Kadant Inc. Price & Performance (KAI)

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 cadent.com Kadant. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we're referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Cadence business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year, and we will then have a Q and A session. [indiscernible] Thanks, Mike.

Hello, everyone.

You for joining us this morning. To review our fourth quarter and full year results and discuss our business outlook for 2025. I'm pleased to report the fourth quarter was a solid finish to a record setting year of Cadence. 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 led to solid margin performance and strong cash flow in the fourth quarter. At the end of twenty twenty four, we were honored once again for our sustainability efforts and named by Newsweek Magazine as one of America's most response [indiscernible] This marks the fifth consecutive year of being included on this list and it's rewarding to be recognized for our efforts in this area. With that, I'd 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 810%, 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 $52,000,000 Overall, the fourth quarter financial performance contributed to record full year financial results. Which I will review next to Slide seven. Stable demand and a strong back $10.28 exceeding the prior record set last year. At $10.04 per share. Our full year adjusted EBITDA was a record $230,000,000 and a record 21 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'd like to review our performance in our three operating segments. [indiscernible] begin with our Flow Control segment. Q4 revenue increased 8% to $95,000,000 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% and adjusted EBITDA margin increased 70 basis points to 28.7% in the fourth quarter compared to the same period last year.

Our 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 101,000,000 compared to the same period last year led by contributions 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. In our Material Handling segment, Q4 revenue declined 4% to $62,000,000 dollars compared to the then record fourth quarter of twenty twenty three, 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. [indiscernible] adjusted EBITDA margin declined 130 basis points compared to the prior year. This decline was largely attributed to 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 second half of the year. As we look ahead to 2025, as the year progresses and demand for aftermarket parts has been stable as we entered the year. The strong and likely strength in U. S. Dollar is expected to negatively impact our foreign currency translation. Particularly as 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 have us well positioned to capitalize on opportunities that may emerge as the year unfolds. We will work to deliver solid financial performance again this year. With that, I'd like to pass the call over to Mike for his review of our financial performance and our outlook. For 2025. Mike?

Thank you, Jeff. I'll start with some key financial metrics. From our fourth quarter. Revenue was $258,000,000 up 8% compared to the fourth quarter of 'twenty three. 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 'twenty four compared to 42.7% in the fourth quarter 'twenty three, 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 Excluding this impact, gross margins were up 110 basis points over the fourth quarter of 'twenty three. As a percentage of revenue, SG and A expenses increased to 27.3% in the fourth quarter 'twenty four compared to 25.1% in the prior year period. SG and A expenses were $70,600,000 in the fourth quarter 'twenty four, increasing $10,700,000 or 18% compared to $59,800,000 in the fourth quarter 'twenty three. The $10,700,000 increase in SG and A expenses was almost entirely due to the inclusion of $10,300,000 of SG and A expense related to our 2024 acquisitions.

Our GAAP EPS decreased 12% to $2.04 in the fourth quarter of twenty twenty four, compared to $2.33 in the fourth quarter 'twenty three. EPS of $2.25 exceeded the high end of our guidance range by $0.15 principally due to lower than anticipated SG and A expenses. Adjusted EBITDA increased 8% to $52,400,000 and represented 20.3%.

Of revenue.

For the full year, for full year, revenue was a record $10,000,000,053,000,000,000 dollars dollars up 10% compared to $23,000,000 including a 12% increase from acquisitions. We had record adjusted EBITDA in '24 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 '24 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 and A expenses increased to 26.6% in 2024 compared to 24.7% in 'twenty three. Approximately half of this increase is due to non cash intangible amortization expense associated with our acquisitions. SG and A expenses were $279,900,000 in 2024, increasing $43,700,000 or 18% compared to $236,300,000 in 2023.

The majority of this increase relates to our 24 acquisitions.

Which had SG and A expenses of $35,600,000 in 2024 and an increase in acquisition related expenses of $4,700,000 The remainder was primarily due to annual wage increases. Our GAAP EPS was $9.48 in '24 down 4% compared to $9.9 in 2023. Our adjusted EPS was a record $10.28 up 2% compared to $10.04 last year. In the fourth quarter 'twenty four, adjusted EBITDA increased 8% to 52,400,000.0 compared to $48,500,000 dollars in the fourth quarter 'twenty three.

As a percentage of revenue, adjusted EBITDA was 20.3% in both periods. For the full year 2024, adjusted EBITDA was a record $229,700,000 and a record 21.8% of revenue. Compared to adjusted EBITDA of $201,300,000 or 21% of revenue in 2023.

Our Industrial Processing segment had record adjusted EBITDA 110,800,000.0 in 2024 and a two fifty basis point improvement adjusted EBITDA margins compared to the prior year. Our Flow Control segment also had a record adjusted EBITDA of $106,900,000 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 eightytwenty 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 adjusted EBITDA performance. As you can see from our cash flow chart, we had strong operating cash flow in the last two quarters of twenty four compared to the first two quarters. For the full year, operating cash flow decreased 6% to $155,300,000 compared to a record $165,500,000 in 2023. Our free cash flow of $134,300,000 in 2024 compared to $133,700,000 in 'twenty three.

We had several notable non operating uses of cash in the fourth We repaid $33,100,000 of debt and paid $5,600,000 for capital expenditures and a $3,800,000 dividend on our common stock. For the full year, we paid $300,300,000 for acquisitions, funded through borrowings. We continue to focus on utilizing our strong cash flows to accelerate the pay down of debt and I'm pleased we are able to repay $124,500,000 this year or approximately 41%. Of our 24 borrowings. Let me turn to our EPS results for the quarter. In the fourth quarter twenty twenty four, 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. The fourth quarter 'twenty three, GAAP earnings per share were $2.33 and adjusted EPS was $2.41 The $0.08 difference relates to $0.1 of acquisition costs $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 twenty twenty four compared to the fourth quarter 'twenty three consists of the following: $0.36 due to lower revenue, $0.2 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 'twenty four compared to the fourth quarter of last year. Now turning to our EPS results for the full year. On Slide 17. We reported GAAP earnings per share of $9.48 in 2024 and our adjusted EPS was $10.28 The $0.8 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 $9.9 in 2023 and our adjusted EPS was $10.04 The $0.14 difference relates to $0.1 of acquisition costs and $0.04 of restructuring costs. The increase of $0.24 in adjusted EPS from $0.23 to 0.24 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. [indiscernible] Now let's turn to our liquidity metrics starting on Slide 18.

Our cash conversion days measured calculated by taking days and receivables plus days in inventory, it's subtracting days in accounts payable was 122 at the end of the fourth quarter of 'twenty four. Down from one hundred and twenty nine days last quarter and one hundred and thirty 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 'twenty four compared to 17.2% in the third quarter 'twenty four. But up from 12.8% in the fourth quarter 'twenty three. Net debt, that is debt less cash at the end of twenty twenty four was 192,600,000.0 a decrease of 19% or 44,100,000.0 from the net debt of $236,700,000 at the end of the third quarter of twenty twenty four.

Farrowings made in 2024 to fund our acquisitions contributed to an increase in our interest expense totaled $20,000,000 in '24 compared to $8,400,000 in 2023.

Our leverage ratio calculated as defined in our decreased below one to 0.99 at the end of 2024 compared to 1.13 at the end of the third quarter twenty twenty four.

We have $122,000,000 of borrowing capacity available under our revolving credit 30 and an additional $200,000,000 of uncommitted borrowing capacity. Now I'll review our guidance for 2025. For the full year, our revenue guidance is $1,400,000,000 to 1,650,000,000.00 and our adjusted diluted EPS guidance is $9.7 to $10.05 which excludes $0.07 related to the amortization acquired profit and inventory and backlog. Looking at our quarterly revenue and EPS performance in '25, 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 twenty twenty five is $235 to $242,000,000 and our adjusted diluted EPS guidance for the first quarter is 1.85 to $2.00 5 which excludes $0.04 related to the amortization of acquired profit NIM in backlog. I should caution here 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 $23,500,000 unfavorable foreign currency translation effect based on exchange rates at the end of twenty twenty four. After excluding this FX impact, and a small amount of acquisition revenue, our organic revenue growth would be 2.5% at the [indiscernible] of our $25,000,000 guidance range.

This FX impact is subject to both upside and downside risk as the year progresses. Our adjusted EPS guidance of $9.7 to $10.05 '25 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 '24 The softer capital bookings we experienced throughout 'twenty four will have a meaningful impact on the revenue and earnings performance in the first half of twenty twenty five. Resulting in tough quarterly comparisons. Our projected increase in capital bookings in '25 are expected to lead to much stronger financial results in the second half of the year.

Before continuing my comments on '25 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 were delayed for thirty days. In '24, 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 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 U. S. 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, '25 an additional 10% tariff was imposed on the import of goods from China. We estimate that this will result in incremental material cost of $1,600,000 in '25 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're 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 will provide further updates as the year progresses. And there is more clarity with the new regulations.

We anticipate gross margins for '25 will be approximately 44.5% to 45%.

As a percentage of revenue, we anticipate SG and A will be approximately 26.5% to 27% and R and D expense will be approximately 1.5% of revenue.

As a result of the significant pay down debt, in 2024, we expect a 30% decrease in interest expense.

For 2025, we anticipate net interest expense of approximately $13,000,000 to 13,500,000.0 We expect our recurring tax rate will be approximately 27% and depreciation and amortization will be approximately $49,000,000 to $50,000,000 Kadant we anticipate CapEx spending in 2025 will be approximately $24,000,000 to $26,000,000 That concludes my review of the financials and I will now turn the call back over to the operator for our Q and A session. Daniel?

Our first question comes from Ross Spareenblick with William Blair. Your line is open. Hey, good morning guys. Hey, just thinking about the organic order growth, we've been on a downward trajectory since around 2022. But are we right to think that the base is kind of in around that $240,000,000 to $250,000,000 level per quarter? Excuse me. And just kind of thinking about the second half step up in sales, should we think about kind of sizing becoming acceleration in orders you're anticipating? Well, I'd say, course, Ross, on the order front, we're really looking for significant delta on capital. So I'd say we really where you pointed out that $240,000,000 to $250,000,000 we're really going to going to we're looking at that improving quite a bit. For capital goods going forward. We've been kind of running in that say, I'll say, 70 low $70,000,000 Kadant we really need to see that improve by say $10,000,000 to 20% and that's that's really kind of what we're forecasting for '25. Okay.

I mean, can you give us a sense of where the capital coming Kadant backlog was at year end?

I think we're around $180,000,000 call it.

Yes. The backlog all in was $257 and capital is 57% of that.

Okay. And is there mix between maintenance or greenfield? Think 2024 was more like a maintenance story that was being deferred presumably, this is going to be like easier set up going into 2025 just given the visibility around that?

I would say it's more in the kind of what's in currently is more in the maintenance mode. But in your right on the go forward it would be it'll be there'll be of course the maintenance and then new projects. Okay. There's one more for me if I can. It's still kind of difficult to parse out this environment You had a peer announced a large order this morning. Seems to support the kind of market sentiment that there's this large project funnel in 2025. But at the same time, we're also seeing more facility closures that were announced So I mean, just trying to reconcile the moving parts as it relates to cadence and if there's anything you guys can call out as it relates to customer conversations that give confidence for this at least greenfield aspect of the capital orders acceleration.

Yes. I think of course as we've talked about for the last seven quarters, capital has been slow. We had that record quarter, first quarter of twenty three.

Then capital orders really started to turn down after that with interest rates going up. And have been pretty soft since then. One of the reasons why our parts and consumables has been so so strong because people are running equipment longer than they normally do and requires more maintenance and parts. But the as we've said for some time now, the projects on the Board discussions are are pretty active. Everybody is just waiting was waiting for more clarity. And we were hoping to get that, but of course, the last three weeks, it's been kind of crazy. So there's, I would say, more uncertainty and more or lack of clarity with specifically around these tariffs, I think people are still trying to sort [indiscernible] But I mean, the project activity is there. They can't go forever without Replacing equipment. I mean, and so it's just a question one that the cycle starts again. I'm not sure who you're 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 the last really last couple of years. Housing starts around $1.3 all of last year, which is pretty soft.

I see that the CBO just came out with a ten year forecast that has it at 1.6 start for the next ten years. So that would be quite strong and quite good, I think, for our business, assuming that that we see that happening. But it's interest rate sensitive, of course. And as I said, a little bit of the uncertainty that's occurring right now think, has frozen interest rates. So but it will, capital will have to come back and we've been in this game for a very long time and we know you can only making those investments for so long.

And so things will start to strengthen. And as Mike indicated, right now, we think second half of the year we're expecting to see some strengthening in these projects.

Yes, that all makes sense. Thank you, guys.

Thank you. Our next question comes from Kurt Yinger with D. A. 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's really 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 there anything else specifically from a macro perspective that you're really keying in on here?

Well, of course, The interest rates are always a key a key metric that impacts but also it impacts economic activity. And I think that's really where our customer we're looking for better visibility and a sense of where the I would say we had some projects that that we've been talking to our customers about that we thought might happen quickly here. And I would say there's a somewhat chaotic environment right now, I think to say the least with what's going on [indiscernible] all that does is add more uncertainty and these guys just say, well, we're going to wait another month to to see how this sorts out. So I think it's we need stability. We need economic growth to start to reaccelerate and stabilize, but we need some some stability. I think that's what they're they're waiting for and hoping for. And as I mentioned just a few minutes ago, you can't delay investing your business forever. At some point, we know we've been in this down cycle for two years now on the capital side. And history tells us that essentially another buying cycle is going to is going to occur. We expect it frankly it happened earlier than it did.

Interest rates have stayed higher than I think people would expected. Economic activity around the globe I mean North America has been reasonably strong for us, but Europe's particularly weak China is weak, And so what we really like for us, what we really like to see is some stability and some growth starting to accelerate Europe and Asia.

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

Well, certainly, our OSB business has held up surprisingly well. Would say that on the Our consumable business on the sawmills that softened [indiscernible] the debarker. So debarking business has been pretty soft now for a while. We had a very strong couple of years there and built up a very large backlog. And I think the industry is absorbing that things have been quite soft. But again, we think based on discussions with our customers that things are going to start to improve there as the year progresses. Certainly, if we get housing starts back, I saw that starts where I think were $1,500,000 in December. If we can average anywhere near that this year, you're going to see you're going to see a much better kind of market condition for our customers, which utilizes parts and consumables from us also allows them to make some investments in the business. Europe turned on its head a little bit because of the Russia situation. And that's slowly sorting itself out. That capacity has had to had to move around. And so we're hoping to to see some stability and growth there. I think the best thing could happen on for us on Europe would be for this Russia, Ukraine war To stop, Then I think you're going to see significant demand.

You've got an entire country to rebuild possibly some sanctions, I suspect would be included in any peace agreement sanction relief pressure, which would be very good for us. So that's something that we're really hoping for is that they're going to be able to stop this conflict And if they do, I think it will there will be significant demand that will come out of kind of rebuilding the Ukraine in particular. So those are things that we're hoping for. But even without that conflict resolving itself. I think you're seeing some shift in stabilization in the market over there. Is it It's taken a few years to kind of sort that out? Okay.

Okay. And if we were to think about the 28 targets you laid out in December and 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 kind of target organic growth period or how would you kind of frame that in light of the multiyear targets?

Yes. I mean, we have we work with economic groups to kind of give us they look at our industries and our metrics and give us their thoughts and their data on on it. And look at the material handling side, if you look at the wood side, in particular, they're talking about an acceleration of growth kind of starting back half of twenty twenty five through certainly through the next few years through 'twenty seven, say 'twenty eight. So we do expect to see an acceleration in most of our key markets. Packaging tends to be a little more stable It's talking about growing 3% or low 1% to 3% over the next several years. But on the material handling side, on the wood side, they're talking about a reacceleration in growth. And that's what we would expect.

Okay.

And then if I could just sneak one more in on the gross margin side. [indiscernible] 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've seen over the last couple of quarters?

Yes, it's a good question, Kurt. Yes, 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 On smaller capital or replacement capital, where we I'd 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 we'll have to wait and see how those shake out. [indiscernible] So that's kind of my view. It's a good question because we are anticipating some larger projects coming in. So, depending on how those land that you'll 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's 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'd say Gary, overall, the segment has the most favorable outlook for us is industrial processing. With wood leading the way and stock prep also. Participating in that. So that's that's 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 we feel that as we move towards the back half of the year, we're going to start to see a nice recovery there.

Okay. And then just maybe a comment on the acquisition pipeline. And I guess, is given that there's generally a consensus here that the economy is 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 the as we said most of last year, the activity level was been quite strong. Our corporate development team has been quite busy, an awful lot of of opportunities that we've looked at and have been in discussions [indiscernible] And so the pricing As always, driven by frankly the private equity guys. They kind of set pricing and their pricing is somewhat set by interest rates and how much leverage they can get. And so that's really I think what what it impacts pricing more so than say a more favorable economic environment. But the activity level, we think it's going to be very strong again in 2025. That's what we're hearing from the bankers and that's kind of what corporate development team is experiencing as a about as you know at any given time we're tracking talking to 200 or 300 companies And I think everybody's just like we're expecting things strengthen as the year progresses, they are too. And so I think that is feeding into I would say, the kind of the increased discussions that we're 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 busted deals, deals that didn't Kadant.

Probably the most I've seen in a long, long time. Where they would enter into an agreement and then it would not close. And I think that was kind of a function of pricing and kind of sluggish performance where things just didn't improve as much as people were hoping for last year. So that's 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're would say we're reasonably enthusiastic about the environment we're seeing and the number of deals that think are going to come to market.

Okay. Thank you.

Thank you. Our next question comes from Walt Liptak with Seaport Research.

Your line is open. Hi, thanks. Good morning, guys. Cornwall. One just dial in a little bit more on the industrial processing and the outlook for the wood products because it sounds like that's where you've got the best chance of getting some capital projects So in the quarter, the the bookings looked good. Was that what was the mix of that in terms of capital projects versus Aftermarket parts.

Yes. It was we had some we had some decent activity on the capital side. First, I'd say parts has been we're good.

But we also had some activity on the capital side I'd say more towards stock prep.

In the quarter.

So That was a positive spot for us in the quarter.

Okay, great. And so then when you 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 $1,500,000 or is it lower interest rates or are you is there something in the the pipeline that says that someone's got to replace some of their Well, I think it's interesting, of course, because as you know, housing drives more than just wood consumption. It really isn't. Key component of the entire economy. Packaging is tied to housing in a big way. And so what we really need to see is the housing starts I mean, we're not coming close to meeting demand out there. Demand is is very high. The demand gap continues to grow. We're built kind of $1,300,000 plus last year we really probably should have been 1,600,000.0 million $7,000,000 So that's a key component of it, I think. And And that, of course, is tied to interest rates. If interest rates come down, housing becomes more more affordable.

So that's a big component. Housing also of course affects our material handling group, right, all the concrete steel and aggregate and everything else that goes into that. So it is a major driver of The U. S. Economy. And so if it does increase from this low, I mean the production was very low last year. It was near other than the two thousand and nine crisis, it was near on average a thirty year low. So we do expect that's going to improve. The forecast all indicate they think things are going to strengthen and that will help both of our sectors, but the Wood Group will see it. First, [indiscernible] Okay, great. And then just appreciate that. And then just changing gears to geographic, I think you've you kind of commented that Europe is sort of sluggish. And how about Asia and any of the the trends that are happening in China?

Well, China has been very slow on the industrial side. The government continues to to put more and more programs in place to try to spur some growth there. They're having to continue to increase the amount of money that they're going to invest So it's slow.

I would say Asia, it kind of depends on which country you're looking at.

But certainly Germany is struggling right now. German the German economy is very much tied to automotive exports. They are losing big market share in in China right now.

And so that's hurting them. And so they've got to sort through that. But in general, I would say the activity levels has been sluggish in most of Europe. What's interesting enough, what they call the Kadant countries doing a little better than the more established ones, Spain, [indiscernible] we're doing a little better than than say Germany and France. And The U. K. Still sluggish. So Europe, has some work to do, I think, to get their economies back accelerating again.

Okay, got it.

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

Our next question comes from Ross Sparemblak with William Blair.

Your line is open. Hi, thanks guys. I just wanted to follow-up on some of the margin sensitivities. Parts and consumables, we're seeing stable demand, but where do we think we are in kind of the restocking cycle there? If there's 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 think that kind of destocking and restocking is kind of kind of played itself out I think we're seeing good strong parts in great part because the equipment is old and we're out.

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

Okay. So as we think about parts and consumables, I think orders were up Yes, 600 basis points TNC mix of orders this year versus last year.

Do you think like half of that's structural from recent M and A and the other half's kind of just older equipment and as you deliver more capacity replacement equipment and maybe it's not as beneficial I'd say really [indiscernible] [indiscernible] The transactions that we did had a high focus on parts and consumables, Ross.

So all in, that's what you're seeing the benefit of the businesses we acquired. If you go down to organic, it's 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. [indiscernible] And then just put a finer point on the twenty twenty twenty twenty five guidance, everything static on the macro that you talked about. What is kind of the internal assumptions on P and C mix versus capital equipment?

We are projecting the mix to be A little a tick above where we finished this year. So we are 66% on parts and consumables this year. We're looking at 67% next year.

Or this year actually 25.

And then just one more really quick on eightytwenty, changes every year, what's the primary focus when we think about the segments for 2025?

So as you know, we have kind of a list of companies. And start date scheduled for them. And so our eightytwenty teams continue to to execute those. And of course, as new companies join the the Cadence family, they get on the list. And so it will be a never ending effort. But we have several companies that are starting eightytwenty this year. Both in U. S. But both in North America and Europe.

All right. Well, thank you guys.

Thank you. I'm showing no further questions at this time.

I would now like to turn it back to Jeff 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.

Our employees once again performed at a very high level to achieve these results. While we expect continued uncertainty and volatility, 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.

This concludes today's conference call. Thank you for participating. May now disconnect.