East Chicago Machine Tool Corporation (KAI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Kadant Acquires Balemaster Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Michael McKenney, Executive Vice President and CFO. Please go ahead.

Thank you, Sarah. Good morning, everyone, and welcome to Kadant's conference call to discuss its acquisition of Balemaster. 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 Kadant's future plans and expectations, including the expected benefits of the acquisition of Balemaster, are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended January 2, 2021, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. With that, I'll turn the call over to Jeff Powell, who will discuss the acquisition. Following Jeff's remarks, we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone, and thank you for joining the call today. As you read in our press release issued yesterday, we completed the acquisition of Balemaster. This morning, we want to provide you a bit more information about this acquisition and give you an opportunity to ask questions about this newest addition to Kadant. As many of you know, we have specific attributes we look for in an acquisition, namely: strong market position, high revenue percentage in parts and consumables, an asset-light operating model and strong financial performance. I'm pleased to say that Balemaster has all these attributes, and we are very excited about them joining the Kadant family. I'll start with an overview of the company and the transaction. Balemaster is a 75-year-old supplier of balers, shredders and ancillary equipment. They are the market leader in North America and serve the paper mill, corrugating and box plant industries as well as large retail and distribution centers. The equipment is manufactured and serviced at its own facility in Crown Point, Indiana. Balemaster's trailing 12-month revenue as of June 30, 2021, was approximately $22 million, and 47% of that was in parts and services. The purchase price is approximately $54 million in cash, subject to customary adjustments. Balemaster's trailing 12-month adjusted EBITDA margin as of June 30, 2021, was approximately 36%, which translates to an EBITDA multiple of 6.7x. We've had discussions with Balemaster by joining the Kadant family for nearly 4 years. Over that time, we have watched the company grow as it served the ever-expanding e-commerce distribution supply chain. Fiber-based products are expanding to meet the dual demands of at-home delivery and sustainable renewable packaging. Every packaging producer, distribution or retail center requires material handling equipment to prepare the waste packaging material for recycling. One of the things that attracted us to Balemaster was its strong focus on the packaging recycling market. They supply to companies baling pre-consumer virgin packaging material as well as post-consumer OCC and waste paper. Its machines are smaller and more focused on single-stream waste, which nicely complements Kadant's larger multi-stream balers manufactured at our facility -- PAAL facility in Germany. There is virtually no overlap between Balemaster and our PAAL products, and PAAL will benefit from having the Balemaster's engineering and service resources to support PAAL's growing U.S. business. With the addition and strength of Balemaster, we are now positioned to offer a complete line of balers throughout the world. Consistent with our decentralized operating model and past practices, we will maintain a multi-brand strategy with Balemaster continuing to operate as a stand-alone business. We each have specialized manufacturing operations and sales organizations that complement each other, serving different markets and geographies. We often find that acquired companies have some best practices, and we look forward to learning more about them. We'd now like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Chris Howe with Barrington Research.

You mentioned some of the quick highlights on their financial details, very healthy EBITDA margin accretive to Kadant's profile. Can you provide some historical context on how the company has been performing? You mentioned they're in the attractive e-commerce distribution supply chain market. Just kind of their overall performance over the past maybe few years and how that looks on a top line and margin basis.

Yes. So they've grown -- as I mentioned, we've kind of been in discussions with them for almost 4 years now. And they had very good, of course, financials that went back many years before that. And they, as you might imagine, have grown quite nicely as the package recycling market and the e-retail business markets have grown. So they've had very nice top line growth, and they've also had -- always had very strong kind of EBITDA margin. And of course, that continues to strengthen as the top line grows and they have operating leverage in their asset-light business model, much like Kadant has. Their operating margins have grown, improved also during that time. So they -- over the 4 years we've watched them, they've grown substantially to service these markets. So it -- as you know, that's an area that is within the United States and really around the world is growing faster than the general markets, the e-retail side and the packaging associated with supporting that. And these guys kind of specialize in that. They specialize principally in the packaging markets, be it pre-consumer and post-consumer. So it's a growing field, and it's one that we've been very interested in and kind of being more involved with and we're quite pleased that they're joining us.

Okay. And then following up on that question. As we kind of think about this, this will have some incremental impacts on Q4, some here in Q3. As we think about the company on a fiscal year basis, is Q4 typically their strongest? Or is it pretty consistent quarter-to-quarter? How would you comment on that?

So they've been quite busy in the last several years. They've had a very healthy backlog. And so they've seen less, I would say, cyclicality than a lot of companies would because they've had such a strong backlog, and they're just basically produce as many machines as possible every quarter. So I don't think there's going to be a big variation from the third to fourth in their business. Now from a purchase guidance standpoint, I'll let Mike address that.

Yes. Chris, we'll have the usual inventory write-up, et cetera, to deal with those inventory and backlog write-ups, and those will flush through over the next 6 to 12 months, probably a little bit shorter than 12 months given their manufacturing cycle.

Okay. Great. And my last question, I'll just hop back in the queue after that. Perhaps you can talk about -- you mentioned there's not much overlap here. But if you compare their existing customer base with yours, perhaps there's some synergies. I know those aren't announced with deals, but perhaps there's some potential here down the line as the combination has some time to run.