KAI - NYSE

Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2024 Kadant Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the 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, press one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Daniel. Good morning, everyone. Welcome to Kadant Inc.'s fourth quarter and full year 2024 earnings call. With me on the call today is Jeffrey 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 Kadant Inc.'s future plans and 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 our 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 Investors section of our website at kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I will turn the call over to Jeffrey Powell, who will give you an update on Kadant Inc.'s business and future prospects. Following Jeffrey's remarks, I will give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeffrey?

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 2025. I am pleased to report the fourth quarter with a solid finish to a record-setting year for Kadant Inc. Despite the continued economic headwinds in many regions, industrial activity in the fourth quarter was relatively stable both year over year and sequentially. We had another well-executed quarter, which led to solid margin performance and strong cash flow in the fourth quarter. At the end of 2024, we were honored once again for our sustainability efforts and named by Newsweek Magazine one of America's most responsible companies. This marks the fifth 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 benefited from stable demand throughout the second half of the year, and the acquisitions we completed in 2024 led our revenue and bookings growth of 8% and 10%, respectively. Adjusted EBITDA was up 8% compared to the same period last year, and our adjusted EBITDA margin was 20.3%. Solid execution by our operations teams around the world played an important role in delivering value to our customers and driving our operating performance in the fourth quarter. Our Q4 cash flow was strong at $52 million. Overall, the fourth quarter financial performance contributed to record full-year financial results, which I will review next with slide seven. Stable demand and a strong backlog fueled record revenue performance of $1.05 billion in fiscal 2024, with aftermarket parts making up 66% of our total revenue. Adjusted EPS increased to a record $10.28, exceeding the prior record set last year at $10.04 per share. Our full-year adjusted EBITDA was a record $230 million and a record 21.8% of revenue. Our strategic focus on improving our margin performance through internal initiatives, people development, and customer-focused innovations delivered results across a variety of metrics. Our workforce around the globe performed exceptionally well throughout a challenging year, and I am 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. Begin with our flow control segment. Q4 revenue increased 8% to $95 million, with strong performance in North America offsetting weaker performance in Europe. Aftermarket parts revenue was up 12% compared to the prior period and made up 71% of total revenue. Adjusted EBITDA was up 15%. Adjusted EBITDA margin increased 170 basis points to 28.7% in the fourth quarter compared to the same period last year. Bookings were up compared to the same period last year, softness in manufacturing sectors persisted in most regions, particularly during the second half of 2024. We believe the long-term market trends impacting industrial markets such as decarbonization, automation, and a focus on energy savings will continue to drive new opportunities for growth, though business activity continues to be influenced by geopolitical and microeconomic challenges around the globe. Turning now to our Industrial Processing segment, our performance in the fourth quarter was strong. Despite slower activity in some of our end markets, revenue increased 17% to $101 million compared to the same period last year, led by contributions from our recent acquisition and capital shipments of our fiber processing equipment. Aftermarket parts revenue was up 24% and represented 67% of total revenue in the fourth quarter. Adjusted EBITDA margin declined 150 basis points compared to the prior year largely due to lower capital equipment margins. Looking ahead to 2025, we expect demand for our capital equipment to strengthen, particularly in our wood processing product line, where capital project activity was relatively soft in 2024. Material handling segment. Q4 revenue declined 4% to $62 million compared to the then-record fourth quarter of 2023 when we made the final shipment of a large capital order for the world's most technologically advanced bulk material conveying system. Aftermarket parts revenue was strong and represented 61% of total revenue in the quarter. Adjusted EBITDA margin declined 130 basis points compared to the prior year. This decline was largely attributed to a decrease in operating leverage associated with lower capital revenue. Looking ahead to 2025, we believe this segment will benefit from planned infrastructure projects, as well as the modernization of assets in the recycling and waste management sectors, particularly in the second half of the year. As we look ahead to 2025, project activity is looking more favorable as the year progresses, and demand for aftermarket parts has been stable as we entered the year. The strong and likely strength in the US dollar is expected to negatively impact our foreign currency translation, particularly if the industrial activity rebound is stronger in Europe and Asia relative to the U.S. Our balance sheet is in great shape, and our ability to generate robust cash flows has us well-positioned to capitalize on opportunities that may emerge as the year unfolds, and we will work to deliver solid financial performance again this year. With that, I would like to pass the call over to Mike for his review of our financial performance and our outlook for 2025.

Thank you, Jeff. I will start with some key financial metrics from our fourth quarter. Revenue was $258 million, up 8% compared to the fourth quarter of 2023, including a 14% increase from acquisitions and a 1% decrease from the unfavorable effect of foreign currency translation. Gross margins increased 70 basis points to 43.4% in the fourth quarter of 2024, compared to 42.7% in the fourth quarter of 2023, due to a favorable increase in the proportion of aftermarket parts, which increased to 67% of total revenue compared to 60% in the prior period. Fourth quarter gross margin of 43.4% included a 40 basis point negative impact from the amortization of acquired profit inventory. Excluding this impact, gross margins were up 110 basis points over the fourth quarter of 2023. As a percentage of revenue, SG&A expenses increased to 27.3% in the fourth quarter of 2024 compared to 25.1% in the prior year period. SG&A expenses were $70.6 million in the fourth quarter of 2024, increasing $10.7 million or 18% compared to $59.8 million in the fourth quarter of 2023. The $10.7 million increase in SG&A expenses was almost entirely due to the inclusion of $10.3 million of SG&A expense related to our 2024 acquisitions. Our GAAP EPS decreased 12% to $2.04 in the fourth quarter of 2024, compared to $2.33 in the fourth quarter of 2023. And our adjusted EPS was down 7% to $2.25 from $2.41. Fourth quarter 2024 adjusted EPS of $2.25 exceeded the high end of our guidance range by $0.15 principally due to lower than anticipated SG&A expenses. Adjusted EBITDA increased 8% to $52.4 million and represented 20.3% of revenue. For the full year, revenue was a record $1.053 billion, up 10% compared to 2023, including a 12% increase from acquisitions. We had record adjusted EBITDA in 2024, which I will cover in the next slide, along with our cash flow performance. Full-year 2024 gross margin exceeded 44% for the first time since 2017. Gross margins increased 80 basis points to 44.3% compared to 43.5% in 2023 due to a favorable increase in the proportion of aftermarket parts, which increased to 66% of total revenue compared to 62% in 2023. The 2024 gross margins of 44.3% included a 40 basis point negative impact from the amortization of acquired profit. Excluding this impact, gross margins were up 120 basis points over 2023. As a percentage of revenue, SG&A expenses increased to 26.6% in 2024 compared to 24.7% in 2023. Approximately half of this increase is due to non-cash intangible amortization expense associated with our acquisitions. SG&A expenses were $279.9 million in 2024, increasing $43.7 million or 18% compared to $236.3 million in 2023. The majority of this increase relates to our 2024 acquisitions, which had SG&A expenses of $35.6 million in 2024 and an increase in acquisition-related expenses of $4.7 million. The remainder was primarily due to annual wage increases. Our GAAP EPS was $9.48 in 2024, down 4% compared to $9.90 in 2023. Our adjusted EPS was a record $10.28, up 2% compared to $10.04 last year. In the fourth quarter of 2024, adjusted EBITDA increased 8% to $52.4 million compared to $48.5 million in the fourth quarter of 2023. As a percentage of revenue, adjusted EBITDA was 20.3% in both periods. For the full year 2024, adjusted EBITDA was a record $229.7 million and a record 21.8% of revenue, compared to adjusted EBITDA of $201.3 million or 21% of revenue in 2023. Our industrial processing segment had record adjusted EBITDA of $110.8 million in 2024 and a 250 basis point improvement in adjusted EBITDA margins compared to the prior year. Our Flow Control segment also had a record adjusted EBITDA of $106.9 million in 2024. As you can see in the full-year chart, our adjusted EBITDA has increased in each of the last four years, leading to an increase in our adjusted EBITDA margin from 18.3% in 2020 to 21.8% in 2024. Part of this increase can be attributed to the benefits of our 80/20 program. Adjusted EBITDA is an important financial metric that presents our financial results excluding certain non-cash expenses like intangible amortization expense. Our 2024 intangible amortization expense increased 57% compared to 2023. While this negatively impacted our EPS performance, our acquisitions contributed to our strong cash flow and adjusted EBITDA performance. As you can see from our cash flow chart, we had strong operating cash flow in the last two quarters of 2024 compared to the first two quarters. For the full year, operating cash flow decreased 6% to $155.3 million compared to a record $165.5 million in 2023. Our free cash flow of $134.3 million in 2024 compared to $133.7 million in 2023. We had several notable non-operating uses of cash in the fourth quarter of 2024. We repaid $33.1 million in debt and paid $5.6 million for capital expenditures and a $3.8 million dividend on our common stock. For the full year, we paid $300.3 million for acquisitions, funded through borrowings. We continue to focus on utilizing our strong cash flows to accelerate the pay down of debt, and I am pleased we are able to repay $124.5 million this year or approximately 41% of our 2024 borrowings. Let me turn to our EPS results for the quarter. In the fourth quarter of 2024, GAAP earnings per share were $2.04 and adjusted EPS was $2.25. The $0.21 difference relates to $0.16 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary. In the fourth quarter of 2023, GAAP earnings per share were $2.33, and adjusted EPS was $2.41. The $0.08 difference relates to $0.10 of acquisition cost, $0.04 of other income related to our facility project in China, and $0.02 of restructuring costs. The decrease of $0.16 in adjusted EPS in the fourth quarter of 2024 compared to the fourth quarter of 2023 consists of the following: $0.36 due to lower revenue, $0.20 due to higher interest expense, $0.02 due to higher operating expenses, and $0.01 due to a higher recurring tax rate. These decreases were partially offset by $0.26 of income from the operating results of our acquisitions excluding the associated borrowing costs, and $0.17 due to higher gross margins. Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.02 in the fourth quarter of 2024 compared to the fourth quarter of last year. Now turning to our EPS results for the full year on Slide seventeen. We reported GAAP earnings per share of $9.48 in 2024 and our adjusted EPS was $10.28. The $0.80 difference relates to $0.74 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary. We reported GAAP earnings per share of $9.90 in 2023, and our adjusted EPS was $10.04. The $0.14 difference relates to $0.10 of acquisition costs and $0.04 of restructuring costs. The increase of $0.24 in adjusted EPS from 2023 to 2024 consists of the following: $0.88 from higher gross margins, $0.87 from the operating results of our acquisitions, excluding borrowing costs, and $0.02 from a lower recurring tax rate. These increases were partially offset by $0.72 from higher interest expense, $0.54 from lower revenue excluding revenue from acquisitions, $0.24 from higher operating expenses, and $0.03 due to higher weighted average shares outstanding. Collectively, including all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.08 in 2024 compared to 2023. Now let's turn to our liquidity metrics starting on slide eighteen. Our cash conversion days measured calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 122 at the end of the fourth quarter of 2024. Down from 129 days last quarter and 130 days at the end of 2023. The 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 15% in the fourth quarter of 2024 compared to 17.2% in the third quarter of 2024. But up from 12.8% in the fourth quarter of 2023. Net debt, that is debt less cash, at the end of 2024 was $192.6 million, a decrease of 19% or $44.1 million from the net debt of $236.7 million at the end of the third quarter of 2024. Borrowings made in 2024 to fund our acquisitions contributed to an increase in our interest expense, which totaled $20 million in 2024 compared to $8.4 million in 2023. Our leverage ratio calculated as defined in our credit agreement decreased below one to 0.99 at the end of 2024 compared to 1.13 at the end of the third quarter of 2024. We have $122 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Now I will review our guidance for 2025. For the full year, our revenue guidance is $1.040 billion to $1.065 billion and our adjusted diluted EPS guidance is $9.70 to $10.05, which excludes $0.07 related to the amortization of acquired profit and inventory and backlog. Looking at our quarterly revenue and EPS performance in 2025, we expect that 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 significantly stronger than the first half as a result. Our revenue guidance for the first quarter of 2025 is $235 million to $242 million, and our adjusted diluted EPS guidance for the first quarter is $1.85 to $2.05, which excludes $0.04 related to the amortization of acquired profit in 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 shipments. I wanted to outline a few points related to our full-year guidance. Our revenue guidance is negatively impacted by a $23.5 million unfavorable foreign currency translation effect based on exchange rates at the end of 2024. After excluding this FX impact, and a small amount of acquisition revenue, our organic revenue growth would be 2.5% at the top end of our 2025 guidance range. This FX impact is subject to both upside and downside risk as the year progresses. Our adjusted EPS guidance of $9.70 to $10.05 for 2025 includes a $0.32 unfavorable foreign currency translation effect. If you exclude the FX impact from the top end of our adjusted EPS guidance range, we would be at $10.37, up modestly from 2024. The softer capital bookings we experienced throughout 2024 will have a meaningful impact on the revenue and earnings performance in the first half of 2025. Our projected increase in capital bookings in 2025 is expected to lead to much stronger financial results in the second half of the year. Before continuing my comments on 2025 guidance, I also wanted to provide some information related to the new tariffs proposed by the Trump administration, which are quite fluid at the moment. But the proposed tariffs on the import of goods from Canada and Mexico in 2024, less than 1% of our cost of sales were related to goods we imported from Canada and Mexico. So a very small percentage. If these tariffs were to take effect, we would look for ways to mitigate the impact, including finding alternative suppliers and cost sharing. Our Canadian business is also selling to the US to third-party customers. We are currently working on assessing the impact, but we believe our competition would also be subject to tariffs. Effective February 4, 2025, an additional 10% tariff was imposed on the import of goods from China. We estimate that this will result in incremental material cost of $1.6 million in 2025, and then approximately 75% of these costs can be mitigated by finding alternative suppliers and passing costs on to our customers. In addition, the Trump administration just announced an incremental tariff on the import of steel and aluminum. We are currently working on assessing the impact of this new regulation. Guidance does not include an estimated impact related to any of these new tariffs. We will continue to monitor these tariff changes and will provide further updates as the year progresses and there is more clarity with the new regulations. We anticipate gross margins for 2025 will be approximately 44.5% to 45%. As a percentage of revenue, we anticipate SG&A will be approximately 26.5% to 27% and R&D expense will be approximately 1.5% of revenue. As a result of the significant pay down in debt in 2024, we expect a 30% decrease in interest expense. For 2025, we anticipate net interest expense of approximately $13 million to $13.5 million. We expect our recurring tax rate will be approximately 27% and depreciation and amortization will be approximately $49 million to $50 million. And we anticipate CapEx spending in 2025 will be approximately $24 million to $26 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. Daniel?

As a reminder, to ask a question, please press star one one on your telephone. And wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Ross Sparenblek with William Blair. Your line is open.

Hey, good morning, guys. Hey. Just thinking about the organic order for us, yeah. We have been on a downward trajectory since around 2022. But are we right to think that the base is kind of in around that $240 to $250 level per quarter? Excuse me. And just kind of thinking about the second half step up in sales, you know, how should we think about kind of, you know, sizing the coming acceleration in orders that you are anticipating?

Well, I would say, you know, of course, Ross, on the order front, we are really looking for significant delta on capital. So I would say we really know, where you pointed out that $240 to $250, we are really going to, you know, we are looking at that improving quite a bit for capital goods going forward. We have been kind of running in that, say, I will say low $70 million. And you know, we really need to see that improve by, say, 10% to 20%, and that is really kind of what we are forecasting for 2025.

Okay. I mean, can you give us a sense of where the capital coming to backlog was at year-end? I think we are around $180 million, call it.

Yeah. The backlog all in was $257 million, and capital is 57% of that.

Okay. And is there a mix between maintenance or greenfield? I think 2024 is more of, like, a maintenance story that was being deferred presumably, this is going to be, like, you know, easier setup going to 2025 just given the visibility around.

I would say, you know, it is more in the kind of what is in currently is more in the maintenance mode. But in your right, on the go forward, it would be, you know, there will be, of course, the maintenance and then new projects.

Okay. There is one more for me if I can. Yeah. It is still kind of difficult to parse out this environment. You know, you had a peer announce a large order this morning. Seems to support the kind of market sentiment that there is this large project funnel in 2025. But at the same time, we are also seeing more facility closures that were announced. So I am just trying to reconcile the moving parts as it relates to Kadant Inc. And if there is anything you guys can call out as it relates to customer conversations, I guess, for confidence for this, you know, at least greenfield aspect of the capital orders acceleration.

Yeah. I think you know, of course, as we have talked about for the last seven quarters, capital has been slow. You know, we had that record quarter, first quarter of 2023, then capital orders really started to turn down after that with interest rates going up and have been pretty soft since then. That is one of the reasons why our parts consumables have been so strong because people are running equipment longer than they might normally do and requires more maintenance and parts. But, you know, as we have said for some time now, the projects on the board discussions are, you know, are pretty active. Airbase is waiting was waiting for more clarity. And we were hoping to get that, but, of course, last three weeks, it has been kind of crazy, you know. So there is, I would say, more uncertainty and more or lack of clarity with specifically around these tariffs. I think people are still trying to sort through. But, I mean, the project activity is there. They cannot go forever without, you know, replacing equipment. I mean, and so it is just a question of when the cycle starts again, I am not sure who you are referring to on the large order, but if you look at, for instance, the housing, our wood product side has been pretty soft the last, you know, the last really, last couple of years. Housing starts around a million three all of last year, which is pretty soft. I see that CBO just came out with the next ten-year forecast. It has it at ten one six point six million start for the next ten years. So, you know, that would be quite strong and quite good, I think, for our business, assuming that we see that happening. But it is interest rate sensitive, of course. And as I said, the a little bit of the uncertainty that is occurring right now, I think, is frozen interest rates. So but it will capital will have to come back and we have been in this game for a very long time, and we know you can only delay making those investments for so long. And so, you know, things will start to strengthen. And as Mike indicated, right now, we think the second half of the year we are expecting to see some strengthening in these projects.

Yeah. That all makes sense. Thank you, guys.

Thank you.

Our next question comes from Kurt Yinger with DA Davidson. Your line is open.

Great. Thanks, and good morning, everyone. I just wanted to dovetail on some of the prior questions just in terms of the uplift on the capital side into the back half. I mean, is your sense that it is really, you know, just getting some of these tariffs settled in, maybe some hope around some relief on interest rates that that would catalyze some of these discussions turning into bookings or is there anything else specifically from a macro perspective that you are really keying in on here?

Well, of course, you know, the interest rates are always a key metric that, you know, impacts but also, you know, it impacts economic activity. I think that is really what our customers are looking for is they are looking for a better visibility and a sense of where the economic activity is going to be. You know, I would say we had some projects that we have been talking to our customers about that we thought might happen quickly here. And, you know, I would say, there is a, you know, somewhat chaotic environment right now, I think, to say the least, with what is going on. You know, Washington and all that does is add, you know, more uncertainty, and these guys just say, well, we are going to wait another month to see how this sorts out. So I think it is as you know, we need stability. We need economic growth to start to reaccelerate, you know, and stabilize, but we need some stability. I think that is what they are, you know, they are waiting for and hoping for. And as I mentioned just a few minutes ago, you cannot delay investing in your business forever. You know, at some point, we know we have been in this down cycle for two years now on the capital side. You know, and history tells us that essentially, another buying cycle is going to occur. We expect it frankly, it happened earlier than it did. Interest rates have stayed higher than I think people would have expected. You know, I think activity around the globe, I mean, North America has been reasonably strong for us, but Europe is particularly weak. China is weak. And so, you know, what we really like for us, what we really like to see is some stability and some growth starting to accelerate in Europe and Asia.

Got it. Okay. That all makes sense. And, you know, you touched on the wood product side. I mean, there is a number of OSB projects out there, new strand-based EWP project. It seems like there is pretty good visibility to the capital side in that market. Beyond that, are there any specific areas or geographies where you feel like, you know, the visibility is really there on the capital side and you think or you are pretty confident in an inflection coming, or how are you thinking about that?

Well, certainly, our OSB business has held up surprisingly well. I would say that on our consumable business, on the sawmills, that softened and the debarkers. So debarking business has been pretty soft now for a while. We had a very strong couple of years there. We have done a very large backlog. You know, I think the industry is absorbing that and things have been quite soft. But, you know, again, we think based on discussions with our customers, you know, things are going to start to improve there as the year progresses. So certainly, if we get housing starts, you know, back I saw that starts where I think we are a million five in December. You know, if we could average, you know, anywhere near that this year, you are going to see a much better, you know, kind of market condition for our customers, which, you know, utilizes parts and consumables from us. And also allows them to make some investments in the business. Europe has been turned on its head a little bit because of the Russia situation. You know, and that is slowly sorting itself out, you know, that capacity has had to move around. And so we are hoping to see some stability and growth there. I think the best thing that could happen for us in Europe would be for this Russia, Ukraine war to stop. Then I think you are going to see significant demand. You got an entire country to rebuild, possibly some sanctions, I suspect, would be included in any agreement, peace agreement, sanction relief from Russia, which would be very good for us. So that is, you know, something that we are really hoping for is if we are going to be able to stop this conflict. And if they do, you know, I think there will be significant demand that will come out of kind of, you know, rebuilding the Ukraine in particular. So, you know, those are things that we are hoping for. Even without, you know, that conflict resolving itself, I think you are seeing some, you know, shift in stabilization in the market over there. Is it, you know, is it it has taken a few years to kind of sort that out?

Okay. And, you know, if we were to think about the 2028 targets you laid out in December and kind of put that together with the outlook here for 2025, recognizing acquisitions are kind of a key factor and hard to predict. Should we be thinking about kind of a meaningful acceleration in 2026, kind of a well above target organic growth period, or how would you kind of frame that in light of the multiyear targets?

Yeah. I mean, we have, you know, we work with economic groups to kind of give us, you know, they look at our industries and our particular metrics and give us, you know, their thoughts and their data on it. And they look at the material handling side, if you look at the wood side, in particular, they are talking about, you know, an acceleration of growth kind of starting, you know, back half of 2025 through certainly through the next few years through 2027, say, 2028. So we do expect to see an acceleration in most of our key markets. Packaging tends to be a little more stable. You know, it is talking about growing a little three percent or low under three percent over the next several years. But on the material handling side, on the wood side, they are talking about, you know, a reacceleration in growth. And that is what we would expect.

Okay. And then if I could just sneak one more in on the gross margin side. With the softness in capital at least here early in the year, can you talk about some of the puts and takes around gross margins? I mean, I would think mix is going to be a benefit, but is there any offset as well from margins on capital orders maybe starting to be less favorable than you have seen over the last couple of quarters?

Yeah. It is a good question, Kurt. Yeah. As you said, the mix is going to be helpful, especially in the front half of the year. Right? And then specific to capital gross margins, I would say, you know, smaller capital or replacement capital where we, I would say, we kind of have a little bit of the upper hand, those margins should be good. The larger projects are the ones that can be more competitive and you get pressure. So I would have to say wait. We will have to wait and see how those shake out. So, you know, that is kind of my view. It is a good question because, you know, we are anticipating some larger projects coming in. So, depending on how those land, that we will certainly see impact in our gross margin performance.

Okay. Makes sense. Appreciate all the color. Thank you.

Thank you. Our next question comes from Gary Prestopino with Barrington. Your line is open.

Hi. Good morning, Jeff and Mike. Could you maybe just for me, let us talk a little bit about on the capital project side across all your three business lines. Where are you seeing the most sluggishness at least in the first half of this year? And then where is going to be the most significant snapback as you get into the back half of 2025?

I would say, Gary, overall, the segment that has the most favorable outlook for us is industrial processing, with wood leading the way and stock prep also participating in that. So that is the segment where we are anticipating the best growth. And then right after that, I would say, is in material handling. Whereas Jeff mentioned, we feel that as we move towards the back half of the year, we are going to start to see a nice recovery there.

Okay. And then just maybe a comment on the acquisition pipeline. And I guess given that there is generally a consensus here that the economy is going to strengthen, things are going to get better. Are you seeing that reflective in your discussions with potential acquisitions in terms of pricing?

I would say, as we said most of last year, the activity level has been quite strong. Our corporate development team has been quite busy, you know, an awful lot of opportunities that, you know, we have looked at and been in discussions with. And so, you know, the pricing, you know, as always, you know, kind of driven by, frankly, the private equity guys? You know, they kind of set pricing, and their pricing is somewhat set by interest rates and how much leverage they can get. And so that is really, I think, what impacts pricing more so than, say, you know, a more favorable economic environment. But the activity level, we think it is going to be very strong again in 2025. That is what we are hearing from the bankers, and that is kind of what our corporate development team is experiencing is a lot. As you know, at any given time, we are tracking talking to two or three hundred companies. And you know, I think everybody is just like we are expecting things to strengthen as the year progresses, they are too. And so, you know, I think they are, you know, that is feeding into, I would say, the, you know, kind of the increased discussions that we are having with everybody. Pricing is still yet to be seen. I would say pricing maybe did stabilize a little bit, but what we really saw last year was a much larger percentage of us to deals, deals that did not happen. Probably the most I have seen in a long, long time. Where, you know, they would enter into an agreement and then it would not close. And I think that was kind of a function of pricing and, you know, kind of sluggish performance where things just did not improve as much as people were hoping for last year. So that is where we really have seen it. So I think pricing is always a challenge, especially for us, because we tend to be very, very disciplined in our pricing strategies. But we are, I would say, reasonably enthusiastic about the environment we are seeing and the number of deals that we think are going to come to market.

Okay. Thank you.

Thank you. As a reminder, to ask a question, please press star one one. Again, that is star one one to ask a question. Our next question comes from Walter Liptak with Seaport Research. Your line is open.

Hi. Thanks. Good morning, guys. Just wanted to dial in a little bit more on the industrial processing and the outlook for the wood products because it sounds like that is where you have got the best chance of getting some capital projects. So in the quarter, the bookings looked good. What was the mix of that in terms of capital projects versus aftermarket parts?

Yeah. We had some decent activity on the capital side. First, I would say parts were good. But we also had some activity on the capital side, I would say more towards stock prep in the quarter. So it was a positive spot for us in the quarter.

Okay. Great. And so then when you think about, I guess, industrial process including stock prep, but also wood processing, what are the pluses and minuses? Do we need to see that housing recovery that you kind of alluded to, the 1.5 million? Or is it lower interest rates, or is there something in the pipeline that says that, you know, someone has got to replace some of their?

Well, I think it is interesting, of course, because as you know, housing drives more than just wood consumption. You know, it really is a key component of the entire economy. Packaging is tied to housing in a big way. And so what we really need to see is, you know, the housing starts to, I mean, we are not coming close to meeting demand out there. You know, demand is very high. The demand gap continues to grow. You know, we are built, you know, kind of a million three plus last year. You know, we really probably should have been million six, million seven. So that is a key component of it, I think. And that, of course, is tied to interest rates. You know, if interest rates come down, housing becomes more affordable. So that is, you know, that is a big component. Housing also, of course, affects our material handling group. Right? All the concrete and steel, and aggregate, and everything else that goes into that. So it is a major driver of the US economy. And to the extent it does increase from this low, I mean, the production was very low last year. It was, you know, near other than the 2008-2009 crisis, it was near a, you know, on average, a thirty-year low. So do expect that is going to improve. The forecast will indicate they think things are going to strengthen, and that will help both of our sectors, but the Wood Group will see it first, for sure.

Okay. Great. And then just appreciate that. And then just changing gears to geographic, I think you kind of commented that Europe is sort of sluggish. And how about Asia and any of the trends that are happening in China?

Well, China has been very slow on the industrial side. The government continues to, you know, to put more and more programs in place to try to spur some growth there. You know, they have had to continue to increase the amount of money that is going to invest. So it is slow. I would say, Asia, it kind of depends on which country you are looking at. But certainly, Germany is struggling right now. The German economy is very much tied to automotive exports. They are losing big market share in China right now. And so that is hurting them, and so they have got to sort through that. But in general, I would say the activity level has been sluggish in most of Europe. What is interesting enough, what, you know, what they call the pig countries doing a little better than the more established ones, you know, Spain, Italy, you know, are doing a little better than, say, Germany and France. And the UK is still sluggish. So Europe has some work to do, I think, to, you know, to get their economies back accelerating again.

Okay, guys. Okay. I appreciate the answers. Thank you.

Thank you. Our next question comes from Ross Sparenblek with William Blair. Your line is open.

Hey. Thanks, guys. I just wanted to follow-up on some of the margin sensitivities. You know, parts consumables are seeing stable demand, but where do we think we are in kind of the restocking cycle there? If there is anything different to call out from what you already said around the geographic dynamics as it relates to factory utilization rates.

I would say that the, you know, kind of destocking and restocking has kind of played itself out. I think we are seeing, you know, good strong parts in great part because the equipment is old and worn out. They just have not made the investments the last couple of years and just like if you drive a car too long, you start to put a lot more money in keeping it running. So I think that is why if you look at the parts demand, it is a little better than we might normally expect relative to the operating rates. It tends to be a function of operating rates. But I would say it is particularly strong relative to the operating rates in part because they have not, you know, they have not made the investments and maintenance investments and the things that they often do. And so but I think it as far as the, you know, kind of as I said, the stocking, restocking, I think that is played out now. And going forward, it is just going to be, you know, kind of, you know, tied to operating rates and the age of the equipment.

Okay. So as we think about, you know, parts and consumables, you know, I think orders are up. Yeah. Six hundred basis points. TNC mix of orders this year versus last year. You think, like, half of that is structural from recent M&A and the other half is kind of just older equipment. And as you deliver more capacity replacement equipment, and maybe it is not as beneficial.

I would say, you know, really the transactions that we did had a high focus on parts and consumables, Ross. So, you know, all in, that is, you know, that is what you are seeing the benefit of the businesses we acquired. If you go down to organic, it is more to what Jeff was talking about. I would say organic has been flat, relatively flat, which given operating rates, etcetera, is a little bit of a surprise to us. A good surprise.

Okay. And then just put a finer point on the 2025 guidance, you know, everything static on the macro that you talked about. What is kind of the internal assumptions on P&C mix versus capital equipment?

We are projecting the mix to be a little a tick above where we finish this year. So we are 66% on parts and consumables this year. We are looking at 67% next year. Or this year, actually, 2025.

And then just one more really quick. On 80/20, you know, changes every year. What is, you know, primary focus when we think about the segments for 2025?

So as you know, we have a, you know, kind of a list of companies. We, you know, that and start date scheduled for them. It is our 80/20 teams continue to execute those. And, of course, as new companies join the Kadant Inc. family, they get on the list. And so it will be a never-ending, you know, effort. But we have several companies that are, you know, starting 80/20 this year. That goes in the US, but both in North America and Europe.

Alright. Well, thank you, guys.

Welcome. Thank you.

I am showing no further questions at this time. I would now like to turn it back to Jeffrey Powell for closing remarks.

Thanks, Daniel. So before wrapping up, I just wanted to leave you with a couple of takeaways. 2024 was another record year for Kadant Inc. Our employees once again performed at a very high level to achieve these results. While we expect continued uncertainty and volatility in various regions around the world in 2025, we believe our decentralized operating structure and our global presence will help mitigate the risk associated with this. And we look forward to maximizing the value we create for our customers and our stockholders in 2025. With that, we want to thank you for joining the call today. Have a great day.