Q4 2024 Kadant Inc Earnings Call
Now or never
I am. Good. Good.
Good day and thank you for standing by.
Speaker Change: Welcome to the fourth quarter and full year 2024 Cadent 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.
Speaker Change: To ask a question during the session, you will need to press star 1 1 on your telephone.
Speaker Change: You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 1 1 again
Speaker Change: 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.
Michael Mckenney: Thank you, Daniel. Good morning, everyone. Welcome to Cadence fourth quarter and full year 2024 earnings call.
Speaker Change: 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.
Speaker Change: Various remarks that we may make today about Caden's 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.
Speaker Change: 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.
Speaker Change: 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 30, 2023 and subsequent filing for the Securities and Exchange Commission.
Speaker Change: In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today.
Speaker Change: While we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or estimates change.
Speaker Change: During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Speaker Change: 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.
Speaker Change: Finally, I wanted to note that when we refer to GAP, 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.
Speaker Change: 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.
Jeff Powell: I'll give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeff? Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our fourth quarter and four-year results and discuss our business outlook for 2025.
Speaker Change: I'm pleased to report the fourth quarter was a solid finish to a record-setting year for Caden.
Speaker Change: Despite the continued economic headwinds in many regions, industrial activity in the fourth quarter was relatively stable both year over year and sequentially.
Speaker Change: We had another well-executed quarter, which led to solid margin performance and strong cash flow in the fourth quarter.
Speaker Change: At the end of 2024, we were honored once again for our sustainability efforts and named by Newsweek magazine as one of America's most responsible companies.
Speaker Change: This marks the fifth consecutive year of being included on this list, and it's rewarding to be recognized for our efforts in this area.
With that, I'd like to review our Q4 financial performance.
Speaker Change: Fourth quarter performance benefited from stable demand throughout the second half of the year and the acquisitions we completed in 2024 led a revenue and bookings growth of 8% and 10% respectively.
Speaker Change: Adjusted EBITDA was up 8% compared to same period last year and our adjusted EBITDA margin was 20.3%.
Speaker Change: Solid execution by our operations teams around the world played an important role in delivering value to our customers and driving our operating performance in the fourth quarter.
Speaker Change: Overall, the fourth quarter financial performance contributed to record full-year financial results, which I will review next, slide 7.
Speaker Change: Stable demand and a strong backlog fueled record revenue performance of 1.05 billion in fiscal 2024, with aftermarket parts making up 66% of our total revenue.
Speaker Change: Adjusted EPS increased to a record $10.28, exceeding the prior record set last year at $10.04 per share.
Speaker Change: Our full year adjusted EBITDA was a record $230 million and a record 21.8% of revenue.
Speaker Change: Our strategic focus on improving our margin performance through internal initiatives, people development, and customer-focused innovations delivered results across a variety of metrics.
Speaker Change: Our workforce around the globe performed exceptionally well throughout a challenging year, and I am proud of our employees for the innovative work they have done and continue to do to serve our customers.
Speaker Change: Next, I'd like to review our performance in our three operating segments.
I'll begin with our flow control segment.
Speaker Change: Q4 revenue increased 8% to $95 million with strong performance in North America, offsetting weaker performance in Europe.
Speaker Change: Aftermarket parts revenue was up 12% compared to the prior period and made up 71% of total revenue.
Speaker Change: Adjusted EBITDA was up 15% and adjusted EBITDA margin increased 170 basis points to 28.7% in the fourth quarter compared to the same period last year.
Speaker Change: While bookings were up compared to the same period last year, softness in manufacturing sectors persisted in most regions, particularly during the second half of 2024.
Bye.
Speaker Change: We believe the long-term market trends impacting industrial markets, such as decarbonization, automation, and a focus on energy savings, will continue to drive new opportunities for growth, though business activity continues to be influenced by geopolitical and microeconomic challenges around the globe.
and Michael McKenney. Thank you.
Speaker Change: Turning now to our industrial processing segment, our performance in the fourth quarter was strong, despite slower activity in some of our end markets.
Speaker Change: Revenue increased 17% to $101 million compared to the same period last year led by contributions from our recent acquisition and capital shipments of our fiber processing equipment.
Speaker Change: Aftermarket parts revenue was up 24% and represented 67% of total revenue in the fourth quarter.
Speaker Change: Adjusted EBITDA margins declined 150 basis points compared to the prior year, largely due to lower capital equipment margins.
Speaker Change: Looking ahead to 2025, we expect demand for our capital equipment to strengthen, particularly in our wood processing product line, where capital project activity was relatively soft in 2024.
Speaker Change: In our material handling segment, Q4 revenue declined 4% to $62 million compared to the then-record fourth quarter of 2023, when we made the final shipment of a large capital order for the world's most technologically advanced bulk material conveying system.
Speaker Change: Aftermarket parts revenue was strong and represented 61% of total revenue of the quarter.
Speaker Change: Adjusted EBITDA margin declined 130 basis points compared to the prior year. This decline was largely attributed to decrease in operating leverage associated with lower capital revenue.
Speaker Change: Looking ahead to 2025, we believe this segment will benefit from planned infrastructure projects as well as the modernization of assets in the recycling and waste management sectors, particularly in the second half of the year.
Speaker Change: The strong and likely strength in U.S. dollar is expected to negatively impact our foreign currency translation, particularly if the industrial activity rebound is stronger in Europe and Asia relative to the U.S.
Speaker Change: Our balance sheet is in great shape, and our ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds, and we will work to deliver solid financial performance again this year.
Speaker Change: With that, I'd like to pass the call over to Mike for his review of our financial performance and our outlook for 2025. Mike. Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter.
Mike: Revenue was $258 million, up 8% compared to the fourth quarter of 2023, including a 14% increase from acquisitions and a 1% decrease from the unfavorable effect of foreign currency translation.
Speaker Change: Gross margins increased 70 basis points to 43.4% in the fourth quarter of 2014.
Mike: compared to 42.7% in the fourth quarter of 2023 due to a favorable increase in the proportion of aftermarket parts, which increased to 67% of total revenue compared to 60% in the prior period.
Mike: Fourth quarter gross margin of 43.4% included a 40 basis point negative impact from the amortization of acquired profit and inventory.
Mike: Excluding this impact, gross margins were up 110 basis points over the fourth quarter of 23.
Mike: As a percentage of revenue, SG&A expenses increased to 27.3% in the 4th quarter of 2024 compared to 25.1% in the prior year period.
Speaker Change: SG&A expenses were $70.6 million in the fourth quarter of 2014, increasing $10.7 million, or 18 percent, compared to $59.8 million in the fourth quarter of 2013.
Speaker Change: The $10.7 million increase in SG&A expenses was almost entirely due to the inclusion of $10.3 million of SG&A expense related to our 2024 acquisitions.
our GAP EPS.
Speaker Change: compared to $2.33 in the fourth quarter of 2023. And our adjusted EPS was down 7% to $2.25 from $2.41.
Speaker Change: Fourth quarter 24 adjusted EPS of two dollars and twenty five cents exceeded the high end of our guidance range by 15 cents principally due to lower than anticipated SG&A expenses.
Speaker Change: Adjusted EBITDA increased 8% to $52.4 million and represented 20.3% of revenue.
for the full year, or for...
Full year, revenue was a record $1,053,000,000.
Speaker Change: Up 10% compared to 23, including a 12% increase from acquisitions.
Speaker Change: We had record adjusted EBITDA in 24, which I'll cover in the next slide, along with our cash flow performance.
Speaker Change: Full year 24 gross margin exceeded 44% for the first time since 2017.
Speaker Change: The 24 gross margins of 44.3% included a 40 basis point negative impact from the amortization of acquired profit and inventory.
Speaker Change: Excluding this impact, gross margins were up 120 basis points over 2023.
Speaker Change: As a percentage of revenue, SG&A expenses increased to 26.6 percent in 2004 compared to 24.7 percent in 2003.
Speaker Change: Approximately half of this increase is due to non-cash intangible amortization expense associated with our acquisitions.
Speaker Change: SG&A expenses were $279.9 million in 2024, increasing 43.7 million, or 18 percent, compared to $236.3 million in 2023.
Speaker Change: The majority of this increase relates to our 24 acquisitions, which had SG&A expenses of $35.6 million in 2024.
The remainder was primarily due to annual wage increases.
Our gap EPS was $9.4824, down 4% compared to $9.9023.
Speaker Change: Our adjusted EPS was a record $10.28, up 2% compared to $10.04 last year.
Speaker Change: In the fourth quarter 24 adjusted EBITDA increased 8% to $52.4 million compared to $48.5 million in the fourth quarter 23.
Speaker Change: For the full year 24, Adjusted EBITDA was a record $229.7 million and a record 21.8% of revenue compared to Adjusted EBITDA of $201.3 million or 21% of revenue in 2023.
Speaker Change: Our industrial processing segment had record-adjusted EBITDA of $110.8 million in 2024 and a 250 basis point improvement in adjusted EBITDA margins compared to the prior year.
Speaker Change: Our flow control segment also had a record adjusted EBITDA of $106.9 million in 2004.
Speaker Change: As you can see in the full year chart, our adjusted EBITDA has increased in each of the last four years, leading to an increase in our adjusted EBITDA margin from 18.3% in 2020 to 21.8% in 2024.
Speaker Change: Part of this increase can be attributed to the benefits of our 80-20 program.
Speaker Change: Our 2024 intangible amortization expense increased 57% compared to 2023. While this negatively impacted our EPS performance, our acquisitions contributed to our strong cash flow and adjusted EBITDA performance.
Speaker Change: As you can see from our cash flow chart, we had strong operating cash flow in the last two quarters of 24 compared to the first two quarters.
Speaker Change: For the full year, operating cash flow decreased 6% to $155.3 million, compared to a record $165.5 million in 2023.
Speaker Change: Our free cash flow of $134.3 million in 2024 compared to $133.7 million in 2023.
Speaker Change: We had several notable non-operating uses of cash in the fourth quarter twenty-four.
We repaid $33.1 million of debt.
Speaker Change: and paid $5.6 million for capital expenditures and a $3.8 million dividend on our common stock.
Speaker Change: For the full year, we paid $300.3 million for acquisitions funded through borrowings.
Speaker Change: We continue to focus on utilizing our strong cash flows to accelerate the pay down of debt and I'm pleased we are able to repay $124.5 million this year or approximately 41% of our 24 borrowings.
Let me turn to our EPS results for the quarter.
Speaker Change: In the fourth quarter 24, GAAP earnings per share were $2.04 and adjusted EPS was $2.25.
Speaker Change: The $0.21 difference relates to $0.16 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary.
Speaker Change: In the fourth quarter 23, GAAP earnings per share were $2.33 and adjusted EPS was $2.41.
The $0.08 difference relates to $0.10 of acquisition costs.
Speaker Change: $0.04 of other income related to our facility project in China and $0.02 of restructuring costs.
Speaker Change: The decrease of 16 cents in adjusted EPS in the fourth quarter of 24 compared to the fourth quarter of 23 consists of the following.
Speaker Change: $0.02 due to higher operating expenses and $0.01 due to a higher recurring tax rate.
Speaker Change: These decreases were partially offset by 26 cents of income from the operating results of our acquisitions, excluding the associated borrowing costs, and 17 cents due to higher gross margins.
Speaker Change: Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of 2 cents in the fourth quarter of 2004 compared to the fourth quarter of last year.
Speaker Change: Now, turning to our EPS results for the full year on slide 17.
Speaker Change: We reported gap earnings per share of $9.4824 and our adjusted EPS was $10.28.
Speaker Change: The $0.80 difference relates to $0.74 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary.
Speaker Change: The $0.14 difference relates to $0.10 of acquisition costs and $0.04 of restructuring costs.
The increase of 24 cents in adjusted EPS.
from 23 to 24 consists of the following.
$0.88 from higher gross margins.
Speaker Change: $0.87 from the operating results of our acquisitions, excluding borrowing costs, and $0.02 from a lower recurring tax rate.
Speaker Change: These increases were partially offset by $0.72 from higher interest expense.
$0.54 from lower revenue, excluding
Speaker Change: $0.24 from higher operating expenses and $0.03 due to higher weighted average shares outstanding.
Speaker Change: Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.08 in 2024 compared to 2023.
Speaker Change: Now let's turn to our liquidity metrics starting on slide 18.
Speaker Change: Our cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 122 at the end of the fourth quarter of 2004, down from 129 days.
last quarter and 130 days at the end of 23.
Speaker Change: The decrease in cash conversion days was principally driven by a lower number of days in inventory.
Speaker Change: Working capitals percentage of revenue decreased to 15% in the fourth quarter 24 compared to 17.2% in the third quarter 24 but up from 12.8% in the fourth quarter 23.
Speaker Change: Net debt, that is debt less cash, at the end of 24 was $192.6 million.
Speaker Change: A decrease of 19%, or $44.1 million, from the net debt of $236.7 million at the end of the third quarter of 2024.
Borrowings made.
Speaker Change: in 24 to fund our acquisitions, contributed to an increase in our interest expense, which totaled 20 million in 24 compared to 8.4 million in 23.
Speaker Change: Our leverage ratio, calculated as defined in our credit agreement, decreased below 1 to 0.99 at the end of 24 compared to 1.13 at the end of the third quarter of 24.
Speaker Change: We have $122 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity.
Now I'll review our guidance for 25.
Speaker Change: For the full year, our revenue guidance is $1,040,000,000 to $1,065,000,000.
Speaker Change: And our adjusted diluted EPS guidance is $9.70 to $10.05, which excludes 7 cents related to the amortization of acquired profit and inventory and backlog.
Speaker Change: Looking at our quarterly revenue and EPS performance in 2025, we expect that the first quarter will be the weakest quarter of the year due to the timing of capital projects.
Speaker Change: and the second half of the year will be significantly stronger than the first half as a result.
Speaker Change: Our revenue guidance for the first quarter of 2025 is $235 to $242 million, and our adjusted diluted EPS guidance for the first quarter is $1.85 to $2.05.
Speaker Change: which excludes four cents related to the amortization of acquired profit and inventory and backlog.
Speaker Change: I should 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.
Speaker Change: I wanted to outline a few points related to our full year guidance.
Speaker Change: Our revenue guidance is negatively impacted by a $23.5 million unfavorable foreign currency translation effect based on exchange rates at the end of 2024.
Speaker Change: After excluding this FX impact and a small amount of acquisition revenue,
Speaker Change: Our organic revenue growth would be 2.5% at the top end of our 25 guidance range.
Speaker Change: This FX impact is subject to both upside and downside risk as the year progresses.
Speaker Change: Our adjusted EPS guidance of $9.70 to $10.05 for 2025 includes a $0.32 unfavorable foreign currency translation effect.
Speaker Change: If you exclude the FX impact from the top end of our adjusted EPS guidance range, we would be at $10.37, up modestly from $24.00.
Speaker Change: The softer capital bookings we experienced throughout 24 will have a meaningful impact on the revenue and earnings performance in the first half of 25, resulting in tough quarterly comparisons.
Speaker Change: Our projected increase in capital bookings in 2025 are expected to lead to much stronger financial results in the second half of the year.
Speaker Change: Before continuing my comments on 25 guides, I also wanted to provide some information related to the new tariffs proposed by the Trump administration.
which are quite fluid at the moment.
Speaker Change: The proposed tariffs on the import of goods from Canada and Mexico were delayed for 30 days.
Speaker Change: In 24, less than 1% of our cost of sales were related to goods we imported from Canada and Mexico, so a very small percentage.
If these terrorists were to...
Speaker Change: To take effect, we would look for ways to mitigate the impact, including finding alternative suppliers and cost sharing.
Speaker Change: Are Canadian businesses also selling to the U.S. to third-party customers?
Speaker Change: We are currently working on assessing the impact, but we believe our competition would also be subject to tariffs.
Speaker Change: We estimate that this will result in incremental material costs of $1.6 million and $1.5 million, and that approximately 75% of these costs can be mitigated by finding alternative suppliers and passing costs on to our customers.
Speaker Change: In addition, the Trump administration just announced an incremental tariff on the import of steel and aluminum.
Speaker Change: We're currently working on assessing the impact of this new regulation.
Speaker Change: Guidance does not include an estimated impact related to any of these new tariffs.
Speaker Change: We will continue to monitor these tariff changes and will provide further updates as the year progresses.
and there is more clarity with the new regulations.
Speaker Change: As a percentage of revenue, we anticipate SG&A will be approximately 26.5 to 27 percent, and R&D expense will be approximately 1.5 percent of revenue.
Speaker Change: as a result of the significant pay down in debt in 24.
We expect a 30% decrease in interest expense.
Speaker Change: For 2025, we anticipate net interest expense of approximately $13 to $13.5 million.
Speaker Change: We expect our recurring tax rate will be approximately 27% and depreciation and amortization will be approximately $49 to $50 million.
Speaker Change: and we anticipate CapEx spending in 2025 will be approximately $24 to $26 million.
Speaker Change: That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session. Daniel? As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster
Speaker Change: Our first question comes from Ross Sparenbleck with William Blair. Your line is open.
Hey, good morning, guys.
Warren Roth
Speaker Change: Hey, just thinking about the organic order growth, you know, we've been on a downward trajectory since around 2022, but are we right to think that the base is kind of in around that 240 to 250 level per quarter? Excuse me, and just kind of thinking about the second half step up in sales, you know, how do you think about kind of sizing the coming acceleration orders that you're anticipating?
Speaker Change: Well, I'd say, you know, of course, Ross, on the order front, we're really looking for a significant delta on capital.
Speaker Change: I'll say low 70 million, and we really need to see that improved by, say, 10 to 20 percent, and that's really kind of what we're forecasting for 2025.
Speaker Change: Okay, I mean can you give us a sense of where the capital commitment backlog was at year-end? I think we're around 180 million call it.
Speaker Change: yeah we the backlog all in was 257 and capital is 57% of that
Okay and is there a mix between maintenance or Greenfield?
Speaker Change: I think 2024 was more like a maintenance story that was being deferred, so presumably this is going to be like an easier setup going into 2025, just given the visibility around that.
Speaker Change: I would say, you know, it's more in the kind of what's in currently is more in the maintenance mode, but in your right on the go forward to be, you know, there'll be there'll be of course the maintenance and then new projects.
Speaker Change: Okay, there's one more from me if I can. Yeah, it's still kind of difficult to parse out this environment. You know, you had a peer announce a large order this morning, which seems to support the kind of market sentiment that there's this large project funnel in 2025.
Speaker Change: But at the same time, we're also seeing more facility closures that were announced. So I'm just trying to reconcile the moving parts as it relates to Cadent, and if there's anything you guys can call out as it relates to customer conversations that give confidence for this at least greenfield aspect of the capital orders acceleration.
Yeah, I think...
Speaker Change: You know, of course, as we've talked about for the last seven quarters, capital has been slow. You know, we had that record quarter, first quarter of 2023, and capital orders really started to turn down after that with interest rates going up.
Speaker Change: and have been pretty soft since then. That's one of the reasons why our parts and consumables has been so strong, because people are running equipment longer than they...
Moderator Good morning everybody.
discussions are, you know, are pretty active, everybody's just waiting.
was waiting for more clarity and
Speaker Change: We were hoping to get that, but of course, the last three weeks, it's been kind of crazy, you know.
Speaker Change: and I think there's a lot of uncertainty and lack of clarity around these tariffs. I think people are still trying to sort through. But, I mean, the project activity is there. They can't go forever without, you know,
Speaker Change: replacing equipment. I mean, and so it's just a question of when the cycle starts again.
Speaker Change: I'm not sure who you're referring to on the large order, but if you look at, for instance, the housing, our wood product side has been pretty soft the last
Speaker Change: You know the last couple of years housing starts around a million three all of last year, which is pretty soft. I see that the CBO just came out with the next ten year forecast that has it at 1.6 million start for the next ten years.
Speaker Change: So, you know, that would be quite strong and quite good, I think, for our business, assuming that we see that happening.
Speaker Change: but it's interest rate sensitive of course and as I said the little bit of the uncertainty that's occurring right now I think it's frozen interest rates so
Speaker Change: But it will, capital will have to come back. I mean, we've been in this game for a very long time, and we know you can only delay making those investments for so long. And so, you know, things will start to strengthen. And as Mike indicated, right now, we think the second half of the year, we're expecting to see some strengthening in these projects.
Yeah, that all makes sense. Thank you, guys.
Speaker Change: Thank you. Our next question comes from Kurt Ginger with DA Davidson. Your line is open.
Great, thanks and good morning everyone.
Kurt Ginger: Maybe some hope around some relief on interest rates that that would catalyze some of these discussions turning into bookings or is there anything else specifically from a macro perspective that you're really keen in on here.
Well, of course, you know...
The interest rates are always a key.
a key metric that, you know, impacts.
Kurt Ginger: but also it impacts economic activity and I think that's really what our customers are looking for is they're looking for a better visibility and a sense of where the economic activity is going to be.
Kurt Ginger: I would say we had some projects that we've been talking to our customers about that we thought might happen quickly here.
And, you know, I would say there's a...
Kurt Ginger: It's a somewhat chaotic environment right now, I think to say the least, with what's going on in Washington, and I know all that does is add more uncertainty, and these guys just say, well, we're going to wait another month to see how this sorts out.
Kurt Ginger: I think it's, you know, we need stability, we need economic growth to start to accelerate, you know, and stabilize, but we need some some stability. I think that's what they're, you know, they're waiting for and hoping for. And as I mentioned, just a few minutes ago, you can't delay
Kurt Ginger: investing in your business forever. You know at some point we know we've been in this down cycle for two years now on the capital side. You know history tells us that
Essentially another buying cycle is going to
It's going to occur
Kurt Ginger: China's weak. And so, you know, what we really like for us, what we really like to see is some stability and some growth starting to accelerate in Europe and Asia.
got it okay that'll make sense and
Beyond that, are there any specific areas or geographies where...
you feel like
Kurt Ginger: The visibility is really there on the capital side and you think, or you're pretty confident in an inflection coming, or how are you thinking about that?
Kurt Ginger: Well certainly our SB business has held up surprisingly well. I would say that on the
Kurt Ginger: Our consumable business on the sawmills, that's softened, and the debarkers, our debarking business has been pretty soft now for a while. We had a very strong couple of years there and built a very large backlog.
Kurt Ginger: and I think the industry is absorbing that and things have been quite soft. But again, we think, based on discussions with our customers, that things are going to start to improve there as the year progresses.
Kurt Ginger: and certainly if we get housing starts you know back I saw the starts where I think we're a million five in December
Kurt Ginger: If we could average anywhere near that this year, you're going to see...
Kurt Ginger: you're going to see a much better, you know, kind of market condition for our customers, which...
Kurt Ginger: You know, utilizes parts and consumables from us and also allows them to make it some investments in business.
Kurt Ginger: Europe has been turned on its head a little bit because of the Russia situation, you know, and that's slowly sorting itself out You know that capacities had to had to move around and so we're hoping to To see some some stability and growth there. I think
Kurt Ginger: The best thing that could happen for us in Europe would be for this Russia-Ukraine
Kurt Ginger: and I think you're going to see significant demand. You've got an entire country to rebuild.
Kurt Ginger: possibly some sanctions I suspect would be included in any agreement, peace agreement, sanction relief in Russia, which would be very good for us. So that's something that we're really hoping for, is that they're going to be able to stop this conflict.
and if they do, you know, I think it will.
Kurt Ginger: There will be significant demand that will come out of kind of, you know, rebuilding the Ukraine in particular.
Kurt Ginger: So, you know, those are things that we're hoping for, but even without, you know, that conflict resolving itself, I think you're seeing some, you know, shift and stabilization in the market over there as it, you know, it's taken a few years to kind of sort that out.
Kurt Ginger: Okay, okay. And, you know, if we were to think about the 2028 targets you laid out in December and kind of put that together with the outlook here for 2025, recognizing acquisitions are kind of a key factor and hard to predict.
Kurt Ginger: Should we be thinking about kind of a meaningful acceleration in 2026, kind of a well above kind of target organic growth period, or how would you kind of frame that in light of the multi-year targets?
Kurt Ginger: Yeah, I mean we have, you know, we work with economic groups that kind of give us, you know, they look at our industries and our particular metrics and give us
Kurt Ginger: starting, you know, that half of 25 through, certainly through the next few years, through 27, say 28. So we do expect to see an acceleration in most of our key markets.
Kurt Ginger: Packaging tends to be a little more stable, you know, it's talking about growing 3% and low under 3% over the next several years, but on the material handling side, on the wood side, they're talking about, you know, a reacceleration in growth. And that's what we, that's what we would expect.
Kurt Ginger: Okay, and then if I could just sneak one more in on the gross margin side.
Kurt Ginger: With the softness in capital, at least here early in the year, can you talk about some of the puts and takes around gross margins? I mean, I would think mix is going to be a benefit, but is there any offset as well from margins on capital orders maybe starting to be less favorable than you've seen over the last couple quarters?
Kurt Ginger: It's a good question, Kurt. Yeah, as you said, the mix is going to be helpful, especially in the front half of the year, right? And then specific to capital gross margins, I would say.
Kurt Ginger: on, you know, smaller capital or replacement capital, where we, I'd say, you know, we kind of have a little bit of the upper hand. Those margins should be good.
the larger projects.
Kurt Ginger: are the ones that can be more competitive and you get pressure.
Kurt Ginger: So I would have to say we'll have to wait and see how those shake out.
Okay, makes sense. Appreciate all the color. Thank you.
Thank you.
Speaker Change: Thank you. Our next question comes from Gary Prestapino with Barrington. Your line is open.
Hi, good morning, Jeff and Mike. Could you...
Speaker Change: Maybe just for me, let's talk a little bit about, on the capital project side, across all your three business lines, where are you seeing the most sluggishness, at least in the first half of this year, and then where's going to be the most significant snapback as you get into the back half of 2025?
you know, the segment that
has the most favorable outlook for us is industrial processing.
Speaker Change: with wood leading the way and stock prep also participating in that so that's the that's the segment where
Speaker Change: We are anticipating the best growth, and then right after that, I would say, is in material handling, where, as Jeff mentioned, we feel that as we move towards the back half of the year, we're going to start to see a nice recovery there.
Speaker Change: Okay, and then just just maybe a comment on the acquisition pipeline and I guess is
Speaker Change: Given that there's generally a consensus here that the economy is going to strengthen, things are going to get better, are you seeing that reflective in your discussions with potential acquisitions in terms of pricing?
Speaker Change: I would say the, as we said most of last year, the activity level has been quite strong. Our corporate development team has been quite busy, you know, an awful lot of opportunities that, you know, we've looked at and been in discussions with. And so, you know, the pricing, you know, is always, you know, kind of driven by, frankly, the private equity guys.
Speaker Change: They kind of set pricing, and their pricing is somewhat set by interest rates and how much leverage they can get.
Speaker Change: And so that's really, I think, what it impacts pricing more so than, say, you know, a more favorable economic environment.
Speaker Change: but the activity level we think is going to be very strong again in 2025.
Speaker Change: that's what we're hearing from from the bankers and that's kind of what our corporate development team is experiencing as they go out. As you know at any given time we're tracking talking to two or three hundred companies.
Speaker Change: and you know I think everybody's just like we're expecting things to strengthen as a year progresses they are too and so you know I think there you know that is feeding into I would say the you know kind of the increased discussions that we're having with everybody.
Speaker Change: Pricing still yet to be seen. I would say pricing maybe did.
Speaker Change: Stabilized a little bit but what we really saw last year was a much larger percentage of busted deals, deals that didn't happen. Probably the most I've seen in a long long time where you know they would enter into an agreement and then it would not it would not close.
Speaker Change: And I think that was kind of a function of pricing and, you know, kind of sluggish performance where things just didn't improve as much as people were hoping for last year. So that's where we really have seen it. So I think.
Speaker Change: Pricing is always a challenge, especially for us, because we tend to be very, very disciplined in our pricing strategies. But I would say we're reasonably enthusiastic about the environment we're seeing and the number of deals that we think are going to come to market.
Okay, thank you
Thank you.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question.
Walt Liptec: Our next question comes from Walt Liptec with Seaport Research. Your line is open.
All right, thanks. Good morning, guys.
Walt Liptec: One day just dial in a little bit more on the industrial processing and the outlook for the wood products because it sounds like that's where you've got the best chance of getting some capital projects.
Walt Liptec: So in the quarter, the bookings looked good. What was the mix of that in terms of capital projects versus aftermarket parts?
Walt Liptec: Yeah, we had some decent activity on the capital side. First, I'd say parts were good.
Walt Liptec: But we also had some activity on the capital side, I'd say more towards stock prep in the quarter. So that was a positive spot for us in the quarter.
Wood processing. What are the pluses and minuses?
Walt Liptec: Do we need to see that housing recovery that you kind of alluded to, the $1.5 million, or is it lower interest rates, or is there something in the pipeline that says that someone's got to replace some of their capacity?
Well, I think.
Walt Liptec: It's interesting, of course, because, as you know, housing drives more than just wood consumption. You know, it really is a key component of the entire economy. Packaging is tied to housing in a big way. And so what we really need to see is, you know, the housing starts to – I mean, we're not coming close to meeting demand out there. You know, demand is –
Walt Liptec: It's very high. The demand gap continues to grow. You know, we're built, you know, kind of a million three plus last year. You know, we really probably should have been million six, million seven. So that's a key component of it, I think.
Walt Liptec: And that, of course, is tied to interest rates. If interest rates come down, housing becomes more affordable. So that's a big component. Housing also, of course, affects our material handling group, all the concrete.
Walt Liptec: Still an aggregate and everything else that goes into that so it is a major driver of the US economy
Walt Liptec: And so if it does increase from this low, I mean, the production was very low last year. It was near, other than the O9 crisis, it was near, on average, a 30-year low. So we do expect that's going to improve. The forecasts all indicate they think things are going to strengthen.
Walt Liptec: and that will help both of our sectors, but the wood group will see it first for sure.
Speaker Change: Okay, great. And then, just appreciate that. And then just changing gears to geographic, I think you kind of commented that Europe is sort of sluggish. And how about Asia and any of the trends that are happening in China?
Speaker Change: Well, China's very has been very slow on the industrial side the government continues to
Speaker Change: You know to put more and more programs in place to try to spur Some growth there, you know, they're having to continue to increase the amount of money that they're going to invest. So it's it's slow
Speaker Change: I would say Asia, it kind of depends on which country you're looking at, but certainly Germany is struggling right now. The German economy is very much tied to automotive exports.
They're losing big, big market share in.
in China right now.
Speaker Change: and so that's hurting them and so they've got to sort through that.
Speaker Change: But in general, I would say the activity level has been sluggish in most of Europe.
Speaker Change: What's interesting enough, what they call the pig country is doing a little better than the more established ones, you know, Spain, Italy.
Speaker Change: are doing a little better than, say, Germany and France, and the U.K. is still sluggish. So Europe has some work to do, I think, to get their economies back accelerating again.
Okay, got it. Okay, I appreciate the answers. Thank you.
Thank you. Our next question comes from
Speaker Change: Thanks guys. I just wanted to follow up on some of the margin sensitivities, you know, parts consumables are seeing stable demand, but where do we think we are in kind of the restocking cycle there, and if there's anything different to call out from what you already said about the geographic dynamics as it relates to factory utilization rates?
Speaker Change: I would say that I think that, you know, kind of destocking and restocking has kind of kind of played itself out. I think we're seeing, you know, good, strong,
Parts
Speaker Change: Great part, because the equipment is old and wore out. They just haven't made the investments the last couple of years. And just like if you drive a car too long, you start to put a lot more money in keeping it running. So I think that's why, if you look at the parts.
Speaker Change: It's a little better than you might normally expect relative to the operating rates. It tends to be a function of operating rates. But I would say it's particularly strong relative to the operating rates, in part because they haven't made the investments, the maintenance investments, and the things that they often do.
Speaker Change: And so, but I think as far as the, you know, kind of, as I said, the stocking, restocking, I think that's played out now and it's going forward. It's just going to be, you know, kind of, you know, tied to operating rates and the age of the equipment.
Speaker Change: Okay, so as we think about, you know, parts of the Zoomables, I think orders are up.
Speaker Change: Yeah, 600 basis points, TNC mix of orders this year versus last year. Do you think like half of that's structural from recent M&A and the other half is kind of just older equipment?
Speaker Change: deliver more capacity replacement equipment and maybe it's not as beneficial.
Well...
Speaker Change: I'd say, you know, really the transactions that we did had a high focus on parts and consumables, Ross.
Speaker Change: So, you know, all in, that's, you know, that's what you're seeing the benefit of the businesses we acquired. If you go down to organic.
Speaker Change: It's more to what Jeff was talking about. I would say organic has been flat, relatively flat, which, given operating rates, et cetera, is a little bit of a surprise to us, a good surprise.
So, okay.
Speaker Change: And then just put a finer point on the 2020-25 guidance. You know, everything's static on the macro that you talked about. What is kind of the internal assumptions on TNC mix versus capital equipment?
Speaker Change: a little a tick above where we finished this year so we are 66% on parts and consumables this year we're looking at 67 next year.
or this year, actually, of 25.
Speaker Change: And then just one more really quick, 80-20, you know, changes every year, what's the primary focus when we think about the segments for 2025?
Speaker Change: So, as you know, we have a kind of a list of companies and start dates scheduled for them. So, our 8020 teams continue to execute those and, of course, as new companies join the
Speaker Change: and family they get on the list and so it'll be a never-ending you know effort but we have several companies that are that are you know starting 80-20 this year
both in North America and Europe.
All right, well thank you guys.
You're welcome.
Thank you.
Speaker Change: I'm showing no further questions at this time. I would now like to turn it back to Jeff Powell for closing remarks
Speaker Change: Thanks Daniel. So before wrapping up today I just wanted to leave you with a couple of takeaways. 2024 was another record year for Cadent. Our employees once again performed at a very high level to achieve these results.
Speaker Change: While we expect continued uncertainty and volatility in various regions around the world in 2025, we believe our decentralized operating structure and global presence will help mitigate the risk associated with this.
Speaker Change: and we look forward to maximizing the value we create for our customers and our stockholders in 2025. With that, we want to thank you for joining the call today.
Have a great day.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.