Q4 2023 Kadant Inc Earnings Call
Good day, and thank you for standing by and walk you through the fourth quarter 2023 catering 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 that you need to press star one one telephone you didn't hear.
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Please be advised that today's conference is being recorded I would now like turn the conference over to his first speaker today, Michael Mckenney Executive Vice President and CFO. Please go ahead.
Thank you Victor good morning, everyone and welcome to cadence fourth quarter and full year 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 <unk> future plans and expectations financial and operating results and prospects are forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 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 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 fourth quarter and full year earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the investors section of our website at Www Dot Cadent Dot com.
Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call. We are referring to each of these measures as calculated on a diluted basis.
With that I'll turn the call over to Jeff Powell, who will give you an update on <unk> business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year and we will then have a Q&A session.
Thanks, Mike Hello, everyone. Thank you for joining us this morning to review our fourth quarter.
And full year results and discuss our business outlook for 2024.
I'm pleased to report the fourth quarter was a solid finish to a record setting year for cadence.
The slowdown in overall manufacturing activity and continued macroeconomic headwinds in many regions, where we are.
Another well executed quarter. This led to solid adjusted EBITDA performance and excellent cash flow in the fourth quarter.
Garik bookings were steady in the fourth quarter with solid demand as we delivered on our mission to provide technologies engineered solutions that help our customers operate more efficiently.
At the end of 2023.
We were honored to once again be named by Newsweek magazine as one of America's most responsible companies.
Mark the fourth consecutive year of being included on this list and it is rewarding to be recognized for our efforts in this area.
With that I would like to review, our Q4 financial performance.
Fourth quarter performance overall was solid and better than expected in several areas Q.
Q4 revenue and adjusted EPS were both up 3% compared to the same period last year, while bookings were comparable with the prior year period.
Although a large portion of our Q4 revenue was from capital shipments excellent execution resulted in an adjusted EBITDA margin of 23%.
I'm, particularly pleased with our operating cash flow.
Which was the second highest in our company history $59 million.
Our fourth quarter earnings performance contributed to exceptional full year financial results, which I will review next on slide seven.
The record demand we experienced in the first quarter of 2023 provide an excellent start to the year and contributed to our record setting revenue performance for the full year.
Adjusted EPS increased 9% to a record $10 of <unk>.
Exceeding the prior record set last year at $9 24 per share.
Our full year adjusted EBITDA was a record $201 million and a record 21% of revenue.
Our strategic focus on improving our margin performance continues to deliver results.
And we are pleased with progress.
On initiatives to grow our businesses.
Our workforce around the globe deserve tremendous credit for these results as they performed exceptionally well throughout the year I'm extremely proud of our employees for the innovative work they have done and continue to do to serve our customers.
Next I'd like to review our performance of our three operating segments.
I'll begin with our flow control segment, Q4 revenue declined 4% to $87 million compared to the Zen record fourth quarter of 2022.
Aftermarket parts revenue was up slightly compared to the prior period and made up 68% of total revenue.
Product mix within both parts and capital negatively affected gross margin.
Led to an adjusted EBITDA margin of 27% for the fourth quarter.
Bookings were up 8% compared to the same period last year, the strong finish to the year positions us well entering 2024.
We believe the fundamental drivers of our end markets remain healthy our business activity continues to be influenced by geopolitical and macroeconomic challenges around the globe.
Sure.
Turning now to our industrial process segment, our performance in the fourth quarter was solid despite the softening in some of our core end markets.
Canoe declined 3% compared to the same period last year due largely to fewer capital shipments of our stock prep equipment used to process recycled fiber.
Aftermarket parts revenue, however was up 5% and represented 64% of total revenue in the fourth quarter.
Adjusted EBITDA margin declined 110 basis points compared to the prior year, but remained strong at 23, 8% of revenue.
This decline was largely attributed to a decrease in operating leverage associated with lower capital revenue.
Looking ahead to 2024, we expect demand in this segment to shift towards aftermarket parts versus capital, particularly with the addition of our recently announced acquisition of <unk>.
<unk> is a manufacturer of engineered knife systems used in various wood processing applications towards the 90% of its revenue is aftermarket parts and additional key life to our industrial process segment is expected to further strengthen our aftermarket position in this segment.
In our material handling segment revenue increased 27% for the fourth quarter to a record $64 million.
Strong bookings in the first half of the year contributed to this record setting performance.
Capital equipment revenue was exceptionally strong and represented 35% total revenue in the quarter led by our conveying product line.
Despite the large portion of revenue attributed to capital business.
We achieved excellent operating leverage adjusted EBITDA margin increased 350 basis points to 22, 1% in the fourth quarter.
The integration of Kw's manufacturing acquired a few weeks ago.
Is underway and progressing well we are pleased to have this leading manufacturer of screw conveyors and related equipment and product cadence.
Looking ahead to 2024, we believe this segment will continue to see good business activity, particularly as new infrastructure projects are executed.
And for <unk> main equipment remained strong.
As we look ahead to the first quarter of 2024 and the full year ongoing project activity is healthy and demand has been solid as we've entered the year.
That said, we are seeing continuing economic uncertainty around the globe.
Demand in 2024 to be similar to 2023.
Our strong backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds.
And we expect to deliver solid financial performance again this year.
I would now like to pass the call over to Mike for his review of our financial performance and outlook for 2024.
Thank you Jeff.
I'll start with some key financial metrics from our fourth quarter.
Gross margin decreased 40 basis points to 42, 7% in the fourth quarter 23, compared to 43, 1% in the fourth quarter 'twenty two due primarily to lower margins achieved on capital projects at our industrial processing and flow control segment.
Our overall percentage of parts <unk> consumables revenue was 60% of total revenue in both the fourth quarters of 'twenty, three and 'twenty two.
As a percentage of revenue SG&A expenses increased to 25, 1% in the fourth quarter of 2003 compared to 24, 5% in the prior year period.
SG&A expenses were $59 8 million in the fourth quarter, 'twenty, three increasing $3 million or 5% compared to $56 8 million in the fourth quarter 2002.
The fourth quarter of 23 included a $1 9 million unfavorable foreign currency translation effect and an increase of $1 3 million of acquisition costs and a decrease of <unk> 8 million and indemnification asset reversals compared to the fourth quarter of 'twenty two.
Excluding these items SG&A expense increased $1 6 million or 3%, primarily due to increased selling related costs.
Our GAAP EPS increased 4% to $2 33 in the fourth quarter.
Compared to $2 23 in the fourth quarter 'twenty two.
And our adjusted EPS was up 3% to $2 41.
From $2 33.
Our fourth quarter 23, adjusted EPS of $2 41.
Exceeded the high end of our guidance range by 29.
Due to higher than anticipated aftermarket revenue, especially at our industrial processing and flow control segment.
We had record operating cash flow and adjusted EBITDA in 'twenty, three which I'll cover on the next slide.
For the full year 'twenty three gross margins increased 40 basis points to 43, 5% compared to 43, 1% and 22 due to higher margins achieved on our aftermarket products, especially at our material handling segment.
Our percentage of parts and consumable revenue was 62% and 23 compared to 63% and 22.
As a percentage of revenue SG&A expenses decreased to 24, 7% and 23 compared to 24, 8% in 'twenty two.
SG&A expenses were $236 3 million, and 23, increasing $11 9 million or 5% compared to $224 million in 2002.
Excluding a decrease of $1 2 million of expense from indemnification asset reversals.
SG&A expenses were up $13 1 million or 6% compared to 22, primarily due to annual wage increases as well as incremental travel and consulting costs.
Our GAAP EPS was $9 90 from 23 down 4% down 4% compared to $10 35, and 22, which included a $1 30 gain on the sale of the Chinese facility.
Our adjusted EPS was a record $10 four up 9% compared to $9 21 last year.
Syed from being a records our adjusted EPS also exceeded the five year target of 8% to $9 a share we sat back at the beginning of 2019.
Yes.
In the fourth quarter of 23, adjusted EBITDA decreased 2% to $48 5 million or 23% of revenue compared to $49 5 million or 21, 3% of revenue in the fourth quarter 2002.
Our material handling segment had a record adjusted EBITDA in the fourth quarter 'twenty, three and a notable 350 basis point improvement in adjusted EBITDA margins compared to the prior year.
This was offset by the performance in our other segments.
As you can see on the slide our annual adjusted EBITDA has grown significantly compared to 2019 up 58%.
For the full year adjusted EBITDA was a record $201 3 million and a record 21% of revenue and 23.
Compared to adjusted EBITDA of $189 1 million or 29% of revenue through 'twenty two.
Our material handling segment had record adjusted EBITDA of $53 6 million in 'twenty, three and a 210 basis point improvement in adjusted EBIT margins compared to the prior year.
Our flow control segment also had record adjusted EBITDA of $105 million and 23, and a record 28, 9% adjusted EBIT margin.
Adjusted EBITDA is an important metric for us we set a five year target for adjusted EBIT margin of 20% back at the beginning of 2019 and I'm happy to see that we have exceeded this target with a record 21% and 23.
Our adjusted EBITDA margin has increased 300 basis points since 2019 due in large part to contributions from subsidiaries participating in our 80 20 program.
This program provides revenue growth through a highly focused sales approach and profitability improvements as a result of dynamic pricing and streamlining product offerings.
Once adopted subsidiaries continue to follow the 80 20 program, yielding incremental benefit the longer they have filed the tenants of the program.
Average adjusted EBIT margin for subsidiaries under the program have consistently exceeded our other subsidiaries.
Over 50% of our revenue.
Is from subsidiaries currently under we're starting our 80 20 program.
One of the highlights for the fourth quarter and full year was our operating cash flow, which increased 68%.
To $59 2 million in the fourth quarter of 2003 compared to $35 2 million in the fourth quarter 2002.
For the full year operating cash flow was a record $165 5 million up $62 9 million or 61% from 2002.
We also had strong free cash flow, increasing a 114% to $49 5 million in the fourth quarter, 'twenty, three and increasing 80% to $133 7 million for full year 'twenty three.
We had several notable non operating uses of cash in the fourth quarter of 23.
We repaid $22 1 million of debt.
And paid $9 8 million for capital expenditures and a three point.
$4 million dividend on our common stock.
For the full year, we repaid $94 million of our debt and paid $31 9 million for capital expenditures, which included a seven 4 million for our facility project in China.
Yes.
Let me turn to our EPS results for the quarter.
In the fourth quarter of 'twenty three GAAP earnings per share was $2 33.
And adjusted EPS was $2 41.
The <unk> difference relates to 10 cents of acquisition costs.
<unk> of other income and one relocation cost both related to the facility project in China.
<unk> <unk> of restructuring costs.
<unk> <unk> of other income is associated with cash received for our remaining assets fueled facility.
In the fourth quarter of 'twenty two.
GAAP earnings per share was $2 23, and adjusted EPS was $2.33 to Tencent difference relates to nine tenths of impairment and restructuring costs and one set of acquisition costs.
The increase of <unk> <unk> and adjusted EPS in the fourth quarter 23, compared to the fourth quarter 'twenty. Two consists of the following.
17 due to higher revenue.
<unk> due to a lower recurring tax rate and <unk> <unk> due to lower interest expense.
These increases were partially offset by 17 and higher operating expenses <unk> <unk> due to lower gross margin and <unk> due to higher weighted average shares outstanding.
The <unk> <unk> impact from a lower recurring tax rate was due to slightly higher tax rate in 'twenty two related to the timing of certain incentive compensation payments.
Collectively included in all other categories I, just mentioned was a favorable foreign currency translation effect of <unk> in the fourth quarter 23, compared to the fourth quarter of last year due to the weakening of the U S dollar.
Now turning to our EPS results for the full year on slide 17.
We reported GAAP earnings per share of $9 90 from 23, and our adjusted EPS was $10.04.
14th difference relates to 10.
Of acquisition costs, <unk> <unk> of other income and <unk> <unk>.
Our relocation cost both related to the facility project in China.
<unk> <unk> of restructuring costs.
We reported GAAP earnings per share of $10 35, and.
In 'twenty, two and our adjusted EPS was $9 24 sites.
Dollar allowance that difference relates to a $1 30 gain on sale related to one of our Chinese facilities and.
Impairment and restructuring costs of 11 and acquisition related costs.
The increase of 80 and adjusted EPS from 'twenty two to 'twenty three consists of the following.
$1 41 from higher revenue.
26, <unk> from higher gross margins.
<unk> and a lower recurring tax rate and one from lower now.
Non controlling interest.
These increases were partially offset by 86.
From higher operating expenses <unk> <unk> from higher interest expense and <unk> <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 nine <unk> and 23 compared to 2002.
Now, let's turn to our liquidity metrics on slide 18.
Our cash conversion days calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 130 at the end of the fourth quarter of 'twenty three down from 138 at the end of the third quarter 'twenty three but up from 102006 days at the end of 'twenty two.
The sequential decrease in cash conversion days was principally driven by a lower number of days in inventory.
Working capital as a percentage of revenue decreased to 12, 8% in the fourth quarter 23, compared to 15, 4% in the third quarter 'twenty, three and 13, 9% in the fourth quarter 2002.
Net debt that is debt less cash at the end of 'twenty three was $4 4 million the lowest level since 2017, representing a decrease of $117 million compared to net debt of $121 4 million at the end of 'twenty two.
Our interest expense increased 30% to $8 4 million and 23 compared to $6 5 million and 22 due to an increase in borrowing rates.
Our.
<unk> ratio calculated as defined in our credit agreement decreased to a very low two seven at the end of 'twenty three compared to <unk> 74 at the end of 'twenty two.
After our recent acquisitions, our borrowing capacity is $71 million available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity.
Now I'll review our guidance for 'twenty four.
We expect to achieve records in a number of key metrics in 'twenty, four including revenue cash flow and adjusted EBITDA.
Our earnings performance in 24 will be affected by increased borrowing costs and noncash intangible amortization expense associated with our recently announced acquisition.
As we look beyond 24, the increase borrowing costs will continue to decrease as we have demonstrated our proven track record of paying down debt.
For the full year, our revenue guidance is $1 4 billion to one point or <unk> 5 billion that is $1 billion $40 million to $1 $65 million.
And our adjusted diluted EPS guidance is $9 75.
To $10 five.
Which excludes 20.
Related to the amortization of acquired profit and inventory and backlog.
Looking at our quarterly revenue and EPS performance for 'twenty four we expect the first quarter will be the weakest quarter of the year due to the timing of capital projects in the second half of the year will be stronger than the first half as a result.
Our revenue guidance for the first quarter of 'twenty, four is 238 million to $246 million and our adjusted diluted EPS guidance for the first quarter is $1 90 to $2, which excludes 14 related to the amortization of acquired profit and inventory and backlog.
I should caution here there could be some variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital sure.
Guidance includes our acquisitions of <unk>, AWS, which we completed in January.
Aside from the impact of intangible amortization.
There is a negative impact in the initial post acquisition period associated with the amortization of profit in inventory and acquired backlog as these amounts are reflected in the income statement when the underlying orders fulfilled and inventory shipped to the customer.
Our GAAP and adjusted EPS guidance.
<unk>, our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for these acquisitions.
I'd like to give some additional metrics on our EPS guidance.
We borrowed $230 million in January for the acquisitions of <unk>.
We will work diligently throughout 'twenty four to pay down that debt as.
As a result of the borrowings we project our interest expense will increase by approximately 70.
Over 23.
In addition, jeanice and kw transactions have significant amounts.
A recurring noncash intangible amortization expense, which is reducing our EPS guidance by approximately 50 and 24.
While the noncash intangible amortization does have a significant impact on EPS, it will not impact our cash flow or EBITDA for 24.
24 guidance includes a favorable foreign currency translation impact of approximately $11 $6 million in revenue and 15 on adjusted EPS due to the weakening of the U S dollar.
We anticipate gross margins for 24 will be approximately 43, 5% to 44, 5%.
As a percentage of revenue, we anticipate SG&A will be approximately 25, 5% to 26, 2%.
And R&D expense will be approximately one three to one 4% of revenue in 'twenty four.
We anticipate net interest expense of approximately 18% to $18 5 million.
And we expect our recurring tax rate will be approximately $26 five to 27, 5% and 24.
We expect depreciation and amortization will be approximately $46 million to $48 million in 'twenty, four and we anticipate capex spending in 24 will be approximately 29% to $31 million, which includes $2 million related to the final payments on a facility project in China.
Approximately 15% of the Capex spending in 'twenty four relates to final payments for Capex projects approved in 'twenty three.
We are a little above or a little bit above our normal capex as a percent of revenue metric as we continue to invest in automation projects and upgrades to our manufacturing capabilities.
That concludes my review of the financials and I will now turn the call back over.
Two Victor for our Q&A session Victor.
Thank you and 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 on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please turn on biodiesel, partly Q&A roster.
Our first question.
Our first question comes from the line of Gary <unk> from Barrington Research. Your line is open.
Hey, good morning, everyone.
Hi, Gary.
Just wanted to go over.
Some of the puts and takes on your outlook in 2024.
What you're basically saying is that the capital part of your business.
We will be sluggish in the first half and then you are anticipating that to come back in the second half.
Is that good.
Good read on yes, yes, all right Gerry.
Yes.
Good read we expect capital activity to pick up here in the second quarter and be stronger in the back half.
And what's driving that.
Thought process or are you seeing any empirical evidence in terms of orders or anything that.
Back half of the year, we're going to see that pick up.
Yes, I think there's a guy there is.
Fairly strong kind of activity.
Quoting.
These projects tend to be.
Taking a little longer to develop and so theres a lot of back and forth between our our engineers and our customers and so there's a fair amount of discussion that's going on.
I would just say the time from quote to.
To book in the order, it's a little longer than normal and I think that's essentially because of the kind of the general economic uncertainties out there people are really trying to guess when the fed is going to start reducing rates theres a lot of pent up demand in many of our markets and so our customers are trying to get ready for that.
Really just a bit of a guessing game on how quickly they pulled the trigger to start making the investments to get ready for what they expect to be an increase in demand. So fair amount a lot of project activity a lot of quoting a lot going on it's just that people are a little slower to actually book the order as they're trying to gauge kind of the pace of recovery.
Right. So as I look at your guidance I mean, the two acquisitions I think.
What did they add about on an annualized basis of $110 million of sales is that about right. If you get a full year run rate.
Yes.
Thats, a decent mark or Garry the caveat to that as I mentioned.
<unk>.
K Ws transaction didn't close until three weeks and the first quarter here.
Right no I understand that.
The puts and takes longer but I mean, if you add that number into what you actually did work looking at rather de minimis growth in sales this year and I just want to make sure I'm understanding this right that that's really more or less a function on the capital side.
Of the business.
Yes, yes.
Yes, that's correct, yes organically.
When we take out the 11 point.
$6 million.
<unk> revenue.
Be down about 2% and revenue organic.
Okay, and then just real quick sorry go ahead, Jeff I'm sorry.
The challenge we have and this is it's more challenging obviously at the first of the year and kind of forecasting what's going to happen. Then then as the quarters progress, but I would say this year is particularly challenging because there is a lot of uncertainty right everybody is try and even the fed from it seems like from week to week their position on the economy changes and so for us.
As you know Gary we're a fairly conservative organizations certainly began the year, we tried to buy pretty cautious.
We're just trying to.
To get a little better visibility on.
Kind of.
The timing of some of this activity is just challenging when you're when you're coming out of.
A slower period.
No no I get that I, just wanted to make sure I was confirming it.
And then just some of the other.
Figures that you guys talked about especially Mike you said, 18% to $18 5 million of net interest expense for this year.
Yes, well just interest expense purely interest expense.
So that's 18 to $18 five of interest.
And then you said DNA has been around for $46 million to $48 million right.
Yes, that's correct Gary.
And what was your Capex this year I didn't see that in the.
Neither releases or maybe I missed it did you mention that.
Yes, one second.
Okay.
We are at essentially $32 million.
Okay. Thank you very much appreciate it.
You're welcome.
Thank you one moment for our next question.
And our next question comes from the line of Kurt Yinger from.
D. A Davidson your line is open.
Great. Thanks, and good morning, everyone.
Could you just wanted to follow up on one of the prior questions.
In terms of strengthening in the back half of the year end.
Is that a situation, where you feel like you need to see improving capital equipment bookings over the next couple of quarters in order for that kind of sales improvements materialize or based on the bookings activity that you've seen in Q4, and what you're expecting for Q1.
Further improvements could actually be a source of upside to what you're kind of assuming for the full year, how should we kind of think about those booking trends and what that means for the back half performance.
Yes, you are right on your first assumption correct. It really is predicated on us seeing strengthening in the capital bookings as we go forward.
Okay.
Got it.
And then one of the bright spots. This year I think has been parts and consumables.
It has had a steady performance despite some choppiness.
And some of the end markets containerboard being kind of a big one I mean, we haven't yet seen a lot of those trends really improved very much is there any concern that that could catch up and start to weigh on parts and consumables going forward or.
Do you expect.
The solid performance in 2023 sets you up pretty well for 2024 as well.
Well, it's interesting when you think of our parts of course, it's Susan.
All of our businesses, but in particular.
We're expecting a big recovery on the containerboard side. This year. So they think cannot containerboard was probably flat last year and it was down for the first time demand I'm talking about was down for the first time.
A very long time.
<unk>, two but therefore casting.
Tanner Board demand increased four 3% this year.
Tissue to be up 4%. This year at 11 20, 538% for tissue and three seven containerboard. So we're really expecting to see a recovery on.
That side of the business and I would say also on the wood processing side seem to slow down of course housing starts were about 146 last months, but permits were about one five so we are starting to see some some improvement there and certainly if if.
If interest rates start to come down there is tremendous pent up demand for housing and we have a lot of activity going on with our customers a lot of discussions about projects or they are really trying to get ready for what they think will be a pretty robust improvement in the market demand once interest rates start to decline so I think.
It's our belief that.
The parts business actually could continue to strengthen throughout the year, assuming things go as as you know.
Most economists are currently forecasting.
Yes.
Okay, and I guess sticking with the wood piece I mean, there was a lot of capacity added in and to your point I think there's a lot of optimism that demand is going to continue to improve but at the same time some of that new capacity is being absorbed I guess as you think about your capital equipment how important is.
New greenfield facilities and new capacity versus just.
Better utilization of existing facilities in terms of the overall kind of sales and demand picture for wood processing.
Yes, I think there's both and of course, because we're global and we have extremely high market share globally.
So if you look at North America. It maybe more just upgrading tired equipment. The average age of a lot of equipment out there is.
It's pretty old and so there's just upgrading but then there's a lot of green new Greenfield is going on in Asia in particular, where are our standing guys are very busy in Asia, a lot of projects a lot of activity, we booked another order in China, a few weeks ago.
And then <unk> got the the situation in Russia, a lot of product came out of Russia and of course, that's got to be replace now so we're seeing activity in in Europe, and in particularly Scandinavia area as they start to invest to offset the lost lost supply out of out of Russia. So the Woodside.
It really depends on the region you are looking at but I would say the activity level right now is as high as it was before the before.
Before the pandemic for us.
Tired equipment out there and frankly more and more.
And particularly on the <unk> side, more and more products using stranded.
<unk>.
Has held up extremely well for us and demand still looks quite good.
Got it thanks, Jeff and then just my last one I guess bigger picture Youre coming off to kind of your strongest organic growth years in 'twenty. One 'twenty. Two this past year was still very solid as well where do you think your business is from kind of a cyclical standpoint entering 'twenty four and I guess is there.
There anything thats changed in terms of how you think about the organic growth profile of the business longer term relative to what you've kind of outlined in the past.
Well, we had as you know we had tremendous organic growth.
Some say kind of 2019 on.
We were I think seven 5% seven 5% organic growth for several years, which.
It is substantially higher than global GDP. So we never budget and assume that was going to be the case say for the next five years, but I would tell you when I look at our three sectors. The material handling side I think is in a good position the money that's going to be spent on both the infrastructure Bill on the chipset is just starting to flow and so we think that our material handling sector will benefit from that.
<unk>.
The billing side has been quite strong in Europe and in the U S from recycling standpoint.
On the paper side, we just talked about the fact that operating rates from operating rates really bottomed out we think in 'twenty three globally run at about 79% as forecasted to get back into the mid <unk> over the next couple of years. So we expect.
Some recovery growth in that market.
In the flow control has always been very steady just as a very stable steady business. The guys always do a great job in finding new end markets, our biggest market right. Our biggest sector right now is our industrial sector, it's bigger than all of our other so there's a lot of industrial markets out there that we're taking our products too. So we think the next few years assuming that.
Something that doesn't happen a black Swan event doesn't happen, we think that that growth actually should be pretty solid for the next few years, but we've got it we got to see that start to materialize I think this year as the year progresses.
Got it okay, well I appreciate all the color guys. Thank you.
Youre welcome.
Thank you one moment for our next question.
Our next question comes from the line of Larry de Maria from William Blair. Your line is open.
Thanks, Good morning, everybody.
Hey, just a few quick sort of clarification, John I know, it's not unusual to have a little bit bigger of a second half than first half can you give us kind of order of magnitude second half versus first half and secondly, maybe you could talk to the financial Flexibilities you have after the recent deals.
M&A pipeline at four out of the market for a while or if it's still relatively healthy.
Okay.
And the split first half second half.
Larry I would say, it's if there is about a 5% delta there.
Yes.
And then on the I would say on the activity side.
We are still quite busy theres still our corporate development people I think.
So there's still a tremendous amount of deal flow out there our balance sheet, even though we took on a little bit of that for these most recent acquisitions our balance sheet still.
Pretty strong we think we have good capacity left so we're we're full speed ahead, we won't be slowing down even though we just did a couple of transactions.
As you know we're always looking for.
Opportunities that are good strategic fits at a fair value and.
That can be challenging from time to time, but but our corporate who were very busy and we've got the capacity and frankly.
Our current debt agreements were put in place when we were smaller so if we needed to do.
Free up those at higher levels, we could easily do that and we'll do that.
If needed as we go out and pursue opportunities. So we're full speed ahead on and looking at opportunities.
Okay sounds good thanks, and then shifting gears a little bit I know you, obviously talked about this a bit already but just.
I'm curious about kind of the order activity from here and how we've done so far it's all about to talk about all the strength in capital equipment.
And it will get order youre short in <unk> and solid demand, but this uncertainty keeping your outlook down seems overly conservative. So can you discuss why this isn't overly conservative considering the comments and the print you just did maybe what areas. The end markets are showing you the weakness and.
What are your expectations from here, which.
They can stay flattish or not.
Yes, I would say Gary.
I pointed to Mike said, you can handle this one Mike.
Yeah.
Okay.
The biggest thing that we're looking at is.
Capital capital order flow and seeing that we get some traction and get some firmness Eric that's the biggest thing.
We're waiting to get some clarity on our guys are very busy as I as I mentioned project discussions and activities are actually pretty strong.
But the time to close.
As lengthened I think as our customers are again trying to gauge how quickly the rates come down and demand starts to pick up and so because those discussions are are taking longer than normal and obviously introduces.
Added degree of caution on our part.
And anything on the order.
The expectation from here and how we've done so far this year I assume obviously capital has been slow.
Yes, I mean, I think right now things are as expected right now as we look through through last week.
Demand is kind of on track with where we would expect it to be.
Okay.
Safe to say that given the commentary to pipeline and trying to close it was longer and at those potential orders don't go away right. They either hit in the second half or they get pushed out to next year is that fair to say, yes, yes, ultimately very very.
It's very very seldom that a project gets cancelled we had one canceled a big project cancelled.
I think back in 2002, I think it was we had a project cancelled, but it's very unusual for that Youre exactly right. They typically just get.
You get delayed these are these big projects.
White lengthy and from a board review standpoint anyway, and so once they get to that point. They normally don't disappear forever. It's just a question of timing on them.
And so that's what has introduced the level of caution that we have is we just don't know where the timing is going to be next quarter or third quarter fourth quarter. The customers just aren't quite sure yet.
Okay Fair enough last quick question parts and consumables in flow and industrial process given the mothballing. It we've seen does it like it doesn't matter, it's just around overall volume and parts and consumables.
More or less be added up whereas capitals guided down debt.
Think about it.
Yes, I mean, what happens is as you know we operate in almost every page and every paper mill in the world and I know some people get hung up when they hear about our closure and <unk>.
I'd like to hear about closures I just mentioned overall demand is forecasted if you look at total paper demand in 'twenty four globally, it's supposed to be up three 3% and it grows every year. So what happens is they just they just shift that to other more efficient mills and we're there too. So we just pick the business up in one versus the other and so we don't get.
Nearly as hung up on me.
Ill closure announcement here or there as long as overall demand continues to grow we're going to be there to get our fair share of that.
Okay very good thank you and good luck.
Thank you.
And as a reminder, that starting 101 for questions are 111 moment. Our next question.
Okay.
Our next question comes from the line of Walter Liptak from Seaport Research. Your line is open.
Hey, good morning, guys.
And to your year.
Thanks, Bob.
Wanted to try one on the flow control bookings plus eight.
4% I Wonder if you could just give us some.
Some incremental color.
Parts related capital.
Capital projects.
Maybe regionally.
Where the orders were coming from.
Looking for my schedule here.
On that.
It was.
Really.
We had it was both and parts and capital, but capital and flow control was quite strong in the fourth quarter actually in December we closed some nice some nice projects, so I'd say that.
Bookings beat was really led by capital and flow control.
Okay great.
You think that the start of a trend is there some follow through.
People, who are drawing down inventory I think.
And being cautious into the end of the year, but it sounds like this buck the trend a little bit.
Yes, it did well but.
And I know that we had are the projects that came through those capital projects. They were on our board for 24. So the orders were a little bit early.
Yes.
Okay. Okay. Thanks that helps.
And then I Wonder if you kind of alluded to this in some of the other questions last year. This time, you were getting that big 42 mile conveyor project in material handling.
And.
Sure.
He has already shipped now that's probably already through your.
But I wonder if it sounds like it's something that you've got more in the finals that are some of these bigger material handling practices is that right.
Well on the on the large projects that we book and booked in the first quarter, what Youre correct. Most of that shift of that $12 million. There is still I think of about $2 million to go and.
A good chunk of that actually went in the fourth quarter, which is why you saw.
Their revenue and other metrics margin and EBITDA were so good because we had excellent and the EBIT front, we had excellent operating leverage there.
Okay, that's great.
It sounds like you've got there is the potential for some more of these big conveyor projects in the funnel yes.
The second longest in the world. So we don't we wouldn't expect.
Although there are discussions for projects that we wouldnt expect anything.
Assume of that magnitude, that's a pretty rare project, but generally speaking that the group is.
Has been strengthening over the last.
In the last I'd say year and a half.
Prospects look good as housing picks up.
That's going to help them.
<unk> is really a very large construction.
Actually if you look at it it's mainly building plants.
That's good for them as well as infrastructure and then the recycling side you know the baler business in the U S.
S continues to be very strong.
And as well as Europe and other parts of the world. So all other segments have.
I think.
I've had a nice steady demand.
We expect that they will continue to be in good shape.
Throughout this year.
Okay great.
I'll try one or two on the 80 20.
Congratulations with the profit improvement that you guys have been seeing.
Do you have how many p&l's.
No.
Have the P&L I guess, we've started but how many P&L do you have.
For 2024 do you have more that'll be starting the 80 20 process.
Yes.
So we have around I think about 24.
Kind of companies with P&L, I would say kind of half of them or are in the.
The thing that's impacting it now, which frankly is a little off.
There is a little frustrating for US is that you really can't have an ERP project going on at the same time as 80 20, because they are both.
So it's so significant.
And scope and.
And the resources they require and so as it turns out whats controlling our some of our 2020 implementation now as companies that are either in or getting ready to start ERP projects. So it just is.
As.
Luck would have it we've got companies at the end of life with a current ERP systems, where we were forced to implement new ones and that really has delayed implementing 80 20 and some of those businesses and so that's been something we've been wrestling with I would say over the last kind of 18 months.
Trying to decide okay, which ones can we delay the ERP project until 800000 finished and which ones are we going to have to delay 80, 20, and so that's really controlling some of the pace.
The other thing of course, as we continue to build up our internal team the expertise.
But it also has.
Some limitations.
The available expertise to implement projects. So we still have I have been saying for some time I think we still have probably another say three years four years for this to run out and that's of course, not including new acquisitions every time, you acquire a new company.
On a new future projected so we have a couple of new future projects, which we just added this year. So it will be it will never stop no, but I think.
We will I think three years to four years have almost all of our businesses.
That we currently have kind of coming out of the back into the process.
Okay. Good.
Okay, maybe one last one for me just.
Switching gears to <unk>.
The pricing environment and in 2020.
I don't remember that there was ever any issues because of your niche markets with selling price, but our you've taken up prices again are you still seeing inflation.
Well I would say that a lot of inflationary pressures, we've seen in raw materials.
Have subsided they have improved.
I'd also say that with demand down somewhat.
<unk> are very reluctant to accept big price increases as we mentioned before back in 'twenty. One 'twenty. Two we're all just trying to to get the materials from a supply chain standpoint to provide and so it was more can you give me something then what's it going to cost us to do it and that was the thing for us buying our raw materials.
So things have stabilized there and so I think we're returning back to a more normal environment from a pricing standpoint.
And as you know we if you look at our improvement that we've made it's almost all been on the on our SGA side, our margins have held very steady which is indication of our pricing.
What we've really worked hard on is reducing our our kind of our operating cost and that's really where we've got an improvement from reducing our internal expenses.
Okay, great. Okay. Thank you.
Yes.
Thank you I'm not showing any further questions in the queue I would now like to turn it back to Jeff Powell for any closing remarks.
Thank you Victor so before wrapping up the call today I just wanted to leave you with a few takeaways by.
2023, it was another record setting year for cadence and our employees deserve a lot of credit for achieving these results I want to thank all our employees around the world for their commitment to serving our customers needs.
I also want to welcome our newest employees from both <unk> and AWS manufacturing, we're excited about the value add Takeda and the opportunity to build upon the successes you've achieved.
In 2024, we will continue to seek new opportunities to create value as we focus on meeting our customers' needs with innovative technologies and solutions that drive sustainable industrial processes.
Lastly, our financial health is excellent and our market positions remain strong we look forward to delivering exceptional value for all our stakeholders again in 2024 with that I want to thank you for joining the call today.
Yeah.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.
Okay.
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Okay.
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