Kadant Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 CADA Earnings Conference call. At this time, all participants' lines are in a listen-only mode. At this speaker's presentation, there will be a question-and-answer session. To ask your question during the session, you'll 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 your speaker today, Michael McKinney, Executive Vice President and CFO. Thank you. Please go ahead.

Thank you, Ryan. Good morning, everyone, and welcome to Cadence First Quarter 2021 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our Safe Harbor Statement. Various remarks that we may make today about Cadence future plans and expectations, financial and operating results, and prospects are forward-looking statements for 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 January 2, 2021, 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'll refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A 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 investor section of our website at www.cadent.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on 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. Thank you for joining us this morning to review our first quarter results and discuss our business outlook for 2021. I'll begin by discussing our operational highlights and our first quarter financial performance. We had a great start to 2021 with high demand for our parts consumables, which led to record bookings in the first quarter. Our businesses executed well and generated strong cash flows, further improving our liquidity position. Capital project activity was robust, and this was especially true in our industrial processing segment, which had another great quarterly performance. I'll provide more details on that when I review our operating segments. Overall, our healthy balance sheet and strong cash flows have us positioned well to capitalize on future growth opportunities. Q1 was an excellent quarter for us, with one of the more notable highlights being our record bookings performance, beating the previous record set just last quarter. While we believe our first quarter bookings reflect some amount of pent-up demand, the record setting start to the year is encouraging. Our Q1 bookings were up 16% compared to the same period last year to $204 million, led by our industrial processing segment. Strong demand led to an 11% sequential increase in parts consumables bookings, which were a new record at $133 million in Q1. Revenue was up 8% compared to the first quarter of 2020, while parts revenue was up 12%. A favorable product mix and solid execution contributed to boosting our adjusted EBITDA margins to 18 percent, while our free cash flow was up nearly four times to 17 million compared to the same period last year. Overall, we benefited from strengthening industrial activity, especially in North America and Europe. Our business has executed well, and our global workforce continued to safely meet our customers' needs despite challenging circumstances in many areas of the world. All three of our operating segments experienced increased business activity and improved revenue performance sequentially and year over year. Flow control segment had record bookings in the first quarter with a strong contribution from parts and consumables. Bookings and revenue were both up 12% compared to the same period last year, and parts made up 72% of total revenue in the first quarter. A favorable product mix combined with improved operating leverage led to a 21% increase in adjusted EBITDA compared to Q1 of 2020 and an adjusted EBITDA margin of 28%. The strong start to the year is expected to continue through the second quarter with demand moderating as the year progresses as our customers normalize their inventory. We continue to believe market conditions will strengthen as COVID-19 vaccines become more widely available and vaccination rates improve. Our industrial processing segment continued to experience strong demand for our wood processing equipment, with bookings in this segment up 32% compared to the prior year. Strong in-market demand for wood products, particularly OSB and dimensional lumber, continued throughout the quarter as U.S. housing starts surged 37% in March compared to March 2020, and is at the highest level since June of 2006. Revenue in this segment increased 7% to $69 million with parts and consumables leading the growth up 19% compared to the same period last year. A favorable product mix and good execution led to 150 basis point improvement in our adjusted EBITDA margin. We are seeing increasing activity in the packaging markets, and shortly after the quarter closed, we booked an OCC system order in China for approximately $17 million. This combined with the record backlog we had at the end of the first quarter positions us well for the remainder of the year. Moving to our material handling segment, we continue to see relatively stable order activity. European markets are beginning to recover, and activity in North America, particularly in the food sector, is improving. Altogether, this led to our third consecutive quarter bookings increase in Q1 to 42 million, and just shy of beating our record bookings set in the first quarter of 2020. Revenue in the first quarter was up 6% to $40 million, and parts consumables revenue made up 60% of total revenue. Capital bookings in our material handling segment were up slightly compared to the same period last year and are above pre-pandemic levels. Based on our business activity increasing over the last few quarters, we believe our material handling segment has solid potential in the secondary material handling and recycling sector. particularly in Europe and impending infrastructure investments in the U.S. As we look ahead to the second quarter of 2021 and the full year, we are seeing signs of improved project activity and increased ability to visit our customers in certain regions. Our solid balance sheet combined with strong cash flows have us well positioned to capitalize on opportunities that may emerge with improving global economy. We're encouraged to see our customers have learned a new way to conduct business as they deal with the challenges of the pandemic. That said, variability in vaccine distribution and accessibility combined with surging infection rates in some areas present a great amount of uncertainty in the global economic recovery and the timing of capital orders. I'd like to pass the call over to Mike now for review of our Q1 financial performance.

Mike. Thank you, Jeff. I'll start with some key financial metrics from our first quarter. Consolidated gross margins were 43.9% in the first quarter of 2021, up 100 basis points compared to 42.9% in the first quarter of 2020. This increase was due to a higher overall percentage of parts and consumables revenue, which represented 68% of revenue in the first quarter of 2021 compared to 66% in the prior year, and higher margins achieved on capital projects. We also had a modest contribution of 20 basis points from government assistance programs. SG&A expenses were $49.4 million in the first quarter of 2021 compared to $45.6 million in the first quarter of 2020 and represented 28.7% of revenue in both periods. There was an unfavorable foreign currency translation effect which increased SG&A expenses by $1.7 million in the first quarter of 2021 and transactional currency gains, which lowered SG&A expenses by 1.3 million in the first quarter of 2020. Our diluted EPS was $1.43 in the first quarter, up 31% compared to $1.09 in the first quarter of 2020. Adjusted EBITDA increased 14% to 31.1 million, or 18% of revenue, compared to 27.3 million, 17.1% of revenue in the first quarter of 2020 due to strong performance in our flow control segment. Operating cash flow was 19.1 million in the first quarter of 2021 compared to 6.2 million in the first quarter of 2020. Historically, the first quarter has been a weak quarter for operating cash flows. This represents a strong start for 2021 with both operating and free cash flow being our highest first quarter performance. We had several notable non-operating uses of cash in the first quarter of 2021. Most importantly, despite the first quarter typically being weakest, the weakest of the year, we were able to pay down debt by 9.1 million. We also paid 2.3 million for capital expenditures, paid a 2.8 million dividend on our common stock, and paid 3.4 million in tax withholding payments related to the vesting of stock awards. Free cash flow was 16.8 million in the first quarter of 2021, compared to 3.5 million in the first quarter of 2020. Let me turn next to our EPS results for the quarter. Both our GAAP and adjusted diluted EPS were $1.43 in the first quarter of 2021, compared to $1.09 in the first quarter of 2020. As shown in the chart, the increase of $0.34 in adjusted diluted EPS in the first quarter of 2021 compared to the first quarter of 2020 consists of the following. $0.35 due to higher revenue, $0.09 due to lower interest expense, $0.08 due to higher gross margin percentages, $0.04 due to government assistance programs, and $0.03 due to a lower effective tax rate. These increases were partially offset by $0.23 due to higher operating costs, $0.01 due to higher weighted average shares outstanding, and $0.01 due to higher non-controlling interest expense. I would also like to mention that in our February call, I noted our tax rate for the first quarter of 2021 would likely be lower than the remaining quarters of 2021 due to an anticipated tax benefit associated with the investing of equity rewards in March. The tax rate for the first quarter was 24.9%, which included a tax benefit related to the vesting of equity. The tax rate would have been 28%. Collectively included in all the categories I just mentioned was a favorable foreign currency translation effect of 7 cents in the first quarter of 2021 compared to the first quarter of last year due to the weakening of the US dollar. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 123 at the end of the first quarter of 2021 compared to 119 at the end of the first quarter of 2020. This increase was driven by a lower number of days in accounts payable. Working capital as a percentage of revenue was 15.1% in the first quarter of 2021, compared to 14.2% in both the first and fourth quarters of 2020. Our net debt, that is debt less cash, decreased 11 million or 7% sequentially to 156 million at the end of the first quarter of 2021. In the first quarter, we continued our pattern of paying down our debt and were able to further lower our leverage ratio, calculated in accordance with our credit agreement. to 1.5 at the end of the first quarter of 2021 compared to 1.61 at the end of 2020 and 2.04 at the end of the first quarter of 2020. Our interest expense decreased 55 percent or 1.4 million to 1.1 million in the first quarter of 2021 compared to 2.5 million in the first quarter of 2020. At the end of the first quarter of 2021, we had 193 million of borrowing capacity available under our revolving credit facility, which matures in December of 2023. While we experienced excellent bookings activity in the first quarter of 2021, there is still uncertainty about the timing of an economic recovery in certain regions. Travel and visitation restrictions in certain parts of the world have continued to have an impact on our ability to interact with our customers. Given this uncertainty, we will continue to provide directional comments for 2021 versus full formal guidance at this time. As Jeff noted in his comments, the increase in demand for our parts and consumables and capital projects that we experienced in the fourth quarter of 2020 continued in the first quarter of 2021, resulting in record bookings in both periods. On our last call in February, I indicated that we anticipated an overall increase in revenue from 2020 of 9 to 12 percent, or 690 to 710 million of revenue in 2021. We now anticipate that we will be at the high end of that range, and if the strong market conditions continue, we could surpass the high end of that range. As a result, we are updating our revenue range for the year to an increase of 12 to 15% to 710 to 730 million. As I noted on the last call, we anticipate revenue in the second half of the year will be stronger than the first half and the fourth quarter will be our strongest. This of course is still predicated and the COVID-19 vaccination rollout improving business conditions in the second half of 2021. I would also note that we anticipate gross margins for the year to come in at approximately 43% with the first half of the year likely being above 43% and the second half likely being below 43% as the mix becomes more heavily weighted towards capital in the second half of the year. We hope these directional comments help provide insight into how we see our current business environment. That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session.

Operator? At this time, if we do have any questions, you can press star 1 for any questions. Again, star 1 for any questions. Our first question comes from the line of Kurt Yeager from DA Davidson.

Yes, good morning, everyone, and thanks for taking my questions.

Good morning, Kurt.

Morning. I just wanted to start out on the capital equipment bookings, you know, obviously another strong performance here. How are you thinking about the sustainability of these bookings levels over the next couple of quarters? And, and how should we be thinking about the timing of some of these projects kind of materializing into revenue? Is that really a late 2021 slipping into 2022 type timeframe?

So I think when you look at our capital, I think we mentioned this before, we really have kind of short production cycles for some of the unit capital and longer cycles for the bigger, more complex systems. So a lot of the things that are – but that being said, a lot that was booked in the first quarter of this year we would expect will be built and shipped this year. So it will be in the second half of the year probably, but we would expect it to be. Some will slip into next year. It always does. But, you know, I think a large percentage of it that gets booked early in the year tends to get, you know, shipped in the calendar year.

I would add to that, Kurt. That's why we're, you know, a component of why I'm pointing out we expect the fourth quarter to be quite strong.

Got it. Okay. As far as the sustainability, I mean, I think – You know, there obviously was very little that happened during most of last year, although we did see a recovery in the fourth quarter of last year, and that's continued now. I think that, you know, there's a little bit of pent-up demand. There's projects that were going to occur last year that did not happen, which, you know, will likely still happen. And then there's just the normal, you know, kind of yearly activity level. So, you know, I think this year could be a a pretty good year for us on capital projects as they try to recover from the, you know, kind of the slow activity level of last year.

Okay. Okay. And then I guess in terms of that pent-up demand kind of by segment, it sounded like flow control was kind of the area where, you know, you felt customer inventories might normalize and you'd see a slowdown in the second half. Is that kind of the only area where you would really point to you know, maybe generating a little bit excess type business here in the first half?

Yeah, I think a couple of things have happened. Obviously, a lot of our customers ran their employees down some last year, so you will have some rebuilding of that. But most of our parts consumables kind of are a function of the operating rates. So as the economies recover around the world and the operating rates, you know, start to improve, we would expect to see kind of returning to normal level of use that tends to go hand in hand with the operating rates.

Yeah, I would say, Kurt, the flow control segment really benefited on the parts and consumables side on the bookings front.

Got it. Okay. And then just on margins, so you kind of maintain the gross margin outlook that you talked about last quarter. And it sounds like, you know, capital equipment in terms of the second half of the year will be kind of a mixed issue there. How does that impact, you know, your thoughts around the ability to drive EBITDA margin expansion this year? Is that something that's more kind of a gross margin headwind, but not so much on the EBITDA line? Or how are you thinking about that?

Yeah, you're exactly right, Kurt. It's more of a gross margin headwind. our operating margins will actually improve. So you're correct in that assumption. You'll see, as we go through the year, you'll see improvement on our even margins.

Okay, makes sense. And then just last one for me. On the balance sheet, obviously, in a really good spot here, you've had a lot of success historically, you know, creating value from M&A. You know, at the same time, I would guess that multiples have moved up quite a bit. So just curious how you're thinking about that and how it's affecting your ability to kind of put the balance sheet to work here.

So we mentioned, I think, in the last quarter call that the business activity level has increased and the deal flow has increased substantially. Again, it's kind of the same story, right? There was a lot of deals that were planned on going to market last year that didn't happen. So you've got that pent up, that backlog, so to speak, of deals. And then you've got just the annual you know, kind of deal flow that we normally see. So our business development people are quite active. You're right that valuations are high. They've been high for a while. You know, money is essentially free and an unlimited supply, it seems like. So it has driven valuations up. I mean, that being said, we've always been pretty good. I think we tend to buy privately owned companies where we develop relationships with them and they see value in their and us becoming the custodians of their businesses. And so we traditionally have had, I think, success in getting very good companies at a reasonable valuation, a fair valuation, and we continue to work that strategy.

Okay. And just to follow up on that, I mean, given maybe some unevenness of the recovery and the strength in some of your core forest products and markets, does that change how you think about you know, acquisition opportunities in terms of bolt-on opportunities that could kind of fit in with what you do already versus, you know, expanding markets with something like Syntron that you've done in the past?

Well, we always, we mentioned, you know, that we kind of look at acquisitions as in three buckets, you know, kind of the bolt-ons, the strategic standalones, and then what we would call a strategic platform or kind of a new area for us. And I would say most of our activity is you know, centers around the first two, the strategic bolt-ons and the strategic standalones. That doesn't mean that if we find a new segment that we think we could create some value in that we wouldn't move into it because we have and we probably will again in the future. But, you know, the majority of the deal flow you see tends to be in areas that we're operating in or that we know something about. And, you know, I would say of our three operating segments at any given time, we're looking at opportunities and searching for opportunities for all three of those segments. So we wouldn't necessarily redirect our resources just because there tends to be a period of time when one of the segments is doing quite well. We try to kind of maintain a long-term view and a long-term focus on our business development activities and our growth.

Got it. Okay. Great. Well, appreciate all the color, and good luck here in Q2, guys.

Thank you. Thank you.

And the next question we have is from the line of Chris Howe from Barrington.

Good morning. Thanks for taking my questions, Jeff and Mike.

Good morning, Chris. Hi, Chris.

Good morning. Starting off with the guidance, very encouraged by that. You increased it to 710 to 730 million, perhaps an outside potential to get beyond that should a recovery accelerate ahead of expectations. Can you talk about that potential to go above this guidance range and what are the puts it takes to that underlie your confidence in increasing that revenue guidance. More specifically, following up on that, the material handling segment, what kind of assumptions or what are you seeing for that business in the current quarter and for the balance of the year?

Yeah, so, Chris, as you obviously are aware, this has been one of the more challenging periods of time to try to forecast. You know, we're very global, right? We're quite international, and there's you know, while North America and the U.S. in particular is doing, I think, a good job in recovering from the pandemic, there's other parts of the world that are, I would say, further behind and still struggling. And so with our international footprint, you know, we find it's, you know, particularly challenging and really trying to understand everything, you know, that's going on from a forecasting. So, you know, and that in our traditional nature of trying to be, you know, conservative and not over promise. So we did increase the you know, our expectations because of, you know, the second, you know, quarter of record bookings. And it really is going to come down, I think, to, you know, how robust the economies are in the second half. You hear a lot of economists say they think things will be quite strong in the second half. You know, assuming that the rest of the world, you know, starts to catch up from a vaccination rate and they start to open up, there is the potential globally for business to do much better. But it's, you know, there's more uncertainty, I would say, now than we normally have to deal with around the world. And so it's just very difficult for us to, you know, to forecast the real upside here. Is there potentially some for everybody if, you know, if the economies around the world continue to strengthen? Sure. But it's a challenging, you know, it's a challenging task right now. And so we're, you know, we're just looking at where we are and you know, what we're seeing and, you know, trying to apply our normal set of expectations to that at this point. Okay. As far as material handling goes, you know, it was impacted the most, I would say, by the shutdowns. It was one of the few sectors we were in where a lot of the clients were shut down and have, you know, are slowly reopening. So we've seen nice, steady, you know, the last three quarters, we've seen nice, you know, steady growth in bookings. You know, and as the economy kind of returns to a normal operating level, and in particular the housing, which, you know, is a nice driver for that particular segment as housing continues to, at this, you know, quite strong pace that it's at now, we think we'll benefit from that. And then, of course, there's the potential for an infrastructure package, which would also help. You know, people seem to think there's going to be one. We just don't exactly know how large it's going to be and where it's going to be directed at this time. But that will help us, as well as just the general strengthening of the economy with all the fiscal stimulus that's going on out there. So we think that's a business that will just continue to be stable and hopefully kind of steady with some growth potential.

Okay, thanks. And moving to wood processing, good bookings performance there in the quarter. I assume that trend is continuing in the current quarter. It doesn't seem there's been too much of a material shift sequentially quarter to quarter as it relates to that market. Is that fair to say?

Well, our customers are doing incredibly well. If you've seen the earnings released from our customers, they're making more money than they've ever made in their life. So it's pretty amazing what they're doing. I would say there's always a little bit of variability in this and that they may order quite a bit of capital in one quarter. And then it takes them a little time to absorb that. But I would say that we have a very high parts consumables business in that segment. And that tends to go as the operating rates go. And the operating rates are very high. and look like for the foreseeable future they're going to remain high. So we would expect our reoccurring revenue there, which is quite high, to continue. And I think the capital orders, I mean, we have a general belief that we always want our customers to be quite successful because they have the resources to then reinvest back in their business to improve it. And we're a partner with them in doing that. So we do think that we'll benefit from that. but really the kind of consistent driver for us is the operating rates and the business that flows from that.

My last question, and that's something I like to talk about. It doesn't seem to be going away completely, but the infection rates we're seeing in India and other parts of Asia, any concern there, or that's something obviously a concern, but can you comment on that?

Sure. So we track, as you might imagine, we track those daily. We review them every week as a management group. And we're always working to make sure that first and foremost, our people are safe and able to conduct business. And we try to work with our clients to serve them as best as possible. It is challenging. A lot of countries you can't get people in or out of. You know, I did see this morning that India, which, of course, is having the toughest time right now, that they think maybe they're turning the corner on that. So I was encouraged. I saw that in the journal this morning. So I was encouraged to see that. You know, Europe is the vaccination rate is starting to improve in Europe. You know, one of the things that we've been impressed with is how the economies and our customers are able to figure out a way to work through this. They somehow managed to get through this by working in different ways, as we've been forced to do. So, you know, all in all, as you can see by the bookings, you know, they're quite good, you know, even considering the fact that there's some still very challenging regions around the world. So I would say every region is different. You know, we're kind of modifying the way we work to meet those conditions around the world. And we expect as the year progresses that this vaccination rate will improve. in most of our major markets, and we'll see things slowly improve there. But there are some areas that are quite challenged right now, and probably India is the biggest. It's an important market to us. It's obviously not our largest market, but it is an important and growing market to us.

Thanks, Jeff. Appreciate all the color. I'll hop back in the queue. Thanks.

At this time, if there are any further questions, you can press star 1. Again, star 1 for any further questions. And we do have a new question. This is from the line of Walter Liptak from Seaport.

Hi, guys. Good morning. Good morning, all. Hi. I wanted to just ask a couple of follow-ups. First, on the discussion about the fourth quarter being the strongest, I wonder if you could go into a little bit more detail about why that is and knowing that the fourth quarter is could be stronger? Is there a way of pulling some of the orders into the third quarter, increasing production levels in the third?

I think, well, really, it's a function of we're booking. We had very good capital bookings in the fourth and the first quarter, and those are going to be shipping in the third and fourth, but it's a little bit more heavily weighted towards the fourth. There's always puts and takes every quarter. So it certainly is possible that some may get pulled into the third or even pushed out into the first quarter of 2022. Okay.

All right, great. And then a follow-up on the gross margin. I wanted to make sure I understood the reason that the gross margin had headwinds. Was that inflation-related?

No, no, it's strictly a function of the mix of the business. And we're in the first half of the year. The mix is going to be favorable towards parts and consumables. And in the second half, it'll be more heavily weighted towards capital. So just just a function of mix.

OK, got it. OK. And I don't think I heard any discussion about, you know, some of the topical things, you know, like the inflationary pressures and supply chains. You know, I wonder if your operations are getting hit by some of those issues.

Yeah, I mean, I think, you know, everybody's starting to see that, and we're watching that closely. You know, of course, with our project activity, we kind of build up our cost, you know, project by project basis. So you kind of take into account any changes that may be occurring in the materials at the time that you're quoting the project. On our parts consumables, which is more of a flow business, That's something we watch closely. We work hard to try to contain those, you know, that inflationary impact. And, you know, there are times when we have to go back to our customers and say, look, you know, the cost has gone up. You know, stainless steel has gone up a third, you know, in the last 12 months. So, I mean, there are some, you know, cost inflation, you know, components that you have to go talk to your customers about. But it's something that we definitely watch closely and monitor.

Okay.

All right.

But it sounds like there's not going to be any sort of impact on your gross margin related to inflation or timing of projects related to availability of parts.

I don't think so on availability. I mean, you know, we're watching the cost. You know, our biggest cost is metal, and it's kind of peaked right now, but it's forecast that the futures are forecasted to come down, you know, some of the remainder of the year. But, you know, it's definitely something we're watching closely. You know, we are seeing some increases, and our divisions are managing it, you know, based on what they're seeing. Okay.

All right, great. And then, you know, last one for me, you know, I'm a big fan of 80-20, and I know you guys have been developing, you know, your 80-20. And I wonder if you can give us an update on, you know, maybe how that's going. Have all the factories at this point had some level of 80-20 training? you know, just to give us an idea of what you're doing with that.

David Chambers- Yeah. So, we have a total, I think, of six divisions that are either implementing 8020 or are in the middle of implementing it. So, you know, we're probably only a third of the way through the company. We have the next four planned. Some of those will be starting up here in the second half of the year. So, we are trying to accelerate the implementation, and we're able to do that as more and more of our senior management go through the program. implement it in their businesses, they then become a resource to help implement it in our other companies. So it is something that's, I think, accelerating. So far, we're quite pleased with what we're seeing. We had great success early on. And the new set of businesses are excited about it, and we think we're going to see some good results from them. We are seeing some already, and we've committed to taking it globally. So it's, you know, we're just focusing now on how do we accelerate, how do we implement it faster, because it's impactful. You know, we're seeing some good results from it.

Okay, great.

All right, thank you very much. And again, if there are any questions, press star 1 on your telephone keypad. Our next question comes from the line of Bobby Eubank from Cherry Chase Trust.

Good morning, guys. Congratulations on the strong orders. Continued record. Nice to see. Thank you. Follow-up on the prior questions. I assume there's not a heavy semiconductor component to some of your capital projects, but any concerns there and just any new markets that you may be looking at in terms of MAA as a follow-up? Thanks.

I mean, you're right. We don't have a lot in semiconductors. Of course, we have PLCs that manage our control systems, that manage our equipment, but it's a very, very low kind of dollar amount of our total material buy. So it doesn't mean that there may not be some challenges. We may have to buy things earlier than we want or something at particular divisions, but as of right now, I've not heard of any concerns about inability to get to our control systems. So As far as M&A activity, as I mentioned, I think, earlier, you know, we always have – we're always looking in discussions with a lot of companies, and it tends to be in all of the areas. I mean, we like the flow control area. As you look at our numbers, you'll see our flow control business is by far our most profitable business. So that's a great market we're in, and so we're always looking to add businesses there. But frankly, you know, in all three of our segments, you know, there are nice opportunities out there. that we're looking at. And, you know, it always comes down to the challenge is always, can you acquire them, you know, at a valuation that makes sense for us? You know, we have to believe that we can bring value and add some value to whatever we buy. And so, you know, we're constantly looking at businesses and saying, okay, how would we increase the value of that business, you know, if it was part of the catered family? So we're looking in all areas. The wood sector, we have our highest market share in the wood processing sector. So that's probably, The one that's most challenging to add something to because, you know, we just have such very high market share there. But there are adjacent areas in the wood sector that, you know, that we are looking at that we're not involved with. And then there's just a lot of, you know, kind of strategic businesses out there that are in the business we're in now that would be great fits for us. So we're always looking at those two. Thank you.

Is mass timber an opportunity for you that's kind of near term or is that would be great addition to the wood products, but much longer term out. And then for some of the larger acquisitions, how much time do you want to spend with that company and that management team before you would consider pulling the trigger? Is it something that you're looking at deals that would really close in 2022? Thank you.

Well, we always have, you know, discussions going on. We had discussions going on during the pandemic. You know, we're always, you know, our business development team is always out looking at opportunities. So they could happen, you know, frankly, you know, at any time. As far as the lumber business, if you look at our products and our technologies, we tend to try to have unique technologies that are quite impactful to a much larger operation. So we would, for instance, likely never get involved in being a turnkey supplier of an entire mill, which has a big construction and installation piece to it. That's not our business model. is having kind of really key high-tech products that really impact the quality and the production of a business and the cost, the input cost of a business. And ideally ones that, you know, that have a nice consumable and spare piece that flows from it. So that tends to be kind of, you know, where we focus.

Thanks, Chris. And we do have a follow-up from the line of Kurt Yeager from DA Davidson.

Yeah, thanks. Just a higher-level question. I mean, from lumber to OSB, pulp paper, I mean, prices along all these commodities are really increasing pretty rapidly as, you know, there doesn't seem to be much flex supply to really respond to the incremental demand we're seeing. Is that starting to impact, you know, your conversations with customers or what you're seeing in terms of their appetite for capital spending? And does it, you know, I guess, increase... your conviction around the organic growth trajectory of the business over kind of a multi-year kind of time period?

Well, it's an interesting thing. If we look at lumber in particular, that's very topical because I think yesterday it hit new record prices again. It's really, you know, as you probably heard from the home building industry, they're just getting destroyed by how much, you know, the price of lumber has gone up. This really is somewhat a remnant of the housing crash that occurred in 08-09. I think I read that the demand is back to kind of 206 level, which was near the record high level, and yet the production is about 16% less. Production capacity is down about 16% from 206. So you have this mismatch where you've got demand back at kind of near record levels and you have production capacity that is well below that. And so it's no surprise that demand is far outstripping supply and therefore prices have hit these record levels. Now, one of two things, of course, will happen. Either demand will moderate or supply will increase. And I think you'll see both. I think you'll see probably maybe demand moderate a little bit. And I think you'll see more capacity come online. to meet those needs. I know OSB in particular, I just saw a report that they're forecasting that globally it will grow greater than 4% a year for the next five years. So it looks like there's going to be nice, strong demand on the OSB side for the next several years. And most of the estimates on the housing demand would lead you to believe that there's going to be healthy demand for dimensional lumber. It may not be the record levels we're seeing now or the record prices, but it should be very solid, very profitable work for our customers. So I think you're going to see that. On the OCC side, there's been a few things that have happened. The pandemic really distorted things because, of course, one of the primary sources of waste paper, which was office waste, went away almost completely. But at the same time, you had the Chinese waste import ban kick in. So you had a lot of dynamics that were occurring at the same time. But what we're seeing right now, of course, is the price for waste paper is actually reasonably high. It's in the kind of $70 to $90 a ton range, depending on which grade you're looking at. So it's kind of come back nicely from the lows that it was at when the Chinese ban first went into play. In some places, of course, there's a fiber shortage. There's high demand for packaging. Obviously, the home delivery market during the pandemic really increased demand for for particular packaging grades. And so prices have responded accordingly for that. And that's one that I've said before that I think will, the home delivery that the pandemic spurred, I think will probably continue in some fashion because once people get used to things being delivered at home and go to the effort to set up accounts and everything, they find it's convenient, it's economical. And so I think most of the experts are predicting that will continue post-pandemic. And so, you know, we're seeing, you know, a lot of activity around packaging, you know, to meet those needs.

Great. Appreciate the thoughts. I'll turn it over.

And at this time, there are no further questions in queue.

All right. Well, thank you, Operator. Before wrapping up the call today, I just wanted to leave you with a few takeaways. First, the health and well-being of our employees remains our top priority as we work through the pandemic. Like our customers, we have learned to work in new ways. As we look ahead and beyond the immediate health crisis, we will continue our focus on meeting our customers' needs as we seek to accelerate revenue growth in our core markets. Our financial health is excellent and our liquidity position is stronger today than when the crisis began. Our ability to generate strong free cash flow remains a cornerstone of our business model. We expect a continuing improvement of the economies around the world, and we look forward to a much stronger 2021. With that, I want to thank you for joining the call today, and please stay safe.

And this does conclude today's conference.