Kadant Inc

Good day and thank you for standing by. Welcome to the fourth quarter of 2023 Cadent Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one. Again, please be advised that today's conference is being recorded. I will now attend a conference over to his first speaker today, Michael McKenney, Executive Vice President and CFO. Please go ahead.

Thank you, Victor. Good morning, everyone, and welcome to Cadent's fourth quarter and full year 2023 earnings call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Cadent'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 10K for the fiscal year ended December 31st, 2022, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation do so, even if our views or estimates change. During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at .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're referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell. We'll give you an update on Cade's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our fourth quarter and full year results and discuss our business outlook for 2024. I'm pleased to report the fourth quarter was a solid finish to a record-setting year for Cade. Despite the slowdown in overall manufacturing activity and continued macroeconomic headwinds in many regions, we had another well-executed quarter. This led to solid adjusted EBITDAF performance and excellent cashflow in the fourth quarter. Organic bookings were steady in the fourth quarter with solid demand as we delivered on our mission to provide technologies and engineered solutions that help our customers operate more efficiently. At the end of 2023, we were honored to once again be named by Newsweek Magazine as one of America's most responsible companies. This marks the fourth consecutive year of being included on this list, and it is rewarding to be recognized for our efforts in this area. With that, I would like to review our Q4 financial performance. Fourth quarter performance overall was solid and better than expected in several areas. Q4 revenue and adjusted EPS were both up 3% compared to the same period last year while bookings were comparable with the prior year period. Although a large portion of our Q4 revenue was from capital shipments, excellent execution resulted in an adjusted EBITDAF margin of 20.3%. I'm particularly pleased with our operating cashflow, which was the second highest in our company history at $59 million. Our fourth quarter earnings performance contributed to exceptional four-year financial results, which I will review next with slide seven. The record demand we experienced in the first quarter of 2023 provide an excellent start to the year and contributed to our record-setting revenue performance for the full year. Adjusted EPS increased 9% to a record $10.04, exceeding the prior record set last year at $9.24 per share. Our full-year adjusted EBITDAF was a record 201 million and a record 21% of revenue. Our strategic focus on improving our margin performance continues to deliver results, and we are pleased with the progress of ongoing initiatives to grow our businesses. Our workforce around the globe deserve tremendous credit for these results, as they performed exceptionally well throughout the year. I'm extremely proud of our employees for the innovative work they have done and continue to do to serve our customers. Next, I'd like to review our performance in our three operating segments. I'll begin with our flow control segment. Q4 revenue declined 4% to 87 million, compared to the then-record fourth quarter of 2022. Aftermarket parts revenue was up slightly compared to the prior period and made up 68% of total revenue. Product mix within both parts and capital negatively affected gross margin, and this led to an adjusted EBITDAF margin of 27% in the fourth quarter. Bookings were up 8% compared to the same period last year. This strong finish to the year positions us well entering 2024. We believe the fundamental drivers of rent markets remain healthy, though business activity continues to be influenced by geopolitical and macroeconomic challenges around

the globe.

Turning now to our industrial processing segment, our performance in the fourth quarter was solid, despite the softening in some of our core end markets. Revenue declined 3% compared to the same period last year, due largely to fewer capital shipments of our stock prep equipment used to process recycled fiber. Aftermarket parts revenue, however, was up 5% and represented 64% of total revenue in the fourth quarter. Adjusted EBITDAF margin declined 110 basis points compared to the prior year, but remained strong at .8% of revenue. This decline was largely attributed to a decrease in operating leverage associated with lower capital revenue. Looking ahead to 2024, we expect demand in this segment to shift towards aftermarket parts versus capital, particularly with the addition of our recently announced acquisition of Keyknife. Keyknife is a manufacturer of engineered knife systems used in various wood processing applications. More than 90% of its revenue is aftermarket parts. In addition to Keyknife, to our industrial processing segment, is expected to further strengthen our aftermarket position in this segment. In our material handling segment, revenue increased 27% in the fourth quarter to a record $64 million. Strong bookings in the first half of the year contributed to this record-setting performance. Capital equipment revenue was exceptionally strong and represented 55% of total revenue in the quarter, led by our conveying product line. Despite the large portion of revenue attributed to capital business, we achieved excellent operating leverage and adjusted EBITDAF margin increased 350 basis points to .1% in the fourth quarter. The integration of KWS manufacturing acquired a few weeks ago is underway and progressing well. We are pleased to have this leading manufacturer of screw conveyors and related equipment a part of Keyknife. Looking ahead to 2024, we believe this segment will continue to see good business activity, particularly as new infrastructure projects are executed and demand for K-Main equipment remains strong. As we look ahead to the first quarter of 2024 in the full year, ongoing project activity is healthy and demand has been solid as we've entered the year. That said, we are seeing continuing economic uncertainty around the globe and expect demand in 2024 to be similar to 2023. Our strong backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds. And we expect to deliver solid financial performance again this year. I'd now like to pass the call over to Mike for his review of our financial performance and outlook for 2024.

Thank you, Josh. I'll start with some key financial metrics from our fourth quarter. Gross margin decreased 40 basis points to .7% in the fourth quarter of 2023 compared to .1% in the fourth quarter of 2022, due primarily to lower margins achieved on capital projects at our industrial processing and flow control segments. Our overall percentage of parts and consumables revenue was 60% of total revenue in both the fourth quarters of 2023 and 2022. As a percentage of revenue, SG&A expenses increased to .1% in the fourth quarter of 2023 compared to .5% in the prior year period. SG&A expenses were 59.8 million in the fourth quarter of 2023, increasing 3 million or 5% compared to 56.8 million in the fourth quarter of 2022. The fourth quarter of 2023 included a 0.9 million unfavorable foreign currency translation effect and an increase of 1.3 million of acquisition costs and a decrease of 0.8 million in indemnification asset reversals compared to the fourth quarter of 2022. Excluding these items, SG&A expense increased 1.6 million or 3%, primarily due to increased selling-related costs. Our GAAP EPS increased 4% to $2.33 in the fourth quarter compared to $2.23 in the fourth quarter of 2022, and our adjusted EPS was up 3% to $2.41 from $2.33. Our fourth quarter 23 adjusted EPS of $2.41 exceeded the high end of our guidance range by 29 cents due to higher than anticipated aftermarket revenue, especially at our industrial processing and flow control segments. We had record operating cash flow and adjusted EBITDA in 23, which I will cover on the next slide. For the full year 23, gross margins increased 40 basis points to .5% compared to .1% in 22, due to higher margins achieved on our aftermarket products, especially at our material handling segment. Our percentage of parts and consumable revenue was 62% in 23 compared to 63% in 22. As a percentage of revenue, SG&A expenses decreased to .7% in 23 compared to .8% in 22. SG&A expenses were 236.3 million in 23, increasing 11.9 million or 5% compared to 224 million in 22. Excluding a decrease of 1.2 million of expense from indemnification asset reversals, SG&A expenses were up 13.1 million or 6% compared to 22, primarily due to annual wage increases as well as incremental travel and consulting costs. Our gap EPS was $9.90 in 23, down 4% compared to $10.35 in 22, which included a $1.30 gain on the sale of a Chinese facility. Our adjusted EPS was a record $10.04, up 9% compared to $9.24 last year. Aside from being a record, our adjusted EPS also exceeded the five-year target of $8 to $9 a share we set back at the beginning of 2019. In the fourth quarter of 23, adjusted EBITDA decreased 2% to $48.5 million or .3% of revenue compared to $49.5 million or .3% of revenue in the fourth quarter of 22. Our material handling segment had a record adjusted EBITDA in the fourth quarter of 23 and a notable 350 basis point improvement in adjusted EBITDA margins compared to the prior year. This was offset by the performance in our other segments. As you can see on the slide, our annual adjusted EBITDA has grown significantly compared to 2019, up 58%. For the full year, adjusted EBITDA was a record $201.3 million and a record 21% of revenue in 23, compared to adjusted EBITDA of $189.1 million or .9% of revenue in 22. Our material handling segment had record adjusted EBITDA of $53.6 million in 23 and a 210 basis point improvement in adjusted EBITDA margins compared to the prior year. Our flow control segment also had record adjusted EBITDA of $105 million in 23 and a record .9% adjusted EBITDA margin. Adjusted EBITDA is an important metric for us. We set a five-year target for adjusted EBITDA margin of 20% back at the beginning of 2019 and I'm happy to see that we've exceeded this target with a record 21% in 23. Our adjusted EBITDA margin has increased 300 basis points since 2019 due in large part to contributions from subsidiaries participating in our 80-20 program. This program provides revenue growth through a highly focused sales approach and profitability improvements as a result of dynamic pricing and streamlining product offerings. Once adopted, subsidiaries continue to follow the 80-20 program yielding incremental benefits for the longer they have followed the tenets of the program. Average adjusted EBITDA margin for subsidiaries under the program have consistently exceeded our other subsidiaries. Over 50% of our revenue is from subsidiaries currently under or starting our 80-20 program. One of the highlights for the fourth quarter and full year was our operating cash flow, which increased 68% to 59.2 million in the fourth quarter of 23 compared to 35.2 million in the fourth quarter of 22. For the full year, operating cash flow was a record 165.5 million up 62.9 million or 61% from 22. We also had strong free cash flow increasing 114% to 49.5 million in the fourth quarter 23 and increasing 80% to 133.7 million for full year 23. We had several noble non-operating uses of cash in the fourth quarter 23. We repaid 22.1 million of debt and paid 9.8 million for capital expenditures and a $3.4 million dividend on our common stock. For the full year, we repaid 94 million of our debt and paid 31.9 million for capital expenditures, which included a 7.4 million for our facility project in China. Let me turn to our EPS results for the quarter. In the fourth quarter of 23, gap earnings per share was $2.33 and adjusted EPS was $2.41. The 8-cent difference relates to 10 cents of acquisition costs, 5 cents of other income, and 1 cent of relocation costs, both related to the facility project in China, and 2 cents of restructuring costs. 5 cents of other income is associated with cash received for remaining assets at the old facility. In the fourth quarter 22, gap earnings per share was $2.23 and adjusted EPS was $2.33. The 10-cent difference relates to 9 cents of impairment and restructuring costs and 1 cent of acquisition costs. The increase of 8 cents in adjusted EPS in the fourth quarter 23 compared to the fourth quarter 22 consists of the following. 17 cents due to higher revenue, 9 cents due to a lower recurring tax rate, and 5 cents due to lower interest expense. These increases were partially offset by 17 cents in higher operating expenses, 5 cents due to lower gross margin, and 1 cent due to higher weighted average shares outstanding. The 9-cent impact from the lower recurring tax rate was due to slightly higher tax rate in 22 related to the timing of certain incentive compensation payments. Collectively, including all the categories I just mentioned, was a favorable foreign currency translation effect of 3 cents in the fourth quarter 23 compared to the fourth quarter of last year due to the weakening of the U.S. dollar. Now turning to our EPS results for the full year on slide 17. We reported gap earnings per share of $9.90 in 23 and our adjusted EPS was $10.04. The 14-cent difference relates to 10 cents of acquisition costs, 5 cents of other income, and 5 cents of relocation costs, both related to the facility project in China, and 4 cents of restructuring costs. We reported gap earnings per share of $10.35 in 22 and our adjusted EPS was $9.24. The dollar and 11-cent difference relates to $1.30 gain on sale related to one of our Chinese facilities, impairment and restructuring costs of 11 cents, and acquisition related costs of 8 cents. The increase of 80 cents in adjusted EPS from 22 to 23 consists of the following. $1.41 from higher revenue, 26 cents from higher gross margins, 8 cents from a lower recurring tax rate, and 1 cent from lower non-controlling interest. These increases were partially offset by 86 cents from higher operating expenses, 7 cents from higher interest expense, and 3 cents due to higher weighted average shares outstanding. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of 9 cents in 23 compared to 22. Now let's turn to our liquidity metrics on slide 18. Our cash conversion days, calculated by taking days in receivables plus days in inventory subtracting days in accounts payable, was 130 at the end of the fourth quarter of 23, down from 138 at the end of the third quarter of 23, but up from 126 days at the end of 22. The sequential decrease in cash conversion days was principally driven by a lower number of days in inventory. Working capital as a percentage of revenue decreased to .8% in the fourth quarter of 23 compared to .4% in the third quarter of 23 and .9% in the fourth quarter of 22. Net debt, that is debt-less cash, at the end of 23 was 4.4 million, the lowest level since 2017, representing a decrease of 117 million compared to net debt of 121.4 million at the end of 22. Our interest expense increased 30% to 8.4 million in 23 compared to 6.5 million in 22 due to an increase in borrowing rates. Our leverage ratio, calculated as defined in our credit agreement, decreased to a very low 0.27 at the end of 23 compared to 0.74 at the end of 22. After our recent acquisitions, our borrowing capacity is 71 million available under our revolving credit facility and an additional 200 million uncommitted borrowing capacity. Now I'll review our guidance for 24. We expect to achieve records in a number of key metrics in 24, including revenue, cash flow, and adjusted EBITDA. Our earnings performance in 24 will be affected by increased borrowing costs and non-cash intangible amortization expense associated with our recently announced acquisitions. As we look beyond 24, the increased borrowing costs will continue to decrease as we have demonstrated our proven track record of paying down debt. For the full year, our revenue guide is 1.04 billion to 1.065 billion, that is 1.040 billion to 1.065 billion, and our adjusted diluted EPS guide is $9.75 to $10.05, which excludes 20 cents related to the amortization of acquired profit and inventory and backlog. Looking at our quarterly revenue and EPS performance for 24, we expect the first quarter will be the weakest quarter of the year due to the timing of capital projects and the second half of the year will be stronger than the first half as a result. Our revenue guidance for the first quarter of 24 is $238 million to $246 million, and our adjusted diluted EPS guidance for the first quarter is $1.90 to $2, which excludes 14 cents related to the amortization of acquired profit and inventory and backlog. I should caution here that there could be some variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital shifts. Guidance includes our acquisitions of Keyknife and KWS, which we completed in January. Aside from the impact of intangible amortization, there is a negative impact in the initial post-acquisition period associated with the amortization of profit and inventory and acquired backlog, as these amounts are reflected in the income statement when the underlying orders fulfilled and inventory is shipped to the customer. Our gap and adjust EPS guidance include our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for these acquisitions. I'd like to give some additional metrics on our EPS guides. We borrowed $230 million in January for the acquisitions of Keyknife and KWS. We will work diligently throughout 24 to pay down that debt. As a result of the borrowings, we project our interest expense will increase by approximately 70 cents over 23. In addition, Keyknife and KWS transactions have significant amounts of recurring non-cash intangible amortization expense, which is reducing our EPS guidance by approximately 50 cents in 24. While the non-cash intangible amortization does have a significant impact on EPS, it will not impact our cash flow or EBITDA for 24. 24 guidance includes a favorable foreign currency translation impact of approximately $11.6 million on revenue and 15 cents on adjusted EPS due to the weakening of the U.S. dollar. We anticipate gross margins for 24 will be approximately .5% to 44.5%. As a percentage of revenue, we anticipate SG&A will be approximately .5% to 26.2%, and R&D expense will be approximately 1.3 to .4% of revenue in 24. We anticipate net interest expense of approximately 18 to 18.5 million, and we expect our recurring tax rate will be approximately 26.5 to .5% in 24. We expect depreciation and amortization will be approximately 46 to 48 million in 24, and we anticipate capex spending in 24 will be approximately 29 to 31 million, which includes 2 million related to the final payments on our facility project in China. Approximately 15% of the capex spending in 24 relates to final payments for capex projects approved in 23. We're a little bit above our normal capex as a percent of revenue metric as we continue to invest in automation projects and upgrades to our manufacturing capabilities. That concludes my review of the financials, and I will now turn the call back over to Victor for our

Q&A session. Victor. Thank you. And at this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We've been part of the Q&A roster. One moment for our first question. Our first question will come from the line of Gary Preslopino from Barrington Research. Your line is open.

Hey, good morning, everyone. Hi, Gary. Just want to go over some of the puts and takes on your outlook in 2024. What you're basically saying is that the capital part of your business will be sluggish in the first half, and then you're anticipating that to come back in the second half. Is that a good read on what's going on?

Yes, Gary. No, yeah, that's a good read. We expect capital activity to pick up here in the second quarter and be stronger in the back half.

And what's driving that thought process? Are you seeing any empirical evidence in terms of orders or anything that back half of the year we're going to see that pick up?

Yeah, I think Gary, there's a fairly strong kind of activity, you know, quoting. And, you know, these projects tend to be, you know, take a little longer to develop. And so there's a lot of back and forth between our engineers and our customers. And so there's a fair amount of discussion that's going on. I would just say the time from quote to book in the order is a little longer than normal. And I think that's essentially because of the kind of the general economic uncertainties out there. People are really trying to guess when the Fed is going to start reducing rates. There's a lot of pent up demand in many of our markets. And so our customers are trying to get ready for that. And it's really just a bit of a guessing game on how quickly they pull the trigger to start making investments to get ready for what they expect to be an increase in demand. So a fair amount of a lot of project activity, a lot of quoting, a lot going on. It's just that people are a little slower to actually book the order as they're trying to gauge, you know, kind of the pace of the recovery.

Right. So as I look at your guidance, I mean, the two acquisitions, I think, what did they add about on an annualized basis, 110 million of sales? Is that about right? If you get a full year run rate?

Yeah, I would. I think that's a decent marker, Gary. The caveat to that is I mentioned,

you

know,

the KWS transaction didn't close until three weeks into the first quarter here.

Right. No, I understand that. You put some takes there. But I mean, if you add that number into what you actually did, we're looking at rather, you know, the minimus growth in sales this year. And I just want to make sure I'm understanding this right, that that's really more or less a function on the capital side of the business.

Yes. Yes, that's you. That's correct. Yeah, organically, you know, when we take out the eleven point six million of effects and revenue, we'd be down about two percent in revenue organic.

OK, and I just just

real quick. Sorry, go ahead, Jeff. I'm sorry.

I was just going to say, you know, it's a challenge we have. And this is it's more challenging, obviously, the first of the year and kind of forecasting what's going to happen then then as the quarters progress. But I would say this year, you know, it's particularly challenging because there is a lot of uncertainty. Right. Everybody is trying even the Fed, you know, from it seems like from week to week, you know, their position on the economy changes. And so for us, you know, as you know, Gary, we're a fairly conservative organization and certainly begin the year we try to be pretty cautious. And we're just trying to, you know, to get a little better visibility on on, you know, kind of the timing of some of this activity. And it's it's just challenging when you're when you're coming out of a, you know, a slower period.

No, I get that. I just wanted to make sure I was confirming it. And then just some of the other figures that you guys talked about, especially Mike, you said 18 to 18 and a half million of net interest expense for this year.

Yes. Well, just interest expense, purely interest expense.

OK, so that's 18 to 18 and a half of interest. And then you said DNA is going to run to 46 to 48 million. Right. Yes, that's correct. And what was your capex this year? I didn't see that in the. And then either releases or maybe I missed it. Did you mention that?

Yeah, one second.

We're at essentially 32 million. OK, thank you very

much. Appreciate it.

You're welcome.

Thank you. One moment for our next question. Our next question comes from the line of Kurt Jinger from D.A. Davidson. Your line is open.

Great.

Thanks

and good morning, everyone. I just want to follow up on one of the prior questions in terms of the strengthening in the back half of the year. And, you know, is that a situation where you feel like you need to see improving capital equipment bookings over the next couple of quarters in order for that kind of sales improvement to materialize or based on the bookings activity that you've seen in Q4 and what you're expecting for Q1? Any further improvements could actually be a source of upside to what you're kind of assuming for the full year. How should we kind of think about those booking trends and what that means to the back half performance?

Yeah, you were right on your first assumption, Kurt. It really is predicated on us seeing strengthening in the capital bookings as we go forward.

OK, got it. And then, you know, one of kind of the bright spots this year, I think, has been parts and consumables. And, you know, it's had a steady performance despite some choppiness, you know, in some of the end markets, container board being kind of a big one. I mean, we haven't yet seen a lot of those trends really improve very much. Is there any concern that, you know, that could catch up and start to weigh on parts and consumables going forward? Or do you expect, you know, the solid performance in 2023 sets you up pretty well for 2024 as well?

Well, you know, it's interesting. When you think of our parts, of course, it's soothing. All of our businesses have it. But in particular, you know, we're expecting a big recovery on the container board side this year. So, you know, they think container board was probably flat last year and it was down for the first time. Demand I'm talking about was down for the first time in a very long time in 22. But they're forecasting, you know, container board demand increased 4.3 percent this year, tissue to be up 4 percent this year, and then even 25, 3.8 percent for tissue and 3.7 for container board. So we're really expecting to see a recovery on that side of the business. And I would say also on the wood processing side, you know, things have slowed down. Of course, housing starts were I think about 1.46 last month, but permits were about 1.5. So we are starting to see some some improvement there. And certainly if if if interest rates start to come down, there's tremendous pent up demand for housing. And we have a lot of activity going on with our customers, a lot of discussions about projects. They're really trying to get ready for what they think will be a pretty robust improvement in the market demand. You know, once interest rates start to decline. So I think, you know, it's our beliefs that that the parts of business actually could continue to strengthen throughout the year, assuming things go as as you know, most economists are currently forecasting.

Right. Okay.

And I guess sticking with the wood piece, I mean, there was a lot of capacity added. And to your point, I think there's a lot of optimism that demand is going to continue to improve. But at the same time, some of that new capacity is being absorbed. I guess as you think about your capital equipment, how important is new greenfield facilities and new capacity versus just better utilization at existing facilities in terms of the overall kind of sales and demand picture for wood processing?

Yeah, I think there's both. And of course, because we're global, we have the extremely high market share globally. It varies. So if you look at North America, you know, it may be more just upgrading tired equipment. The average age of a lot of equipment out there is is pretty old. And so, you know, there's just upgrading. But then, you know, there's a lot of green new green fields going on in Asia in particular, our our stranding guys are very busy in Asia. A lot of projects, a lot of activity. We booked another order in China a few weeks ago. And then you've got the situation. Russia, a lot of product came out of Russia. And of course, that's got to be replaced now. So we're seeing activity in Europe and in particularly Scandinavia area, you know, as they start to invest to offset the lost the lost supply out of Russia. So, you know, the wood side, you know, it really depends on the region you're looking at. But I would say the activity level right now is as high as it was before the pre before the pandemic for us with all the tired equipment out there and frankly, more and more, you know, in particular on the stranding side, more and more products using stranded material. You know, that's held up extremely well for us. And, you know, and demand still looks quite good.

Thanks, Jeff. And then just my last one, I guess, bigger picture. You're coming off two of kind of your strongest organic growth years and 21 and 22. This past year was still very solid as well. Where do you think your business is from kind of a cyclical standpoint entering 24? And I guess is there anything that's changed in terms of how you think about the organic growth profile of the business longer term relative to what you kind of outlined in the past?

Well, we had, as you know, we had tremendous organic growth, you know, from say kind of 18, 19 on. It was, you know, we were, I think, what, seven and a half percent? Yeah, about seven and a half percent organic growth for several years, which, you know, is substantially higher than global GDP. So we would never budget and assume that was going to be the case, say, for the next five years. But I would tell you, when I look at our three sectors, the material handling side, I think, is in a good position. The money that's going to be spent on both the infrastructure bill and the Chips Act is just starting to flow. And so we think that our material handling sector will benefit from that. The billing side has been quite strong in Europe and in the US, you know, from a recycling standpoint. On the paper side, we just talked about the fact that, you know, operating rates, operating rates really bottomed out, we think, in 23, you know, globally, you know, running at about 79 percent is forecasted to get back into the mid 80s over the next couple of years. So we expect, you know, kind of some recovery growth in that market. And the flow control has always been very steady. You know, it just is a very stable, steady business. The guys always do a great job in finding new end markets.

You know, our biggest market,

our biggest sector right now is our industrial sector. It's bigger than all of our others. So, I mean, there's a lot of industrial markets out there that we're taking our products to. So, you know, we think the next few years, assuming that, you know, something doesn't happen, a black swan event doesn't happen, we think that that growth actually should be pretty solid the next few years. But we've got to, you know, we've got to see that start to materialize, I think, this year as the year progresses.

OK, well, appreciate all the color, guys. Thank you.

You're welcome.

Thank you. One moment for our next

question. Our next question, Larry DeMaria from William Blair. Your line is open.

Thanks. Good morning, everybody. Hey, just a few quick sort of clarification. I know it's not unusual, I have a little bit bigger second half than first half. Can you give us kind of order of magnitude second half, first half? And secondly, maybe you could talk to the financial flexibilities you have after the recent deals and this M&A pipeline if we're out of the market for a while or if it's still relatively healthy.

On the split, first

half, second half, Larry, I'd say there's about a 5% delta there.

And then on the I would say on the activity side, we're still quite busy. There's still our corporate development people, I think, are said that still a tremendous amount of deal flow out there. Our balance sheet, even though we took on a little bit of debt for these most recent acquisitions, our balance sheet still pretty strong. We think we have good capacity left. So we're we're full speed ahead. We won't be slowing down, even though we just did a couple of transactions. You know, as you know, we're always looking for opportunities that are good strategic fits at a fair value. And, you know, and that can be challenging from time to time. But but our corporate, we were very busy and we've got the capacity. And frankly, you know, our current debt agreements, you know, were put in place when we were smaller. So if we needed to to, you know, free up those at higher levels, we could easily do that. And we'll do that if needed as we go out and pursue opportunities. So we're full speed ahead on looking at opportunities.

OK, sounds good. Thanks. And then now, shipping gears a little bit. And I obviously talked about this a bit already, but it's about kind of the order of expectations from here and how we've done so far. It's a little bit odd to talk about, I don't know, the strength and capital equipment and the order of your short in four Q and solid demand. But this uncertainty keeping the outlook down seems overly conservative. So can you discuss why this isn't overly conservative, you know, considering the comments and the print you just did? Maybe what areas and markets are showing you the weakness and, you know, order expectations from here, which, you know, they can say flattish or not.

Yeah, I would say, Gary, I pointed to Mike and said, you can handle this with Mike.

The biggest

thing that we're looking at is capital capital order flow and seeing that we get some traction and get some firmness there. That's the biggest thing that we're waiting to get some clarity on.

Our guys are very busy, as I as I mentioned, project discussions and activities are actually pretty strong. But the time to close is as lengthened, you know, I think as our customers are again trying to gauge how quickly rates come down and demand starts to pick up. And so because those discussions are are taking longer than normal, it obviously introduces a added degree of caution on our part.

And anything on the order expectation from here and how we've done so far this year, I assume obviously capital flow.

Yeah, I mean, I think right now things are as as expected right now, as we look through, you know, through last week, demand is kind of on track with with where we would expect it to be. Is

it safe to say that given the comments in the pipeline and it's time to close, it's a little longer. I think those potential orders don't go away, right. They either hit in the second half or they get pushed out to next year. Is that fair to say? Yeah, yeah.

Exactly. It's very, very seldom that a project gets canceled. We had one canceled, a big project canceled, I think, back in twenty two. I think it was we had a project canceled, but it's very unusual for that. You're exactly right. They typically just get they get delayed. You know, these are these big projects, you know, are quite lengthy and from a from a board review standpoint anyway. And so once they get to that point, they normally don't disappear forever. It's just a question of timing on them. And so that's what has introduced the level of caution that we have is we just don't know where the timing is. You know, it's going to be next quarter or third quarter, fourth quarter. The customers just aren't quite sure yet.

OK, fair enough. Last quick question. Parts of consumables and flow and industrial process, given the mothballing that we've seen, is it like, you know, doesn't matter. It's just around overall volume and parts and consumables are more or less guided up. Where is capital guided down? Is that the fair way to think about it?

Yeah, I mean, what happens is, as you know, we operate in almost every paper in every paper mill in the world. And I know some people get hung up when they hear about a closure and we never like to hear about closures. But I just mentioned overall demand is forecasted. If you look at total paper demand in twenty four globally, it's supposed to be up three point three percent and it grows every year. So what happens is they just they just shift that to other more efficient mills. And we're there, too. So we just pick the business up in one mill versus the other. And so we don't get nearly as hung up on a mill closure announcement here or there as long as overall demand continues to grow. So we're going to be there to get our fair share of that. OK,

very good. Thank you and good luck.

Thank you. And as a reminder, that's star one one for questions, star one one. One moment for our next question. Our next question will come from a Walter Liptych from Seaport Research. Your line is open.

Hey, good morning, guys, and

good

into your year. Thanks. Thanks, Walt. Want to try one on the flow control bookings, the plus eight point four percent. I wonder if you just give us some some incremental color. Was that parts related? Was that capital projects? You know, maybe regionally where the orders were coming from.

I'm looking for my schedule here. It was really we had it was both in part and capital,

but capital and flow control was quite strong in the fourth quarter. Actually, in December, we closed some nice some nice projects. So I'd say that bookings beat was really led by capital and flow control.

OK,

great. And is is you think that the start of a trend is there some follow through or, you know, you know, people are drawing down inventory, I think, and being cautious into the end of the year. Sounds like this fucked the trend a little bit.

Yeah, it did. Well, but I happen to know that we had our projects that came through those capital projects. They were on our board for twenty four. So the orders were a little bit early.

OK, OK, thanks. That helps.

And then I wondered if you kind of alluded to this and some of the other questions. You know, last year, this time you were getting that big forty two mile conveyor project in material handling. And that probably is already shipped now. That's probably already through your process. But I wonder if it sounds like it sounds like you've got more in the final that are some of these bigger material handling projects. Is that right?

Well, I'm the I'm the large project that we book and looked in the first quarter while you're correct. Most of that shipped of that 12 million, there's still I think about two million to go. And a good chunk of that actually went in the fourth quarter, which is why you saw their revenue and other metrics margin and EBITDA were so good because we had an excellent on the EBITDA front. We had excellent operating leverage there.

OK, that's great. And it sounds like you've got there's the potential for some more of these big conveyor projects in the final.

Yeah, that that was the you know, the second longest in the world. So we don't we wouldn't expect all of their you know, there are discussions for projects. We wouldn't expect anything, you know, soon of that magnitude. That's a pretty rare project. But generally speaking, the group is, you know, it's been strengthening over the last year and a half. And, you know, the prospects, you know, the good housing picks up, you know, certainly that's going to help them. The Chips Act is a really a very large construction act. If you look at it, it's mainly building plants. So that's that's good for them as well as infrastructure. And then the recycling side, you know, the Baylor business in the U.S. continues to be very strong as well as Europe and other parts of the world. So, you know, all of their segments have, you know, I think have had nice, steady demand. And we expect that they'll, you know, they'll continue to be in good shape throughout this year.

OK, great. And maybe I'll try one or two on the 80-20. Congratulations with the profit improvement that you guys have been seeing. And I thought that you might be further along than 50 percent of the plants started. I wonder if you could just refresh us. How many, you know, P&Ls do you have? How many P&Ls? And, you know, half of it, half the P&Ls, I guess, have started. But how many P&Ls do you have? And for 20-24, do you have more that will be starting the 80-20 process?

Yeah, so we have around, I think, about 24, you know, kind of companies with P&Ls. And I would say, you know, kind of half of them are in it. The thing that's impacting it now, which frankly is a little frustrating for us, is that you really can't have an ERP project going on at the same time as 80-20 because they're both, you know, so significant, you know, in scope and the resources that they require. And so as it turns out, you know, what's controlling some of our 80-20 implementation now is companies that are either in or getting ready to start ERP projects. It just has, as, you know, luck would have it, we've got companies that are at end of life with the current ERP systems where we were forced to implement new ones. And that really has delayed implementing 80-20 in some of those businesses. And so that's been something we've been wrestling with, I would say, over the last kind of 18 months, you know, trying to decide, OK, which ones can we delay the ERP project until 80-20 is finished and which ones are we going to have to delay 80-20? And so that's really controlling some of the pace. The other thing, of course, is, you know, we continue to build up our internal team, the expertise, but it also has, you know, has some limitations, you know, and just the available expertise to implement projects. So, you know, we still have, I've been saying for some time, I think we still have probably another, say, three years, you know, to four years for this to run out. And that's, of course, not including new acquisitions. Every time you acquire a new company, then you take on a new future project. And so we have a couple of new future projects which we just added this year. So it'll never stop, you know, but I think we will, I think, in three to four years have almost all of our businesses that we currently have, you know, kind of coming out of the back end of the process.

Okay, good. Okay, good. Maybe one last one for me, just switching gears to the pricing environment. And in 2020, you know, I don't remember that there was ever any issues because your niche markets were selling price, but are you taking up prices again? Are you still seeing inflation?

Well, I would say that a lot of the inflationary pressures we've seen on raw materials have subsided. They've improved. I would also say that with demand down somewhat, you know, customers are very reluctant to accept big price increases. You know, as we mentioned before, back in 2021, 2022, we were all just trying to get the materials, you know, from a supply chain standpoint to provide. And so it was more, can you get me something and what's it going to cost us to do it? That was the same for us buying our raw materials. So things have stabilized there. And so I think we're returning back to a more normal environment from a pricing standpoint. And as you know, if you look at our improvement that we've made, it's almost all been on our SGA side. You know, our margins have held very steady, which is an indication of our pricing. So, you know, what we've really worked hard on is reducing our, you know, kind of our operating cost. And that's really where we've gotten the improvement from, is reducing our internal expenses.

Okay, great. Okay, thank you.

Thank you. I'm not showing any further questions in the queue. I would like to turn it back to Jeff Powell for any closing remarks.

Thank you, Victor. So before wrapping up the call today, I just want to leave you with a few takeaways. 2023 was another record-setting year for K-Net, and our employees deserve a lot of credit for achieving these results. I want to thank all our employees around the world for the commitment to serving our customers' needs. I also want to welcome our newest employees from both Keyknife and KWS Manufacturing. We're excited about the value you will add to Cadence and the opportunity to build upon the successes you have achieved. In 2024, we will continue to seek new opportunities to create value as we focus on meeting our customers' needs with innovative technologies and solutions that drive sustainable industrial processing. Lastly, our financial health is excellent and our market positions remain strong. We look forward to delivering exceptional value for all our stakeholders again in 2024. With that, I want to thank you for joining the call today.

Thank you for your participation in today's conference. This does not conclude the program. You may now disconnect. Everyone, have a great day.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

Thank you. Thank you. Thank you. Thank you. Good day and thank you for standing by. Welcome to the fourth quarter of 2023 Cadence 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 a session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising, your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I will now attend the conference over to the first speaker today, Michael McKenney, executive vice president and CFO. Please go ahead.

Thank you, Victor. Good morning, everyone, and welcome to Cadence fourth quarter and full year 2023 earnings call. With me on the call today is Jeff Powell, our president and chief executive officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about 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 December 31, 2022, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at .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're 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 Cade's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our fourth quarter and full year results and discuss our business outlook for 2024. I'm pleased to report the fourth quarter was a solid finish to a record-setting year for CAIDEM. Despite the slowdown in overall manufacturing activity and continued macroeconomic headwinds in many regions, we had another well-executed quarter. This led to solid adjusted EBITDAF performance and excellent cash flow in the fourth quarter. Organic bookings were steady in the fourth quarter with solid demand as we delivered on our mission to provide technologies and engineered solutions that help our customers operate more efficiently. At the end of 2023, we were honored to once again be named by Newsweek Magazine as one of America's most responsible companies. This marks the fourth consecutive year of being included on this list, and it is rewarding to be recognized for our efforts in this area. With that, I would like to review our Q4 financial performance. The fourth quarter performance overall was solid and better than expected in several areas. Q4 revenue and adjusted EPS were both up 3% compared to the same period last year while bookings were comparable with the prior year period. Although a large portion of our Q4 revenue was from capital shipments, excellent execution resulted in an adjusted EBITDAF margin of 20.3%. I am particularly pleased with our operating cash flow, which was the second highest in our company history at $59 million. Our fourth quarter earnings performance contributed to exceptional full-year financial results, which I will review next with slide 7. The record demand we experienced in the first quarter of 2023 provided an excellent start to the year and contributed to our record-setting revenue performance for the full year. Adjusted EPS increased 9% to a record $10.04, exceeding the prior record set last year at $9.24 per share. Our full-year adjusted EBITDAF was a record $201 million and a record 21% of revenue. Our strategic focus on improving our margin performance continues to deliver results, and we are pleased with the progress of ongoing initiatives to grow our businesses. Our workforce around the globe deserves tremendous credit for these results, as they performed exceptionally well throughout the year. I am extremely proud of our employees for the innovative work they have done and continue to do to serve our customers. Next, I would like to review our performance in our three operating segments. I will begin with our flow control segment. Q4 revenue declined 4% to $87 million compared to the then-record fourth quarter of 2022. Aftermarket parts revenue was up slightly compared to the prior period and made up 68% of total revenue. Product mix within both parts and capital negatively affected gross margin, and this led to an adjusted EBITDAF margin of 27% in the fourth quarter. Bookings were up 8% compared to the same period last year. This strong finish to the year positions us well entering 2024. We believe the fundamental drivers of rent markets remain healthy, though business activity continues to be influenced by geopolitical and macroeconomic challenges around

the globe.

Turning now to our industrial processing segment, our performance in the fourth quarter was solid despite the softening in some of our core end markets. Revenue declined 3% compared to the same period last year due largely to fewer capital shipments of our stock prep equipment used to process recycled fiber. Aftermarket parts revenue, however, was up 5% and represented 64% of total revenue in the fourth quarter. Adjusted EBITDAF margin declined 110 basis points compared to the prior year, but remained strong at .8% of revenue. This decline was largely attributed to a decrease in operating leverage associated with lower capital revenue. Looking ahead to 2024, we expect demand in this segment to shift towards aftermarket parts versus capital, particularly with the addition of our recently announced acquisition of Keyknife. Keyknife is a manufacturer of engineered knife systems used in various wood processing applications. More than 90% of its revenue is aftermarket parts. An addition of Keyknife to our industrial processing segment is expected to further strengthen our aftermarket position in this segment. In our material handling segment, revenue increased 27% in the fourth quarter to a record $64 million. Strong bookings in the first half of the year contributed to this record-setting performance. Capital equipment revenue was exceptionally strong and represented 55% of total revenue in the quarter, led by our conveying product line. Despite the large portion of revenue attributed to capital business, we achieved excellent operating leverage and an adjusted EBITDA margin increased 350 basis points to .1% in the fourth quarter. The integration of KWS manufacturing acquired a few weeks ago is underway and progressing well. We are pleased to have this leading manufacturer of screw conveyors and related equipment a part of Keyknife. Looking ahead to 2024, we believe this segment will continue to see good business activity, particularly as new infrastructure projects are executed and demand for K-Main equipment remains strong. As we look ahead to the first quarter of 2024 in the full year, ongoing project activity is healthy and demand has been solid as we enter the year. That said, we are seeing continuing economic uncertainty around the globe and expect demand in 2024 to be similar to 2023. Our strong backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds, and we expect to deliver solid financial performance again this year. I'd now like to pass the call over to Mike for his review of our financial performance and outlook for 2024.

Thank you, Josh. I'll start with some key financial metrics from our fourth quarter. Gross margin decreased 40 basis points to .7% in the fourth quarter of 2023 compared to .1% in the fourth quarter of 2022, due primarily to lower margins achieved on capital projects at our industrial processing and flow control segments. Our overall percentage of parts and consumables revenue was 60% of total revenue in both the fourth quarters of 2023 and 2022. As a percentage of revenue, SG&A expenses increased to .1% in the fourth quarter of 2023 compared to .5% in the prior year period. SG&A expenses were 59.8 million in the fourth quarter of 2023, increasing 3 million or 5% compared to 56.8 million in the fourth quarter of 2022. The fourth quarter of 2023 included a 0.9 million unfavorable foreign currency translation effect and an increase of 1.3 million of acquisition costs and a decrease of 0.8 million in indemnification asset reversals compared to the fourth quarter of 2022. Excluding these items, SG&A expense increased 1.6 million or 3% primarily due to increased selling related costs. Our gap EPS increased 4% to $2.33 in the fourth quarter compared to $2.23 in the fourth quarter of 2022, and our adjusted EPS was up 3% to $2.41 from $2.33. Our fourth quarter 23 adjusted EPS of $2.41 exceeded the high end of our guidance range by 29 cents due to higher than anticipated aftermarket revenue, especially at our industrial processing and flow control segments. We had record operating cash flow and adjusted EBITDA in 23, which I will cover on the next slide. For the full year 23, gross margins increased 40 basis points to .5% compared to .1% in 22, due to higher margins achieved on our aftermarket products, especially at our material handling segment. Our percentage of parts and consumable revenue was 62% in 23 compared to 63% in 22. As a percentage of revenue, SG&A expenses decreased to .7% in 23 compared to .8% in 22. SG&A expenses were 236.3 million in 23, increasing 11.9 million or 5% compared to 224 million in 22. Excluding a decrease of 1.2 million of expense from indemnification asset reversals, SG&A expenses were up 13.1 million or 6% compared to 22, primarily due to annual wage increases as well as incremental travel and consulting costs. Our gap EPS was $9.90 in 23, down 4% compared to $10.35 in 22, which included a $1.30 gain on the sale of a Chinese facility. Our adjusted EPS was a record $10.04, up 9% compared to $9.24 last year. Aside from being a record, our adjusted EPS also exceeded the five-year target of $8 to $9 a share we set back at the beginning of 2019. In the fourth quarter of 23, adjusted EBITDA decreased 2% to $48.5 million or .3% of revenue compared to $49.5 million or .3% of revenue in the fourth quarter of 22. Our material handling segment had a record adjusted EBITDA in the fourth quarter of 23 and a notable 350 basis point improvement in adjusted EBITDA margins compared to the prior year. This was offset by the performance in our other segments. As you can see on the slide, our annual adjusted EBITDA has grown significantly compared to 2019, up 58%. For the full year, adjusted EBITDA was a record $201.3 million and a record 21% of revenue in 23, compared to adjusted EBITDA of $189.1 million or .9% of revenue in 22. Our material handling segment had record adjusted EBITDA of $53.6 million in 23 and a 210 basis point improvement in adjusted EBITDA margins compared to the prior year. Our flow control segment also had record adjusted EBITDA of $105 million in 23 and a record .9% adjusted EBITDA margin. Adjusted EBITDA is an important metric for us. We set a five-year target for adjusted EBITDA margin of 20% back at the beginning of 2019, and I'm happy to see that we've exceeded this target with a record 21% in 23. Our adjusted EBITDA margin has increased 300 basis points since 2019, due in large part to contributions from subsidiaries participating in our 80-20 program. This program provides revenue growth through a highly focused sales approach and profitability improvements as a result of dynamic pricing and streamlining product offerings. Once adopted, subsidiaries continue to follow the 80-20 program, yielding incremental benefits the longer they have followed the tenets of the program. Average adjusted EBITDA margin for subsidiaries under the program have consistently exceeded our other subsidiaries. Over 50% of our revenue is from subsidiaries currently under or starting our 80-20 program. One of the highlights for the fourth quarter and full year was our operating cash flow, which increased 68% to 59.2 million in the fourth quarter of 23 compared to 35.2 million in the fourth quarter 22. For the full year, operating cash flow was a record 165.5 million, up 62.9 million or 61% from 22. We also had strong free cash flow, increasing 114% to 49.5 million in the fourth quarter 23 and increasing 80% to 133.7 million for full year 23. We had several notable non-operating uses of cash in the fourth quarter 23. We repaid 22.1 million of debt and paid 9.8 million for capital expenditures and a $3.4 million dividend on our common stock. For the full year, we repaid 94 million of our debt and paid 31.9 million for capital expenditures, which included a 7.4 million for our facility project in China. Let me turn to our EPS results for the quarter. In the fourth quarter of 23, gap earnings per share was $2.33 and adjusted EPS was $2.41. The 8-cent difference relates to 10 cents of acquisition costs, 5 cents of other income, and 1 cent of relocation costs, both related to the facility project in China, and 2 cents of restructuring costs. 5 cents of other income is associated with cash received for remaining assets at the old facility. In the fourth quarter 22, gap earnings per share was $2.23 and adjusted EPS was $2.33. The 10-cent difference relates to 9 cents of impairment and restructuring costs and 1 cent of acquisition costs. The increase of 8 cents in adjusted EPS in the fourth quarter 23 compared to the fourth quarter 22 consists of the following. 17 cents due to higher revenue, 9 cents due to a lower recurring tax rate, and 5 cents due to lower interest expense. These increases were partially offset by 17 cents in higher operating expenses, 5 cents due to lower gross margin, and 1 cent due to higher weighted average shares outstanding. The 9-cent impact from the lower recurring tax rate was due to slightly higher tax rate in 22 related to the timing of certain incentive compensation payments. Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of 3 cents in the fourth quarter 23 compared to the fourth quarter of last year due to the weakening of the US dollar. Now turning to our EPS results for the full year on slide 17. We reported gap earnings per share of $9.90 in 23 and our adjusted EPS was $10.04. The 14-cent difference relates to 10 cents of acquisition costs, 5 cents of other income, and 5 cents of relocation costs, both related to the facility project in China, and 4 cents of restructuring costs. We reported gap earnings per share of $10.35 in 22 and our adjusted EPS was $9.24. The dollar and 11-cent difference relates to $1.30 gain on sale related to one of our Chinese facilities, impairment and restructuring costs of 11 cents, and acquisition related costs of 8 cents. The increase of 80 cents in adjusted EPS from 22 to 23 consists of the following. $1.41 from higher revenue, 26 cents from higher gross margins, 8 cents from a lower recurring tax rate, and 1 cent from lower non-controlling interest. These increases were partially offset by 86 cents from higher operating expenses, 7 cents from higher interest expense, and 3 cents due to higher weighted average shares outstanding. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of 9 cents in 23 compared to 22. Now let's turn to our liquidity metrics on slide 18. Our cash conversion days calculated by taking days and receivables plus days in inventory and subtracting days and accounts payable was 130 at the end of the fourth quarter of 23, down from 138 at the end of the third quarter of 23, but up from 126 days at the end of 22. The sequential decrease in cash conversion days was principally driven by a lower number of days in inventory. Working capital as a percentage of revenue decreased to .8% in the fourth quarter of 23 compared to .4% in the third quarter of 23 and .9% in the fourth quarter of 22. Net debt, that is debt less cash, at the end of 23 was 4.4 million, the lowest level since 2017, representing a decrease of 117 million compared to net debt of 121.4 million at the end of 22. Our interest expense increased 30% to 8.4 million in 23 compared to 6.5 million in 22 due to an increase in borrowing rates. Our leverage ratio calculated as defined in our credit agreement decreased to a very low 0.27 at the end of 23 compared to 0.74 at the end of 22. After our recent acquisitions, our borrowing capacity is 71 million available under our revolving credit facility and an additional 200 million uncommitted borrowing capacity. Now I'll review our guidance for 24. We expect to achieve records in a number of key metrics in 24, including revenue, cash flow, and adjusted EBITDA. Our earnings performance in 24 will be affected by increased borrowing costs and non-cash intangible amortization expense associated with our recently announced acquisitions. As we look beyond 24, the increased borrowing costs will continue to decrease as we have demonstrated our proven track record of paying down debt. For the full year, our revenue guidance is $1.04 billion to $1.065 billion, that is $1.040 billion to $1.065 billion, and our adjusted diluted EPS guidance is $9.75 to $10.05, which excludes $0.20 related to the amortization of acquired profit and inventory and backlog. Looking at our quarterly revenue and EPS performance for 24, we expect the first quarter will be the weakest quarter of the year due to the timing of capital projects, and the second half of the year will be stronger than the first half as a result. Our revenue guidance for the first quarter of 24 is $238 million to $246 million, and our adjusted diluted EPS guidance for the first quarter is $1.90 to $2, which excludes $0.14 related to the amortization of acquired profit and inventory and backlog. I should caution here that there could be some variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital shifts. Guidance includes our acquisitions of Keyknife and KWS, which we completed in January. Aside from the impact of intangible amortization, there is a negative impact in the initial post-acquisition period associated with the amortization of profit and inventory and acquired backlog, as these amounts are reflected in the income statement when the underlying orders fulfilled and inventory shipped to the customer. Our gap and adjust EPS guidance include our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for these acquisitions. I'd like to give some additional metrics on our EPS guides. We borrowed $230 million in January for the acquisitions of Keyknife and KWS. We will work diligently throughout 24 to pay down that debt. As a result of the borrowings, we project our interest expense will increase by approximately $0.70 over 23. In addition, Keyknife and KWS transactions have significant amounts of recurring non-cash intangible amortization expense, which is reducing our EPS guidance by approximately $0.50 in 24. While the non-cash intangible amortization does have a significant impact on EPS, it will not impact our cash flow or EBITDA for 24. 24 guidance includes a favorable foreign currency translation impact of approximately $11.6 million on revenue and $0.15 on adjusted EPS due to the weakening of the US dollar. We anticipate gross margins for 24 will be approximately .5% to 44.5%. As a percentage of revenue, we anticipate SG&A will be approximately .5% to 26.2%. And R&D expense will be approximately 1.3 to .4% of revenue in 24. We anticipate net interest expense of approximately 18 to 18.5 million. And we expect our recurring tax rate will be approximately .5% to .5% in 24. We expect depreciation and amortization will be approximately 46 to 48 million in 24. And we anticipate capex spending in 24 will be approximately 29 to 31 million, which includes 2 million related to the final payments on our facility project in China. Approximately 15% of the capex spending in 24 relates to final payments for capex projects approved in 23. We're a little bit above our normal capex as a percent of revenue metric as we continue to invest in automation projects and upgrades to our manufacturing capabilities. That concludes my review of the financials, and I will now turn the call back over to Victor for our Q

&A session. Victor? Thank you. And at this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We can pod the Q&A roster. One moment for our first question. Our first question will come from the line of Gary Preslipino from Barrington Research. Your line is open.

Hey, good morning, everyone. Hi, Gary. Just want to go over some of the puts and takes on your outlook in 2024. What you're basically saying is that the capital part of your business will be sluggish in the first half, and then you're anticipating that to come back in the second half. Is that a good read on what's going on?

Yes, Gary. No. Yeah, that's a good read. We expect capital activity to pick up here in the second quarter and be stronger in the back half.

And what's driving that thought process? Are you seeing any empirical evidence in terms of orders or anything that back half of the year we're going to see that pick up?

Yeah, I think Gary, there's a fairly strong kind of activity, you know, quoting. These projects tend to take a little longer to develop, and so there's a lot of back and forth between our engineers and our customers. And so there's a fair amount of discussion that's going on. I would just say the time from quote to book in the order is a little longer than normal. And I think that's essentially because of the, you know, kind of the general economic uncertainties out there. People are really trying to guess when the Fed's going to start reducing rates. There's a lot of pent up demand in many of our markets, and so our customers are trying to get ready for that. And it's really just a bit of a guessing game on how quickly they pull the trigger to start making investments to get ready for what they expect to be an increase in demand. So a fair amount of project activity, a lot of quoting, a lot going on. It's just that people are a little slower to actually book the order as they're trying to gauge, you know, kind of the pace of the recovery.

Right, because as I look at your guidance, I mean the two acquisitions, I think, what did they add about on an annualized basis, 110 million of sales? Is that about right? If you get a full year run rate?

Yeah, I think that's a decent marker, Gary. The caveat to that is I mentioned,

you know, the KWS transaction didn't close until three weeks into the first quarter here.

Right, no, I understand that. You can put some takes there, but I mean if you add that number into what you actually did, we're looking at rather, you know, the minimus growth in sales this year, and I just want to make sure I'm understanding this right, that that's really more or less a function on the capital side of the business.

Yes, yes, that's correct. Yeah, organically, you know, when we take out the 11.6 million of FX and revenue, we'd be down about 2

% in revenue, organic.

Okay,

and I just want to say

real quick, sorry, go ahead, Jeff, I'm sorry.

I was just going to say, you know, it's a challenge we have and this is it's more challenging obviously the first of the year and kind of forecasting what's going to happen then, then as the quarters progress. But I would say this year, you know, it's particularly challenging because there is a lot of uncertainty right everybody is trying, even the Fed, you know, from it seems like from week to week, you know, their position on the economy changes and so for us, you know, as you know, Gary, we're a fairly conservative organization and certainly at the beginning of the year, we try to be pretty cautious and we're just trying to, you know, to get a little better visibility on, you know, kind of the timing of some of this activity. It's just challenging when you're coming out of a, you know, a slower period.

No, I get that. I just wanted to make sure I was confirming it. And then just some of the other figures that you guys talked about, especially Mike, you said 18 to 18 and a half million of net interest expense for this year.

Yes,

well,

just interest expense purely interest expense.

Okay, so that's 18 to 18 and a half of interest. And then you said DNA is going to run to 46 to 48 million, right? Yes, that's correct. Gary. And what was your capex this year? I didn't see that in the. And either releases or maybe I missed it. Did you mention that?

Yeah, one second.

We're at essentially 32 million. Okay,

thank you very much. Appreciate it.

You're

welcome. Thank you. One moment for our next question. Our next question comes from line of Kurt from Davidson. Your line is open. Great. Thanks and

good morning, everyone. I just wanted to follow up on one of the prior questions in terms of the strengthening in the back half of the year. And, you know, is that a situation where you feel like you need to see improving capital equipment bookings over the next couple quarters in order for that kind of sales improvement to materialize or based on the bookings activity that you've seen in Q4 and what you're expecting for Q1? Any further improvements could actually be a source of upside to what you're kind of assuming for the full year. How should we kind of think about those booking trends and what that means to the back half performance?

Yeah, you were right on your first assumption, Kurt. It really is predicated on us seeing strengthening in the capital bookings as we go forward.

OK, got it. And then, you know, one of kind of the bright spots this year, I think, has been parts and consumables. And, you know, it's had a steady performance despite some choppiness, you know, in some of the end markets, container board being kind of a big one. I mean, we haven't yet seen a lot of those trends really improve very much. Is there any concern that, you know, that could catch up and start to weigh on parts and consumables going forward? Or do you expect, you know, the solid performance in 2023 sets you up pretty well for 2024 as well?

Well, you know, it's interesting. When you think of our parts, of course, it's soothing. All of our businesses have it. But in particular, you know, we're expecting a big recovery on the container board side this year. So, you know, they think container board was probably flat last year and it was down for the first time. Demand, I'm talking about, was down for the first time in a very long time in 2022. But they're forecasting, you know, container board demand increase 4.3 percent this year, tissue to be up 4 percent this year, and then even 25, 3.8 percent for tissue and 3.7 container board. So we're really expecting to see a recovery on that side of the business. And I would say also on the wood processing side, you know, things have slowed down, of course. So housing starts were, I think, about 1.46 last month, but permits were about 1.5. So we are starting to see some improvement there. And certainly if interest rates start to come down, there's tremendous pent up demand for housing. And we have a lot of activity going on with our customers, a lot of discussions about projects. So they're really trying to get ready for what they think will be a pretty robust improvement in the market demand, you know, once interest rates start to decline. So I think, you know, it's our belief that that the parts of business actually could continue to strengthen throughout the year, assuming things go as as you know, most economists are currently forecasting.

Right. Okay.

And I guess sticking with the wood piece, I mean, there was a lot of capacity added. And to your point, I think there's a lot of optimism that, you know, demand is going to continue to improve. But at the same time, some of that new capacity is being absorbed. I guess as you think about your capital equipment, how important is, you know, new greenfield facilities and new capacity versus just, you know, better utilization at existing facilities in terms of the overall kind of sales and demand picture for wood processing?

Yeah, I think there's both. And of course, because we're global and we have the extremely high market share globally, it varies. So if you look at North America, you know, it may be more just upgrading tired equipment. The average age of a lot of equipment out there is is pretty old. And so, you know, there's just upgrading. But then, you know, there's a lot of green new green fields going on in Asia in particular, where our our stranding guys are very busy in Asia. A lot of projects, a lot of activity. We booked another order in China a few weeks ago. And then you've got the situation Russia, a lot of product came out of Russia. And of course, that's got to be replaced now. So we're seeing activity in Europe and in particular Scandinavia area, you know, as they start to invest to offset the lost supply out of Russia. So, you know, the wood side, you know, it really depends on the region you're looking at. But I would say the activity level right now is as high as it was before the pre before the pandemic for us with all the tired equipment out there and frankly, more and more, you know, in particular on the stranding side, more and more products using stranded material. You know, that's held up extremely well for us. And, you know, and demand still looks quite good.

Got it. Thanks for that, Jeff. And then just my last one, I guess, bigger picture. You're coming off two of kind of your strongest organic growth years and 21 and 22. This past year was still very solid as well. Where do you think your business is from kind of a cyclical standpoint entering 24? And I guess is there anything that's changed in terms of how you think about the organic growth profile of the business longer term relative to what you kind of outlined in the past?

Well, we had, as you know, we had tremendous organic growth, you know, from say kind of 18, 19 on. It was, you know, we were, I think, what, seven and a half percent? Yeah, about seven and a half percent organic growth for several years, which, you know, is substantially higher than global GDP. So we we would never budget and assume that was going to be the case, say, for the next five years. But I would tell you, when I look at our three sectors, the material handling side, I think, is in a good position. The money that's going to be spent on both the infrastructure bill and the Chips Act is just starting to flow. And so we think that our material handling sector will benefit from that. The billing side has been quite strong in Europe and in the US, you know, from a recycling standpoint. On the paper side, we just talked about the fact that, you know, operating rates, more operating rates really bottomed out, we think, in twenty three, you know, globally, you know, run at about seventy nine percent is forecasted to get back into the mid 80s over the next couple of years. So we expect, you know, kind of some recovery growth in that market and the flow control has always been very steady. You know, it just is a very stable, steady business. The guys always do a great job in finding new end markets.

You know, our biggest market,

our biggest sector right now is our industrial sector. It's bigger than all of our others. So, I mean, there's a lot of industrial markets out there that we're taking our products to. So, you know, we think the next few years, assuming that, you know, something doesn't happen, a black swan event doesn't happen, we think that that growth actually should be pretty solid the next few years. But we've got to, you know, we've got to see that start to materialize, I think, this year as the year progresses.

OK, well, appreciate it. Thank you.

You're welcome.

Thank you. One moment

for our next question. Our next question comes from Larry DeMaria from William Blair. Your line is open.

Thanks. Good morning, everybody. Hey, just a few quick sort of clarification. I know it's not unusual, I have a little bit bigger of a second half than first half. Can you give us kind of order of magnitude, second half versus first half? And secondly, maybe you could talk to the financial flexibilities you have after the recent deals and this M&A pipeline if we're out of the market for a while or if it's still relatively healthy.

On the split

first half, second half, Larry, I'd say there's about a five percent delta there.

And then on the I would say on the activity side, we're still quite busy. There's still our corporate development people, I think, are said that still a tremendous amount of deal flow out there. Our balance sheet, even though we took on a little bit of debt for these most recent acquisitions, our balance sheet still pretty strong. We think we have good capacity left. So we're we're full speed ahead. We won't be slowing down, even though we just did a couple of transactions. You know, as you know, we're always looking for opportunities that are good strategic fits at a fair value. And, you know, and that can be challenging from time to time. But but our corporate people are very busy and we've got the capacity. And frankly, you know, our current debt agreements, you know, were put in place when we were smaller. So if we needed to do, you know, free up those at higher levels, we could easily do that. And we'll do that if needed as we go out and pursue opportunities. So we're full speed ahead on looking at opportunities.

OK, sounds good. Thanks. And then now, shift gears a little bit. And I obviously talked about this a bit already, but it's about kind of the order of expectations from here and how we've done so far. It's a little bit odd to talk about, I don't know, the strength and capital equipment and the order you're short in four Q and solid demand. But this uncertainty keeping the outlook down seems overly conservative. So can you discuss why this isn't overly conservative, you know, considering the comments and the print you just did? Maybe what areas the end markets are showing you the weakness and, you know, order expectations from here, which, you know, they can stay flat or not.

Yeah, I would say, Gary,

I pointed to Mike and said, you can handle this one,

Mike. The biggest thing that we're looking at is

capital capital order flow and seeing that we get some traction and get some firmness there. That's the biggest thing that we're waiting to get some clarity on.

Our guys are very busy, as I as I mentioned, project discussions and activities are actually pretty strong. But the time to close is as lengthened, you know, I think as our customers are again trying to gauge how quickly rates come down and demand starts to pick up. And so because those discussions are taking longer than normal, it obviously introduces an added degree of caution on our part.

And anything on the order expectation from here and how we've done so far this year, I assume obviously capital flow.

Yeah, I mean, I think right now things are as expected right now, as we look through, you know, through last week, demand is kind of on track with with where we would expect it to be. Is

it safe to say that given the comments in the pipeline and it's time to close, it's a little longer. I think those potential orders don't go away, right. They either hit in the second half or they get pushed out to next year. That's fair to say. Yeah, yeah.

Very, very exactly. It's very, very seldom that a project gets canceled. We had one canceled, a big project canceled, I think, back in twenty two. I think it was we had a project canceled, but it's very unusual for that. You're exactly right. They typically just get they get delayed. You know, these are these big projects, you know, are quite lengthy and from a board review standpoint anyway. And so once they get to that point, they normally don't disappear forever. It's just a question of timing on them. And so that's what has introduced the level of caution that we have is we just don't know where the timing is. You know, it's going to be next quarter or third quarter, fourth quarter. The customers just aren't quite sure yet.

OK, fair enough. Last quick question. Parts of consumables and flow and industrial process, given the mothballing that we've seen, is it like, you know, doesn't matter. It's just around overall volume and parts and consumables are more or less guided up. Where is capital guided down? Is that the fair way to think about it?

Yeah, I mean, what happens is, as you know, we operate in almost every paper in every paper mill in the world. And I know some people get hung up when they hear about a closure and we never like to hear about closures. But I just mentioned overall demand is forecasted. If you look at total paper demand in twenty four globally, it's supposed to be up three point three percent and it grows every year. So what happens is they just they just shift that to other more efficient mills. And we're there, too. So we just pick the business up in one mill versus the other. And so we don't get nearly as hung up on a mill closure announcement here or there as long as overall demand continues to grow. So we're going to be there to get our fair share of that. OK,

very good. Thank you and good luck.

Thank you. And as a reminder, that's star one one for questions, star one one. One moment for our next question. Our next question will come from a Walter Liptych from Seaport Research. Your line is open.

Hey, good morning, guys, and good into your year. Thanks. Thanks,

Walt.

Want to try one on the flow control bookings, the plus eight point four percent. I wonder if you just give us some some incremental color. Was that parts related? Was that capital projects? Maybe regionally where the orders were coming from.

I'm looking for my schedule here. It was really we had it was both in part and capital,

but capital and flow control was quite strong in the fourth quarter. Actually, in December, we closed some nice some nice projects. So I'd say that bookings beat was really led by capital and flow control.

OK,

great. And is is you think that the start of a trend is there some follow through or, you know, you know, people are drawing down inventory, I think, and being cautious into the end of the year. Sounds like this but the trend a little bit.

Yeah, it did. Well, but I happen to know that we had our the projects that came through those capital projects. They were on our board for twenty four. So the orders were a little bit

early.

OK, OK, thanks. That helps.

And then I wonder if you kind of alluded to this and some of the other questions. You know, last year, this time you were getting that big forty two mile conveyor project in material handling. And that probably is already shipped now. That's probably already through your process. But I wonder if it sounds like it sounds like you've got more in the final that are some of these bigger material handling projects. Is that right?

Well, I mean, I'm the large project that we book and looked in the first quarter while you're correct. Most of that shipped that twelve million. There's still I think about two million to go. And a good chunk of that actually went in the fourth quarter, which is why you saw their revenue and other metrics margin and EBITDA were so good because we had excellent on the EBITDA front. We had excellent operating leverage there.

OK, that's great. And it sounds like you've got there's the potential for some more of these big conveyor projects in the final. Yeah,

that that was the you know, the second longest in the world. So we don't we wouldn't expect although there there you know, there are discussions for projects that we wouldn't expect anything, you know, soon of that magnitude. That's a pretty rare project. But generally speaking, you know, the group is, you know, it's been strengthening over the last over the last, I would say, year and a half. And, you know, the prospects, you know, the good if housing picks up, you know, certainly that's going to help them. The Chips Act is a really a very large construction act. If you look at it, it's mainly building plants. So that's that's that's good for them as well as infrastructure. And then the recycling side, you know, the Baylor business in the U.S. continues to be very strong as well as Europe and other parts of the world. So, you know, all of their segments have, you know, I think have had nice, steady demand. And we expect that they'll, you know, they'll continue to be in good shape throughout this year.

OK, great. And maybe I'll try one or two on the 80 20. You know, congratulations with the profit improvement that you guys have been seeing. And I thought that you might be further along than 50 percent of the plants started. I wonder if you could just refresh us. How many, you know, PNLs do you have? How many PNLs and half of it, half the PNLs, I guess, have started. But how many PNLs do you have? And for 20, 24, do you have more that will be starting the 80 20 process?

Yeah, what the so we have around, I think, about 24, you know, kind of companies with PNLs. And I would say, you know, kind of half of them are are in it. The the thing that's that's impacting it now, which frankly is a little is a little frustrating for us, is that you really can't have an ERP project going on same time as 80 20 because they're both, you know, so so significant, you know, in scope and the resources they require. And so as it turns out, you know, what's controlling our some of our 80 20 implementation now is companies that are either in or getting ready to start ERP projects. It just has as as, you know, luck would have it. We've got companies that are at the end of life with the current ERP systems where we were forced to to implement new ones. And that really has delayed implementing 80 20 in some of those businesses. So that's been something we've been wrestling with. I would say over the last kind of 18 months, you know, trying to decide, OK, which ones can we delay the ERP project until 80 20 is finished and which ones are we going to have to delay 80 20? And so that's really controlling some of the pace. The other thing, of course, is, you know, we continue to build up our internal team, the expertise. But it also has, you know, has some limitations, you know, and just the available expertise to implement projects. So, you know, we still have I've been saying for some time, I think we still have probably another, say, three years, you know, four years for this to run out. And that's, of course, not including new acquisitions. Every time you acquire a new company, then you take on a new future project. And so we we have a couple of new future projects which we just added this year. So it'll be it'll never stop. No, but I think we will, I think, in three to four years have almost all of our our businesses that we currently have, you know, kind of coming out of the back end of the process.

OK, good. OK, good. Maybe one last one for me, just switching gears to to the pricing environment. And in 2020, you know, I don't remember that there was ever any issues because your niche markets were selling price. But are you taking up prices again? Are you still seeing inflation?

Well, I would say that a lot of the inflationary pressures we've seen on raw materials have have subsided. They've improved. I would also say that with demand down somewhat, you know, customers are very reluctant to accept big price increases. You know, as we mentioned before, back in 21, 22, we were all just trying to to get the materials, you know, from a supply chain standpoint to provide. And so it was more can you get me something and what's it going to cost us to do it? That was the same for us buying our raw materials. So things have stabilized there. And so I think we're returning back to a more normal environment from a pricing standpoint. And as you know, we if you look at our improvement that we've made, it's almost all been on the on our SGA side. You know, our margins have held very steady, which is an indication of our pricing. So, you know, what we've really worked hard on is reducing our our kind of our operating cost. And that's really where we've gotten the improvement from is reducing our internal expenses.

OK, great. OK, thank you.

Thank you. I'm not showing any further questions in the queue. I'd like to turn it back to Jeff Powell for any closing remarks.

Thank you, Victor. So before wrapping up the call today, I just want to leave you with a few takeaways. Twenty twenty three was another record setting year for Cadent and our employees deserve a lot of credit for achieving these results. I want to thank all our employees around the world for the commitment to serving our customers needs. I also want to welcome our newest employees from both Keyknife and KWS Manufacturing. We're excited about the value you add to Cadent and the opportunity to build upon the successes you have achieved in twenty twenty four. We will continue to seek new opportunities to create value as we focus on meeting our customers needs with innovative technologies and solutions that drive sustainable industrial processing. Lastly, our financial health is excellent and our market positions remain strong. We look forward to delivering exceptional value for our stakeholders again in twenty twenty four. With that, I want to thank you for joining the call today.

Thank you for your participation in today's conference. This doesn't include the program. You may now disconnect. Everyone have a great day.