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spk04: Good day, and thank you for standing by. Welcome to CADEN's first quarter 2024 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 the session, you'll 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael McKinney, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
spk02: Thank you, Norma. Good morning, everyone, and welcome to CADEN's first quarter 2024 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 CADEN's future plans and expectations financial and operating results, and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. 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 30, 2023, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at www.cadent.com. Finally, I wanted to note that when we refer to gap 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 Cadence Business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?
spk03: Thanks, Mike.
spk11: Hello, everyone. Thank you for joining us this morning. to review our first quarter results and discuss our business outlook for 2024. Q1 was a solid start to 2024. Our acquisitions, KeyKnife and KWS, completed at the beginning of the year, performed very well, and contributed directly to revenue in the first quarter. Solid execution by our operations teams around the globe contributed to excellent adjusted EBITDA. As expected, demand in the first quarter moderated from the unprecedented record-setting first quarter of last year. as economic headwinds tempered manufacturing activity, particularly in Europe and Asia. As you can see on slide six, our Q1 revenue increased 8% to a record $249 million. Our recent acquisitions and strong performance in our industrial processing segment were the drivers of this record revenue. Our aftermarket parts revenue made up 69% of Q1 revenue and was up 13% to a record $171 million. Solid operating performance led to an adjusted EPS of $2.38 and adjusted EBITDA of $52 million, representing 21% of revenue. All our operating segments delivered excellent adjusted EBITDA margin performance despite inflationary pressures. Cash flow in Q1, which is historically a weaker quarter, decreased 38% to $23 million compared to last year's record cash flow for a first quarter, while free cash flow was $17 million. As expected, bookings softened in the first quarter, primarily due to reduced capital project activity. I'll provide more details about this when I discuss each of our operating segments, beginning with our flow control segment. Our flow control segment experienced solid demand in the first quarter for both parts and capital equipment, particularly in North America. Bookings of $95 million were strong. However, they were down 9% compared to the record performance of Q1 last year. Q1 revenue declined 3% to $87 million, partly due to fewer capital shipments in the first quarter compared to the same period in the prior year. Aftermarket parts revenue made up 74% of Q1 revenue and is expected to remain stable as the year progresses. Adjusted EBITDA declined 9% or adjusted EBITDA margin of 27.8% was down due to lower operating leverage. As many of you know, the first quarter of the year is often our strongest quarter for our flow control segment in terms of bookings, as our customers prepare for annual spring maintenance shutdowns. That said, we do expect to deliver strong performance again this year in our flow control segment. Turning now to our industrial processing segment on slide eight, we can see the positive effect from our recent acquisition of KeyKnife, which became a key part of this segment beginning in the first quarter. Q1 revenue was up 27% to a record $106 million, and aftermarket parts revenue made up 69% of total revenue in the segment. Excluding the impact of FX and the acquisition, revenue was up 7% compared to the same period last year. Q1 bookings were down 7% compared to the prior year period, reflecting the recent moderation of capital orders in the segment. However, there is significant capital project activity developing in this segment, and we expect to convert a good portion of those active projects into orders as the year progresses. Improved operating leverage and contributions from our recent acquisition led to record-adjusted EBITDA of $27 million and adjusted EBITDA margin of 25.5 percent. Overall, we had a good start to the year and expect to see solid performance from this segment in the months ahead. In our material handling segment, we experienced solid demand for aftermarket parts and benefited from our acquisition of KWS manufacturing completed at the end of January. Revenue of $56 million was flat compared to the prior year period and was negatively impacted by some customer delays in shipments, as well as softness in capital equipment revenue. Demand for capital equipment was down from the record performance set in the prior year period, which included an unusually large capital order. However, we believe the weaker capital order activity in the quarter was largely due to timing, as project activities remained relatively strong. Adjusted EBITDA margin of 20.3% of revenue was down 170 basis points from the same period last year, due largely to reduced operating leverage associated with lower organic revenue. The outlook for this segment remains positive, as the end markets we serve are fundamentally strong. As we look to the second quarter of 2024 in the full year, our healthy balance sheet and ability to generate robust cash flows have us well positioned to fund growth as the year unfolds. We expect industrial demand to strengthen in certain regions and remain stable in others as the year progresses. We remain focused on accelerating profitable growth in our core markets and expect to deliver strong financial performance again this year. Mike will discuss this in more detail, and with that, I'll turn the call over to Mike.
spk02: Thank you, Jeff. I'll start with some key financial metrics from our first quarter. Gross margin was 44.6% in the first quarter of 24, up 20 basis points compared to 44.4% in the first quarter of 23. The gross margin in the first quarter of 24 was negatively affected by the amortization of acquired profit and inventory related to our recent acquisitions, which lowered gross margin by 90 basis points. Including the impact of the amortization of acquired profit and inventory, gross margin in the first quarter of 24 was 45.5%, up 110 basis points compared to the first quarter of 23. This is one of the highest gross margins in our recent history due in part to higher margins achieved in our industrial processing segment on parts and consumables, as well as the mix of capital projects in the quarter. Also contributing to the improved gross margin was a higher overall percentage of parts and consumables revenue, which represented 69% of revenue in the first quarter of 24 compared to 66% in the prior year. SG&A expenses as a percentage of revenue increased to 28.2% in the first quarter of 24 compared to 25.5% in the prior year period, a higher percentage in the first quarter of 24 is due in part to the non-recurring acquisition-related costs. In addition, the first quarter revenue represents the lowest quarterly revenue we expect for the year. SG&A expenses were $70.3 million in the first quarter of 24, an increase of $11.7 million compared to $58.6 million in the first quarter of 23. This included an increase of $7.3 million from our acquisitions, $1.9 million from acquisition-related costs, and a $0.2 million unfavorable foreign currency translation effect. Excluding these items, SG&A expenses were up $2.3 million, or 4%, compared to the first quarter of 23, primarily due to annual wage and incentive increases. Our effective tax rate in the first quarter was 23.9% and included tax benefits related to the vesting of equity awards, which lowered the effective tax rate by 1.5%. Our GAAP EPS decreased 13% to $2.10 in the first quarter compared to $2.40 in the first quarter 23 due to acquisition related costs in the current period. Our adjusted EPS decreased 1% to $2.38, which exceeded the high end of our guidance range by 38 cents due to several factors. Gross margin was stronger than anticipated, and we had higher than anticipated revenue, especially for our aftermarket products in our industrial processing segment. In addition, the operating results for our acquisitions were better than expected. We closed our KeyKnife acquisition at the beginning of the first quarter and our KWS acquisition in late January, and the integrations are going well, as Jeff mentioned earlier. Adjusted EBITDA increased 8% to $52.2 million compared to $48.6 million in the first quarter of 23, driven by strong performance in our industrial processing segment. This segment had record adjusted EBITDA due to contributions from its recent acquisition and improved performance at our other wood processing businesses. As a percentage of revenue, adjusted EBITDA was 21% compared to 21.1% in the first quarter of 23. Operating cash flow at $22.8 million was lower than the prior two quarters due to an increase in working capital requirements and down 38% compared to the first quarter of 23. Free cash flow was $16.6 million in the first quarter of 24, down 49% compared to the first quarter of 23, which was a record for first quarter cash flows, both in operating and free cash flow. We expect higher cash flows for the remaining quarters of the year and overall anticipate strong cash flows for 24. We paid $232.3 million, net of cash acquired, for our acquisitions of KeyKnife and KWS in the first quarter. We borrowed $234 million mainly to fund our acquisitions, and we also repaid $33 million of our debt in the first quarter of 24. Other non-operating uses of cash in the first quarter of 24 included $6.3 million for capital expenditures, $3.4 million for dividends on our common stock, and $5.9 million for tax withholding payments related to the vesting of stock awards. Let me turn next to our EPS results for the quarter. In the first quarter of 24, GAAP EPS was $2.10, and after adding back 28 cents of acquisition-related costs, adjusted EPS was $2.38. In the first quarter of 23, GAAP and adjusted EPS were $2.40. The decrease of two cents in adjusted EPS in the first quarter of 24 compared to the first quarter of 23 includes increases of 21 cents from our acquisitions, 18 cents due to higher gross margins, five cents due to a lower tax rate. These increases were offset by 18 cents due to higher operating expenses, 14 cents due to lower organic revenue, 13 cents due to higher interest expense, and one cent due to higher weighted average shares outstanding. Collectively, including all the categories I just mentioned, was a favorable foreign currency translation effect of one cent in the first quarter of 24 compared to the first quarter last year due to the weakening in the US dollar. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, decreased to 128 at the end of the first quarter of 24 compared to 136 at the end of the first quarter of 23 due to a lower number of days in inventory. Working capital as a percentage of revenue was 15.7% in the first quarter of 24 compared to 15.6% in the first quarter of 23. Our net debt, that is debt less cash, increased to 223 million sequentially increased $223 million sequentially to $227 million at the end of the first quarter of 24 due to borrowings from the two acquisitions. Our leverage ratio, calculated in accordance with our credit agreement, increased to 1.12 at the end of the first quarter of 24 compared to 0.27 at the end of 23. At the end of the first quarter of 24, we had $102 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Now I'll update our guidance for 24. We are maintaining our full-year revenue guidance of $1,040,000,000 to $1,065,000,000 and our adjusted EPS guidance of $9.75 to $10.05, which excludes $0.36 of acquisition-related costs. We now expect GAAP EPS of $9.39 to $9.69, revised from our previous guidance of $9.55 to $9.85, which had assumed acquisition-related costs of 20 cents. 2024 guidance includes an unfavorable foreign currency translation impact of approximately 0.9 million on revenue and one cent on adjusted EPS. This represents a reduction of 16 cents from our prior forecast due to the strengthening of the US dollar against other currencies. Our revenue guidance for the second quarter of 24 is 258 to 266 million, and our adjusted EPS guidance is $2.40 to $2.50, which excludes 4 cents of amortization expense associated with acquired profit and inventory, and two cents related to acquired backlog. Our 2024 guidance assumes amortization expense related to acquired profit and inventory will be completed in the second quarter and an additional two cents of amortization expense associated with acquired backlog in the third quarter. Excluding acquired backlog, the 2024 intangible amortization expense associated with the acquisition is 46 cents. Both GAAP and adjusted EPS guidance include our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize evaluation work for these acquisitions. While we are maintaining our revenue and adjusted EPS guidance for 24, we remain cautious and continue to monitor risks to our guidance. Requests for capital project proposals are high, but the timing for finalizing orders is uncertain, especially in certain regions like China, where securing financing can be a challenge. As a result, the timing for large capital projects can shift by quarter, with some potentially moving to next year. In addition, central banks' policy response to inflation and the impact on the U.S. dollar and other currencies can have a significant impact on guidance. Our 24 guidance currently includes a one-cent unfavorable foreign currency translation effect which represented a 16-cent decrease from our previous guidance. Further strengthening or weakening of the U.S. dollar will impact this estimate. We continue to anticipate gross margins for 24 will be 43.5 to 44.5 percent. As a percent of revenue, we still anticipate SG&A will be approximately 25.5 to 26.2 percent. and R&D expense will be approximately 1.3 to 1.4 percent of revenue. We now expect net interest expense of approximately 17 to 17.5 million down from our previous guidance of 18 to 18.5 million as a result of faster debt pay downs than originally forecast. We continue to expect our recurring tax rate will be approximately 26.5 to 27.5 percent in 24. And we continue to expect depreciation and amortization will be approximately $46 to $48 million. And we're maintaining our CapEx guidance spending of $29 to $31 million. That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session. Norma?
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question comes from the line of Ross Sperenbleck with William Blair. Your line is now open.
spk07: Hey, good morning, guys. Morning, Ross. Yeah, surprising strength on the aftermarket, you know, particularly given the concerns coming into the year that there was maybe a pull forward late last year. Can you just help parse out some of the drivers here during the quarter, and how are we thinking about price and volume for aftermarket for 2024? I know there seems to be a continuation of customer mothballing across the key markets, and just trying to gauge at what point does a broader capacity reduction begin to outweigh volume growth?
spk11: I think in general, Ross, as you know, our parts and consumables are kind of our function of operating rates. And the operating rates really vary quite a bit around the world right now. In North America, they're holding up, I think, reasonably well. I would say the lowest operating rates are in China right now, which is still struggling to kind of recover from their pandemic policies and coming out of that. And then Europe, it varies, but some of the major economies in Europe, Germany, and the UK are certainly very slow and maybe technically in recession. So the rates vary a fair amount around the world. I do think that for a while, a lot of our customers were operating off of existing inventory. There was certainly some pull forward in some areas, but I think a lot of people also were running their stores lean. And so they're starting to replenish those And so I think we're benefiting from that. And then some of the markets, you know, there are some markets we have, the OSB in particular, that's still running very strong, you know, surprisingly strong. So, you know, there's kind of a fair amount of, I say, disparity around the globe. But all in all, they're hanging in there. And as you know, that's a big focus of ours. So we're constantly working to pick up market share and the spares and the consumable piece.
spk07: Yeah, no, that's very helpful. Can you maybe just also help frame the sensitivity of your equipment sales or your guidance? I know you kind of previously spoke to that in the comments. But any updated color from customer conversations as we think about potential second half recovery? And then maybe any nuances that we should be thinking about in regards to strength and maintenance and rebuilds versus greenfields?
spk11: Well, so there's a couple of things. First of all, as you know, many of our customers were quite busy during during the pandemic and really ran their equipment very hard. And then also a lot of our equipment, as we analyze the average age of our equipment, in a lot of our markets, the equipment is getting quite old. So there is an awful lot of discussions and activity, and I would say quotes going on. The issue is I think everybody's in the same boat. They're all waiting to get more visibility and clarity on when things are going to start to turn around and strengthen. And it's very much driven by interest rates. And obviously in the U.S. in particular, the economy doesn't seem to be responding or acting the way the Fed had expected. And so rates are holding maybe higher longer than I think a lot of people had thought. But I do think that at some point they will start to reduce rates. And I think there's a fair amount of pent-up demand in many of our markets, as well as kind of old, tired equipment that will need to be upgraded. And so we think that the underlying fundamentals are still quite strong. It's just a question of timing. as to when people get confident enough that things have bottomed out and are starting to turn around to start making those investments.
spk07: Yeah, I mean, it looks like you have the backlog for the guidance this year, but when we think about the magnitude of these projects, I mean, is the expectation that we could see still sustained growth in 2025? I know it's still very early, but that's where the investor interest is right now.
spk02: Well, it's a function of when the orders get booked, Ross, for sure. I think we are looking at the, you know, we are cautiously optimistic that in the back half of the year here, we're going to start to see capital bookings really start to firm up.
spk07: Okay. So it's a meaningful pipeline here on the project side that you're speaking to.
spk02: There's a lot of projects on the board. Awesome.
spk07: That's perfect. I'll jump back in queue. Thanks, guys.
spk04: Thank you. One moment for our next question, please. Our next question comes from the line of Kurt Janger with DA Davidson. The line is now open.
spk01: Great.
spk08: Thanks, and good morning, everyone. It sounded like perhaps the commentary around industrial processing and material handling, you know, pointed to maybe an expectation for improved booking trends, particularly on capital in the coming quarters. I guess, am I interpreting that correctly, or... Is the expectation still that that's more of a back half type phenomenon?
spk02: No, you're right on there, Kurt. You know, the industrial processing has some, you know, I think we may see things, that'll be the earliest, and there are also some good projects and material handling. But I think industrial processing is the one that really stands out to me as having some projects coming up earlier.
spk08: Makes sense. And in terms of the strong gross margins, it sounded like industrial processing was kind of a standout there. Anything really noteworthy to call out there? I mean, maybe the strength in OSB you referenced, you know, was beneficial from a mixed perspective. And is that something that can kind of prove sustainable, do you think?
spk02: You know, Kurt, I mean, I gave a lot of credit. I thought the industrial processing segment performance was just outstanding. But our gross margins improved across the board for us in all three segments. So I was very, very happy to see that. And it was very good in parts and consumables, but we also had broadly amongst the segments favorable mix in capital projects that went through. So good gross margins also on our capital projects.
spk08: Got it. Okay. And I'm not sure if I missed it. I apologize if I did. But was kind of the full year outlook for gross margins, I guess, maintained on that 43.5% to 44.5% range? And I guess if we were to think about coming down from Q1, Is that primarily a mixed factor just in shifting more back towards capital or anything else that I guess could dampen us from the elevated Q1 level that we just saw?
spk02: You're correct, Kerr. It's really a function of just having more capital in the mix. And I also wanted to point out that that guidance range of 43.5% 44.5, that has the inventory write-up in it, the impact of that in there, which is about probably 25 basis points for the year or something like that.
spk08: Gotcha. So that would be, I guess, the GAAP gross margin, not the adjusted?
spk02: Correct. It's the GAAP gross margin. I thought that would be the most useful to put out.
spk08: Got it. Okay. That makes sense. And then In terms, it looked like, you know, KeyKnife and KWS, you know, order of magnitude, you know, contributed maybe 24 to 25 million in bookings and sales this quarter. Any way to think about kind of the split of that between aftermarket parts and consumables versus capital?
spk02: Well, KeyKnife is essentially all parts and consumables and the split between on KWS is about 60-40, with 60-40 being parts. So whoever you're building your model, you can use that as the way to parse it.
spk08: Okay. Makes sense. And then just lastly, you know, there are two big deals in the container board space, the consolidation of some European and U.S. players What do you think about any potential impacts to your business from that? And I guess longer term, any thoughts around kind of the implications of just continued consolidation and some of your key forest product customer base?
spk11: Yeah, as you obviously know, Kurt, there's been a fair amount of consolidation actually going on for quite some time. The overall global demand continues to grow. But I actually think it's a positive thing for us. I think it's positive for the industry because they do a better job in balancing supply and demand. They do a better job, I think, in controlling pricing and improving their profitability. And from our perspective, we always want our customers to be as profitable as possible because then they have the capital to invest in their business. And so for us, I think, generally speaking, consolidation is good because it increases profitability of the industry and increases their opportunities to invest to continue to drive efficiencies. And, you know, they're big customer of ours. Obviously, if you're talking about, you know, IP and Westrock, both of them are quite big customers of ours. So I actually look at it as ultimately as a positive thing because it'll improve the overall health of the industry. Makes sense.
spk08: All right. Appreciate the color, guys, and good luck here at Q2. Thank you.
spk04: Thank you. One moment for our next question, please. Our next question comes from the line of Gary Prestapino with Barrington Research. Your line is now open.
spk10: Good morning, Jeff and Mike. How are you? Good. Okay, a couple of questions here. First of all, Mike, the DNA for this quarter is, did not reflect, I believe, a full quarter run rate from the acquisitions. Can you give us an idea of what the DNA would be on an annual basis or even a quarterly basis with the full effect of these acquisitions?
spk02: Yeah. Well, the most important piece of it to me is on the recurring amortization. And right now we have that at about 7.2 million annually. And so you can, and, you know, we maintained our guidance range on the DNA, but that'll hopefully help you in terms of, you know, the valuations are still open, but I think we're closing in on finalizing.
spk10: Okay. That's great. And then given the environment that you're operating in right now, especially with the capital projects being, you know, choppy, And with the acquisitions that you've made here this year, do you think you can keep your parts and consumable revenues as a percentage of revenues in the high 60s, low 70s throughout the year?
spk02: Well, as we go through the year, we're looking at capital increasing. So I would say we'll probably be in the kind of – 62 to 65% range as we go through the remainder of the year by quarter.
spk10: Okay. And then lastly, just on adjusted EBITDA, because that's how I look at your company, and you may have mentioned this or not in the guidance, did you give an adjusted EBITDA margin number for this year in terms of what is part of your guidance?
spk02: No, I haven't. You know, I usually do not do that because, well, one, Gary, with the guidance I've given out, you can back into it, right? You have all the pieces to back into it. But I will say, you know, very broadly that, you know, the guidance range that we've given out, when you calculate that, you'll find we're About 21%-ish.
spk09: Yeah, that's what I figured. Okay, thank you. Okay.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. And it looks like I'm currently showing no further questions at this time. I'll hand the conference back over to Mr. Powell for any closing remarks.
spk11: Thank you, Norma. So before wrapping up the call today, I just wanted to leave you with a few takeaways. The first quarter was a solid start to 2024. Despite continued economic uncertainty, our employees around the globe continue to focus on meeting our customers' needs and finding new ways to deliver long-term value to our stakeholders. Our financial health is excellent, and our ability to generate strong free cash flow has us well positioned to quickly pay down the debt associated with our recent acquisitions. We look forward to delivering exceptional value for all our stakeholders again in 24. And we want to thank you for joining us today, and we look forward to updating you on our progress next quarter.
spk04: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day. Hello. Thank you. Thank you. Thank you. Good day and thank you for standing by. Welcome to CADEN's first quarter 2024 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 the session, you'll 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael McKinney, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
spk02: Thank you, Norma. Good morning, everyone, and welcome to CADEN's first quarter 2024 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 CADEN's future plans and expectations financial and operating results, and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. 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 30, 2023, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at www.cadent.com. Finally, I wanted to note that when we refer to gap 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 Cadence Business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?
spk03: Thanks, Mike.
spk11: Hello, everyone. Thank you for joining us this morning. to review our first quarter results and discuss our business outlook for 2024. Q1 was a solid start to 2024. Our acquisitions, KeyKnife and KWS, completed at the beginning of the year, performed very well, and contributed direct revenue in the first quarter. Solid execution by our operations teams around the globe contributed to excellent adjusted EBITDA. As expected, demand in the first quarter moderated from the unprecedented record-setting first quarter of last year. as economic headwinds tempered manufacturing activity, particularly in Europe and Asia. As you can see on slide six, our Q1 revenue increased 8% to a record $249 million. Our recent acquisitions and strong performance in our industrial processing segment were the drivers of this record revenue. Our aftermarket parts revenue made up 69% of Q1 revenue and was up 13% to a record $171 million. Solid operating performance led to an adjusted EPS of $2.38 and adjusted EBITDA of $52 million, representing 21% of revenue. All our operating segments delivered excellent adjusted EBITDA margin performance despite inflationary pressures. Cash flow in Q1, which is historically a weaker quarter, decreased 38% to $23 million compared to last year's record cash flow for the first quarter, while free cash flow was $17 million. As expected, bookings softened in the first quarter, primarily due to reduced capital project activity. I'll provide more details about this when I discuss each of our operating segments, beginning with our flow control segment. Our flow control segment experienced solid demand in the first quarter for both parts and capital equipment, particularly in North America. Bookings of 95 million were strong. However, they were down 9 percent compared to the record performance of Q1 last year. Q1 revenue declined 3% to $87 million, partly due to fewer capital shipments in the first quarter compared to the same period in the prior year. Aftermarket parts revenue made up 74% of Q1 revenue and is expected to remain stable as the year progresses. Adjusted EBITDA declined 9% or adjusted EBITDA margin of 27.8% was down due to lower operating leverage. As many of you know, the first quarter of the year is often our strongest quarter for our flow control segment in terms of bookings, as our customers prepare for annual spring maintenance shutdowns. That said, we do expect to deliver strong performance again this year in our flow control segment. Turning now to our industrial processing segment on slide eight, we can see the positive effect from our recent acquisition of KeyKnife, which became a key part of this segment beginning in the first quarter. Q1 revenue was up 27% to a record $106 million, and aftermarket parts revenue made up 69% of total revenue in the segment. Excluding the impact of FX and the acquisition, revenue was up 7% compared to the same period last year. Q1 bookings were down 7% compared to the prior year period, reflecting the recent moderation of capital orders in the segment. However, there is significant capital project activity developing in this segment. and we expect to convert a good portion of those active projects into orders as the year progresses. Improved operating leverage and contributions from our recent acquisition led to record-adjusted EBITDA of $27 million and adjusted EBITDA margin of 25.5 percent. Overall, we had a good start to the year and expect to see solid performance from this segment in the months ahead. In our material handling segment, we experienced solid demand for aftermarket parts and benefited from our acquisition of KWS manufacturing completed at the end of January. Revenue of 56 million was flat compared to the prior year period and was negatively impacted by some customer delays in shipments, as well as softness in capital equipment revenue. Demand for capital equipment was down from the record performance set in the prior year period, which included an unusually large capital order. However, we believe the weaker capital order activity in the quarter was largely due to timing, as project activities remained relatively strong. Adjusted EBITDA margin of 20.3% of revenue was down 170 basis points from the same period last year, due largely to reduced operating leverage associated with lower organic revenue. The outlook for this segment remains positive, as the end markets we serve are fundamentally strong. As we look to the second quarter of 2024 in the full year, our healthy balance sheet and ability to generate robust cash flows have us well positioned to fund growth as the year unfolds. We expect industrial demand to strengthen in certain regions and remain stable in others as the year progresses. We remain focused on accelerating profitable growth in our core markets and expect to deliver strong financial performance again this year. Mike will discuss this in more detail, and with that, I'll turn the call over to Mike.
spk02: Thank you, Jeff. I'll start with some key financial metrics from our first quarter. Gross margin was 44.6% in the first quarter of 24, up 20 basis points compared to 44.4% in the first quarter of 23. The gross margin in the first quarter of 24 was negatively affected by the amortization of acquired profit and inventory related to our recent acquisitions, which lowered gross margin by 90 basis points. Excluding the impact of the amortization of acquired profit and inventory, gross margin in the first quarter of 24 was 45.5%, up 110 basis points compared to the first quarter of 23. This is one of the highest gross margins in our recent history due in part to higher margins achieved in our industrial processing segment on parts and consumables, as well as the mix of capital projects in the quarter. Also contributing to the improved gross margin was a higher overall percentage of parts and consumables revenue, which represented 69% of revenue in the first quarter of 24 compared to 66% in the prior year. SG&A expenses as a percentage of revenue increased to 28.2% in the first quarter of 24 compared to 25.5% in the prior year period. A higher percentage in the first quarter of 24 is due in part to the non-recurring acquisition related costs. In addition, the first quarter revenue represents the lowest quarterly revenue we expect for the year. SG&A expenses were $70.3 million in the first quarter of 24, an increase of $11.7 million compared to $58.6 million in the first quarter of 23. This included an increase of $7.3 million from our acquisitions, $1.9 million from acquisition-related costs, and a $0.2 million unfavorable foreign currency translation effect. Excluding these items, SG&A expenses were up $2.3 million, or 4%, compared to the first quarter of 23, primarily due to annual wage and incentive increases. Our effective tax rate in the first quarter was 23.9% and included tax benefits related to the vesting of equity awards, which lowered the effective tax rate by 1.5%. Our GAAP EPS decreased 13% to $2.10 in the first quarter, compared to $2.40 in the first quarter 23 due to acquisition related costs in the current period. Our adjusted EPS decreased 1% to $2.38, which exceeded the high end of our guidance range by 38 cents due to several factors. Gross margin was stronger than anticipated, and we had higher than anticipated revenue, especially for our aftermarket products in our industrial processing segment. In addition, the operating results for our acquisitions were better than expected. We closed our KeyKnife acquisition at the beginning of the first quarter and our KWS acquisition in late January, and the integrations are going well, as Jeff mentioned earlier. Adjusted EBITDA increased 8% to $52.2 million compared to $48.6 million in the first quarter of 23, driven by strong performance in our industrial processing segment. This segment had record adjusted EBITDA due to contributions from its recent acquisition and improved performance at our other wood processing businesses. As a percentage of revenue, adjusted EBITDA was 21% compared to 21.1% in the first quarter of 23. Operating cash flow at $22.8 million was lower than the prior two quarters due to an increase in working capital requirements and down 38% compared to the first quarter of 23. Free cash flow was $16.6 million in the first quarter of 24, down 49% compared to the first quarter of 23, which was a record for first quarter cash flows, both in operating and free cash flow. We expect higher cash flows for the remaining quarters of the year and overall anticipate strong cash flows for 24. We paid $232.3 million, net of cash acquired, for our acquisitions of KeyKnife and KWS in the first quarter. We borrowed $234 million mainly to fund our acquisitions, and we also repaid $33 million of our debt in the first quarter of 24. Other non-operating uses of cash in the first quarter of 24 included $6.3 million for capital expenditures, $3.4 million for dividends on our common stock, and $5.9 million for tax withholding payments related to the vesting of stock awards. Let me turn next to our EPS results for the quarter. In the first quarter of 24, GAAP EPS was $2.10, and after adding back 28 cents of acquisition-related costs, adjusted EPS was $2.38. In the first quarter of 23, GAAP and adjusted EPS were $2.40. The decrease of two cents in adjusted EPS in the first quarter of 24 compared to the first quarter of 23 includes increases of 21 cents from our acquisitions, 18 cents due to higher gross margins, five cents due to a lower tax rate. These increases were offset by 18 cents due to higher operating expenses, 14 cents due to lower organic revenue, 13 cents due to higher interest expense, and one cent due to higher weighted average shares outstanding. Collectively, including all the categories I just mentioned, was a favorable foreign currency translation effect of one cent in the first quarter of 24 compared to the first quarter last year due to the weakening of the US dollar. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, decreased to 128 at the end of the first quarter of 24 compared to 136 at the end of the first quarter of 23 due to a lower number of days in inventory. Working capital as a percentage of revenue was 15.7% in the first quarter of 24 compared to 15.6% in the first quarter of 23. Our net debt, that is debt less cash, increased to 223 million sequentially increased $223 million sequentially to $227 million at the end of the first quarter of 24 due to borrowings from the two acquisitions. Our leverage ratio, calculated in accordance with our credit agreement, increased to 1.12 at the end of the first quarter of 24 compared to 0.27 at the end of 23. At the end of the first quarter of 24, we had $102 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Now I'll update our guidance for 24. We are maintaining our full-year revenue guidance of $1,040,000,000 to $1,065,000,000 and our adjusted EPS guidance of $9.75 to $10.05, which excludes $0.36 of acquisition-related costs. We now expect GAAP EPS of $9.39 to $9.69, revised from our previous guidance of $9.55 to $9.85, which had assumed acquisition-related costs of 20 cents. 2024 guidance includes an unfavorable foreign currency translation impact of approximately 0.9 million on revenue and one cent on adjusted EPS. This represents a reduction of 16 cents from our prior forecast due to the strengthening of the U.S. dollar against other currencies. Our revenue guidance for the second quarter of 24 is 258 to 266 million, and our adjusted EPS guidance is $2.40 to $2.50, which excludes 4 cents of amortization expense associated with acquired profit and inventory, and two cents related to acquired backlog. Our 2024 guidance assumes amortization expense related to acquired profit and inventory will be completed in the second quarter and an additional two cents of amortization expense associated with acquired backlog in the third quarter. Excluding acquired backlog, the 2024 intangible amortization expense associated with the acquisition is 46 cents. Both GAAP and adjusted 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. While we are maintaining our revenue and adjusted EPS guidance for 24, we remain cautious and continue to monitor risks to our guidance. Requests for capital project proposals are high, but the timing for finalizing orders is uncertain, especially in certain regions like China, where securing financing can be a challenge. As a result, the timing for large capital projects can shift by quarter, with some potentially moving to next year. In addition, central banks' policy response to inflation and the impact on the U.S. dollar and other currencies can have a significant impact on guidance. Our 24 guidance currently includes a one-cent unfavorable foreign currency translation effect which represented a 16 cent decrease from our previous guidance. Further strengthening or weakening of the US dollar will impact this estimate. We continue to anticipate gross margins for 24 will be 43.5 to 44.5%. As a percent of revenue, we still anticipate SG&A will be approximately 25.5 to 26.2%. and R&D expense will be approximately 1.3 to 1.4 percent of revenue. We now expect net interest expense of approximately 17 to 17.5 million down from our previous guidance of 18 to 18.5 million as a result of faster debt pay downs than originally forecast. We continue to expect our recurring tax rate will be approximately 26.5 to 27.5 percent in 24. And we continue to expect depreciation and amortization will be approximately $46 to $48 million. And we're maintaining our CapEx guidance spending of $29 to $31 million. That concludes my review of the financials. And I will now turn the call back over to the operator for our Q&A session. Norma?
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question comes from the line of Ross Berenbeck with William Blair. Your line is now open.
spk07: Hey, good morning, guys. Morning, Ross. Yeah, surprising strength on the aftermarket, you know, particularly given the concerns coming into the year that there was a pull forward late last year. Can you just help parse out some of the drivers here during the quarter, and how are we thinking about price and volume for aftermarket for 2024? I know there seems to be a continuation of customer mothballing across the key markets, and just trying to gauge at what point does a broader capacity reduction begin to outweigh volume growth?
spk11: I think in general, Ross, as you know, our parts consumable is kind of our function of operating rates. And the operating rates really vary quite a bit around the world right now. North America, they're holding up, you know, I think reasonably well. I would say the lowest operating rates are in China right now, which is still struggling to kind of recover from their pandemic policies and, you know, coming out of that. And then Europe, it varies, but some of the major economies in Europe, Germany, and the UK are certainly very slow and maybe technically in recession. So the rates vary a fair amount around the world. I do think that for a while, a lot of our customers were operating off of existing inventory. There was certainly some pull forward in some areas, but I think a lot of people also were running their stores lean. And so they're starting to replenish those And so I think we're benefiting from that. And then some of the markets, you know, there are some markets we have, the OSB in particular, that's still running very strong, you know, surprisingly strong. So, you know, there's kind of a fair amount of, I say, disparity around the globe. But all in all, they're hanging in there. And as you know, that's a big focus of ours. So we're constantly working to pick up market share and the spares and the consumable piece.
spk07: Yeah, no, that's very helpful. Can you maybe just also help frame the sensitivity of your equipment sales or your guidance? I know you kind of previously stuck to that in the comments. But any updated color from customer conversations as we think about potential second half recovery? And then maybe any nuances that we should be thinking about in regards to strength and maintenance and rebuilds versus greenfields?
spk11: Well, so there's a couple of things. First of all, as you know, many of our customers were quite busy during during the pandemic and really ran their equipment very hard. And then also a lot of our equipment, as we analyze the average age of our equipment and a lot of our markets, the equipment is getting quite old. So there is an awful lot of discussions and activity, and I would say quotes going on. The issue is I think everybody's in the same boat. They're all waiting to get more visibility and clarity on when things are going to start to turn around and strengthen. And it's very much driven by interest rates. And obviously in the U.S. in particular, the economy doesn't seem to be responding or acting the way the Fed had expected. And so rates are holding maybe higher longer than I think a lot of people had thought. But I do think that at some point they will start to reduce rates. And I think there's a fair amount of pent-up demand in many of our markets, as well as kind of old, tired equipment that will need to be upgraded. And so we think that the underlying fundamentals are still quite strong. It's just a question of timing. as to when people get confident enough that things have bottomed out and are starting to turn around to start making those investments?
spk07: Yeah, I mean, it looks like you have the backlog for the guidance this year, but when we think about the magnitude of these projects, I mean, is the expectation that we could see still sustained growth in 2025? I know it's still very early, but that's where the investor interest is right now.
spk02: Well, it's a function of when the orders get booked, Ross, for sure. I think we are looking at the, you know, we are cautiously optimistic that in the back half of the year here, we're going to start to see capital bookings really start to firm up.
spk07: Okay. So it's a meaningful pipeline here on the project side that you're speaking to.
spk02: There's a lot of projects on the board. Awesome.
spk07: That's perfect. I'll jump back in queue. Thanks, guys.
spk04: Thank you. One moment for our next question, please. Our next question comes from the line of Kurt Janger with DA Davidson. The line is now open.
spk01: Great.
spk08: Thanks, and good morning, everyone. It sounded like perhaps the commentary around industrial processing and material handling pointed to maybe an expectation for improved booking trends, particularly on capital in the coming quarters. I guess, am I interpreting that correctly, or... Is the expectation still that that's more of a back half type phenomenon?
spk02: No, you're right on there, Kurt. You know, the industrial processing has some, you know, I think we may see things, that'll be the earliest, and there are also some good projects in material handling. But I think industrial processing is the one that really stands out to me as having some projects coming up earlier.
spk08: Makes sense. And in terms of the strong gross margins, it sounded like industrial processing was kind of a standout there. Anything really noteworthy to call out there? I mean, maybe the strength in OSB you referenced, you know, was beneficial from a mixed perspective. And is that something that can kind of prove sustainable, do you think?
spk02: You know, Kurt, I mean, I gave a lot of credit. I thought the industrial processing segment performance was just outstanding. But our gross margins improved across the board for us in all three segments. So I was very, very happy to see that. And it was very good in parts and consumables, but we also had broadly amongst the segments a favorable mix in capital projects that went through. So good gross margins also on our capital projects.
spk08: Got it. Okay. And I'm not sure if I missed it. I apologize if I did, but was kind of the full year outlook for gross margins, I guess, maintained on that 43 and a half to 44 and a half percent range. And I guess if we were to think about coming down from Q1, Is that primarily a mixed factor just in shifting more back towards capital or anything else that I guess could dampen us from the elevated Q1 level that we just saw?
spk02: You're correct, Kurt. It's really a function of just having more capital in the mix. And I also wanted to point out that that guidance range of 43.5% 44.5 that that has the inventory uh write up in it that the impact of that in there which is uh about probably 25 basis points for the year or something like that gotcha so that would be i guess the gap gross margin not not the adjusted correct it's the gap i i it's the gap gross margin i thought that would be the most useful to put out got it okay that that makes sense um and then
spk08: In terms, it looked like, you know, KeyKnife and KWS, you know, order of magnitude, you know, contributed maybe 24 to 25 million in bookings and sales this quarter. Any way to think about kind of the split of that between aftermarket parts and consumables versus capital?
spk02: Well, KeyKnife is essentially all parts and consumables and the split between on KWS is about 60-40 with 60-40 being parts. So however you're building your model, you can use that as the way to parse it.
spk08: Okay. Makes sense. And then just lastly, you know, there are two big deals in the container board space, the consolidation of some European and U.S. players do you think about any potential impacts to your business from that and I guess longer term any thoughts around kind of the implications of just continued consolidation and some of your key force product customer base yeah as you obviously know Kurt there's been a fair amount of consolidation for actually going on for quite some time you know the overall global demand continues to grow
spk11: But I actually think it's a positive thing for us. I think it's positive for the industry because they do a better job in balancing supply and demand. They do a better job, I think, in controlling pricing and improving their profitability. And from our perspective, we always want our customers to be as profitable as possible because then they have the capital to invest in their business. And so for us, I think, generally speaking, consolidation is good because it increases profitability of the industry and increases their opportunities to invest to continue to drive efficiencies. And, you know, they're big customer of ours. Obviously, if you're talking about, you know, IP and Westrock, both of them are quite big customers of ours. So I actually look at it as ultimately as a positive thing because it'll improve the overall health of the industry. Makes sense.
spk08: All right. Appreciate the color, guys, and good luck here at Q2. Thank you.
spk04: Thank you. One moment for our next question, please. Our next question comes from the line of Gary Prestapino with Barrington Research. Your line is now open.
spk10: Good morning, Jeff and Mike. How are you? Very good. Okay, a couple of questions here. First of all, Mike, The DNA for this quarter did not reflect, I believe, a full quarter run rate from the acquisitions. Can you give us an idea of what the DNA would be on an annual basis or even a quarterly basis with the full effect of these acquisitions?
spk02: Yeah. Well, the most important piece of it to me is on the recurring amortizations. And right now we have that at about $7.2 million annually. So you can – and, you know, we maintained our guidance range on the DNA, but that will hopefully help you in terms of – and, you know, the valuations are still open, but I think we're closing in on finalizing.
spk10: Okay. That's great. And then given the environment that you're operating in right now, especially with the capital projects being – you know, choppy. And with the acquisitions that you've made here this year, do you think you can keep your parts and consumable revenues as a percentage of revenues in the high 60s, low 70s throughout the year?
spk02: Well, as we go through the year, we're, you know, we're looking at capital increasing. So I would say, you know, we'll probably be in the kind of, 62 to 65% range as we go through the remainder of the year by quarter. Okay.
spk10: And then lastly, just on adjusted EBITDA, because that's how I look at your company, and you may have mentioned this or not in the guidance, did you give an adjusted EBITDA margin number for this year in terms of what is part of your guidance?
spk02: No, I haven't. You know, I usually do not do that because, well, one, Gary, with the guidance I've given out, you can back into it, right? You have all the pieces to back into it. But I will say very broadly that the guidance range that we've given out, when you calculate that, you'll find we're about 21%-ish.
spk09: Yeah, that's what I figured. Okay, thank you.
spk02: Okay.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. And it looks like I'm currently showing no further questions at this time. I'll hand the conference back over to Mr. Powell for any closing remarks.
spk11: Thank you, Norma. So before wrapping up the call today, I just wanted to leave you with a few takeaways. The first quarter was a solid start to 2024. Despite continued economic uncertainty, our employees around the globe continue to focus on meeting our customers' needs and finding new ways to deliver long-term value to our stakeholders. Our financial health is excellent, and our ability to generate strong free cash flow has us well positioned to quickly pay down the debt associated with our recent acquisitions. We look forward to delivering exceptional value for all our stakeholders again in 24. And we want to thank you for joining us today, and we look forward to updating you on our progress next quarter.
spk04: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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