Q1 2025 Kadant Inc Earnings Call
Yes.
[music].
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to Kate in first quarter 'twenty 25 earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session to ask a question. During this session you would need to press star one on your telephone you wouldn't hear an automated message of fights and you're hanging just raised to withdraw your question. Please press star one again.
Speaker Change: Please be advised that today's conference is being recorded I would like now to turn the conference over to Michael Mckenney Executive Vice President and Chief Financial Officer. Sir. Please go ahead Sir.
Michael Mckenney: Thank you Michele.
Michael Mckenney: Good morning, everyone and welcome to cadence first quarter 2025 earnings call with me on the call today is Jeff Powell, our President and Chief Executive Officer.
Michael Mckenney: Before we begin let me read our safe Harbor statement.
Michael Mckenney: Remarks that we may make today about cadence future plans and expectations financial and operating results and prospects are forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
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.
Michael Mckenney: 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 28, 2024, and subsequent filings with the Securities and Exchange Commission.
Michael Mckenney: In addition, any forward looking statements we make during this webcast represent our views and estimates only as of today.
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.
Michael Mckenney: 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.
Michael Mckenney: Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first 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 cadence Dot com.
Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on the call. We are referring to each of these measures as calculated on a diluted basis.
Michael Mckenney: With that I'll turn the call over to Jeff Powell, who will give you an update on cadence business and future prospects. Following 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. Thanks for joining US this morning to review our first quarter results.
Michael Mckenney: To discuss our business outlook for 2025.
Michael Mckenney: Before I get into my remarks on our Q1 performance.
Michael Mckenney: I'd like to take a few minutes to outline the actions we've taken so far to understand the implementation and implications of the tariffs on our industry's supply lines.
Michael Mckenney: Customers and how we might respond based on a variety of scenarios we consider.
Michael Mckenney: Each of our operating teams is assessing their supply chain vulnerability.
Michael Mckenney: Understand our exposure to potential tariffs and the impact it could have on our operations. This assessment include potential changes and cost impacts on production of lead time, and how we would address these factors.
Michael Mckenney: I should note that one of the strategic benefits of our decentralized structure is our ability to respond quickly to changing economic circumstances.
Michael Mckenney: We're also exploring alternate supply sources with the feasibility of switching suppliers in response to changed trade relationships and tariffs.
Michael Mckenney: While we have a good handle on the known alternatives the fluidity in the trade policies make decision, making more complicated.
Michael Mckenney: Sure.
Michael Mckenney: Yes.
Michael Mckenney: Cadence, we are fortunate to have experienced operations leaders around the globe.
Michael Mckenney: We paced decisions on local conditions and information from our global network of companies.
Michael Mckenney: Our analysis to date.
Michael Mckenney: We believe we are well positioned to react to changes in trade policy and relationships, while maintaining our high level of support to our customers.
Michael Mckenney: As you know Cana with few exceptions manufacturers in the regions we sell in currently.
Michael Mckenney: Currently we do not believe any of our competitors gain a benefit from the tariffs.
Michael Mckenney: Later in our review, Mike will provide our estimate of the financial impact tariffs could have on our business.
Michael Mckenney: Now, let's go into the first quarter performance I will begin with the operational highlights.
Michael Mckenney: Despite the high level of uncertainty fueled by the global tariffs, it's just economic headwinds in Europe, and China are first quarter came in as expected across most financial metrics.
Michael Mckenney: Demand for aftermarket parts was robust and our operations teams around the globe once again executed extremely well in a challenging environment.
Michael Mckenney: Delivered high value to our customers. This led to strong margin performance and solid free cash flow.
Michael Mckenney: Turning now to our first quarter financial performance on slide six.
Michael Mckenney: I'd like to highlight a few metrics that I believe are fundamental to our growth story.
Michael Mckenney: First our new order activity was up in the first quarter, despite the relatively low capital business.
Michael Mckenney: Certainly created by the rapidly evolving tariff situation has delayed capital equipment orders as our customers assess the potential impact on their businesses.
Michael Mckenney: Aftermarket parts bookings represented 74% of our total bookings and was a record $190 million.
Michael Mckenney: As many of you know the first quarter of the year is often our strongest quarter in terms of parts bookings as our customers prepare for annual maintenance shutdowns.
Michael Mckenney: This strong demand benefits from our large installed base and our ability to deliver exceptional value to our customers.
Michael Mckenney: Second our free cash flow remained healthy at $19 million.
Michael Mckenney: Our asset light operating model enables us to capture solid cash flows even during challenging and volatile economic times.
Michael Mckenney: Revenue in the first quarter declined 4% compared to the same period last year due to weaker capital shipments in our industrial processing segment.
Michael Mckenney: Our aftermarket parts revenue made up 75% of Q1 revenue.
Michael Mckenney: It was up 5% to a record $179 million.
Michael Mckenney: While our gross margin performance was excellent.
Michael Mckenney: Our adjusted EBITDA of $48 million was down 8%.
And lower operating leverage led to a decline in adjusted EBITDA margin of 100 basis points compared to the same period last year.
Michael Mckenney: Next I'd like to discuss the performance of each of our three operating segments, beginning with flow control segment.
Michael Mckenney: Sure.
Michael Mckenney: Flow control segment experienced solid demand in the first quarter led by our North American businesses bookings of $100 million were up 6% compared to Q1 of last year.
Michael Mckenney: <unk> revenue increased 7% to $92 million with strong performance in our fluid handling product line, which includes our most recent acquisition.
Michael Mckenney: Aftermarket parts revenue made up 76% of total Q1 revenue is expected to remain stable as the year progresses.
Michael Mckenney: Our high percentage of aftermarket parts revenue helped drive adjusted EBITDA up 8%, resulting in adjusted EBITDA margin of 28, 3%.
Michael Mckenney: We expect to deliver strong performance again this year in our flow control segment. Despite transitory headwinds introduced by the current geopolitical climate.
Michael Mckenney: Yes.
Michael Mckenney: Turning now to our industrial processing segment on slide eight our aftermarket parts business was relatively stable, which helped to offset the weaker capital business in the first quarter.
Q1 revenue declined 15% compared to then record 106 million set in the same period last year.
Michael Mckenney: This was largely due to a significant decline in capital shipments that was expected based on the relative softness in capital projects through 2024, particularly in our wood processing product line.
Michael Mckenney: Aftermarket parts revenue of Q1 made up a record 80% of total revenue in this segment.
Michael Mckenney: Q1 bookings on the other hand, we're up 3% compared to the prior year period $92 million.
Michael Mckenney: There continues to be significant capital project activity developed in this segment. The current chaotic geopolitical environment makes the timing of these orders even more uncertain.
Michael Mckenney: The weaker revenue volume led to reduced operating leverage and adjusted EBITDA margin of 24, 2%.
Michael Mckenney: Overall, our first quarter performance of the segment was soft.
Michael Mckenney: This segment has high exposure to large capital.
Michael Mckenney: And the elevated uncertainty in global trade policy has significantly impacted the timing of capital projects.
Michael Mckenney: In our material handling segment, we experienced solid demand for aftermarket parts, which helped to offset a softer capital environment in the first quarter.
Michael Mckenney: Revenue of 57 million was up slightly compared to the prior year period with aftermarket parts, making up 65% of Q1 revenue.
Michael Mckenney: Demand for capital equipment was down from the prior year period, and overall bookings were flat.
We are seeing growing activity in this segment, particularly in our high performance Baler product line and expect a number of capital projects, we executed in the coming quarters, although the timing can be somewhat uncertain.
Michael Mckenney: Adjusted EBITDA margin of 22% of revenue was flat compared to the same period last year.
Michael Mckenney: Despite the geopolitical and trade uncertainty to the outlook for this segment remains positive as the end markets. We serve such as aggregates mining waste management recycling are fundamentally strong.
Michael Mckenney: As we look to the second quarter of 2025, and the full year, we remain focused on strengthening our businesses around the road adapting to navigate these challenging times.
Michael Mckenney: Despite the increase the uncertainty that limits our visibility.
Michael Mckenney: The longer term underlying fundamentals of our markets remained strong.
Michael Mckenney: Our aftermarket business continues to provide strength and stability, even as capital project activities affected by global trade and tariff uncertainties.
Michael Mckenney: We are confident in our ability to deliver our value proposition our balance sheet remains healthy our ability to generate strong free cash flow was solid.
Mike: And with that I'll turn the call over to Mike.
Mike: Thank you Jeff.
Mike: I'll start with some key financial metrics from our first quarter.
Mike: Gross margin was 46, 1% in the first quarter 'twenty five the highest gross margin since 2017.
Mike: Gross margin was up 150 basis points compared to 44, 6% in the first quarter 'twenty four.
Mike: Over half of this increase relates to the negative effect of acquired profit and inventory amortization.
Mike: Which lowered gross margin in the first quarter 'twenty four by 90 basis points.
Mike: The remaining increase is primarily associated with a higher overall percentage of aftermarket parts, which represented 75% in the first quarter, 25% compared to 69% in the prior year.
Mike: We only had a minor impact in the first quarter from tariffs I'll discuss the prospect.
Mike: Effective tariff impact when I review the guidance.
Mike: SG&A expenses as a percentage of revenue increased to 29, 8% in the first quarter 25, compared to 28, 2% in the prior year period.
Primarily due to the comparatively lower revenue performance in 'twenty five.
Mike: SG&A expenses increased $9 million or 1% to $71 2 million in the first quarter 25, compared to $70 3 million in the first quarter 'twenty four.
Mike: This included an increase of $3 2 million from our acquisitions, partially offset by a $1 4 million favorable foreign currency translation effect.
Mike: And a $1 $2 million decrease in acquisition related costs.
Mike: Our effective tax rate in the first quarter was 24, 3% and included tax benefits related to the vesting of equity awards.
Mike: Which lowered the effective tax rate by one 3%.
Mike: Our GAAP EPS decreased 3% to $2 four in the first quarter and our adjusted EPS decreased 12% to $2 10, which exceeded the high end of our guidance range by five.
Mike: Adjusted EBITDA decreased 8% to $47 9 million compared to $52 2 million in the first quarter 'twenty four principally due to lower capital revenue at our industrial processing segment, which led to reduced EBIT performance.
Mike: As a percentage of revenue adjusted EBITDA was 20% compared to 21% in the first quarter 'twenty four.
Mike: Operating cash flow at $22 8 million was flat compared to the first quarter 'twenty four.
Mike: Free cash flow increased 15% to $19 million in the first quarter 25, compared to $16 6 million in the first quarter 'twenty four.
Mike: First quarter tends to be the weakest cash flow quarter as was the case in 'twenty four due in part to the payment of management incentives.
Mike: Other non operating uses of cash in the first quarter 'twenty five included $14 million of repayments on our debt.
Mike: $3 8 million for capital expenditures.
Mike: $3 8 million for dividends on our common stock and $6 million for tax withholding payments related to divesting of stock Awards.
Mike: Let me turn next to our EPS results for the quarter.
Mike: Our adjusted EPS decreased 28.
Mike: From $2 38 and.
Mike: In the first quarter of 24 to $2 10 in the first quarter 'twenty five.
Mike: This Inc. This included increases of eight.
Mike: Due to a higher gross margin percentage seven.
Mike: Due to lower operating expenses <unk> <unk> from the operating results of our acquisitions and <unk> due to lower net interest expense.
Mike: These increases were offset by decreases of 52 due to lower revenue in <unk> due to higher noncontrolling interest expense.
Mike: Collectively included in all the categories I, just mentioned was an unfavorable foreign currency translation effect of <unk> in the first quarter 25 compared to the first quarter of last year due to the strengthening of the U S. Dollar.
Mike: 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 in accounts payable increased to 130 at the end of the first quarter 25 compared to 128 at the end of the first.
Mike: <unk> 24.
Mike: Working capital as a percentage of revenue was 16, 8% in the first quarter 25, compared to 15, 7% in the first quarter of 'twenty four.
Mike: Our net debt that is debt less cash decreased $10 million sequentially to $183 million at the end of the first quarter 'twenty five.
Mike: Our leverage ratio calculated in accordance with our credit agreement decreased to <unk> 95 at the end of the first quarter 25 compared to <unk> 99 at the end of 'twenty four.
Mike: At the end of the first quarter 'twenty, five we had $133 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity.
Mike: Before I review, our guidance for 25, I'll make some comments on tariffs.
Mike: Yes.
Mike: As you are well aware in the first quarter. The Trump administration initiated tariffs modified tariffs added new tariffs and then reduce tariffs for 90 days and most countries, while leaving a baseline tariff rate of 10% in place. In addition to the tariffs put in place.
Mike: On steel and aluminum.
Mike: The administration has imposed a very high tariff rate on imports from China with China, initiating a retaliatory tariff on U S exports to China.
Mike: Among the various impacts from the announced tariffs the most significant impact cadence related to import of products from China and tariffs on imports of steel and aluminum.
Mike: Specific to the steel and aluminum tariffs the impact and steel is important to us.
Mike: We noted that regardless of the country of origin steel prices in the U S increased 20% to 30% essentially right. After the tariffs were put in place.
Mike: We believe we'll be able to mitigate the impact of the steel price increase by working with our suppliers and cost sharing with our customers.
Mike: The China tariffs.
Mike: Packed us over the short term.
Mike: We work to realign our supply chain.
Mike: We are estimating incremental material cost of approximately $5 million to $6 million or 32% to 39 per share and our April forecast associated with tariffs that cannot be mitigated in the short term.
Mike: The majority of this impact is occurring in the second and third quarter prior to the full benefit of mitigation efforts being realized.
Mike: This estimate is obviously subject to change based on the ongoing tariff negotiations.
Mike: We will continue to pursue opportunities to reduce the impact of these costs by finding alternative suppliers through cost sharing and in some cases, making investments to change our manufacturing capabilities and manufactured components at different cadence facilities.
Mike: Okay.
Mike: Another significant impact related to tariffs is the resulting uncertainty in the market, which has impacted our customers' decision making process for our capital equipment.
Mike: We have a very healthy level of quote activity for our capital equipment, and we have seen little disruption to capital order activity related to maintenance and mission critical equipment.
Mike: However, if customers have flexibility with the timing for their equipment purchase they are delaying placing the order until there's more certainty and stability in the markets. They serve.
Mike: Some projects have already been delayed into the back half of 'twenty five or into next year.
Mike: This is especially true for larger projects and Greenfield projects, where it is critical for the customer to understand how tariffs may impact future input and output costs.
Mike: This environment has made it extremely difficult for our operations to forecast the timing of capital orders requiring significant judgment.
Mike: And order timing and future material cost.
Mike: We'll continue to monitor these tariff changes and we'll provide further updates as the year progresses and there is more clarity with the new regulations.
Mike: As a result of these tariff related impacts we are revising our full year 2005 guidance.
Mike: We now expect revenue of $1 $20 million to $1 billion $40 million and 25% revised from our previous guidance of $1 billion.
Mike: $40 million $2.065 billion.
Mike: And we now expect adjusted EPS of $9 five to $9 25.
Mike: <unk>, which excludes <unk> <unk> of acquisition related costs.
Revised from our previous adjusted EPS guidance of $9 70.
Mike: To $10 five.
Mike: The revised adjusted EPS guidance includes a 32% to 39.
Mike: Impact directly from tariffs.
Mike: The remainder of the guidance change is due to delays in capital orders as a result of the uncertainty created by the tariffs.
Mike: Looking at our quarterly revenue and EPS performance in 2005, we expect that the second half of the year will be significantly stronger than the first half.
Mike: Our revenue guidance for the second quarter of 2005 is $243 million to $250 million and our adjusted EPS guidance for the second quarter is $1 90 to $2, which excludes <unk> <unk> of acquisition related costs.
Mike: The second quarter adjusted EPS guidance includes an estimated 14 to 18 <unk> impact from tariffs.
Mike: We now anticipate gross margins for 25 will be 44.2 to 44, 7%.
Mike: As a percentage of revenue, we now anticipate SG&A will be approximately 27 to 27, 7%.
Mike: For 'twenty five we now anticipate slightly lower net interest expense of approximately 12 to $12 4 million and we now expect our recurring tax rate will be approximately 26% to 27%.
Mike: In addition, the following guidance estimates remain unchanged for 2005.
Mike: R&D expense will be approximately one 5% of revenue depreciation and amortization expense of $49 million to $50 million in capex spending of $24 million to $26 million.
Mike: That concludes my review of the financials, and then I will now turn the call back over to Michelle for our Q&A session Michelle.
Mike: Thank you <unk>.
Speaker Change: Minder to ask a question. Please press star one on your telephone and wait for your name to be announced and to withdraw. Your question. Please press star one again.
Speaker Change: Our first question will come from Ross Barren Blake with William Blair. Your line is open.
Speaker Change: Hey, good morning, gentlemen.
Speaker Change: Good morning Ross.
Speaker Change: Hey, maybe just starting high level on the order book I can appreciate it sound like there's a bit of a pause. It also sounds like you guys have some pretty strong visibility to maybe just $20 million to $25 million of orders being deferred into 2026.
Speaker Change: Kind of as we think about your customer conversations.
Speaker Change: And the sensitivity to that that push out is there anything else, we shouldnt look for to be aware of that might.
Speaker Change: Cause further to four of deferrals into next year.
Speaker Change: And you get the sense that the overall kind of project funnel is still.
Speaker Change: Pretty strong or is there any risk of contraction here.
Speaker Change: Yes Ross.
Ross: One of the issues of course is that the projects get pushed off a quarter or two the revenue recognition, sometimes pushes it into next year and that's part of what we're dealing with here I would say the discussion level and the activity level actually is is reasonably strong.
Speaker Change: Before the craziness of these tariffs kicked in.
Ross: Several weeks ago.
There was I would say an increase in activity.
Ross: We signed a nice order early in the second quarter of Big capital Order and we're in discussions for a few more so.
Ross: I think it's still yet to be seen how much of a pause.
Ross: Current environment will.
Ross: Cause I think.
Ross: We haven't seen any projects canceled.
Ross: It's just an issue that they just they just say, okay I'm going to wait another two weeks here and see.
Ross: Where things fall out so I would tell you that and we've been saying this for some time that we're we're really in the beginning of the third year of what we consider to be a capital equipment recession started really in the second quarter of.
Ross: 23.
Ross: And our experience within this business for our company has been around for 100 plus shares.
Ross: Know that you can't continue to grow without investing in new equipment, and so theyre going to have to start making these investments one of the reasons, we're still booking record levels of parts of consumables, even though the operating rates are at record levels right now because theyre running old tired equipment.
Ross: A lot more parts consumables to keep it running so they're going to have to start to invest.
Ross: In the business and we thought that this year certainly the back half of the year that was going to be the case.
Ross: Might be but theres, just an added level of uncertainty now with all the chaos that this.
Ross: These trades.
Ross: These trade.
Ross: Negotiations is causing and as you as you obviously know depending on the day and the time of the day they are different everywhere.
Ross: It's just a very chaotic time right now, but we haven't seen any signs that projects are going away.
Ross: If they get delayed a quarter it can be pushed back our revenue recognition by a quarter on them and some of that if it comes late in the year, we will slip into next year.
Ross: Yes, I know that's a good segue here I mean kind of thinking about that maintenance cycle I believe last year in the order book and the capital equipment side as lot one greenfield related.
Ross: Do you have a sense I mean is this.
Ross: A year two years of excess demand for kind of the maintenance spend.
Ross: Yes, the average age of the installed base.
Ross: We did buy in excess couple of years, and then we still kind of thinking 10 years to 20%.
Ross: <unk> 625 in the capital equipment.
Ross: Well, we know that our average age of our equipment is older than historical and historical norms.
Ross: Which is often the case when you get to economic uncertainty everybody pulls back and so.
Ross: No.
Ross: We are benefiting from our.
Ross: Parts consumable asps.
Ross: I expect because of that but.
Ross: I think we.
Ross: We also put a lot of brand new capital out.
Ross: <unk>.
Ross: In 'twenty, one 'twenty two and it takes a couple of years before that starts to degenerate parts business and so we will start to see over the next couple of years I think we'll start to see.
Ross: That new all that new installed equipment that we've booked and sold in 2020. One 'twenty two we will see that start to generate parts as it starts to get some age on it.
Ross: Consumables will pick up of course, if operating rates start to pick up there kind of a function of economic activity and operating rates, but what we really so.
Ross: Don't expect a big drop off in parts consumables, but with what we do expect.
Ross: <unk> is an increase in capital because capital is clearly performing below below market and they can't do that forever and so it's just a question of.
Ross: When they start to get the comfort level to start to make those investments. So as I said, we were seeing a little activity, we booked a big project a couple of weeks ago and we're in discussions on a few more so we're seeing some activity just a question of timing.
Ross: Awesome I'll hop back in queue. Thanks, guys.
Speaker Change: And the next question will come from Gary <unk> with Barrington. Your line is open.
Gary: Hi, good morning.
Speaker Change: Jeff and Mike.
Speaker Change: Mike would you have the percentage of the revenue of consumables by segment for last year's first quarter Andy.
Speaker Change: Yes.
Speaker Change: And in flow control.
Speaker Change: It was 74%.
Speaker Change: Industrial processing it was 69%.
Speaker Change: And material handling, 62% and then overall as I mentioned in my comments, 69%.
Speaker Change: Okay great.
Speaker Change: Everything is in a quandary near because of these tariffs and I guess do you.
Speaker Change: Do you get the sense that.
Speaker Change: Once there is clarity on these tariffs.
Speaker Change: Or ever will be.
Speaker Change: At your at least discretionary capital projects will then kind of move ahead or is there.
Speaker Change: Is there any any potential that some of these things to just overall be canceled just because the tariffs become so corners.
Speaker Change: I'm just trying to get an understanding of what you are.
Speaker Change: And markets are feeling doing and saying yes.
Speaker Change: Yes.
Speaker Change: It's pretty rare for projects to get cancer, and we do see projects. Every every every few years Youll see a project go away, but as far as as significant a large number of projects getting cancelled it just doesn't happen in this business.
Speaker Change: Even in the <unk> line, we had the financial crisis things got put on hold for a couple of years, but then it came back pretty strong after that so just.
Speaker Change: Now is it possible that the tariffs so disrupted global trade.
Speaker Change: But you know what's going to happen is of course is there.
Speaker Change: A source from other places and because we are.
Speaker Change: International we operate in every country in the world.
Speaker Change: Well, Ben will pick up that business elsewhere, if it is not being produced in Europe.
Speaker Change: Europe and it will be produced in the U S or if it's not being produced in China will be produced in Europe. So.
Speaker Change: We'll chase that business, because we're active everywhere in the world.
The extent that there is still global growth will benefit from that although there could be some disruptions and relocations associated with us.
Speaker Change: Okay. So very few of these things ever do get canceled.
Speaker Change: Normally when things get canceled its because.
Speaker Change: Frankly, it's been in the developing world and has mainly been because of lack of financing.
Speaker Change: Not so much demand.
Speaker Change: Okay.
Speaker Change: And most of this impact on the capital side is going to be felt in the industrial processing segment. This year. If you look at the first quarter flow control had a very good first quarter really and material handling was flat. It was really industrial processes. The capital side. That's the segment, where we believe we will have the strongest level of capital bookings this year.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: The next question comes from Kurt Yinger with D. A Davidson your line is open.
Kurt Yinger: Great. Thanks, and good morning, everyone.
Kurt Yinger: I just wanted to start off.
Speaker Change: We look at the Q2 guide and some of the pressures there how much of that is maybe bookings in Q1 that some of those projects have been deferred in the back half and you have pretty good visibility at this stage and then I guess as we think about the ramp.
Kurt Yinger: Thats kind of assumed in the back half for sales.
Kurt Yinger: What would that suggest in terms of the level of capital bookings that youll need to see kind of in Q2 and Q3.
Curt: Yes, Youre right Curt.
Kurt Yinger: <unk>.
Kurt Yinger: The.
Kurt Yinger: The weakness here in the first.
Kurt Yinger: Orders really is impacted.
Kurt Yinger: Some of what we thought would start to see some revenue.
Second quarter, along with good bookings in the second quarter, which would really lead us to a very strong second half. So I think when you.
Kurt Yinger: Now looking at we're looking at currently.
Kurt Yinger: On the on the bookings front.
Kurt Yinger: We are going to really you have heard me mentioned kind of that 10% to 20%.
Kurt Yinger: We are going to need I'd say, 15% to 20%.
Kurt Yinger: Order flow on increase in order flow on the.
Kurt Yinger: And.
Kurt Yinger: Capital.
Kurt Yinger: Really make those make the back half of the year.
Jeff Powell: But as Jeff said.
Jeff Powell: There are we've seen some good activity thus far in the second quarter.
Jeff Powell: And we have a number of projects that we're tracking so we know there are there I think my overarching concern and you saw that and guy.
Jeff Powell: Our guidance is I think we could end up with a case, where we actually get the orders.
Jeff Powell: But because they have incrementally moved out.
Jeff Powell: It will get pushed to revenue in 2006.
Jeff Powell: So we could end up with a year were really quite good orders, but.
Jeff Powell: Some of that revenue is going to be 26 revenue.
Jeff Powell: Got it okay.
Jeff Powell: And.
Jeff Powell: I guess generally.
Jeff Powell: The big tariff announcements at the beginning of this month.
Jeff Powell: Have you seen a.
Jeff Powell: A little bit of shock and all at the start from customers and maybe some acceptance and realization that it's not the end of the world.
Jeff Powell: Let's continue to move forward.
Speaker Change: Or I guess, what are you hearing in those conversations in terms of the pushout you've already seen.
Jeff Powell: And maybe what gives you confidence that those are still on the board this year.
Speaker Change: Yes.
Speaker Change: Youre exactly right everybody.
Speaker Change: Still still in shock. So I don't know is a fully informed our thinking right now because it changes every day literally I remember were in a meeting two weeks ago. When we went in in the morning, and we had one tariff for the project and we came out in the afternoon, and we had a different set of tariffs for the projects that literally the cost input cost changed in one day. So.
Speaker Change: I think it's just right now people are still trying to figure out.
Speaker Change: Actually what's going on and as you know, it's just human nature, when there's that kind of uncertainty you just don't do anything and so they just said even things that were very close to being let.
Speaker Change: They are sitting on their hands, Okay, where you got the contract we are negotiating the contracts we're waiting for the signatures. There just signatures are coming more slowly because anybody saying well, let's let's understand what all this means so I think it's just the.
Speaker Change: Yes.
Speaker Change: Arctic nature of it.
Speaker Change: Think is causing the the pause.
Speaker Change: But I think that.
Speaker Change: Most of our customers leave ultimately as we do frankly this is going to get sorted out.
Speaker Change: There probably will be some tariffs that do survive and we will have to try to mitigate those as much as possible, but I think people think.
Speaker Change: It's going to get sorted out this year you have now though of course as you saw they just released the first quarter GDP and it was it was down and so that.
Speaker Change: Clearly.
Speaker Change: And then this chaos kind of started really late in the quarter. Although there were some hint that it was coming.
Speaker Change: So the question is are we going to see a further economic slowdown in the second quarter because of all of this.
Speaker Change: I wouldn't be surprised if we do it.
Speaker Change: And again that always it adds another layer of the decision making process. Okay. Now we're in a.
Speaker Change: A technical recession.
Speaker Change: How does that factor into our thinking but as I said, a few minutes ago. These projects our equipment tends to be part of a very expensive project, we're a small piece of it.
Speaker Change: $5 million to $10 million or 200 or $400 million project and so normally when these things get started.
Speaker Change: Guys are long term plan is just like we are they don't let short term disruptions got it totally stopped the project they just slow it down.
Speaker Change: Okay.
Speaker Change: That makes sense.
Speaker Change: And then just with the revision to guidance.
Michael Mckenney: Mike maybe you could just update us in terms of kind of what you're assuming in terms of parts versus capital mix in terms of.
Michael Mckenney: Sales this year and I guess implicit in that question would be do you expect the strength in parts and consumables that you saw here in Q1 to persist or maybe.
Michael Mckenney: Is there any pull forward benefit.
Michael Mckenney: Given that maintenance dynamic or even maybe some anticipation by customers that prices for parts and components would go up and maybe a little bit of an inventory build.
Michael Mckenney: Yes.
Michael Mckenney: Do think Curt that there was some some folks who.
Michael Mckenney: Pre bought.
Speaker Change: I talked to the people in the field.
Michael Mckenney: Hi.
Michael Mckenney: There was some of that but.
Michael Mckenney: I think it ended up just really being a few million dollars.
Michael Mckenney: It wasn't it wasn't anything that I felt like I really needed to better.
Michael Mckenney: Make sure. This is in the call and that of course is factored into our guidance for the second quarter.
Michael Mckenney: But on the on your question in regards to parts and consumables.
Michael Mckenney: It relates to a percent of revenue going forward in.
Michael Mckenney: In the back half of the year, where we hope to have better capital revenues than in the first half.
Michael Mckenney: Looking at.
Michael Mckenney: Right now.
Michael Mckenney: Third and fourth quarter at 68% and 64% and the year on parts and consumables coming out at 69%.
Michael Mckenney: So as you recall some of the businesses we bought were.
Michael Mckenney: We're heavy parts and consumable business, so that has given us a little bit of a <unk>.
Michael Mckenney: Up lift here, we finished out last year at 66, and if our forecasts are correct will end up this year at 69.
Speaker Change: Okay excellent I appreciate the color guys. Thank you.
Michael Mckenney: Welcome.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and then next question comes from Walter Liptak with Seaport Research. Your line is open.
Walter Liptak: Hey, good morning, guys.
Speaker Change: So Martin to Trump just starting to cabinet meeting so maybe the tariffs will change again.
Walter Liptak: Okay.
Walter Liptak: Yes.
Speaker Change: We were thinking about putting the tariff charge on all of our prices, but after he hammered Amazon yesterday.
Speaker Change: Rethought that we probably won't show the tariff impact on our our pricing doesn't seem to like that.
Speaker Change: Okay Alright.
Speaker Change: I wanted to ask you about that specifically.
You called out some numbers I think $36 million and put it in EPS bracket around it what is that exactly is that.
Speaker Change: Price tariff that youre expecting that you're going to have to do.
Absorbing the margins.
Speaker Change: Or is that.
Speaker Change: <unk>.
Speaker Change: Selling prices that you're expecting I guess or is that volume that.
Speaker Change: You don't think youll get because of the tariffs.
Speaker Change: Isn't that estimate of the tariffs that you presented.
Speaker Change: Yes.
Speaker Change: So it's $5 million to $6 million and that will be included in our.
Speaker Change: Our material cost.
Speaker Change: And it's.
Speaker Change: Our.
Speaker Change: Direct impact of the tariffs that as best we can estimate.
Speaker Change: We will end up having to incur before our mitigation efforts are completed.
Speaker Change: So kind.
Speaker Change: When you look at the.
Speaker Change: When you look at the guidance.
Speaker Change: Sure.
We're down say on the low end.
Speaker Change: 65 on the high end.
Speaker Change: 80, <unk> and roughly half that decrease and is the impact of what we believe will have to pay and tariffs as we procure material for for jobs.
Speaker Change: Okay.
Speaker Change: As you invoice customers put in a surcharge or something for for those incremental costs.
Speaker Change: Yes.
Speaker Change: We have a number of levers, we're pulling surcharges will be one of them, but the issue.
Speaker Change: Is that that isn't instantaneous so although the divisions have those plans and we'll execute on them.
Speaker Change: Most of the units are sand will start to have traction frankly.
Speaker Change: Frankly.
Speaker Change: Dave I believe essentially already addressed the steel issue, which was.
Speaker Change: Sure.
Speaker Change: That was a blow in and of itself with prices going up 25% to 30%. So now we're down to the I'll say the rest of the tariffs and where youre sourcing from.
Speaker Change: And can they can't be mitigated instantly.
Speaker Change: So we're planning on doing hoping to do is we'll pull the levers and as we go through the year hopefully we'll by the time, we get to the end of the year, we'll have large.
Speaker Change: Be able to largely mitigate any impact of the tariffs on a go forward basis.
Speaker Change: Okay do you with the tariffs you would you hope to be.
Speaker Change: I guess its tariff price cost neutral by the end of the year.
Speaker Change: Just to catch up or do you think youll have to absorb some of those tariffs permanently.
Speaker Change: Yes.
Speaker Change: Great question kind of remains to be seen but our goal of course is to be neutral.
Speaker Change: But.
Speaker Change: Can you sustain.
Jeff Powell: As Jeff mentioned, we we think our competitors are essentially in the same boat as us so.
Speaker Change: We don't think we're at a competitive disadvantage.
Speaker Change: Okay, all right I appreciate that and then just one follow up for me.
Speaker Change: I understand that.
Speaker Change: The back half.
Speaker Change: And.
Speaker Change: The full year guidance, so in the guidance youre expecting that there's going to be some recovery and capital projects, but it sounds like you need to get some of those projects that are in the funnel right now to get.
Speaker Change: Let go or to get awarded to you by in the second quarter or will be looking at the numbers coming down again for <unk>.
Speaker Change: For the back half of the year is that right.
Speaker Change: Yes.
Speaker Change: We do need some to come in here in the second quarter for sure. Some and then we need that activity on the capital side to continue in the third and fourth quarter.
Speaker Change: So and Thats.
Speaker Change: We took down the revenue.
Speaker Change: Really by the on our guidance ranges by on the low end $20 million the high end $25 million because.
Speaker Change: Basically in the first quarter we.
Speaker Change: Had very soft capital activity.
Speaker Change: But the projects are still there and now we are seeing.
Speaker Change: Some projects.
Speaker Change: Activity here in the second quarter, so, but that even just that delay.
Speaker Change: As I said.
Speaker Change: Answering the question a little bit earlier, that's my kind of my overarching concern is we may end up having a great.
Speaker Change: Booking here on capital, but it may come in later late enough that it causes the revenue to go into 'twenty six.
Speaker Change: Okay, right because of the percentage of completion for the long cycle projects.
Speaker Change: No.
Well that's a good comment on your part on the percent complete are now call over time that is really largely in our fiber processing.
Speaker Change: So when you hear US say, we got a fiber processing order those tend to be on an overtime basis.
Speaker Change: On the other.
Speaker Change: Areas like I'll say wood products, where we see a number of.
Speaker Change: Good order possibilities.
Speaker Change: Those will be point in time, which basically means we're going to recognize revenue when we ship it and that's my that's my concern.
Speaker Change: Those projects a move out a few months or a quarter.
Speaker Change: Then instead of it being delivered in the fourth quarter 25 could be first quarter 'twenty six.
Speaker Change: Yes.
Speaker Change: Got it okay. Thank you yes.
Speaker Change: Yes.
Speaker Change: Okay.
Kurt Yinger: And our next question comes from Kurt Yinger with D. A Davidson your line is open.
Great. Thanks, I appreciate it just two quick follow ups.
Kurt Yinger: The $5 million to $6 million I guess, if we were to think about the overall cost impact.
Kurt Yinger: Without mitigation efforts and kind of the current tariff environment, what would that kind of total additional cost be.
Kurt Yinger: Well, it's 32% to 39 cents.
Kurt Yinger: We are mitigating the tariffs that 5% to 6% is what we haven't mitigated do we know what the total care.
Kurt Yinger: Sure.
Kurt Yinger: Excellent question, Kurt and.
Kurt Yinger: The people in the field were swimming upstream to keep up with all the changes so I boil down the request to just tell us.
Kurt Yinger: What you won't be able to mitigate immediate.
Kurt Yinger: The near future immediately and we will put that into our guidance.
Kurt Yinger: So I don't have I can't tell you it's twice this number.
Kurt Yinger: But like I said, we are now.
Kurt Yinger: Steel is 25% to 30% and I think our folks who have largely address that that's our single biggest cost single biggest input cost of steel.
Speaker Change: Got you so it's more of a steel dynamic as opposed to <unk>.
Speaker Change: Some of the imports versus China steel would be the much larger bucket.
Speaker Change: Those.
Speaker Change: Two is that the right way to think about it.
Speaker Change: Well overall steel is significant its significant to us.
Speaker Change: When we look at sourcing of course the.
Speaker Change: In terms of what Hasnt been mitigated yet.
Speaker Change: The biggest piece of that is from is both coming in from China and stuff from U S to China. We were surprised I was surprised at how much we still sell into China from from here when we start looking at the numbers we know.
Speaker Change: I knew we were going to have the tariff hit.
Speaker Change: The things we bring in from our from our divisions there.
Speaker Change: You'll remember that about 80% of what we build in China stays into the China market and then they made up about 20%. They built for their sister divisions. Some in the U S and Thats where were getting the hit but I was a little surprised actually how much because China put a reciprocal tariff on I was surprised how much that was for stuff were sent in to China is still it was a lot more than that.
Speaker Change: I'd expect it so.
Speaker Change: To the extent that the.
Speaker Change: U S and China can get this under control that would be pretty impactful for us.
Speaker Change: Right and not to get too sidetrack, but in terms of what you might be making here and shipping to China.
Primarily be related to acquisitions, you've done over time, where you leverage some of the sales force there.
Speaker Change: No.
Speaker Change: <unk> businesses.
Speaker Change: Obviously, we are in international over there or is that maybe too general.
Speaker Change: Well there is there are some critical parts that we still make here.
Speaker Change: Our Chinese divisions incorporate into the into their products with some technology that we've we've kind of safeguarded here.
Speaker Change: They don't engineer that we send over.
Speaker Change: Fully built as just as an IP protection standpoint, so that's a lot of it.
Speaker Change: Okay.
Speaker Change: Got you, Okay, perfect and then.
Speaker Change: Thinking ahead potentially a little bit.
Speaker Change: I guess size for us.
Speaker Change: How much of <unk> business that is manufactured in Canada kind of ultimately gets shipped down to the U S.
Speaker Change: I mean, it doesn't seem like any of that's exposed to tariffs at this stage, but.
Speaker Change: If something were to change.
Speaker Change: How would you think about kind of framing that.
Speaker Change: They are.
Speaker Change: The capital equipment. The machines that are made are made.
Speaker Change: In Canada.
Speaker Change: They come in under the U S. MCA. So there there is no tariffs on those currently.
Speaker Change: Yes.
Speaker Change: If something was to go well.
Speaker Change: With the flip on U S. MCA then they would it would be impacted by that and if it was if we thought it was long term and we'd have to look at.
Speaker Change: Other alternatives.
Speaker Change: But as of right now there they qualify under the trade agreement.
Speaker Change: Got it okay. Thank you.
Speaker Change: As a reminder to ask a question. Please press star one one on your phone.
Speaker Change: I am showing no further questions at this time I would now like to turn the call back over to Jeff Powell for closing remarks.
Jeff Powell: Thanks Michelle.
Jeff Powell: I'll wrap it up the call today I just want to leave you with a few takeaways.
Jeff Powell: Our activity was up for the start of 25 and it was kind of broad based.
Jeff Powell: There's still a lot of discussions going on around new projects, although the timing of these projects is more uncertain than normal because of the issues that we've just discussed here today.
Jeff Powell: Despite the continued geopolitical and trade policy uncertainty our employees around the globe continue to focus on meeting our customers' needs.
Jeff Powell: Finding new way to deliver long term value to our stakeholders.
Jeff Powell: Lastly, in our financial health is still excellent.
Jeff Powell: Our strong free cash flows our balance sheet is in very good position.
Jeff Powell: And we look forward to delivering.
Good value to our stakeholders again in 2025.
Jeff Powell: So with that I want to thank you for joining us today, and we look forward to talking to you in future.
Jeff Powell: This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Thank you Michelle.
Speaker Change: Okay.
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Speaker Change: Okay.
Speaker Change: Yes.
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Speaker Change: Okay.
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