Kadant Inc

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 Cadence, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that time, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to our first speaker for today, Mr. Michael McKinney, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Anne. Good morning, everyone, and welcome to Cadence's third quarter earnings call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Cadence'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. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our annual report on Form 10-K for the fiscal year ended December 28, 2019, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at www.cadent.com. Finally, I want to note that when we refer to gap earnings per share or EPS or adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Cadence Business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter. We will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. Since our last earnings call, the world has continued to be impacted by the COVID pandemic. An increasing number of cases in Europe and the U.S. continue to create depressed economic activity and uncertainty around the world. I'll begin by discussing how this impacted our operations and our third quarter financial results. The effects of the global pandemic made the third quarter another challenging quarter in terms of predicting demand and overall business levels. As we continue to work under advanced safety protocols, I remain proud of our dedicated employees around the world for the work they have done and continue to do to serve our customers. We had solid execution by our businesses in the third quarter, along with various cost containment measures which contributed to our strong margin performance. We also benefited from government employee retention assistance, which allowed us to maintain our talented workforce despite the lower business levels during the quarter. Our balance sheet remains healthy and our liquidity position is solid. Both cash flows have always been a strength of cadence and we expect this will continue as economies begin to recover. Turning now to our Q3 performance, we had better than expected EPS results due to our industrial processing and flow control segments. This was further enhanced by government employee retention assistance that contributed to our solid adjusted EPS of $1.31 a share. Our adjusted EBITDA margin was excellent at 19.4% and our cash flow was strong at $24 million. Our parts and consumable revenue made up 66% of total revenue. On a sequential basis, parts revenue was up 6% to 103 million in the third quarter. As many of you know, growing our parts and consumable business is a key strategic focus. Overall, the quarter was better than expected, and I'm really pleased with how our employees performed to deliver these solid operating results. Next, I would like to review our performance in our three operating segments. While our flow control segment performed better than expected during the quarter, We continue to face a challenging market environment with industrial production weakening as quarter progressed. Product mix, improved operating leverage, and solid execution led to a strong adjusted EBITDA margin of 27.5% for the third quarter, up 70 basis points from the same period last year. Although demand for aftermarket parts was solid and made up 69% of total revenue in the quarter, customer delays in capital project execution and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic suppressed our bookings performance. Looking ahead to the fourth quarter, we expect Q4 to show improvement in terms of both capital project bookings and demand for parts and consumables. Turning now to our industrial processing segment, we experienced strong demand for our wood processing equipment with bookings at their highest level since our record-setting 2018. This demand was driven by a robust U.S. housing market and continued strong demand for wood-based products. Revenue in this segment declined 16 percent to 62 million year-over-year and down 5 percent sequentially. This decline was largely due to a slowdown in capital business during the quarter in certain end markets, particularly in paper and packaging. Parts and consumables revenue, on the other hand, was solid and made up 68 percent of total revenue in the third quarter. Encouragingly, U.S. housing starts continue to show strength and were 1.4 million in September, up 11% compared to the same period last year, which benefits our customers producing OSB and dimensional lumber. We are experiencing an increase in capital project activity and expect capital bookings to strengthen significantly in the fourth quarter. Just last week, for example, we received a large order for a turnkey recycled stock preparation system from a container board producer in the U.S. with a value of approximately $11 million and expect to receive additional capital orders as the quarter progresses. In our material handling segment, we saw improved capital project activity and increased demand for aftermarket parts in Q3 versus Q2. Parts and consumables revenue in the third quarter made up 60 percent of total revenue but it's still below historical run rates. Capital bookings in our material handling segment increased 34% sequentially, led by increased demand for our billers used in agricultural and waste processing applications. While this increase was coming off of a week prior quarter, we are encouraged to see our customers showing increased confidence in their economic outlook by awarding these larger capital purchases. As in our other segments, we are seeing increased market activity albeit still not on pace with prior years. Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates and food end markets as economies continue to recover from the pandemic. As we look ahead to the final quarter of 2020, we are seeing signs of increased project activity in a number of end markets, particularly in our industrial processing segment. With capital equipment expected to make up a larger portion of our product mix in Q4, we expect to show solid improvements in bookings compared to Q3. As was the case in the second and third quarters of this year, the uncertainty caused by the pandemic limits our ability to forecast the timing of orders. As a result, we will not be providing guidance for Q4. I'd now like to pass the call over to Mike for a review of our Q3 performance.