset of.
Paper, but a little more stable.
Michael Mckenney: These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements. As a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our annual report on Form 10K for the fiscal year ended December 31st, 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.
And then just general industry, it's amazing how many industries that are out there that use our our fluid handling products from.
Solar fields to when mills too.
All kinds of applications out there. So there is a quite a mix of general industry that.
And they are continuing to make good progress in taking their products to new markets and so.
In fact, I'd say, that's true through all of the cadence where our largest segment now is what we call general industry. It's our biggest of all of our segments. So everybody who works hard to try to take their products and new markets in the.
And the fluid handling in particular has a lot of broad applications there.
Michael Mckenney: 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 refer to some non-gap financial measures. These non-gap measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-gap financial measures to the most directly comparable gap 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 in the investor section of our website at www.cadent.com. Finally, I want to note that when we refer to gap earnings per share or EPS and adjusted EPS on this call, we're referring to each of these measures as calculated on a diluted basis.
Okay. Thank you.
Yeah.
One moment for our next question.
Our next question comes from Lawrence de Maria with William Blair. Your line is open.
Hi, Thanks, good morning, everybody.
First first question.
Do you expect I believe flat backlog at the end of the year. Obviously you gave your sales guide implies orders pick up sequentially to the 220 to $2 30 range. So if I could the first what's driving that uptick sequentially.
Especially if the MHS, maybe down a little bit I guess, the other do you have to be up but is there any specific driving that can have a good visibility as we move into next year.
Well I'd say specific to the fourth quarter Larry.
Jeff Powell: With that, I'll turn the call over to Jeff Powell, who will give you an update on cadence business and future prospects. Following just remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
Im not sure how you define that base.
Basically the guidance, we gave last quarter.
We indicated that we expected bookings in the third and fourth quarter to kind of.
B mirror, what we saw last year in the third and fourth quarter. So.
Jeff Powell: Jeff? Thanks, Mike.
Jeff Powell: Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. I'll begin by reviewing our operational highlights. The third quarter was another record-setting performance benefiting from a combination of excellent execution across the operating segments and struggling expected aftermarket parts revenue. This led to near record revenue and record adjusted EBITDA, record adjusted EBITDA margin, and record adjusted EPS in the third quarter. As has been the case throughout 2023, our operations teams around the globe delivered exceptional value for our customers in the most recent quarter leading to excellent performance across our key financial metrics.
So I think we think of right now it looks like it's going to be relatively flat.
I would tell you that when you when you are.
Julian.
And the economy right now with all the puts and takes it's particularly hard to figure out what demand is and particularly the timing on it Larry.
The.
Customers are being cautious so looking for more visibility today.
Today's going I guess, making making announcements that may impact. So I think you're a little bit. So I would say these times are more uncertain than we normally see just because of where we are in this economic cycle and kind of the interest rate environment, but generally speaking, we think that it can be fairly flat with.
Last quarter and really with last year.
Jeff Powell: I want to thank them for their outstanding work and the results they generated not only in the third quarter, but throughout the year. Turning next to slide six, I'd like to review our Q3 financial performance. As you can see on the slide, our Q3 performance was notably higher across most key metrics compared to Q3 of last year. Revenue was up 9% compared to the third quarter of 2022 to 244 million and benefited from record capital shipments and strong aftermarket parts business.
That's on the order right.
And okay.
Very helpful. Thank you.
Okay.
Well just to clarify there and obviously one would assume that there is much more price. There is more pricing. These orders. So is it fair to say that the more price and lower volume that we exit the year or maybe thats.
We're discussing but I think it is.
Well.
As you know.
We really work hard to try to contain our cost and maximize our value to our customers. There are times and there were times during the last probably 18 months, where we have had to pass some price increases on because of the cost increases were just so significant but we always work hard to really try to two to reduce our costs. So that we maxim.
Jeff Powell: Solid execution contributed to our record adjusted EBITDA, a 53 million and a record EBITDA margin of 21.6%. All our operating segments delivered excellent adjusted EBITDA margin performance. Cash flows from operations and free cash flow, route standing in the third quarter at 47 million and 38 million respectively, demonstrating the strengths of our business model. As anticipated, booking soften from the record setting pace earlier this year and were essentially flat compared to the prior period.
<unk> is a value for our customers.
Clearly if you look at our margins they stayed pretty flat, which would tell you that our divisions did a good job of staying in front of the inflationary pressures.
And we're able to kind of maintain.
Kind of a flat performance, which is what we were shooting for and so.
Jeff Powell: I'll review the performance of our operating segments next, beginning with our flow control segment. Capital project activity to solid aftermarket demand contributed revenue growth and our flow control segment up 5% compared to Q3 of last year. Bookings were 83 million down 2% due to weaker capital bookings compared to the prior period. Aftermarket parts, bookings were up slightly in the third quarter and represented 71% total revenue in this segment. Excellent execution in both the commercial and operational areas of the business led to solid adjusted EBITDA and an adjusted EBITDA margin of 29.7%.
There is some.
Certainly some.
Price increases that have stuck.
Some input cost has started to come down.
If you look at our margins. It would tell you that we just kind of stayed kind of even with what was going on from a cost standpoint.
Perfect. Thank you and then my other question.
Bigger picture.
International paper, obviously shutting down large portion of the company have their install base. So there's some pulp and paper mothball and going on enclosures. So can you speak to the direct impact to your business, if youre seeing yet how material that could be for 24. So just kind of help us contextualize some of those bigger events that are happening in drill down.
Jeff Powell: Many in markets and our flow control segment remained strong despite the general sluggishness found in the manufacturing sector. We continue to see good levels of project activity and are well positioned to win new business as these projects move forward although the timing is somewhat uncertain. In our industrial processing segment, revenues were up 9% to 94 million led by record aftermarket parts business which made up 60% of our total revenue in Q3.
To what it means for your performance if you think about it.
Well I'll open up on that one very specific to the most I'd say most recent IP announcement.
When I look across the.
Operation that theyre going to be closing there.
Cadence isn't doing a lot of business in those mills.
Some some of that was on the pulp side.
Jeff Powell: Adjusted EBITDA was up 9% and our adjusted EBITDA margin was excellent at 23.8%. As anticipated, demand slowed in Q3 in response to producers taking market-related downtime. As was the case in our flow control segment, capital project activity and interest remained high across all product lines despite the economic headwinds. In our material handling segment, we experienced strong demand for both capital equipment and aftermarket parts. Revenue was up 15% to 59 million due to record capital revenue in the third quarter.
Not much in the way of activity for us there.
The other on the containerboard side, those we do business in those mills, but they haven't been very big for us.
So we don't and of course, some of that production will get shifted.
They're more efficient mills and so.
We don't think that that particular announcement will show up in our numbers in any material way.
Okay. So we should know really analyze those and think thats going to have a big impact.
What's going on.
If you look at the cost the production cost of paper company, especially in the northwest.
Jeff Powell: All product lines in this segment contributed to this performance. Pockets in this segment were up 17% compared to the same period last year to 56 million. This growth was largely due to increase demand for our high performance billers, used to prepare recycled materials and post-consumer waste for secondary process, at E. Bada by 33% and adjusted E. Bada margin by 300 basis points compared to the same period last year. While we expect demand to moderate the near term, we continue to see growing business activity for our bulk material handling equipment in our dealers, particularly in North America.
Relative to the cost in other parts of the country and in particular southeast there is a significant difference in our cost we're talking in some cases hundreds of tonnes hundreds of dollars to $300 a ton difference in production cost.
When you see an announcement in these mills, it's often if it is a very old inefficient mill or more likely its just in a very high cost area and they've got the ability to to move that production down into a low cost area and so what you really need to look at it as kind of what the total output is.
Paper products in the country, because if it's just transitioning from one region to the next we operate in every mill and so we're likely not to see a big impact from that if you see tonnage dropping down now that's a different issue I mean for instance, I think.
Jeff Powell: As we look ahead to the remainder of 2023, we expect to finish the year with record results. We ended the third quarter with a large backlog and expect fourth quarter demand to be consistent with the prior quarter. Although we are seeing a lot of activity around capital projects, the time of these projects is uncertain due to macroeconomic headwinds. And finally, our healthy balance among cash flow have us well positioned to pursue new opportunities.
Packaging boxes. This year are down about seven 3% over last year. So we felt that obviously our bookings.
The slowdown in that area because of that but when it just shifting from our higher cost area to a lower cost area that has less of an impact on us because we are just as they pick up volume in <unk> and another mill will benefit in that.
Michael Mckenney: With that, I'll pass the call to Mike for his review of our Q3 financial performance. Thank you, Jeff. I'll start with some key financial metrics from our third quarter. Consolidate gross margins were 43.3% in the third quarter of 23. Up 80 basis points compared to 42.5% in the third quarter of 22. All our segments contributed to the higher gross margins, especially our material handling segment, which was up 340 basis points compared to the third quarter of 22.
Well first at that point should we expect.
Or either further shutdowns in other areas or and what do you have a view on tonnage next year.
As it relates to the specific end market.
If you look at what the the companies that have announced already in the third quarter I would say the general tone is slightly optimistic that things are improving a little bit not in a significant way because I think theres still no visibility, but just if you look at the color that theyre, giving on there.
On the earnings calls.
Theyre, hoping they saw a slight pickup in the third quarter or in some cases, and they're hoping that there'll be some continued improvement into next year, but I think it's still <unk>.
Michael Mckenney: Parts and consumables revenue represented 61% of revenue in the third quarter of 23 compared to 63% in the prior. SGNA expenses were 57.9 million in the third quarter of 23 and increase of 4.7 million compared to 53.2 million in the third quarter of 22. And include a 1.1 million increase from the unfavorable effect of foreign currency translation. The remaining increase in SGNA expenses primarily associated with increased compensation expense and outside consulting fees.
I will caution that it's as I said earlier still uncertain times visibility is not great, but they are I would say slightly positive that things are going to strengthen a little bit.
Okay. Thank you very much I appreciate it.
Yep.
One moment for our next question.
Our next question comes from Ed did you Madame with D. A Davidson your line is open.
Hi, Good morning, Jeff Mike and thank you for taking my question actually have a follow up to that question.
Michael Mckenney: As a percentage of revenue, SGNA expenses were 23.7% in the third quarter of 23 and 22. Our effective tax rate of 25.8% in the third quarter of 23 was lower than we anticipated due to discrete tax items. Our gap EPS increased 12% to $2.63 in the third quarter compared to $2.35 in the third quarter of 22 and our adjusted EPS increased 13% to a record $2.69. Our third quarter of 23 adjusted EPS exceeded the high end of our guidance range by 40 cents due primarily to higher revenue in our stock preparation and material handling product lines.
The North America containerboard sector was too big Destocking challenges and volumes seem to be a better trajectory, but he bought as being the game in a markman.
And the apartments strong market. So have you seen those different elements impact Bakken consumable demand with the capital equipment appetite and whether you think that potential inflection in the market could represent an inflection for your activity level with that customer.
Well youre right theres been too kind of trends or phenomenon is happening. This year. One is of course, a slowdown in industrial production, but also there has been a destocking.
No effort going on both with our customers and their customers when there is uncertain times.
Michael Mckenney: In addition, lower selling related costs and a lower tax rate also contributed to the guidance beat. Adjusted EBITDA increased 10% to a record 52.7 million compared to 47.89 in the third quarter of 22 due to strong performance in all our segments, most notably in our material handling segment, which had near record revenue and adjusted EBITDA in the course.
And the fed is trying to talk down the economy, everybody tends to to destock and try to conserve capital. So there has been some of that that can't go on forever or experienced in the past says that that happens for us.
<unk> of quarters, and then <unk>.
<unk> starts to two.
Get a little clearer.
Youll start to see that Destocking stop and then obviously ultimately reverses and they start to build inventory and theres a little bit of that going on I think I've seen some of the companies announced that they are starting to maybe build inventories a little bit.
Michael Mckenney: Peter. Adjusted EBITDA as a percentage of revenue was a record 21.6% in the third quarter of 23 compared to 21.3% in the third quarter of 22. We had our highest quarterly operating cash flow since the fourth quarter of 21 at 47 million in the third quarter of 23. Up 89% compared to 24.99 in the third quarter of 22. We had cash outflows in the first half of the year related to working capital to support our record backlog.
It's still a little too early to.
Two to know if that's a trend that youre going to see throughout the industry, but but maybe at a minimum and maybe the destocking is kind of.
Hit its bottom.
It's certainly our hope that the stock in hit its bottom and we'll start to see inventory start to build a little bit most of our customers that we talked to think that the.
First half of next year is still going to be kind of sluggish and our hope is that the second half of the year is going to is going to improve many of them are sitting on a lot of money. They made a lot of money in the last few years and frankly many of them have equipment that's it.
Michael Mckenney: In the third quarter, projects were completed and shipped resulting in a sequential decrease in inventory of 12 million. Overall, working capital was a 5.8 million source of cash in the third quarter of 23. Free cash flow increased 106% to 38.1 million in the third quarter of 23 compared to 18.5 million in the third quarter of 22. We had several notable non-operating uses of cash in the third quarter of 23. Paid down debt by 25.7 million in the quarter, paid 8.8 million for capital expenditures, and paid a 3.4 million dividend on our common stock.
It's run hard they ran at very hard the last few years to meet demand.
And they really need to make some investments, but they are just waiting to see.
You know kind of when the economy starts to turn and interest rates start to drop. So that's that's kind of what we're currently operating under.
Is the belief that things will probably.
<unk> Star.
Start out slowly next year and with little hope will start to improve as the year goes on certainly the back half of the year.
Oh, great, Yes, that's good to hear and perhaps a follow up has the donors.
The customer changed much relative to last quarter.
David any additional indications regarding customers potentially looking to push out or extend timeline on gateway project.
Michael Mckenney: I would also note that 2.5 million of the 8.8 million in capital expenditures related to the facility project in China. The facility move has been essentially completed with the remaining capital expenditure of approximately 2 to 3 million.
Well, that's normally what happens I think we normally say on most calls that it's unusual for our projects to be canceled.
<unk> terminated forever, they just get delayed and I would say in all the discussions we've had with our customers and there's actually a fair amount of that that occurs once summer is over we kind of theres tradeshows industry shows and so we get an opportunity to spend more time with our customers and get a sense of their their current thinking and I would say what we are generally hearing.
Michael Mckenney: Let me turn next to our EPS results for the quarter. In the third quarter of 23, our gap EPS was $2.63 and after adding back 3 cents of relocation costs and 3 cents of restructuring and impairment costs, our adjusted EPS was $2.69. The relocation costs relate to the facility project in China and the restructuring and impairment costs relate to the consolidation of one of our smaller manufacturing facilities into a larger facility, both in Europe.
As I mentioned earlier as well.
Got the cash to make investments we have some older equipment that we know we need to to make some investments in but we just wanted to just.
Get a little better sense of.
Where we are in this economic cycle have we bottomed out is there a recession still to occur and what's going to go on with interest rates. So they are all taken a wait and see attitude, but obviously every quarter that goes by without a without a downturn or without a technical recession.
Michael Mckenney: In the third quarter of 22, our gap EPS was $2.35 and after adding back 2 cents of acquisition costs and one cent of restructuring costs, our adjusted EPS was $2.38. As shown in the chart, the increase of 31 cents in the adjusted EPS in the third quarter of 23 compared to the third quarter of 22 consists of the following. 53 cents due to higher revenue, 13 cents due to higher gross margins, and one cent due to lower tax rate.
Interesting.
Inflation continues to moderate I think they are.
Become more and more hopeful that we're going to get through this without a true recession and things will start to turn around but it's right now it's a very challenging time.
Michael Mckenney: These increases were partially offset by 33 cents due to higher operating expenses, 2 cents from higher interest expense, and 1 cent from higher weighted average shares outstanding. Collectively included all the categories I just mentioned was a favorable foreign currency translation effect of 3 cents in the third quarter of 23 compared to the third quarter of last year, here. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days and receivables plus days in inventory and subtracting days and accounts payable, were 138 at the end of the third quarter 23 unchanged from the prior quarter.
Let's see what chairman Powell says today I think.
Yes, I think we are looking forward to that.
Let's see what he has to say and.
And just lastly on capital allocation just I'm, just curious on the M&A pipeline and how you're thinking about M&A versus share repurchases.
So.
I mentioned I think through the last couple of quarters that our corporate development group is probably as busy as they've been in many years.
There was clearly.
A slow period.
During the pandemic and after the pandemic.
This year things have been very very active.
And.
Of course, our balance sheet is in very very good shape. So we are well positioned to pursue these opportunities and we're hopeful that we're going to find some good fits for the organization, but there's a there's a fair amount of discussions and activities and opportunities out there in the marketplace right now.
As far as stock buyback, we haven't done that for many years.
Michael Mckenney: Working capital as a percentage of revenue decreased to 15.4% in the third quarter 23 from 16.7% in the second quarter of 23. Our net debt that is debt less cash decreased 36 million or 42 percent sequentially to 50 million at the end of the third quarter 23. We've paid down 70 million of our revolving credit facility debt in 23 helping to lower our leverage ratio, calculated in the courts with our credit agreement to 0.38 at the end of the third quarter 23 compared to 0.74 at the end of 22.
We normally have found that we can create we create more value. If we can find good good opportunities to bring companies into.
The <unk> family and so that tends to be where we we first focus on capital allocation. It doesn't mean that we wouldn't buy stock back but it certainly is.
As long as there's good opportunities to acquire companies out there that's our that's our first priority and focus.
Got it makes sense good luck in the homestretch here guys.
Thank you. Thank you.
One moment for our next question.
Our next question comes from John France ramp with Sidoti <unk> Company. Your line is open.
Michael Mckenney: Our net interest expense increased 0.2 million to 1.7 million in the third quarter 23 compared to 1.5 million in the third quarter 22. We have a strong balance sheet in our well-positioned to take advantage of investment opportunities with our current net debt position of 50 million current borrowing capacity of 285 million available under our revolving credit facility and an additional 200 million of uncommitted borrowing capacity.
Good morning, guys and thanks for taking the questions.
I'd like to circle back to what you said about the Balers and maybe a little bit more discussion on the whole recycling market are you seeing differences in demand on a regional basis or not.
Well I think North America has been particularly strong but we've also had good I would say really over the last several quarters, maybe a year and half ago, Mike Good in Europe.
There's been a lot of consolidation into larger and larger recycling facilities in Europe, and our our machines in Europe.
Michael Mckenney: Now turning to our guidance for the fourth quarter in full year 23. Due to our strong third quarter performance we are increasing our full year revenue guidance to 941 to 949 million from 925 to 940 million. And we are increasing our adjusted EPS guidance for the full year to $9.65 to $9.75 from $9.15 to $9.35.
<unk> are well suited to a very large multi stream machines that are well suited for these big merge these big recycling centers, we are recycling everything and so we've had we've had good success there.
A product that gets a fair amount of development in R&D work.
From an investment standpoint, and we've introduced some new products that have been quite successful in Europe and also we brought that product to the U S. The acquisition of Bell Master really has helped us start to penetrate the U S market with our European technology, because we now have the engineering and the service network in America that our customers look forward here and so that's helped us.
Michael Mckenney: The adjusted EPS guidance excludes three cents of relocation costs and three cents of restructuring and apartment costs. Our revenue guidance for the fourth quarter 23 is 222 to 230 million and our adjusted EPS guidance is $2.02 to $2.12. As always I'll caution here that there could be some 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 and softening markets.
A lot too. So we started to have some some good success with that so I would say, it's broadly based but in particular North America, our Bell Master, which makes machines that go into the into the packaging industry the distribution centers the corrugator.
<unk> been quite quite busy but a lot of demand.
And in Asia, It was Wednesday.
A major migration.
Going there.
Is that process.
Currently over post Covid.
Where did that end up relative to your expectations.
Michael Mckenney: We continue to anticipate gross margins for 23 will be 43 to 43.5% with fourth quarter margins projected to be in the mid 42% range as the mix is expected to be more heavily weighted towards capital. We expect our tax rate for the fourth quarter will be approximately 27%.
You saw that on the <unk> side or other aspects of the business.
Other aspects of the recycling business other aspects of that.
So.
On the stock prep side, which is the technology that recycled packaging and paper.
Alright.
They started to build these facilities.
I think youre, referring to these these countries in southeast Asia that really ring, China to get around the.
Operator: We hope these guidance comments are helpful and that concludes my review of the financials and I will now turn the call back over to Amy for our Q&A session. Amy? As a reminder to ask a question please press star 11 on your telephone and wait for your name to be announced. To a draw your question please press star 11 again. Please stand by when we compile the Q&A roster. Thank you.
Important band, Yes, I would say that had I would say mixed success.
As we somewhat expected allow those companies or those countries well if you don't want the waste coming into your country why would we want to coming into ours and some of the economics didn't work out and so I would say that's had mixed success.
They've come to the U S.
<unk>.
And bill took over facilities rehab facilities here, and that's where we're getting some of the fiber, but there is also an emerging kind of recycled fiber market out there that they are able to just buy from and theyre doing that too and of course. There are also putting in some some mechanical pulp mills into China to generate some some fiber there but.
Gary Prestopino: Our first question comes from Gary Prestopino with Barrington Research. Your line is open. Hey, good morning, Jerk from Mike.
Jeff Powell: Could you maybe I was trying to write this down as quickly as possible, could we maybe dwell a little bit into the strength that you saw in material handling and and I think you said you were going to see maybe a step down in demanding you for. Could you help me out there? Sure, well, you know, we had very we've had very strong performance on the material handling front on the in regards to bookings and that continued in the third quarter.
I would say that the.
Question around where we are in that cycle on those countries that ring, China, I would say that slowed down quite a bit and probably will not be a major growth area going forward.
Perfect.
Okay.
Not not going in China. It is a growth area for South East Asia because of course those countries are still growing well and so we are working we are booking orders in those countries.
Jeff Powell: And I would say, you know, I remind you that in the first quarter, we had a large order that we booked for that that conveying system, the 42 mile long convenience system. You that is you're seeing some of that in revenue in the third quarter and you're going to see a good portion of that in revenue in the fourth quarter. So I think on the revenue front material handling performance will be pretty strong, but on the bookings front, I'd say, I'll just let me just take a peek here for the fourth quarter.
For a product that will stay in those countries, but as far as they would be in a fiber source for mainland China.
I think thats, probably not going to be.
It's not going to be a major market.
Great.
And in your prepared remarks, it sounded like you were surprised by the strength of the parts business in the quarter did I misinterpret that and if that was the case how would you expect the fourth quarter compared to the third.
Yes, John.
<unk>.
I would say we.
We are very happy with the parts performance it was quite strong and as I noted in my call notes.
Jeff Powell: You know, we usually don't get to a granular on forecasting bookings, but when I look back to our performance in the fourth quarter of 22, we had quite a strong quarter on capital bookings and I would anticipate that we'll see that pull back a little bit. So that may cause overall, that may make material handling kind of flatish or down a little bit on the bookings front. You also wrote down your demand for bailers that that was pretty strong too. Yes, we had very very good strength in the baller business.
That was the lead driver of the.
The revenue beat.
So.
That helped us out in the quarter to produce the excellent results that we did produce looking at the fourth quarter in terms of.
Parts and consumables front.
I think.
One.
Thanks.
Little bit of a unique phenomenon forces.
As we go through the year.
Parts bookings.
R R.
Usually they are strongest in the first first quarter and then they just kind of slowly step down throughout the year and I think we'll see that here in.
In the fourth quarter is what I'm anticipating so I think when you stack it up against the third quarter, it will likely be a little bit weaker but that would be I'd say normal course for us.
Jeff Powell: Okay. And then the flow control, you mentioned good levels of project activity within various segments of the business. Could you maybe elaborate on that a little bit? Yeah, so of course, you know, we're particularly strong. They're particularly strong in the packaging and paper, but they've also done a great job. That product line probably has more applications through the general industry than almost any other product we have. And they've grown that side, that industrial side nicely.
Got it and.
Jeff Powell: So they're particularly strong in the metals. They have the particularly strong in food and tissue, which is a subset of paper, but a little more stable. And then just general industry, you know, it's amazing how many industries there are out there that use our fluid handling products, you know, from solar fields to windmills to just all kinds of applications out there. So there's quite a mix of general industry that and they're continuing to make good progress in taking their products to new markets.
And you had excellent free cash flow quarter.
In part due to the inventory drawdown.
I guess two questions regarding that should we expect.
Not as strong of a operating.
Operating cash flow quarter as you rebuild the inventory for future capital projects.
And now that you've completed.
That facility relocation, how should we think about capex in 2024 relative to 2023.
Well I'd say.
My Hope is we are not done producing.
Excellent cash flows to your to your specific point on where we need to rebuild inventory.
We.
<unk> had a significant backlog in capital, which we've been working down and Thats why I made the comment on inventory.
Jeff Powell: So in fact, I'd say that's true through all of Caden, where our largest segment now is what we call general industry with our biggest of all of our segments. So everybody works hard to try to take their products in new markets in the fluid handling in particular has a lot of broad applications there.
<unk> has started to turn and has come down so to.
Operator: Okay, thank you. One moment for our next question.
So that specific point.
I don't think we will that will be an issue for us until we see the next robust buying cycle and on the <unk>.
Backlog grows so I don't think that that particular issue is going to be a.
Lawrence DeMaria: Our next question comes from Lawrence, DeMaria, with William Blair. Your line is open. Hi, thanks.
A headwind.
For us.
See Opex next year.
So yes the facility project this year.
Jeff Powell: Good morning, everybody. First question, do you expect, I believe, flat backlog for the end of the year, it obviously gave your sales guide, implies orders pick up sequentially to the 220 to 230 range? So if I can first describe that uptick sequentially, especially if the MHs may be down a little bit, I guess the other two have to be up, but is there any specific driving that, because that's good visibility as we move into next year?
I give numbers on that every quarter and I think we're going to end up.
Our overall capex, maybe $8 million to $9 million will have been for the facility in China.
We have fairly robust demand for.
Robotics from our site, so I think youll see us continue.
To make investments if I back off the we had a facility project in China, We have a facility project in our wood group in Europe.
Jeff Powell: Well, I'd say specific to the fourth quarterly, I'm not sure how you define that. Basically, the guidance we gave last quarter, we indicated that we expected bookings in the third and fourth quarter to kind of be mere of what we saw last year in the third and fourth quarter. So I think we think it right now it looks like it's going to be relatively flat. I will tell you that when you're dealing in the economy right now with all the puts and takes, it's particularly hard to figure out what demand is in particular the timing on it Larry, the customers are being cautious.
If I take those out our capex was projected to comment a little over 2%. So I will say for for next year.
Probably where we'll be in that two little over 2% range.
Perfect. That's exactly I was looking for I appreciate the clarity guys.
Welcome John Thanks, John.
As a reminder, if you have a question. Please press star one one on your telephone.
Again that is star one one.
Jeff Powell: So looking for more visibility, the Fed today is going, I guess, making an announcement that may impact the thinking a little bit. So I would say these times are more uncertain than we normally see just because of where we are in this economic cycle and kind of the interest rate environment. But generally speaking, we think that it's going to be fairly flat with last quarter and really with last year. That's on the orders, right?
And I'm showing no further questions at this time I would now like to turn the conference back to Jeff <unk> for closing remarks.
Thank you Amy.
So before wrapping up the call today I just wanted to leave you with a few takeaways.
First 2023 is shaping up to be the best year in our history across the wide range of metrics.
We made solid progress this year on our efforts to accelerate revenue growth.
Jeff Powell: Not the back one. That's on the orders. Yeah, exactly. And okay, that's very helpful. Thank you. And we'll just clarify there. And obviously, one would assume that there's much more price, there's more price in these orders. So it's a fair to say that it's more price in lower volume. As we exit the year, we're, you know, maybe that's not in word discussion, but I think it is. Well, you know, as you know, we, we really work hard to try to contain our cost, you know, maximize our value to our customers.
New business and boost our profitability despite the increasingly challenging macroeconomic environment.
Our leverage ratio is <unk>, 38, which positions us well to pursue new business opportunities.
And as always we expect to deliver excellent cash flows and optimize the allocation of capital to maximize the value for our shareholders.
With that we'll conclude the call today and I want to thank you for joining us.
This concludes today's conference call. Thank you for participating you may now disconnect.
Jeff Powell: There are times and there were times during the last, you know, probably 18 months where we have had to pass some price increases on because the cost increases were just so significant. But we always work hard to really try to to reduce our costs so that, you know, we maximize the value for our customers. Clearly, you know, if you look at our margins, they stayed pretty flat, which would tell you that, you know, our divisions did a good job of staying in front of them, stationary pressures, you know, and we're able to kind of maintain their, you know, kind of a flat performance, which, you know, is what we were shooting for.
Okay.
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Okay.
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Jeff Powell: And so, you know, there is some, you certainly some, you know, price increases that have stuck. Some input costs have started to come down. But if you look at our margins, it would tell you that we just kind of stayed kind of even with what was going on with cost standpoint. Perfect.
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Jeff Powell: Thank you.
Lawrence DeMaria: And then my other question, you know, bigger picture, you know, international paper obviously shutting down watch portion, I think 10% of the installed base. So there's some pulp and paper, mothball and going on and closures. So can you speak to the, you know, direct impact your business, if you're seeing it yet, how material that could be for, you know, 24. So just kind of help us contextualize, you know, some of those bigger events that are happening and drill down into what is, for your performance. Do you think about it? Thanks.
Yes.
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Hum.
Jeff Powell: Well, I'll open up on that one very specific to, you know, the most, I'd say, most recent IP announcement. You know, when I look across the operations that they're going to be closing there, you know, Kadant isn't doing a lot of business in those mills. Some of that was on the pulp side, not much in the way of activity for us there, the other on the container board side. We do business in those mills, but they haven't been very big for us.
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Okay.
Jeff Powell: So we don't, you know, and of course some of that production will get shifted, you know, to their more efficient mills. And so, you know, we don't think that that particular analysis that will show up in our numbers in any material way. Okay, so we should know really, you know, analyze those and think that's going to have a big impact. Well, you know, what's going on? If you look at the cost, the production cost, the paper company, especially in the Northwest, you know, relative to the cost in other parts of the country, and in particular Southeast, there's a significant difference in their cost.
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Okay.
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Jeff Powell: We're talking, you know, in some cases, hundreds of tons, hundreds of dollars, two, three hundred dollars of ton difference in production costs. And so when they, when you see an announcement in these mills, it's often, if it's a very old and efficient mill, or more likely, it's just any very high-cost area, and they've got the ability to move that production down into a low-cost area. And so what you really need to look at is kind of what the total output is, you know, paper products in the country, because if it's just transitioning for one region to the next, you know, we operate in every mill, and so we're likely not to see a big impact from that.
Yes.
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Jeff Powell: If you see cuttings dropping down, now that's a different issue. I mean, for instance, I think packaging, you know, boxes this year are down about 7.3 percent over last year. So, you know, we, you know, we felt that, obviously, our bookings, you know, have slowed down in that area because of that. But when it's just shifting from a higher-cost area to a lower-cost area, that has less of an impact on us, because we'll just, as they pick up volume, and another mill will benefit in that.
Lawrence DeMaria: Well, so to that point, should we expect, you know, either further shutdowns in other areas, or and, you know, what do you have if you want to manage next year that it relates to, you know, this specific market? If you look at what the, the, the companies that have announced already in the third quarter, I would say the general tone is slightly optimistic that things will are improving a little bit, not in a significant way, because I think there's still enough visibility.
Okay.
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Okay.
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Lawrence DeMaria: But I would just, if you look at the color that, you know, that they're giving their, their, on their earnings calls, they, they're hoping they saw a little slight pickup in the third quarter, in some cases, and they're hoping that there'll be some continued improvement into next year. But I think it's still, you know, they'll, they'll caution that it's, as I said earlier, still in certain times, visibility is, is not great. But there, I would say, slightly positive that things are going to strengthen a little bit. Okay, thank you very much, appreciate it.
Operator: One moment for our next question.
Aditya Madhan: Our next question comes from Aditya Madhan with the A. Davidson. Your line is open. Hi, good morning, Jeff Mike, and thanks for taking my question. I actually have a follow up to that question. So we've seen the North America container board sector work to take these talking challenges and volumes seem to be a, a better trajectory. But we've also seen containment announcements, and we have found a strong market. So how have you seen those different elements impact parts in consumables demand?
Aditya Madhan: Was capital equipment appetite? And whether you think that potential and flexion in the market could represent an inflection for your activity levels with that customer? Well, you're right. There's been two kind of trends or phenomenon happening this year. One is of course a slowdown in industrial production, but also there has been a de-talking effort going on both with our customers and their customers. When there's uncertain times, in the feds trying to talk down the economy, everybody tends to talk and try to conserve capital.
Aditya Madhan: So there has been some of that. That can go on forever. Our experience in the past says that happens for a number of quarters. And then as the ability starts to get a little clearer, you'll start to see that the stockings stop and then obviously ultimately reverses and they start to build inventory. And there's a little bit of that going on. I think I've seen some of the companies announced that they may be build inventory a little bit.
Aditya Madhan: I think it's still a little too early to know if that's a trend that you're going to see. Maybe throughout the industry, but maybe at a minimum, maybe the de-talking is kind of hit its bottom. That's certainly our hope that the stockings hit its bottom and we'll start to see inventory start to build a little bit. Most of our customers that we talked to think that the first half of next year is still going to be sluggish.
Aditya Madhan: And their hope is that the second half of the year is going to improve. Many of them were sitting on a lot of money. They made a lot of money the last few years. And frankly, many of them have equipment that it's run hard. They ran it very hard the last few years to meet demand. And they really need to make some investments. But they're just waiting to see when the economy starts to turn and industry start to drop.
Aditya Madhan: So that's what we're currently operating under. It's the belief that things will probably start out slowly next year. And with a little hope, we'll start to improve as the year goes on. Certainly the back after year. Oh, great. Yeah. That's what they hear. As far as follow up, has that don't in your conversations with customers, change much relative to last quarter. And have there been any additional indications regarding customer potential, looking to push out or extend timeline on gap with projects?
Aditya Madhan: Well, that's normally what happens. I think we normally say on most calls that it's unusual for projects to be canceled, you know, terminated forever. They just get delayed. And I would say in all the discussions we've had with our customers, and it's actually a fair amount of that that occurs once summer's over. You know, we kind of there's trade shows, industry shows, and so we get an opportunity to spend more time with our customer and get a sense of their current thinking.
Aditya Madhan: And I would say what we're generally hearing, as I mentioned earlier as well, we've got the cash to make investments. We have some older equipment that we know we need to to make some investments in. But we just want to, you know, just get a little better sense of where we are on this economic cycle. Have we bottomed out, is there a recession still to occur and what's going to go on with interest rates?
Aditya Madhan: So they're all taking weight and see attitude. But obviously every quarter that goes by without a without a downturn or without a technical recession and interest and inflation continues to moderate. I think they're, you know, they become more and more hopeful that we're going to get through this without a true recession and things will start to turn around. But it's right now it's a very challenging time. We'll see what Chairman Powell says today I think. Yeah, I think we all are looking forward to that. So let's see what he has to say.
Jeff Powell: And just lastly on capital allocation, just I'm curious on the M&A pipeline and how you thinking about M&A was the sharing purchases. So I mentioned, I think through the last couple of quarters that our corporate development group is probably as busy as they've been in many years, you know, there was clearly a, you know, a slow period, you know, kind of during the pandemic and after the pandemic. But this year things have been very, very active and of course our balance sheet is in very, very good shape.
Jeff Powell: So we're well positioned to pursue these opportunities and, you know, we're hopeful that, you know, we're going to find some good fits for the organization, but there's a, there's a fair amount of discussions and activities, you know, and opportunities out there in the marketplace right now.
Jeff Powell: As far as stock buyback, we haven't done that for many years. You know, we normally have found that we can create, we create more value if we can find good, good opportunities to bring companies into the cabinet family. And so that tends to be, you know, where we first focus on capital allocation doesn't mean that we wouldn't buy stock back, but you know, certainly as long as there's good opportunities to acquire companies out there, that's our, that's our first priority in focus. Got it makes sense.
Operator: Good luck in the home stretch, you guys. Thank you.
John Fransreb: One moment for our next question.
John Fransreb: Our next question comes from John Fransreb with the body and company. Your line is open. Good morning guys and thanks for taking the questions.
Jeff Powell: I'd like to circle back to what you said about the balers and maybe a little bit more discussion on the whole recycling market. Are you seeing differences in demand on a regional basis or not? Well, I think North America has been particularly strong, but we've also had good, I would say really over the last several quarters, maybe a year and a half or so, my good in Europe. There's been a lot of consolidation into larger and larger recycling facilities in Europe.
Jeff Powell: And our machines in Europe are well suited. They're very large, moldy stream machines that are well suited for these big murves, these big recycling centers where you're recycling everything. And so we've had, you know, we've had good success there. That's a product that gets a fair amount of development and R&D work. From the best standpoint, and we've introduced some new products that have been quite successful in Europe. And also we've brought that product to the US.
Jeff Powell: The acquisition of Bellmaster really has helped us start to penetrate the US market with our European technology because we now have the engineering and the service network in America that our customers look for here. And so that's helped us a lot too. So we started to have some some good success with that. So it's, I would say it's broadly based, but in particular North America, you know, our Bellmaster, which makes machines that go into the packaging industry, the distribution centers, the coordinators, they've been quite, quite busy with a lot of demand, and in Asia, there was once a major migration going there.
Jeff Powell: In that process, permanently over post-COVID, where did I end up relative to T.R, expectations? You saw that on the bailer side or other aspects of the business, other aspects of the recycling business, other aspects of that. On the stock prep side, which is the technology that recycles packaging and paper, they started to build these facilities in, I think you're referring to these countries in Southeast Asia that really ring China to get around the import ban.
Jeff Powell: I would say that had, I would say, mixed success. As we somewhat expected, a lot of those countries said, well, if you don't want the waste coming into your country, why would we want it coming into ours? Some of the economics didn't work out, so I would say that's had mixed success. They've come to the U.S, and took over facilities refab facilities here, and that's where they're getting some of the fiber, but there's also an emerging kind of recycled fiber market out there that they're able to just buy from, and they're doing that too.
Jeff Powell: Of course, they're also putting in some mechanical pulp mills into China to generate some fiber there, but I would say that the question around where we are in that cycle on those countries that ring China, I would say that slowed down quite a bit and probably will not be a major growth area going forward.
Jeff Powell: Perfect. At least not going into China. It is a growth area for Southeast Asia, because of course those countries are still growing well, and so we are working with our booking orders in those countries, for a product that will stay in those countries, but as far as they be in a fiber source for mainland China, I think that's probably not going to be a major market.
Jeff Powell: Great. In your program, Mark, it sounded like you were surprised by the strength of the parts business in the quarter. Did I misinterpret that? If that was the case, how would you expect the fourth quarter to compare to the third? John, we were very happy with the parts performance. It was quite strong, and as I noted in my call notes, that was the lead driver of the revenue beat. That helped us out in the quarter to produce the excellent results that we did produce, looking at the fourth quarter in terms of the parts and consumables front.
Jeff Powell: I think one thing that's a little bit of a unique phenomenon for us is as we go through the year, the parts, bookings are usually the strongest in the first quarter, and then they just kind of slowly step down throughout the year, and I think we'll see that here in the fourth quarters, what I'm anticipating. I think when you stack it up against the third quarter, it will likely be a little bit weaker, but that would be, I'd say, normal course, for us. Got it.
Michael Mckenney: And you had an excellent free cash flow quarter in part through the inventory Jordan. I guess two questions regarding that. Should we expect not as strong of an operating cash flow quarter as you rebuild the inventory for future capital projects, and now that you've completed that facility relocation? How should you think about CAPEX in 2024 relative to 2023? Well, I'd say, you know, my hope is we are not done producing excellent cash flows to your specific point on where we need to rebuild inventory.
Michael Mckenney: We had a significant backlog in capital, which we've been working down. And that's why I made the comment on, you know, inventory finally has started to turn and has come down. So to that specific point, I don't think we'll that will be an issue for us until we see the next robust buying cycle and on the backlog grows. So I don't think that that particular issue is going to be a headwind for us.
Michael Mckenney: I'm what we see up next. And so, yeah, the facility project this year, you know, I give numbers on that every quarter. And I think we're going to end up of our overall CAPEX, maybe eight to nine million will have been for the facility in China. We have fairly robust demand for robotics from our sites. So I think you'll see us continue to make investments. If I back off, we had a facility project in China.
Michael Mckenney: We have a facility project in our wood group in Europe. If I take those out, our CAPEX was projected to come in a little over 2%. So I'll say for, you know, for next year, you know, that's probably where we'll be in that to little over 2% range.
Michael Mckenney: Perfect. That's exactly what I was looking for. Appreciate the clarity, guys. You're welcome, John.
Operator: I've done. As a reminder, if you have a question, please press star 11 on your telephone. Again, that is star 11.
Operator: And I'm showing no further questions at this time.
Jeff Powell: I would like to turn the conference back to Jeff Powell for closing remarks. Thank you, Amy.
Jeff Powell: So before wrapping up the call today, I just wanted to leave you with a few takeaways. First, 2023 is shaping up to be the best year in our history. Foster wide range of metrics. We've made solid progress this year on our efforts to accelerate revenue growth when new business and boost our profitability despite the increasingly challenging macroeconomic environment. Our leverage ratio is .38, which positions us well to pursue new business opportunities.
Jeff Powell: And as always, we expect to deliver excellent cash flows and optimize allocation capital to maximize with that we'll conclude the call today and I want to thank you for joining us.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. [inaudible]