Kadant Inc. (KAI) Earnings Call Transcript & Summary

[Presentation] Welcome, everyone, to Kadant's Investor Day. I'm Deb Selwood, Chief Accounting Officer. Let me start with our safe harbor statement. Various remarks we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements. For purposes of the safe harbor provisions of 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 our 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. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is contained in the slides to this webcast, which are available in the Investors section of our website at www.kadant.com. And now a little bit more about Kadant.

Thanks, Deb. Good morning, everyone. I'm Jeff Powell, the President and CEO of Kadant. We welcome everyone to Kadant's Investor Day today. We want to thank you for taking the time to come. For those of you that are here in person and those participating via the webcast. We're going to talk today about our new 5-year plan. This is our fourth 5-year plan, I believe it is. These are critical to us. They form the basis for our strategic planning. They form the basis for our acquisition strategies, for our product development strategies as well as our geographic expansion. They also form the basis for setting the objectives that all of our employees around the globe understand and work every day to try to help us to achieve. I mean, a lot of companies don't do 5-year detailed financial plans like this, but we found that they actually serve us quite well and they're a critical part of our planning and our growth. I thought I would introduce the presenters today that are going to be speaking to you. We did something a little different this time versus our prior Investor Days. Kadant has grown and gotten more complex, and it gets more and more challenging to fully understand the scope of the organization, the scope of the business. So we thought that it would be helpful to invite a lot of our business leaders and to talk a little more -- in a little more detail about their products, the markets they serve and the drivers that are fueling the growth. So we're going to get into a little bit of detail today. I hope that everybody finds that helpful. And I thought it would make sense to introduce the presenters as well as some of the other corporate officers that are here today. And if you could just quickly stand when I call your name. First will be Wes Martz, he's Vice President of Flow Controls America. Wes is in the back of the room, I see him standing there. After Wes, we'll hear from Bilal Mehmood, who's President of Kadant Solutions; and then Chad Greenfield, who is Commercial Director of Syntron Material Handling. Next, Craig Heley, President of Kadant PAAL, out of the Europe; Michael Colwell, Senior Vice President in charge of our Industrial Processing segment; Chris Demler, who's President of Kadant Black Clawson; then Dara Mitchell, who's Senior Vice President of Corporate Development. Last but certainly not least, to Mike McKenney, Executive Vice President and our Chief Financial Officer. In addition to that, some others that we have in attendance today is Stacy Krause, Senior Vice President, General Counsel and Corporate Secretary. You just heard from Deb, Senior Vice President and Chief Accounting Officer; Andy Blanchard, who's Vice President of our Material Handling sector; Fred Westerhout, which is Vice President of our Flow Control; and Orrin Bean, who's our Treasurer. So you'll hear from all of them today. Quickly going over the agenda. So we report 3 operating segments, and we've invited people from each of those segments to discuss their businesses and the markets around the world. So we'll start with the Flow Control group and go to the Material Handling group and finish with the Industrial Processing group. After that, you'll hear from Dara on our acquisition strategy. Dara is also responsible for our 80/20 program, very important initiative that we have undertaken. So she'll talk about that and the results associated with that. And then Mike will go over our financial performance as well as our new 5-year targets and goals. I'll make a very quick kind of summary comments, and then we're going to go to questions and answers. And then we have a reception and product demonstration set up around the corner here at the end of the day. And hopefully, everybody will be able to attend that. We have a lot of products and videos there, and we also will have subject matter experts in each of those that you can ask more detailed questions about. So I thought I was -- I wanted to talk a little bit about what makes Kadant what we are, our DNA. We've been around for a very long time. We have business actually within Kadant that are 160 years old, 165 years old. Almost everything that we sell, we were the original inventors of, the original patent holders of. We spun off from Thermo, was in thermal electrons, now Thermo Fisher Scientific, I guess, about 23 years ago as an independent public company. But we have been around, as I mentioned, for a long time. We have very, very stable businesses that have been serving their markets for 50 or 100 years. The great thing is these markets are going to be here 50 years from now, 100 years from now. So they're very stable businesses. And as I said, we were the original vendors in almost everything we sell. So we've had very long-term relationships with our customers, what we call kind of a sticky customer relationship. And what we really are providing are components and systems that go into very expensive operations and our systems have a very, I would say, oversized impact on the overall operation. If you think of an automobile, you're driving it down the road and the radio quits working or their condition quits working, you can still drive down the road. If the transmission goes out or the fuel pump goes out, you're on side of the road. Well, that's kind of the way our products serve our customers. So they're very, very important. We tend to provide products and systems to go into very rush, harsh and rugged duty environments, a lot of wear and tear and a lot of breakage. And so it's critical that we have the parts and the service available to keep our customers operating. If you shut down a large operation, it may cost hundreds of thousands of dollars a day for every day that they are down. So it's critical that we have the parts, the expertise and the services available to keep them running at all times. And our aftermarket parts is a big focus of our business, which we'll talk about a little bit more today. One of the things we're actually quite happy with is we have really strong, what I would call, global macro trends that are driving the business. We don't really have any market segment that's in decline. They're all growing. Some of them are growing faster than others, of course but they're all growing. I would say probably our market drivers are strong as they've ever been for us. I mean we were in the paper business early on. Of course, the digitalization of a lot of information with computers and iPads and phones, there was a big decline in newsprint and some other products. Our packaging side of our business, which is about 20% of our business now is growing. Tissue is another 20% is growing. And really, that's kind of our exposure for the most part on the paper side of the business. So all of our kind of major markets are growing. You'll hear more about those in detail [indiscernible]. We run a decentralized structure. We believe the best decisions are made as close to the customer as possible. We think the lowest risk is when locals are making decisions based on the conditions on the ground there. It also harness-- kind of harnesses the power of entrepreneurism. As I said, we spun off from Thermo and the founder of Thermo, George Hatzopoulos very much believed in the power of entrepreneurism. And we really try to make sure that we maximize the leverage of that. We also have an asset-light operating model. What that means is we have tremendous operating leverage when business is strong, and you'll see the results a little later that we achieved with that. We've been a good financial performer, an improving financial performer And we run an asset-light operating model, so we don't have to invest a lot back in the businesses. So we generate a lot of free cash flow, very strong free cash flow generation. And of course, the allocation and investment of that is very critical. And so we're fairly disciplined. We're also fairly conservative in the way we invest that capital, and you'll see what the returns have looked like over the years with that. Last but certainly not least, you couldn't do what we've done without a very talented and committed workforce, our employees around the world, extremely talented, very committed, have been with us for a long time, very long tenured. We just had somebody just celebrated their 50th year with us. Our turnover rate is very, very low. People tend to join Kadant and never leave. Many of us -- from the Thermo days, I joined Thermo 38 years ago. We have many people who have been here longer than that. We are a global company. It's -- we operate in every country in the world with the exception of the 3 or 4 that the U.S. government says we cannot operate in. And this is really an asset. Sometimes it's an underappreciated asset that we have the skill set, the capability to go to faraway places and conduct business and support our customers. In some of these places, it's not easy to do. We've been in Asia for over 30 years. Almost every market we're in, we have dominant market share. We're #1 or #2 in almost every market that we serve around the world. The nice thing about being global is you get a little bit of geographic diversity. So it tends to smooth out some of the economic cycles that you -- that we typically experience. So for instance, now North America is quite strong. Asia is quite weak. Europe, somewhere in the middle. There's been times when that's been the opposite. So our geographic diversity really helps smooth the different economic cycles around the world. By end markets, packaging was our first and paper were our first too. We diversified into the wood products side, but you now see that our biggest market, and it's actually our fastest-growing market is what we call general industrial. And you'll hear a lot about that today. I think some of you will probably be surprised how many industries we now serve with our products. We've really worked hard strategically in trying to take our products into new markets, industrial markets, and you'll hear a lot about that today. We do, as I mentioned earlier, report 3 segments. Our Flow Control group, a little more than 1/3 of our business has our largest percentage of aftermarket. Obviously, aftermarket parts tend to be more predictable, more stable and frankly, more profitable. And so that's always a key strategic focus of ours. In the Flow Control group, you'll hear focus a lot on save energy, saving water consumption, chemical consumption. One of the things that you will see that's common amongst all of our groups, is what we do is we try to help our customers produce more while consuming less. And most of our customers are processing natural resources. So there's a strong sustainability play to that, a strong focus from our perspective on that. And next to hear from Material Handling group, there our products tend to support recycling, but also the processing of natural resources in the most efficient way possible. And then the third group is our Industrial Processing. That's where our paper recycling, our fiber recovery, our stock business resides. It's interesting. This year, there was more paper and packaging in the world made from recycled fiber than any other year since. So recycled fiber is continuing to grow and become a larger and larger part of the production of packaging and paper. We're very strong there, very large market share around the world there. You can see there about 62% of that is in parts consumables. The other business there is our wood processing. What has been around forever. It was the original material used for housing, for fuel, for transportation long ago. It is Mother Nature's most sustainable crop. You'll hear from Michael Colwell on the benefits and the growth of the wood side, more and more products now are starting to gravitate towards wood. We've grown, obviously, over the last many years, but we also thought it was strategically important to diversify because we had such large market share in our initial markets. We knew we needed to move into some adjacent areas. And so we have moved into adjacent areas, and you'll hear about those 3 sectors in detail today. And just kind of quickly concluding, everything we do is focused on making sure that our customers are operating and operating as efficiently as possible. And as I mentioned, it's a very rugged environment. You'll see that in some of the videos and some of the discussions you will hear from some of our customers today. So making sure that we've got the parts where they need to be serving these people is very critical. And you can see that year-to-date, about 2/3 of our business is parts and services. That varies from low 60s to high 60s. But this year, we're running about 2/3 parts consumables, which is a very stabilizing part of our business. And with that, we'll start the presentations. There's supposed to be a video running here. It's supposed to have audio. [Presentation]

Good afternoon. My name is Wes Martz, I'm Vice President of Flow Control Americas at Kadant. And I have the opportunity this afternoon to present to you about our Flow Control operating segment as well as some more details about our Fluid Handling product line in this particular segment. I thought it would be helpful to start out by explaining what makes up our Flow Control segment. There are 2 major product lines, what we call Fluid Handling and Doctoring, Cleaning & Filtration. Both of these products are custom engineered solutions that are applied in various industries in order to help facilitate heat transfer, to increase productivity, to transfer power and data as well as a variety of other tasks within the industry. Each product line represents approximately 50% within the Flow Control segment. There are a number of key attributes that define the Flow Control segment. You'll see them listed on the slide screen here. One that I'm going to spend quite a bit of time talking about today is the end market diversification. It is one of the things that really differentiates the Flow Control segment from other segments within Kadant, is the high number of markets that we serve. The second thing that we have is a strong aftermarket to our business. Now this is something that you'll hear across all operating segments. All operating segments at Kadant have a very strong aftermarket component. For the Flow Control group, it's nearly 70% of our total revenue, is made up of aftermarket parts. The third thing that you'll see on -- as far as a key attribute is our geographic expansion opportunities. This is particularly true with our newer acquisitions, where they might only be operating in a local region or a specific country, there's opportunities to utilize the Kadant global footprint to really expand that throughout the world. The fourth thing is our market drivers are really favorable toward Kadant in this particular segment. And I'd like to share a little bit more about that with this slide here. You'll see here, there's 5 key market drivers listed, and these are consistent across Kadant. Those that are most relevant for the Flow Control group are the first 2 that are listed. Decarbonization and the shift toward electrification is really creating new opportunities for the Flow Control operating segment. In this case, as companies work to reduce their greenhouse gases, to reduce various emissions, they're coming up with either new technologies or new needs or they're seeking ways to really minimize their energy utilization. Kadant plays a very important role in that and particularly within our Flow Control unit, where we help our customers and their decarbonization efforts. The second aspect that's listed here is disruptive technologies. In this case, as we see the constant movement toward adopting more automation, toward advanced robotics and AI in the workplace, growing connectivity within industrial processes. What we're finding are new opportunities for Kadant. And I'll share some of those with you as I go through the presentation today. With that, I'd like to jump into the Fluid Handling product line. You'll see that there are 3 main product categories that we have for the Fluid Handling product line. We have standard rotary joints. And those are products that are used on very relatively simple applications, including for steam and water transfer between some rotating device and fixed piping. It's a critical element, but it's a relatively standard application. In the center, you'll see we have custom rotary unions, and those are specific to an application. Sometimes it's a very large application with a lot of opportunities. And other times, it's more focused on a specific OEM or a customer need. But in this case, it could be different types of fluids, different types of media that's traveling through the rotary joint. The third one is precision rotary unions. In this case, we're usually solving a challenge with high temperature, high speed or high pressure or maybe all 3. And in that case, a precision rotary union is deployed. I thought it would be helpful to illustrate what a rotary joint does by sharing this. This is a steam rotary joint that's applied on a typical packaging machine. And what you'll see is that the rotary joint is mounted to the end of a rotating dryer. Now on a typical packaging machine, there's anywhere from 50 to 70 of these drying cylinders. Each one of them has a rotary joint. This allows the steam to pass through the rotating joint into the dryer in order to begin the drying process. If we take a little closer look at the rotary joint we'll illustrate how the steam enters the dryer. So we'll cut this away, you'll see steam entering this rotating cylinder. As the steam enters this cylinder, it gives up its heat energy, it then turns into condensate or condensed water. Well, we have to remove that condensed water to allow the steam to continue to release its heat energy. So we do that through a siphon tube, the condensate exits through the rotary joint and has returned to the boiler room. This is a closed loop system. In fact, it's a system we designed. It's a system that allows for the reuse of the processed water and of the chemicals and other heating elements that were part of this to generate the steam. Inside the rotary joint, there's a number of patented or proprietary parts, and that's what makes up our aftermarket business. And this is the part that as we continue to see these mechanical components need to be repaired, that makes up the significant aftermarket business for us. I thought I'd share a few more examples of rotatory joint. This one here shows an illustration of a large rotary joint installed on a very large dryer that's used to produce corn-based ethanol. In this case, this is a 15-foot diameter dryer, about 100 feet long. And the rotary joint is used to put steam into this cylinder to help with the drying process of the corn that's used to eventually turn into ethanol fuel. In this example, this is a factory automation with a robot that's used to pick and sort packages. A rotary join is installed on the end of the arm of this robotic tool in order to read the package and then place it in the correct location. In this application, this is in the defense sector, where we have a radar cooling system. The rotary joint is applied to the radar system itself as it is rotating to help keep the internal components cool so that's fully operational. And then finally, an example from the metals industry. This is a continuous casting machine that's used to produce steel billets. In this case, you can see the steel. It's that bright yellow or orange colored material coming off this machine. Well, it starts out as liquid metal, molten metal and travels across approximately 300 rolls. Each of those rolls has a Kadant rotary union that's designed to keep the bearings cool so that as the metal flows along this machine, the rolls keep moving to allow the whole process to, at the end, turn into a solid piece of steel. I mentioned a few industries. Here are a few more. I'm not going to go into details of each one of these. But I did want to share with you the significance of Flow Control's activity across a number of different industries. I illustrated here 4 different segments or 4 different applications. Packaging being the first, it's also the largest, representing approximately 38% of our global revenue within Flow Control. The other industries represent certain portions, some -- and I'll go through a little more detail, but some use a lot of our product, some use fewer. But in any case, there's a broad diversification across these segments. If we take a look at Kadant's position in each of these segments, what you'll find is that in most of these, they're #1 or #2. That's a great place to be especially when you're selling a premium product designed for usually a pretty challenging application where there's very high expectations on performance. And that's Kadant's sweet spot for a demanding application in a really challenging environment. What you'll see here on this chart also is the size and growth leading to what we believe is the opportunity for us in a specific marketplace. There's 4 markets that, in particular, that we believe have some higher growth relative to the others. They're highlighted here in the bold face, but industry segments such as energy. And in energy, we span the realm from traditional energy source to transitional to renewables. Each of those segments use Kadant's Flow Control products. In other cases, defense and aerospace, where there's a general tendency to -- it's very difficult and sometimes time consuming to go through the prototyping stage and the testing and qualification. But once you're in the program, it's generally a 5- to 7-year process as that program continues through, and we are extremely well positioned to continue to grow in that particular segment. Construction and factory automation are 2 other areas that we believe are higher growth in areas that we are very well positioned as well to capture that growth as the market continues to develop. Next, I'd like to run through just a few examples as I wrap up the Fluid Handling product line discussion about where we've seen customer-driven innovations that have allowed us to continue to grow and to find new opportunities in areas that frankly didn't exist even 10 years ago. The first one is in the medical industry. Here, we have an image-guided radiation therapy, where a rotary joint is used inside the gantry of this large machine, and it's used to -- for radiation treatment for cancer patients. So as the patient is moved into the radiation machine, our rotary joint allows the laser to be actuated in order to allow a very specific, highly targeted treatment. It's one that is -- needs a high reliability as well as certain other performance parameters that make this a great challenge and a great opportunity for Kadant. We're doing quite well in that particular segment. On the defense side, this is an application of a mine roller, a very challenging application in that there's a lot of stresses on the rotary joint that goes into this particular piece of equipment. And we've been able to design a product and have it not only tested, but put into service, frankly, resulting in improved safety as well as accuracy when it's out in the field. In the third case, this end-of-arm tool that was used, the customer came to us and said, we have a need to simplify our vision system within the robot. The whole idea was to try to eliminate these hoses that were blocking the camera's view in order to scan the address information and other details about the package so that it could be quickly moved to the right place for sorting and then eventually fulfillment. In this case, we designed a product that eliminated the need for hoses, integrated a slip ring which allowed data to be transferred from the robots vision system back to their control system and really allow them to improve their productivity. In this last example, this is an example using our illumen.X digital platform specifically in the packaging industry. In this case, we were asked to develop a way to alert the operator of some type of issue that was going on within the plant with all of the plant assets. So we monitor set points. There's a certain range when something would go either above or below, an alert is sent to the operators. And not only is it an alert, but then there's a diagnosis that says, this is the problem and then some suggestions on how to fix that particular problem. It was a huge success from the perspective that many of our customers today are struggling with keeping labor. There's labor shortages. There's challenges with finding people who want to do the work that they need to have done. And this tool allowed them to kind of skill up their operators so that they didn't have to be experts in everything, but they had to know enough on what to do and where to go when they receive the specific alert. With that, I'd like to hand the presentation over to Bilal Mehmood, who will go into the Doctoring, Cleaning & Filtration product line.

Good afternoon, everybody. I'm excited to talk to you about the Doctoring, Cleaning & Filtration product line, which belongs in the Flow Control sector. A little bit of history. The business and the product line I'm here talking to you about has a unique story. It's actually where the genesis of Kadant started. It was one of the first acquisitions that Thermo made back in their 60s. As you heard earlier and you'll hear later on, it's about a 100-year-old business, stable business. It's been around a lot of the industry best practices, the products and the standards that are in this product line space were set up by the DCF product line businesses across the globe. In the industry parlance of DCF, I want to make sure I explain that to you all. D stands for Doctoring, Cleaning and Filtration. These are products that used in any continuous process in a variety of industries. Of course, our start in this product line was in the paper industry. Well, since then, we've taken a lot of these products across multiple industry spaces. And as mentioned earlier, the diversification of the Flow Control segment also is within the DCF product line. There's a variety of markets that we serve across the globe. I'll be only talking to you about 3 of these examples today. But as you can see, the application of our products are varied. Some of these industries that we serve, much like in the Fluid Handling sector product line, we also are #1. We are either #1 or #2. And a lot of these markets that we serve represent huge growth potential for Kadant's businesses going further. Just to get everybody acclimated to the concept of doctoring, the best analogy I can give you is a giant razor blade. It's a device and a system that's used to scrape either debris or an actual product that is being made in the continuous process. Doctoring is used, in some cases, to make the actual product or, in some cases, condition the roll surfaces or clean the roll surfaces mechanically to make sure that the process and the end product is not contaminated. And this concept of doctoring is applied, as I mentioned, across a variety of industries. Our Genesis was in the paper industry, but it has since moved on to across many different industries. The visual here that you saw was a removal and insertion of a blade, and that represents one of the largest consumable products that Kadant sells globally. We are the #1 blade supplier as it's called in the doctoring space across the entire globe. And that represents a majority of our consumable business in the DCF product line. The first example I'd like to talk to you about, again, is true to our roots. It's in the paper market. But the 2 areas that are significant growth -- have significant growth trajectories in the paper market are tissue and packaging. Within tissue industry, if you are consuming a tissue product in your day-to-day life, there's a 99-plus percent chance that, that product was made using Kadant equipment. There isn't a tissue machine in the world that does not have the Kadant products installed that actually make the end product. So whether it's a bathroom tissue, whether it's facial tissue or whether it's paper towels or napkins, the actual blade material is what creates that characteristic of that tissue. And Kadant's equipment is basically the industry standard across a variety of tissue machines. The other innovation that we presented in this space over the last many decades is the type of blade material that's used. The conventional blade materials are typically carbon steel, low-end commodity type of material, but Kadant has innovated in the space with bimetal and ceramic blades. And that, again, represents a significant payback for our customers up to $1 million in savings if a customer switches to Kadant blade material. What you also see in the picture there is world's largest craping doctor system, that's about 25,000 pounds, about 6 feet tall on 6-inch bearings and journals. It's installed at one of the largest tissue producers of the world on the West Coast of the U.S. So in terms of scale, keep that in mind because that's on one end of the scale. And if we talk about other applications, for example, like food which is also where we supply doctoring equipment, Again, if you're consuming any type of candy stack, whether it be Cheez-Its, there's a good chance that that's made using Kadant equipment as well. And in this particular case, the quality of our products have to be certified through the HACCP certification, which means we are an approved supplier to the food industry. Food safety is, of course, critical. And again, using our equipment in comparison to what the customers may get from the OEMs. Typically, our equipment, which is an aftermarket install will lead to anywhere from 12% and higher in terms of production increase. In this example, as you can see, it's being used to clean off -- scrape off chocolate as well as starch in the bottom example down there. This next example talks about our key market of nonwovens, which we address through our cleaning conditioning product line. This market is a significant growth for DCF product line because it increases significant needs for our customers that revolve around sustainability, which is consumption of fresh water that is used in the nonwoven process. By applying traditional method, customers would end up spraying a large amount of water into the process. And the process actually requires removal of water through. However, water is used to clean the fabrics that are used in making the nonwoven product. Kadant's innovation of what's called a single-jet traversing shower applies localized water to clean the fabric surface as can be seen in this video. And with the application of high-pressure water that is both safe for the fabric as well as ability to clean any localized space, we're able to reduce water consumption by up to 95%. This is a significant savings both from a cost perspective but also from a sustainability impact. And again, the process equipment that's used by applying this kind of technology the span of those fabrics which can be in the tens of thousands of dollars can sometimes be improved by a factor of 4. So there's significant payback when Kadant equipment is utilizing this application. The last key market I'd like to talk to you about is in the molded fiber space. As we're all aware, single-use packaging of plastic and other non-renewables is making its way to reduce of molded fiber. And a lot of these processes require reuse of processed water. So again, a reduction of use of freshwater in these applications and also returning a lot of the most expensive input to this process, which is the fiber itself, the ability for our equipment to not only filter the water but rather remove and collect that fiber and return it to the customer for reusing the process. We have a large installed base of filtration equipment all across the world, and we estimate close to 1.2 billion gallons of water that are filtered today, leading to about $0.5 billion of energy savings. Those energy savings are derived from not having to reheat freshwater to process temperatures to be able to use. So when you can reuse and filter current process water, you end up having that savings in energy. And lastly, as I mentioned, Kadant has across all of our product lines and has a history of innovation on the product space. Another area that we're putting a lot of resources is innovation on the service space. With our use of our illumen.X and other digital technologies, we have an umbrella of products named under the kConnect series that allow real-time information in terms of inventory tracking for a consumable product that can have a significant impact on the customers' runability. These blades that we talked about earlier can range anywhere from a few hundred dollars to several thousand dollars. Yet they're using machines and processes that would cost on the upwards of tens of thousands of dollars per hour. So a lack of a blade material for a unique process at any given time can cause significant downtime for the customer. So the ability to have traceability, real-time inventory on the floor and the ability for the customer to have product delivered without having to initiate purchase orders is a unique feature that we provide with our kConnect series of products. And with that, I'll close by reminding everybody that we have highly diversified markets and the drivers that we've previously discussed have a significant positive impact in our growth trajectory. The DCF product line being the original product line has a tremendously wide geographic presence across the world. We serve every single market across the world through our many distribution and manufacturing locations in every continent, the DCF product line is manufactured and supplied locally in a lot of the markets in the world. And as mentioned earlier, also the blade business represents one of our largest consumable aftermarket businesses in the Flow Control sector. So with that, I'll hand it over to Chad Greenfield, who will talk about the Material Handling sector.

Good afternoon. My name is Chad Greenfield, and I'm the Commercial Director for Syntron Material Handling. I'm excited to be able to join you today, talk a little bit about Kadant and our Material Handling sector. So to begin, I want to talk a little bit about some of the key attributes that as they apply to the Material Handling sector. So first, our products are process critical to our customers. And many of our customers are in infrastructure critical end markets. So those are markets like steel, cement and aggregate. And so we have steady demand that's driven due to the importance of our equipment to those processes. But in addition to seeing steady demand from our customers in those infrastructure critical end markets, we also see steady demand and growth opportunities from the markets actually growing themselves. And so those markets are growing to try to keep up with growing demand. And then the increase of sustainability initiatives is also driving significant growth opportunities, especially in our baler product lines, which Craig will speak to a little bit later here in just a few minutes. And then a common theme that you've already started to hear and you'll hear throughout the day, is that Kadant enjoys a strong global market share, and our businesses enjoy a strong aftermarket component that drives steady demand. So there are several favorable market trends driving demand in the Material Handling sector, primarily the increase in urbanization, the aging infrastructure that we see across the country and the introduction of new and disruptive technologies. So population growth is driving demand for new and upgraded infrastructure. And that's led to the passage of several bills at the federal level over the last couple of years. So bills like the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Bipartisan Infrastructure Law have driven trillions of dollars into infrastructure advancement projects. And so those dollars have led our customers to initiate projects to prepare for and spend capital to prepare for the increased demand that they're going to see. But population growth isn't only driving demand in those infrastructure markets. It's also driving the need for greater food production. And so this growth has led our food and packaging customers to have to make the same types of plans and investments so that they can have their facilities ready to meet upcoming demands as well. And then lastly, we're going to discuss several new technologies that are disrupting the market and how we see those playing out in the future. So the Material Handling product lines can be divided really into 2 product groups. We have our conveying and our vibratory feeding products. And those consist of about 55% of the revenue of this sector. And then we also have our baling product group. And so I have the opportunity to speak to you just a little bit more about our conveying and our vibratory feeding product line before I hand it over to Craig to talk about balers. So our products have a wide variety of uses, and they're designed to handle everything from heavy-duty rock and minerals to some of the most fragile products, so things like fruits, potato chips, medications. And so on the top row there, you'll see many of the raw materials that we help handle. And then on the bottom row, you'll see what some of those raw materials are eventually turned into. But if you look at the top row, you have some of the materials like aggregates and cement, steel, copper, sand and gravel. All of those markets play a significant role in everything that we touch on a day-to-day basis, they're used in -- some of those things are fairly obvious, but they're used to build roads, bridges and tunnels, our sewer systems, but they're also used for things that you might not think of. So things like our telecommunication systems, or even consumer electronics, the computers and the cell phones that we use every day. To maintain our standard of living, each person in the U.S. requires over 40,000 pounds of minerals every day. So that includes over 10,000 pound of stone, over 7,000 pounds of sand and gravel and almost 1,000 pounds of cement. And for every dollar of sales of one of those products, it drives roughly $4 of sales in other industries. But our products aren't again just infrastructure related. Our products are also used in the agriculture and the pharmaceutical industry. So in agriculture, our products handle things like nuts and fruits and berries, but they're also used in the creation of other products, so things like fertilizers. And in the pharmaceutical industry, our products are used to help in the creation of medications and then ultimately into the packaging of those medications for consumer use. So we provide 3 major types of solutions with our products. We provide solutions for the conveying, the screening and the vibratory feeding of bulk materials. And in most cases, those materials are in raw or unfinished good form. So the products that we convey, screen and feed, as I mentioned earlier, have varied significantly. But ultimately, the solutions that we provide allow our customers in these numerous and diverse industries to move their materials and their products through their facility so that they can process them for their ultimate end use. So when it comes to our conveying products, our companies manufacture 3 primary types of products. We have conveyor idlers, conveyor belt trackers and screw conveyors, which you can see on the screen here. A screw conveyor conveys raw material from one place to other with a large spinning screw. Conveyor idlers are used to support a conveyor belt. So the conveyor belt can actually move product from one place to another. And then conveyor belt trackers are used to keep the conveyor belt where it's supposed to go. Conveyor belts have a really nasty habit of wanting to get off track. And when they do that, they can become inefficient and they can even cause safety risk. And so conveyor belt trackers sense where that conveyer belt is and provide course correction so that we can get that conveyor belt back where it's needed. Our products are trusted around the world by some of the world's largest mineral producers. And we've been producing a lot of these products since as early as the 1880s. But we're not just producing products that we have been producing for over 100 years. We're also pushing forward, and we're continuing to incorporate new technology into our products. And so, for example, in conveying, we are now incorporating new technology into our idler rolls that allows for 24/7 monitoring of these rolls, and that increases safety. It decreases downtime, but it also provides a solution to our customers that have some of the labor issues that are becoming so prominent. Vibratory screens come in all shapes and sizes. So we have large screens that are often used in quarries and mines to size material. So many of our customers sell their material based on the size of the material. And so they use these screens to size the material, but also to skim off material that needs to be reprocessed for efficiency's sake. When we get to food and packaging customers, they often use small screens, and they can use it to screen out material that's unwanted, so maybe things like leaves or twigs, or dirt or maybe even defective product that we want to make sure it doesn't get into a bag and get sold. But they're also used for processes like seasoning processes. So as a product is going through a seasoning process, these screens will filter and collect the seasoning that doesn't attach to the product so that it can be reprocessed and used again. And then with all of our products, we are working to add wireless monitoring solutions. And so our wireless monitoring solutions allow our customers to monitor the health and the production status of our screens. And so we monitor things like bearings and take metrics on things like temperature and vibration so that we can warn of potential issues before they happen and allows us to prevent unscheduled downtime. And then our last product group is our vibratory feeders. So we invented the electromagnetic feeder technology almost 100 years ago, and we've been a leader in the industry ever since. Our feeders are used in a wide variety of industries and applications, like I've mentioned already but feeders are used a little bit differently than screens and conveyors. Feeders are used to efficiently and accurately feed other machines and processes. So for example, a feeder might be commonly used to feed a crusher to size material, and it might be used to load a conveyor belt in a minor quarry. But they're also used to meter and mix projects -- products such as you see here, like the ingredients that go into a trail mix or they might be used to put the Cheetos into the bag before it's sealed and sold? Or they might be used to put the 2 scoops of raisin in your raisin bran. And so like our vibratory screens, we also have the ability to monitor the health of our feeders 24/7 with our wireless monitoring solutions. So I've mentioned wireless monitoring solutions several times so that is one of the innovations that we're really excited about what it's going to last too. But our wireless monitoring solutions, much like the illumen.X platform that we've discussed already, our asset performance monitoring ultimately allows us to provide customers with alerts of operational anomalies, potential failures before they happen, so that we can: one, help them be more efficient; two, prevent unplanned downtime; and three, ultimately help them have a safer production. And so our users see increased production and decreased unplanned downtime, which ultimately saves them money. And then another innovative product that we're really excited about the future for is our smart idler. So traditional conveyor systems often suffer from roller failure. It's a primary cause of downtime. 50% of unscheduled conveyor downtimes from bulk material are due to a roller failure. And so even just a seemingly small issue with a roller can potentially lead to a catastrophic failure and significant downtime for our customers. And the downtime opportunity cost for our customers range from $100,000 to $500,000 an hour when they're down. And so anything that we can do to help them prevent that downtime is incredibly beneficial to them. And so ultimately, what our technology does is through the 24/7 wireless monitoring solutions, we're able to give them a heads-up days, weeks, sometimes even months before an issue may arise, which allows to get -- it allows us to give them predictive insights so that they can have proactive maintenance so that they can run more efficiently but ultimately so that they can also run safer. And one example of where we have employed this technology is in the Dune Express project with Atlas Energy Solutions. The Dune Express project is the largest -- excuse me, the longest conveyor in the Western Hemisphere. It's a little bit over 42 miles long and runs in West Texas into Eastern New Mexico. And it is one of the most technologically advanced conveyors in the world, and that's primarily due to the technology in our smart idler. But it doesn't -- our smart idler and this project doesn't just have an impact for Atlas Sand and in the production. It also is going to have a major impact on the community surrounding it because it's going to reduce emissions and road traffic by up to an estimated 70%. So in the Permian Basin, you're 6x more likely to die in an automobile-related accident than anywhere else in the state due to the amount of traffic from oilfield-related business. And so this automated conveyor system is going to reduce that road traffic by up to 70%. We believe it's going to take 100,000 trucks off the road every year. And that just simply would not be possible without our smart idler technology. And so given the scale of this project, traditional manual inspection method is are not feasible. Having an individual walk the conveyor or even drive a truck along the conveyor is just not a feasible due to the length of the conveyor. And so the introduction of our smart idler technology offers them some unparalleled advantages where they can wirelessly and remotely monitor the health of this entire conveyor from an office, hundreds of miles away and have the insight to be able to prevent issues before they happen. And so to wrap up, I just want to share this graphic because I think it does a wonderful job of highlighting many of the products that we help get into your home. So whether it's the road that you drive on to get to your home, or the foundation that your home sits on, or the wires in the wall, or the food on your table, the electronics that sit in your house, or even the medications in your medicine cabinet, Kadant's Material Handling sector plays a pivotal role in getting those products from the manufacturer to your home. We're incredibly proud of all that we do to improve people's lives and I'm incredibly proud to be a part of the Kadant team. So I really appreciate your time. Thank you very much, and I'd like to introduce Craig Heley.

Good afternoon. My name is Craig Heley. I'm the President of the Kadant PAAL group Companies. And I'm going to talk to you about the baler product range. The most effective way to increase recycling is to make the process as efficient and as financially attractive as possible. The job of the baler is to transform light and bulky material that is the material of a recyclable product into dense heavy blocks that can then be efficiently and cost effectively, handled, stored and most importantly, transported by our customers. When it comes to baling, there isn't a one-size-fits-all solution, different applications, different materials require different types of baler and in some cases, different types of pretreatment. Being able to satisfy a customer is absolutely critical. And so by being the -- offering the largest range of balers, this secures Kadant's position as the #1 provider in the market. This animation shows PET bottles, plastic bottles going through a perforator prior to being baled. This is actually an excellent example of the way that balers transformed that light and bulky material because in a single bale, which may be 1.5 cubic yards, not meters, cubic yards, then there could be upwards of 15,000 bottles. Balers are structurally very solid. They operate in demanding environments, processing abrasive material. And typically, they will be working for well over 10 years. And so during that period, there is a continual requirement for spare parts and wear parts. Any industry that needs to handle, store and transport light and bulky material needs to consider some kind of compaction equipment. When volumes increase and become significant, then auto-tie balers are definitely the most cost-effective solution. In some applications, the bale itself is the product that our customer sells. And this is the case in a material recycling facility or MRF. This type of large MRF is actually very complex and surprisingly sophisticated operation. There's a continuous inflow of material that needs to go through several processes whilst it's being sorted into different material types and material grades. In a MRF, the baler is the final step in the process. But this means that if the baler doesn't operate, the whole plant stops and the material backs up frightenly quickly. And so such an occurrence, costs the customer a huge amount in terms of downtime. So this obviously means that the customer is committed to keep the baler operating and is willing to invest in the spare parts and service support that's required to do that. In other applications, the baler may actually be processing a secondary material. For example, in the box plant, the baler will process the off cuts from the primary production line. But even in such a facility, if the baler doesn't operate, then this will actually eventually cause the primary production line to block and stop. And again, it becomes incredibly costly and disruptive for our customers. So again, there is that opportunity to invest in spare parts and service to prevent that from happening. Some applications, the baler operates with a single type of material, such as the box plant, but a MRF material recycling facility processes, a broad range of recyclable products. And so a single baler needs to be able to process and provide excellent results with a wide range of materials. And this is actually one of the, I would say, the key technical sales features that help to distinguish us from most of the competition. In addition to the baling of recyclable material, Kadant also offers balers that can bale waste. And if you combine it with a wrapping system, it provides a very clean and hygienic alternative to the classic landfill. We can bale refuse-derived fuel, which goes to waste-to-energy applications, and we can also bale a range of agricultural products. And it's also worth emphasizing that in addition to this wide sector spread, we also are very active in all of the main geographical markets across the world. As we've seen, balers are a critical part of our customers' operations. And so when we manufacture a baler, we have to be sure that we are providing the highest repeatable quality. And this means investment in the latest technology. To guarantee the structural integrity of a baler, a lot of welding is required, a large baler may involv maybe 1,000 foot of welding. And so welding robots are really critical to that quality of the process. And Kadant has invested in 3 such large welding in robots across the facilities. And this investment in automation has helped the Kadant baler line to become the world leader and we manufacture around 5 balers a week and we offer the shortest lead times in the market. Part of the sustainability narrative concerns traceability. So how does a customer, a producer, a consumer really know what happens to the material that enters the recycling stream? BALEiD offers a patented solution that automatically and securely attaches the label to a bale. This provides the opportunity to then link information with a specific bale. So this could be the material composition, the bale weight, the location, the dates. So this provides a lot of very, very valuable information. And then this information can then shared by our customers with their customers. And so by doing this, this really helps close the loop in terms of traceability as to what's happening to the material. BALEiD provides data about the bale, whereas our illumen.X platform provides data about the baler which can be excessed remotely. There are several elements to this, but all are designed to help our customers to manage their operations more efficiently, more effectively. The Connect provides basic production data, which we will see on the next slide. Analytics monitors performance against prescribed targets. And then you can provide notifications if the performance levels fall without the -- fall outside of the agreed ranges. [ Predix ] will monitor lots of machine performance indicators and we'll give a warning as to when parts will need to be replaced. And finally, our web shop is our online shop, which will provide a quick and easy way for our customers to react to the information they are gaining from the other tools. This is an example of the Connect dashboard. So the user can see what's happening at any given moment or you can put in a prescribed time period. In this case, in very, very small letters, it's between 12:00 a.m. on a Sunday up to 6:00 a.m on a Monday. This then provides basic production data, how long the baler was available, the number of bales that were made by the different grades, whether there were any bad or scrapped bales, et cetera. And also accessible via the illumen.X platform is our web shop, which is our online parts ordering system. So each customer has given access to an exploded drawing of their specific baler and they can then drill down, drill down until they find the part or parts that they want to order, they place it in a basket and the order appears at the factory. So very similar very to -- very, very similar to Amazon-type experience. So finally, in terms of the key takeaways the companies comprising the Kadant's Material Handling division are subject to different market growth drivers. Some will benefit from the planned investment in upgrading the country's infrastructure and others will benefit from the huge commercial and political pressures to -- link to the sustainability agenda and particularly linked to the drive to increase recycling rates. Kadant is in a prime position to take advantage of these market growth drivers, has a very strong global presence supported by established and trusted brands. Our large customers are growing and their operations are becoming increasingly lean and efficient. So this means they cannot risk costly and disruptive downtime. So this means that they will be looking to partner with trusted high-quality suppliers such as Kadant, and they will be looking to partner with Kadant for the lifetime, the economic lifetime of their equipment. So long-term market growth will occur. And with Kadant's continued commitment to invest in automation and innovation, Kadant is uniquely positioned to capitalize on the opportunities that will arise. Thank you.

Thanks, Craig. Hello, everyone. My name is Michael Colwell, I'm the Senior Vice President of our Industrial Processing sector. It's my privilege to introduce that sector to you today. Industrial Processing is sort of 2 groups. It includes our wood companies, which I'll talk about, and the fiber processing companies that my colleague, Chris will introduce shortly. Jeff mentioned that Industrial Processing contributed about 37% of the revenue to Kadant in 2023, and that was split about 60-40 in the sector, with wood being 60% and the fiber processing 40%. The equipment we sell into this sector, similar to the other equipment you've heard about today, plays key roles in the production of the fiber-based products that you see every day. You can't walk past the construction site or through a Home Depot or even furniture store without seeing something that Kadant wood companies touched. And in a similar way, you probably already touched something today that our fiber processing companies help to make from paper cups to paper napkins, to cardboard and facial tissues, our fiber processing companies help make products you use every day and recycle those things when you're done with them. We're the world leader in both segments with more than 100 years of market leadership. So why is Kadant so important to this market? It starts with the outsized impact that our equipment has on our customers' processes. Kadant equipment is usually found at the first stage of that process, and it's critical to get that right. Our equipment is in contact with wood and fiber all day long, and in the long run, fiber beats steel. So service and replacement parts are very important to their operations. As you heard Jeff say, more than 60% of our revenue comes from that -- revenue from the parts and service we provide. We're dominant in our markets with industry-leading brands and have thousands of installations, which drive that repetitive parts and service revenue. Fiber has a very bright future as you'll hear from Chris and me. So for Kadant and our investors, the end markets we serve have very attractive characteristics. Start with wood frame construction. Wood frame construction is gaining adoption worldwide. In addition to the environmental benefits of using wood, it also performs better. In Japan, for example, wood frame buildings have resisted earthquakes better than brick and concrete. And it's easier to heat and cool wood structures. Talking a bit about homes, there's a global shortage of housing units. Here in the U.S., we have several million homes short of our demand and population growth means that, that demand is only going to increase. We have here a snapshot of the U.S. housing start data from the last while from 1984 up until the great financial crisis in 2008. You can see that since that time, we have significantly underbuilt the demand for houses, which leaves us with a big opportunity for housing here in the U.S. And in fact, a shortage of housing is a feature you find in most Western economies. Moving from housing to commercial construction. The advent of mass timber means that wood will replace steel and concrete in many applications. I'll have more to say about that shortly. And in a similar way, over on our fiber processing side, fiber is set to replace plastic, foam and aluminum in a wide variety of applications, particularly in single-use items like in food service. And if you think about the demand that's been driven for cardboard by the event of e-commerce, you can see there's a bright future. And in both cases, those are entirely sustainable products that Kadant can help create and recreate as time goes by. All this growth means that fiber is becoming more scarce and more valuable, and our customers have to get more from every tree and recover more fiber from waste. Kadant plays a key role in both those activities. Fiber is now seen as entirely renewable resource, one that can be managed to provide economic and social benefits. You've heard it probably said that money doesn't grow on trees, and we say that's right. We believe money grows as trees. So I'll jump in and talk to you a little bit about our wood sector. Start with a question. Have you ever seen a machine that's 100% solar-powered, removes carbon dioxide from the air, converts it to a strong, sustainable building product and releases pure oxygen as a byproduct? The answer is you have. We call them trees. We all know that wood comes from trees, but let's talk about how you get from a tree to a product and how Kadant is involved. Kadant's wood processing equipment plays key roles in the efficient manufacture of many of the wood products you see. Most important, we help our customers keep those running 24/7 in some of the harshest environments, you can imagine. Kadant owns several of the world's leading equipment and technology companies, and we're global. You'll find cadence on 6 continents. And everywhere you find one of our machines, you'll usually find it's the first thing a log touches when it gets to the mill. Why does that matter? Because if you make a mistake at the beginning, it cannot be fixed downstream. So that $300 million OSB mill needs the Kadant debarkers and Kadant stranders at the front end to do their job every time or the mill won't be profitable. So what do we do? Start with our debarking companies. Together, Kadant with our debarking companies supply 80% of the high-speed ring debarkers globally. Debarkers matter because the first thing you do with the log no matter what you're going to make from it is take off the bark. That has to be done perfectly. If you leave bark on the log, you reduce the value of the end product and create maintenance headaches at the mill. And if you overdo it, you waste valuable fiber. So the debark -- you saw the little video at the beginning, debarker in a debarker, log enters an array of spinning arms that have carbide tips that break through the bark layer down to the surface of the log and peel out a way. And the bark isn't wasted. It goes into commercial applications, everything from energy to power the mill to the bark mulch spread around the trees in your garden. Next, our engineered wood stranders. Here, we also have an 80% market share in OSB globally. A strander is used to slice a log into thin strips the size of business cards, a specially engineered Kadant feeder stacks the batch of logs and pushes them into a cutting zone where an 8-ton ring spinning at 400 RPM and fitted with 48 razor sharp knives reduces those to strands. A strander chews through wood quickly. If you think about that 40-foot trailer of logs, you see being pulled down the highway, well, we would debark that in about 5 minutes and turn it to business cards in about 15. Kadant also produces the chippers you'd find in sawmills, pellet mills, pulp mills and chip plants where they reduce raw material into small chunks that are used to make pulp, press into pellets for energy or into diverse applications like animal bedding or the safety surfaces and playgrounds. A chipper has a flat disc on the front that carries between 6 and 12 knives that spins at about 250 RPM. As the material moves along a conveyor into it, that spinning disk has the knives fracture it and break the wood up into small chunks, called chips. The most common application you'll find for these is wastewood chippers, where in a sawmill, leftover pieces that can't really be sold for anything else are reduced into chips that provide another revenue stream for the mill and make sure that no part of the log is wasted. Finally, I'll talk about our knife systems. Kadant manufactures knife systems that are used in all of these machines. Knife technology has advanced significantly in the past 30 years. 30 years ago, mills would employ technicians and make capital investment in grinding machines to sharpen large heavy knives that they would clamp into their machines. Handling these razor sharp knives was somewhat dangerous and required highly skilled tradespeople to do that installation and the grinding. While in the same way the disposable -- disposal razors have revolutionized home shaving -- I don't think any of us sharpened to razor before we shaved this morning. Kadant has invented disposable knife systems that revolutionized the processes at the mill. So our customers no longer have to train those technicians or buy that equipment to sharpen knives, they can simply buy knives from Kadant. Our customers like them because they're safer, they produce better product, they last longer. And we like them because they are unique to us. Some of them are patented. And once you install those Kadant systems on your machine, you have to buy your knives from us. And our customers go through knives quickly. Some knives have to be replaced in as few as 8 hours. So now you've heard a little bit of our products. Let's look at what are the new operation. Here's one of our customers to tell you about our debarkers. [Presentation]

Okay. So once a log as debarked, what do you do with it? Well, Kadant's customers use our equipment to many of the wood products you know and some of you may not. Start with OSB and plywood. If you've seen a house being constructed, you've seen panels on the outside of the house or in the floor, that's typically where OSB and plywood end up, in addition to some packaging and some concrete forms. We help make medium density fiberboard or MDF and particle board, which you'll find in kitchen cabinets, in furniture and the molding that goes around your house. The byproducts of the manufacturing -- bark mulch and wood chips end up going to several light uses. Sometimes they're burned at the mill to provide energy. Sometimes they can be packaged up for residential purposes. I'm sure many of us have put bark mulch around our gardens and the wood chips are used in a variety of industries from pulp and paper to energy. Dimensional lumber, you'll see being used all over the place from the framing you see to your house, to the oak barrels that help age your bourbon and wine, to a hockey stick for your kids to play with, lots of applications for dimensional lumber. But the one I want to talk a little bit more about today is mass timber. Mass timber is kind of the most exciting opportunity that we see lying ahead for wood. And mass timber is going to replace concrete and steel in many of the construction applications that you see. Think of mass timber as a whole bunch of 2x4s glued together into a big block. Some of those blocks end up being the size of a tennis court, and they're lifted by cranes into place to build buildings. The tallest building today made entirely of wood is in Milwaukee, Wisconsin, 25 stories. And next to it, they're building a 55-story building that will be entirely made of wood even down to the elevator shaft. It's a carbon capture and store solution like no other, and it's coming to a high-rise near you. And added to the benefits of all that is that people -- we find love the look, smell and even the feel of real wood in their home environments. When you put it all together, the average home contains more than 20 different types of wood products, all of which were touched at some point by Kadant and their manufacturer. So we've mentioned that we're dominant. We stay ahead of our competition by innovating all the time, and I want to talk to you about a few of the innovations we're bringing to the market to keep ourselves ahead of our competitors. The first one is our VFR or variable flare reducer. This machine helps increase fiber recovery and lowers the cost of lumber. Now when nature grows a tree, it flares at the bottom, where it goes into the ground, and that flare makes it difficult to handle in a high-speed sawing operation. Our VFR solves that problem. When the logs arrive at the mill, as you can see, they get scanned, an optical sensor scans them to figure out how large the butt of the log is and sends the information to the software that the mill will use to decide what to do about that log. Knowing where the location of the flare start and the size of the flare, a solution is sent that allows us to open the jaws of the VFR as you see opening up there and cut the log to the size it's needed so that it can be moved through the process quickly once the VFR is complete. That allows the mills to operate faster and get more yield from the logs. Second, our disposable knives, in the battle between wood and steel, wood wins in the long run. We work hard to design equipment that has long operational life and easy to replace parts. A key to our success was the creation of disposable knives, which we started back in the 1980s. Recently, Kadant has introduced a patented combination of called the ISK or integrated scoring knife that's used in OSB. It cuts OSB strands more accurately and efficiently and with less waste than resharpen knives, more than even our first generation of disposable lives. We've revolutionized the way that mills source and use knives and create a great stickiness with our customers. These knives are patent protected, proprietary, and once you install the Kadant system, you have no choice but to come back and use our knives to operate. Finally, I'd like to talk about a new vision and IoT system called ARGUS. We're happy to see it won the Innovation of the Year award at the American Panel board Association just a couple of months ago. Our ARGUS system combines custom cameras, our illumen.X data system and PLC software to help our customers increase production, use less energy and lower the labor cost at their OSB mill. ARGUS makes sure of 2 things. On the load side, what you see happening here, we made sure that the machine gets the maximum amount of wood into the cutting chamber. The more you load a machine, obviously, the more strands you'll make but also the better quality you'll have because knives are -- sorry, logs that are held together tightly cut better. Then on the outfeed of the strander, as you see the ring cutting through -- the strands dropped down on to an outfeed conveyor, and we use a high-speed camera to measure the relationship between the large strands which they want and the small ones called fines that they don't want. It's important to keep that ratio below about 20% to make efficient use of the strander and to have a productive mill, and we're able to give our customers direct feedback in real time as to what's happening with their strander. In closing, I thought it would be useful to hear from one more of our customers about why Kadant is a key to their success. So here's what the RoyOMartin company from Louisiana says about Kadant. [Presentation]

Now I'll turn it over to Chris to talk about our fiber processing.

Hello. I'm Chris Demler, President and a 28-year veteran of Kadant Black Clawson, and I'd like to introduce you to our fiber processing business. Kadant fiber line designs custom systems and machinery for the global pulp and paper industry. Pulp and paper is a capital-intensive industry with stable growth globally. Paper packaging, tissue and similar products are made of virgin and recycled fibers. We are specialists in both the virgin and recycled businesses with recycling being our biggest group. Interestingly, the global production of recycled paperboard exceeded that of virgin fiber the first time last year. You should know that the recycled part of our business is our biggest part in that you should -- that recycled fibers can be used 6 or 7 times. So there's pace for the recycling business to continue to grow. So we recently launched a new division called Upcycling that was focused on turning the reject material from a recycling system. That's mostly the plastics and metals into sustainable and marketable revenue streams. Now as fiber processing experts, we help clients make boxes, packaging, tissue and those types of products and more. And we have adjacencies available to us as well. Now all of these products that you see here are made in large 24/7 continuous processes. And we help our clients optimize their product quality, process yield, energy consumption, and those types of things as long as we were there. Now a paper recycling plant is made up of a number of sub -- of connected subsystems and machines shown as islands here. And we are experts with over 150 years of experience and have optimized solutions for every grade of paper, tissue and raw material blend. We design systems and select equipment to meet the client demand based on their raw material and end product specifications. And depending on what we're removing, we need to clean the cellulose fiber and handle those rejects. And that's where our Reject Handling or Upcycling business and the recycling business go hand in glove of one another. Whatever is being removed from that raw material, that's fed to the recycling center, needs to be processed, and we do that. Now today, more often than not, our clients are working in brownfield installations. It brings a lot of opportunity but some challenges as well. Now this is a photo of a mill client purchased to convert it to make a new profitable grade of paper. They made a significant investment. Our contribution was design and supply of 2 stock systems, a brown fiber and a fly leaf recycling system that integrated really strategically in this old plant. I should note that this plant has the same feedstock, the bales of paper that Craig was showing, are what generally come into a recycling center. On this photo, you see about half of the buildings there are new, but there are many older ones that are kind of hidden in this photo. But we have machines and tanks all strategically placed for that through that system to minimize the investment for this client. This project was a big success. This mill makes the highest quality paper in their industry, and we do it with less than 1.5% usable fiber loss. Now recovered paper often contains up to 10% contamination by weight. So for every 1,000 tonnes a day of production at a plant, there's maybe 100 tonnes a day of reject material coming off that needs to be cleaned, dewatered and removed. Now traditionally, it's mostly plastic. This material will be landfilled, but we are now able to dewater it very efficiently using our [ mix 6 ] screw press. This keeps the water on site and in use. And I'll show you a video in a moment, but you can see this the material comes out very dry and ready to be incinerated. You can take it even further and dry it and create a saleable and reusable plastic pellets. Now in this case, our client was landfilling 100 tonnes a day of wet plastics at a cost of EUR 1.5 million per year. So we're able to take this in and press it and save them over EUR 1 million in just savings. So as Bilal was talking about, energy and water costs are kind of hand in glove, and they're very expensive. So there's a lot of value in the water. So you can see in this video, how dry -- this is reject from a paper recycling system. Again, this is -- we save them EUR 1 million year-over-year, simple payback on this project for about 6 months. We also supply several lines of equipment used in the production of virgin fiber. I'd like to share a client story in this space. So this client recognized the foundation failure in old clarifier. The clarifier is basically a large caustic settling tank with an underflow scraping system. But when they noticed this failure, they had to shut it down immediately. So shutting this unit cost a mill about 300 tonnes per day of lost production and required in the beginning using fresh lime because they weren't making up what they were with the machine down. In total, they were losing about $75,000 a day. So design and installation of a new clarifier is usually a 12-month or longer process. You can consider at $75,000 a day. It's a lot of expense they are looking at. So we are known for our patented clarifier technology. But obviously, this client was down, was having a major cost issues and the best technical solution might not win. So this failure is founded on a Friday afternoon, and we're on the phone immediately with them. And we had people on site that Monday. Our competition did not arrive until Thursday. So that gave us a little bit of a leg up. Thankfully, we had the longest lead time materials already in process for another client that we're able to flex to this job. And so that was obviously a big advantage for us. But take it further, we took responsibility for all the detailed engineering, the sourcing, the project management, in addition to our equipment supply. So you see some photos of this machine going together and all the intricacies of it. In the end result, it was a $10 million project completed on time and budget in 28 weeks. So it's about 2x faster than the traditional construction process and save them more than $5 million in lost sales and operating cost increase. Now in addition to our service, we take pride in our innovation, it's core to being people who lead our industry. And one of the tools we use to consistently deliver new and elegant products, it's called systematic adventive thinking or SIT. And we've been using SIT for many years to break down mental fixedness and have used it to produce the ideas for the world's first continuous detrashing system, the first ever inverted cleaner and other products well. Now SIT uses a toolbox of thinking tools to help anyone develop new and innovative ideas. There are 5 tools in the process, but I'm going to share subtraction with you. The basic idea of SIT is to apply one of the thinking tools to create a virtual product that you consider without emotion and doing R&D without a motion is the real trick to the deal. Using an example of an airplane. The pilot is a critical component. And if we subtract that pilot from the aircraft, we have the virtual product what I call a pilotless airplane. So if you consider the benefits of that virtual product, a plane with no pilot, it can be smaller, it can be safer to use. It can be less expensive, produced, et cetera, et cetera. So obviously, we call these UAVs or drones today, and there are many benefits to them, and that is why they exist. So if we use this idea of subtraction on one of our standard products, this is a cleaner bank, each of these cleaners is processing about 100 gallons a minute and removing sand from the process. Along the top, you can see the pictures of the piping. Well, if we remove that pipe, our virtual product is a cleaner with no pipes. And you kind of think about how does that work? Well, a cleaner with no pipes, if it did work, cost less, takes up less space, it should be easier to be assembled, et cetera. So that's the idea of the benefit. The third step of the SIT process, to decide should it be done. And in this case, we said, yes, this should be done. And we created what we call our XCEL NT Cleaner. So this cleaner basically has all the heads of the cleaners all joined together to create the pipe, to recreate the function of that pipe. In total, this product has 4 features that were all developed from SIT. And with some partial replacement, we can now do very large systems in a higher density with the partial replacement of piping as well. So that's the experience with the subtraction tool. I should mention that SIT is a lot of fun to do. We do it in little teams of 2 people, all kind of multidisciplinary and we've taught it to many of the Kadant divisions now who are also using it. Let's discuss a few industries and stats that influence us as well. The first, paper is one of the most recycled products in the world. So most recycled packaging material in Europe. In the U.S., 94% of people have access to either curbside or recycling centers. Last year, Americans recycled almost 70% of paper and over 70% of paperboard products. So we are highly engaged in this entrenched and sustainable industry. One trend everyone is aware of is the increased use of online shipments and the growth of boxes. So fiber-based containers are very sustainable and have been a consistent growth industry for many years. And although there's been some slight consolidation and some destocking recently, we know the business grows with the economy and standards of living. Kadant fiber processing has also been a consistent performer, and we expect to continue to grow as well. Everyone knows the egg carton, probably the best known molded fiber product in the world, but there are many other molded products we use every day like paper plates, product packaging for your computers, all forms of industrial parts. And if you've been in Chipotle recently Chipotle, right? So this business is expected to grow up to 8% per year as 100% sustainable fiber, both trees and many agricultural residues are used to replace single-use plastics. We're currently providing fiber recycling systems in this industry and are helping this technology to advance with fiber-based coatings like our bio fiber. Bio fiber improves the oil and water resistance of molded products to make them higher performance and able to replace more plastic uses for food, trays, bags and similar utensils, things like that. So we're excited to see this business grow. So most of us are aware of the environmental impact of single-use plastics and it is driving a live molded fiber. But did you know that 60% of garments today are made from plastic. The vast majority of them are only worn a handful of times and almost none of them are recycled, let alone made into new clothing. So Kadant is a fiber processing experts and there's regulation growing to address the textile industry issues. We have machinery installed these first systems that are recovering the cotton and recycling the plastics contained in this waste stream. I'd like to highlight 3 trends supporting our organic growth. Our illumen.X cloud connectivity system provides us machine and process health monitoring capabilities. Our paper front dynamic process modeling software allows our engineers and clients to create digital twins of their processes. So we can do training before start-up we can troubleshoot issues. And in the future, we'll be able to predictively optimize their processes. Demographics have created a gap in skills within our industry and creating an opportunity for us to expand our services and become more than a machinery supplier. Today, we're providing annual service contracts and machinery fully installed. Of course, sustainability is driving businesses to do more with their raw material, and we are creating new and valuable revenue streams from what is often being considered a reject. And our experience as fiber processing experts has us well positioned to support the emerging textile recycling industry -- I'm sorry, I got back here. In total, the Industrial Processing segment has many companies serving many different segments of the forest products industry. The companies that make up our Industrial Processing segment have many similarities. Fundamentally, we are providing strategic and critical front-end solutions that drive plant yield and process efficiency. Our clients depend on us to provide highly reliable performance machinery, but also flexible, efficient systems. All Kadant Industrial Processing businesses have large installed bases of equipment needing regular parts and services and they are in high wear environments that demand rugged design and quality service to maintain peak performance. And our businesses are offerings stable and growing markets that produce sustainable cellulose-based products we use every day. Thank you.

And as the slide shows, we're going to take a 10-minute break, so we'll start back up at 1:25. [Break]

Okay. I think I'm good to go. All right? Hi, everyone. I'm Dara Mitchell, I'm the Senior Vice President of Corporate Development, and I'm also responsible for our 80/20 activities. Today, I'm doing a double header. First, I'm going to talk to you about our acquisition strategy, and then I'm going to spend some time talking about where we are with 80/20. I have to say a couple of days ago, I completely lost my voice. So that's why I have this water up here in case I lose it. But Jeff doesn't know this. I was actually kind of concerned that I was going to be up here. Jeff was going to be next to me. I was going to be whispering my speech into his ear. He was going to have to be saying it louder. That's how bad it was. But I'm glad to be here and with a somewhat okay voice. So I'm going to start with one of my favorite slides. You guys might be familiar with this one. This is a slide that shows the logos of all the deals that we've done. And when I look at it, I'm just impressed at how many different geographies that we're in. If you notice all those flags for different countries we've done deals. I'm often asked by bankers do we have a preference for a particular geography? And I can honestly say that we don't. We look at every deal through the lens of how good a deal it is and whether it makes sense for us to do. And of course, there are some geographies that are a little bit more challenging than others, but we factor those in. So I want to spend a little bit of time talking about how we think about acquisitions, the different categories and then also where they come from. A lot of people ask us how do we find our deals. So I'll spend a little bit of time on that. The first category are tuck-ins. So what are tuck-ins? They're smaller businesses that fit discretely into one of our divisions. Oftentimes, they're a product line or they might be a set of customers. They're businesses that allow our divisions to ramp their growth a little bit faster than they could do if they were doing it with their own resources. A great example of this is a business called Conveyors Plus. When Chad Greenfield was giving his presentation on Syntron earlier, he mentioned one of the products was the belt alignment product. That was actually -- that came through a small acquisition that we made with this business called Conveyors Plus. Syntron actually found that company. Corporate development didn't do that. They were out. They were at a trade show. They thought it would be a really cool and complementary product for them, and they fostered that relationship. And that's how we find those tuck-ins. We use our operations. We educate them on the types of deals that we're looking for, what makes it an attractive acquisition, and they go out and form those relationships. And it really is a force multiplier for our corporate development team. The second category are strategic stand-alones. So these are similar in that they're in markets that we already know, but they're large enough to be a stand-alone business. And a great example of a strategic stand-alone is Balemaster. So when we acquired Balemaster, it was just very complementary to our European baling business. It was the North American market leader in horizontal balers. And so it complemented it very well, but it was large enough to be its own business. So where do we find these strategic stand-alones? Well, we spend again a lot of time with our operations. One of the first things that we do when we make an acquisition is we sit down with the management team there and we ask them who we should acquire, what are the businesses that they think are great. And these guys know best because they're out in the market. They know the markets really well. They know the brands that are the best brands there and who customers respect. And so we have 500 or more identified targets that we spend time forming relationships with. And we spend time with the operations to prioritize those. And we have what are known as our AAA targets. And those are the ones that we try and build really, really strong relationships with. It takes time to build those relationships. And we try and do them across cadence. So not just with our corporate development team, but with Jeff and Mike and with the guys in our operations. So when the seller decides that they want to buy that business, they've already done their research to know that Kadant makes a great home for their business. And it's a long game. We have to play the long game. You never know when somebody is going to want to sell their business or they're going to want to pass it on to their sons or daughters. In the case of Clouth, I think that was the longest one. We've been courting that business, I'm told from the seller for 30 years. Just to be clear, that was well before my time. But those -- I mean, that just goes to show how long these relationships take. And then the third category is new platforms. So these are ancillary markets for us. Syntron is a great example of this. Syntron started our Material Handling segment. Carmanah is another great example. We didn't have anything in wood processing before we acquired Carmanah. We don't do a lot of new platforms. And the reason for that is we don't want to become too diverse. It has to make really good strategic sense for us to acquire a business that's outside of the area. And so we spend a lot of time thinking about that. I like to think of it as like a big jigsaw puzzle. So for me, it like -- if we're going to like acquire this business over here, there has to be a logic for the rest of our business, and it has to be able to kind of tie back in some form or another. It's like we're creating a big picture. And what it does is it makes our business more robust, as Jeff was talking about our roots being in pulp and paper, and we've grown, it's made us a more robust business. And because these new platforms are in areas that sometimes we're less familiar with, they tend to come from bankers. They tend to be ideas that bankers bring to us. And so our corporate development team has relationships with over 150 bankers worldwide, and we educate them on what we're looking for in an acquisition. And that's really important. So for example, when Syntron was being sold, we didn't know -- we knew a little bit about material handling because we have material handling in mills and paper mills and sawmills, et cetera. But we didn't know the Syntron name. And it came to us from a banker who called me up and said, "I have a perfect business for you. It meets all the criteria that you guys are looking for. And that's what we want to do. We want to have them bringing us ideas for these types of businesses. So I wanted to kind of convey what a typical year looks like for us. So in a typical year, these are very rough numbers. We maybe have 120 actionable opportunities. And when I say actionable, that means that the business owners have decided to sell in the near term. Of those 100 -- and I should point out, some of those will come from our list. So those might be ones where we're talking to a business directly and some will come from bankers. Of those, we'll maybe put in 15 indications of interest. So I mean, it really starts -- the funnel starts to narrow down pretty quickly. And so why wouldn't we put in an indication of interest? So one of the hardest parts of about my job is we'll identify a company that looks great. We'll spend time knocking on the door, getting the owner to talk to us. And then they say, okay, we're ready to sell and they give us the financials. And it's like, yes, I don't think that we -- this business is right for Kadant. It will have some other factor that makes it not an attractive business for us, and we won't bother putting in an offer. And of the 15 that we put offers on, we maybe do 3 in a year. Sometimes we do more, sometimes we do less. I don't think there's been a year where we haven't done any deals since I've been here, but there have been years when we've just done one small tuck-in. And this year, we did 7. So it was a busy year for us. And why might we not do a deal? I mean, the worst ones for me are when we put in an indication of interest, and it's a business that we really like, and we think Kadant would be a great home for it, but we're outbid. And we're very disciplined about the price we'll pay. And so that happens. And it's frustrating. But you can see it really narrows down quickly. And our goal is to see as broader range of actionable opportunities as we can so that we can pick the very best opportunities. So this slide is a really important slide. And the reason for that is of the 16 deals that we did over the last 5 years, 14 of them were proprietary. And why is that important? I mean if you think about it, if you're buying a house and you have the opportunity to negotiate directly with the seller and to form a relationship with that seller and the seller cares about who they're selling their house to for whatever reason, that's a much -- you're much more likely to get a better price for that than if you go to an open house that's thronging forming with people and you have to put in a sealed bid. So the more that you can form those relationships and not have it be a huge banker-led competitive process, the better the situation is for us. And then the other thing I wanted to point out on the slide is you can see tuck-ins, strategic stand-alones and new platforms. And as I said, we've done very few new platforms intentionally. And then you can also see the segments that we've done them under. And the reason why I wanted to show that is, again, bankers like they ask about geographies, will ask us if there's any particular area that we really want to grow. And I can honestly say that no, there's great opportunities in each of our segments, and that's why you see it pretty evenly balanced. And again, for each opportunity, we look at how good a deal it is and whether it makes sense for us. So why do I think Kadant's been pretty successful at acquisitions? It comes down to really 3 things. The first is we're very discerning. We have very clear acquisition criteria that we stick to when we're making an acquisition, and I'm going to talk you through that in a little bit. Second, we're also, for lack of a better word, discerning on the price that we're willing to pay. Does that mean we won't pay a higher price for a business that we really want? Yes, but the returns have to work, and we're very focused on making sure the returns work. And then finally, we want to preserve and unlock value in the businesses that we acquire. So I'll touch on each of these. So I thought in terms of taking a look at the acquisition criteria, it would be nice to use a real example, and this is Key Knife, which we acquired in 2024, so this year. First and fundamental is about making sure that we buy a strong business. And what does that mean buying a robust business? Well, it needs to be -- have -- I mean, I think you probably heard this from all of the previous presentations, but it needs to have a mission-critical role in a process industry. It needs to have a large and sticky customer base, and it needs to be in a market-leading position. And then it also needs to have very robust financials. So if we look at Key Knife, well, they make chipper heads, they're the market leader in making chipper heads and knives for sawmills. They have a very large customer base that's very loyal to them, and they're the market leader in that position. If you're a sawmill and you don't have access to Key Knife's products, you basically can't produce dimensional lumber. So we're talking about a really core role that they carry out. And from -- in terms of having robust financials, Key Knife's products are 100% consumable. So that makes for very, very steady revenue. So that's all good. Like this would be like one of the businesses where we get there and we'd be cording it whatever and then we couldn't get it for the right price, but we were able to get it for the right price. And the reason we were able to get it for the right price was we were able to leverage relationships. So Camanah had a long-term relationship with Key Knife, and they were very good about maintaining that. They were able to introduce our corporate development team and our executive team to the business. And the reason why it worked so well with Key Knife is they were an ESOPs. So I don't know how much you guys know about ESOPs, but the culture is really, really important. Everybody in that business owns a part of the business, and they're very focused on creating value in that business. And it has that culture and they didn't want to lose that culture. And so Kadant, one, they had seen Carmanah succeed under Kadant, and they had followed the story. They stayed in touch with Michael. And they knew that we were a good home for businesses. And second, our decentralized operating model meant that they would be able to retain their culture and to continue to do what they do best, which is what we wanted them to do. And so that allowed us to avoid a process. And then finally, it's about preserving and enhancing value. And again, I touched on our decentralized operating model, and I'm going to talk next about how we enhance value of the businesses we acquire. So it's really the best of both worlds. Actually, I think it's a great model because I love that we're -- we let the businesses decide what they want to do. We're not taking a top-down approach and saying, this is what you need to do to increase value. But we have a whole range of levers and programs that we can use in which the businesses can decide what makes the most sense and the timing for those to increase their value. So an example is the 80/20 program, which I'm going to talk about next. But also things like illumen.X, you've been able to hear that our businesses have been able to share the resources that came from our Cogent acquisition and to develop illumen.X to meet their needs. And then also just the geographic footprint and internal networking. We really encourage our businesses to talk to each other and to learn from each other. So whether that's about entering a new market like India or South America or whether it's about learning about using cobots or 3D printing, they're able to talk to each other and to network with each other to enhance their own value. And again, it's very bottom-up as opposed to top down, but with support from the top as well. So I wanted to talk a little bit about the financial impact of acquisitions. Since 2013, we've completed 24 acquisitions. That's 56% of our forecasted revenue for 2024 and 64% of our adjusted EBITDA. I mean as you can see, it's our biggest use of free cash flow, and we're very careful about what we do with that. We want to be good stewards of that money. Our average deal multiple is 8.8x through that period, which I know is pretty impressive. I know because I talk to my peers and I see what other industrial public companies are paying for acquisitions and what sponsors are paying. And I just can't get my head around it sometimes in terms of how they can create value from acquiring businesses at such high multiples. But anybody can buy revenue. And if you pay a high enough multiple, you can buy revenue, you can buy earnings. But what it comes down to really is how good a return you're getting for it. And if you take the average adjusted return on invested capital since 2023, ours is 15%, which I think is really quite impressive. So what's the future hold for our acquisition strategy? I don't think you guys will be surprised to hear more of the same. We intend to stick to our knitting to be very disciplined in what we do to be very conscious of the prices that we pay. I think it's likely that we'll continue to do more deals and to do larger deals because that's the course we've been on over the last 10 years, but we'll do it very carefully and in a measured way. Next, I'm going to talk about 80/20 -- sorry, excuse me for a second. I just need a little sip. I thought it would -- before I start talking about our 80/20 activities, I thought it was worth explaining why I'm up here, why the person running corporate development is also running 80/20. And that's because when we first started this process in 2016 and brought in outside consultants, I actually asked if I could go along and just watch what they were doing. And I did that, one, because I just thought it was interesting. And two, I thought it might be able to apply to our acquisitions, and it might be a way that we could get more out of our acquisitions. So I spent a year -- I was lucky, I should mention. The first one we did was in Massachusetts. It's actually Bilal's business. And so it was easy for me to get to. And I spent a year just shadowing what they did and going along every month and hearing their meetings. And what I thought was really cool is it was kind of like doing an NBA all over again because each part of the business is put under a microscope and examined looking for where -- what the key value drivers are and focusing on those. It's about doing a small set of things exceptionally well, and that's really, really powerful. So I think you guys -- most people here probably know about 80/20 and the Pareto principle. But just in a really, really short, it basically is 80% of results come from 20%, and that holds true everywhere. It was originally discovered by this guy, Pareto in Italy in the 1800s. He noticed that 80% of his wealth -- not his wealth, 80% of the wealth in his principality was controlled by 20% of the people. And then he went to the next principality and it was the same thing and the next and the same thing. And then he started looking around him, and he was noticing this held true for a whole range of different things. So if you want to think about a personal one, most people wear 20% of the clothes in their wardrobe 80% of the time. And I bet if you think about it, that's probably true with your favorite shirts and whatever. I know I do that. Or one that's kind of closer to my heart is golf. I'm not a very good but a very enthusiastic golfer. And if I look at my score and my shots, the bulk of them are my puts. So if I really wanted to lower my score, I could focus on putting and stop 3 putting all the time, and it would be the most impactful to my score. From a business perspective, we focus on products and customers. So -- and this -- I find this amazing. I mean you kind of don't believe it at first, but if you actually go out and run the data for different businesses, it holds true. 80% of your revenue comes from 20% of your products and 80% of your revenue comes from 20% of your customers. And we've done -- we've run the data for most of our businesses, and it's within a couple of percentage points, always true. So the idea of 80/20 is all about simplifying your business to focus on the most important things. So from a product perspective, you can't really get rid of 80% of your products, but you can try and simplify all the SKUs that you have. And same thing with your customers. And there, what you want to try and do is focus on treating your best customers even better and to maximize that. So what are the benefits from reducing complexity? Well, for a start, it deepens customer relationships. You're really focused on your best customers and driving those relationships. But by reducing complexity, whether it's in your manufacturing processes or through your products, you're driving profitable revenue growth. And that's the goal here to focus all the energy on improving the results and improving the bottom line and expanding growth through profitable revenue growth. But not only that, it also really empowers employees, and I'm going to touch on that in a little bit just in terms of some of the broader things that we see from 80/20. So that all sounds kind of simple, but how does the process actually work like from that kind of high concept thing of focusing on the most important things. First, it's heavily data-driven. You don't make any decisions without first pouring over the data. None of it is gut instinct and all decisions are made with detailed data analysis. The process is -- it's got a very methodical tempo to it, an operational tempo. So the meetings are carried out every month. The management team is a steering committee. And there's a series of 5 or 6 different teams that are analyzing data to come up with recommendations. Those teams are cross-functional. So there may be people on the sales side, they may be people in manufacturing, right across different levels and right across the whole business. And those recommendations are driven from the bottom up, and that's why it's so empowering because these guys are taking the data and they're saying, this is what we recommend that you do. And they're doing that in front of the management team. And I've rarely seen the management team turn a decision down because it's so well thought through. If anything, they're more likely to say we want you to dig a bit deeper or we want you to modify it slightly. But that's very empowering. And I think the thing that I want to make -- drive home the most is it's not a project. Like you don't go in and do an 80/20 project. It's a process. You're changing the culture of the business to focus on the things that are most important. So I thought I would try and bring this home to you by focusing on an actual team and the results. So every 80/20 process will have a product simplification team. As I said, it's one of the areas that you want to focus on is to take complexity out. And the product simplification team for our North American Doctor Blade business focused on -- you always want to focus on the biggest things. They focused on the blade materials. So you heard Bilal earlier explaining about these blade materials about Doctor Blades in general. Over the years of running this business, they had accumulated a large mass of different kinds of materials and different configurations. And that's just from the nature of doing what different customers wanted over time and not simplifying it. So they put together a multifunction team that included people from applications and sales and even the stock room. And these guys systematically analyze the data and made recommendations about how to reduce it. And we were then able to -- when we started the 80/20 process for our European blade business, they didn't have to recreate the wheel. They didn't necessarily take the same results that the American business did. But what they were able to do is to go through the same process and to use a lot of the same types of analysis, it got them up the road faster. So let's take a look at the results from that. And these are actuals results. So our North American business was able to reduce materials by 37% and configurations by 50%. And in Europe, that went even more so. So they actually reduced materials by 74% and configurations by 85%. So pretty impressive results. And again, those were not top down, anyone telling them what to do. This was suggested in-house by their teams and their guys. And so what are the results of that? Well, it's a hugely simplified manufacturing process if you don't have to constantly change the setup for different configurations of different materials. It's a much easier sales process because your guys don't have to go out and learn all the different properties of different materials and why they're better or worse. It streamlines the supply chain and it reduces inventory. And I threw a quote up there that you guys can read from one of the guys. So I mentioned earlier, in part, you're doing 80/20 because you want to improve the financial results, but there's a huge amount of qualitative benefits as well. And every single President that we've done this with has noted that one of the great things about 80/20 is it allows you to identify really good talent, the hidden diamonds that are in your business that may not ever have a chance to engage with the management team. So that's been huge in terms of thinking about succession for different roles, and that's been really beneficial to us. And as I said, it's also got this whole employee engagement angle to it. I think about myself, who doesn't want to work on something that's a value. You don't want to be doing things that are meaningless and that no one pays attention to. These are business drivers. These are things that have a material impact to the business. And so it's a lot of extra work for these guys to be involved in these teams, but they get a lot of value out of it as well. They enjoy doing it. And then finally, it increases communication across business functions. So because you have all these cross-functional teams. It's like every time you go into any business and you ask people what -- how good is communication, 9 times out of 10. In fact, 10 times they say communication isn't very good. They always want more. But 80/20, they're getting involved in the things that are directly impactful to the business. And so they kind of know what's going on a lot more. So people ask us how much of our business is currently under the 80/20 program. Right now, it's about 50%. I was asked to put up a slide to try and show where we would be, and I can't. And the reason why I can't is, as we continue to do acquisitions, it changes when we're going to do them next, which businesses will 80/20 next. And so 80/20 tells us we should be starting with our businesses that are the largest in terms of EBITDA and that have the greatest potential from 80/20, and that's what we'll continue to do. So if we make an acquisition where there's great potential, that will come up before something that maybe we already have. What I can tell you is that we're going to -- we're going as fast as we can, but it is a time-intensive process. And we want to make sure that we do it so that it's embedded in the culture. So finally, I just want to touch on the fit. I want to wrap it all around the fit between acquisitions and 80/20. So I know you guys have heard in the past that when we make acquisitions, we don't factor in synergies. And the reason why we don't factor synergies in is they're so elusive. I think oftentimes, people think they're going to get much more out of their synergies and those synergies actually result in. And also, it kind of goes against our ethos for us to be sitting in a corporate office and deciding where we're going to get synergies from a business as opposed to letting the business decide how to most impact their value, it doesn't fit well with us. So 80/20 fits really well with that. It allows us to improve businesses, but the businesses are doing it in their own way. Their guys are the guys are the guys who are coming up with how to improve the business, and it's their management team that's deciding which of those decisions make the most sense. So it really lets us enhance our businesses, but in a way that fits with our decentralized operating structure. And so my last slide, I'm going to show you what the impact is. These are actual results. This is a business we acquired in 2019, we started the 80/20 process in 2020. So you can see, we always start with the year that we started the process, what the numbers were and then where they are now. And what I want to really draw your attention to is the 450 basis points change in gross margin and the 660 basis points change in EBITDA. Now of course, some of this is operating leverage and market conditions, but the largest portion of it is down to 80/20. And the reason that I know that is because we have done analysis to look at all the businesses that are under 80/20 and the businesses that were not under 80/20 during the same time period. And all of the businesses under 80/20 had much larger improvement to both gross margin and to EBITDA. And so it's really pretty powerful stuff. And just one last thing I want to say is, if you're wondering why, like did we choose 2020 because that was like a bad year, no. If we put 2019, it wouldn't have been any different in terms of the changes. We did 2020 because then you can see the parts as well. And that's all I have for you. There are 2 topics that I love. I'm more than happy to talk to anybody about it later in the Q&A. And I'm going to pass it over to Mike because I know you're all dying to hear about the financials.

Hi, everyone. I'm Mike McKenney, Chief Financial Officer. Since several folks took the opportunity to introduce themselves and talk about how long they've been with Kadant, I'll start out with my tenure. I've been with Kadant for 31 years, came in through an acquisition in '93. So Dara had a slide up that showed all the acquisitions we've done. I've been here for all but 2, Lamort and Vickery, all the others I've been around for. So thanks for putting that up Dara. So I'm a great historian. This shows some of the topics I'll be reviewing today. I'd say these tend to be some of the areas that I most commonly get questions on. So I'll kind of cycle through and touch on each one of these and of course, ending with our new 5-year plan targets. Here's our performance from '18 to '23. So this is over our last 5-year plan. And as you can see, on revenue, we grew a little over 50%. On operating income and adjusted EPS, we grew almost 90%. And the 2 that I'm most proud of are our growth in adjusted EBITDA, 75% and our improvement in adjusted EBITDA margins 280 basis points from 18.2% to 21%. So that was absolutely fantastic. And of course, that improvement in EBITDA margins contributes to the growth in cash flow and the growth in EPS. So I'm very proud to be standing here and telling you that when we did our last 5-year plan, we were at 18.2%. We are targeting growing to 20%, and we beat that target. That is absolutely fantastic. And all the folks that have already come up and presented, that's all due to their hard work, the folks in the field. I'm the lucky guy who gets to come up here and show what all those folks have done. So we're often asked what companies can we compare Kadant to. And I think as you probably saw today, that's a bit of a challenge because we're in a lot of different industries. But what I do have for you is that Baird produces a Baird industrial company composite, which represents 484 companies, which Baird views as indicative of the publicly traded industrial company universe. So let's take a look and see how Kadant up. The first chart on the left is our forecasted revenue growth for '24 at 9.7%. And you can see that Kadant is firmly in the top quartile. Now that's the only chart that will reference '24 because in their analytics, everything was really focused on '23. So the next chart, to the right of that, Kadant's gross margins for '23 were 43.5%. That puts us firmly in the top quartile and better than 85% of industrials. Now looking at adjusted EBITDA margin and return on invested capital, excluding goodwill. That's the way Baird does it. It's not my standard calculation, but we just followed along. You can see here, on both metrics, Kadant is firmly in the top quartile. And I'd say here, as proud as I am of what we've achieved on our improved EBITDA margins, this shows that to be a top industrial, there's still room for improvement. And finally, looking at total shareholder return over a 1-, 3- and 5-year period and comparing that to the Russell 3000 and Dow Jones U.S. Industrial Machinery indexes, you can see that Kadant outperforms quite handily in all 3 periods. Parts and consumables, near and dear to my heart. We pay a lot of attention to our parts and consumable business. It's very important to us. Kadant businesses have been around for a long time, as you've heard from many people. So we have a large installed base, and we are often the inventors of the technology being deployed. And why are we so focused? Why is everybody in Kadant so focused on parts and consumables? The answer is pretty straightforward. It's a more predictable revenue stream that yields higher gross margins than our capital business. And by focusing on your parts and consumable business, it also keeps you very close to your customer. Now this is a slide that Jeff also showed, but I essentially want to make the same point that steady, more predictable revenue stream that parts and consumables gives us, I could extend that to our geographic footprint. That also can act as a buffer. So let's say one region is down, it may be offset by another region. As currently is the case, North America is performing better than both Europe and Asia. And I'd make that same point on our end market diversity. As you saw today, we are in a lot of different end markets. Free cash flow. There's a reason that this has followed, that this comes just a couple of slides, after the parts and consumable business. The parts and consumable business is a significant contributor to our strong free cash flows. In addition, other attributes that Kadant has that contribute to our strong free cash flows are our CapEx requirements run at approximately 2% to 2.5% of revenue. Our working capital requirements run at about 12% to 15% of revenue, which I believe generally tends to be lower than other industrials. And our R&D requirements to support and grow our business run at 1.5% of revenue. Capital deployment. Dara helps me out with this quite a bit. As Dara mentioned, we're quite acquisitive. And as you can see on this chart, 62% of the capital that we've deployed over the last 5 years has been on M&A. Now we know acquisitions are risky. And what we try to do is we try to derisk them by sticking to our criteria that Dara laid out and also, frankly, being willing to pass on transactions. Some of the other areas, which I've already covered are CapEx and R&D. And I wanted to touch on dividends. We instituted a dividend in 2013, and we're not looking, we're not striving to achieve a certain yield. but we would like to increase the dividend every year, and we've been able to do that every year since we started paying a dividend. And finally, I'd make the point on what's missing from this 5-year chart is stock buybacks. And I occasionally get asked that question. We always have an open stock buyback authorization, but we really feel that we can create more value via acquisitions than we can on stock buybacks. 5-year financial targets. This is a historical walk-through. This was our first 5-year plan, the base year is 2012. The reason I wanted to walk through our past 3 5-year plans was to demonstrate our track record of setting challenging goals and achieving them. You'll see, if you look at the base year on the left and you look at the targets we set, I don't think anybody say that's like falling off a log. But I can tell you when we set our targets, we always feel we have a path to get there. So the middle is the target and the last column shows where we landed after 5 years. This slide shows our second 5-year plan, again, left column showing where we set it. One thing I'd mention, we do 5-year plans, you may notice that the base period increment is not 5 years. And that's because if we're progressing well against our 5-year plan, we'll challenge ourselves and reset and do another 5-year plan, reset our goals. And that's what you see here. We are doing quite well against the 2012 plan, and we reset our goals in 2016. Again, I'd point to the middle column, as you can see, not like falling off a log; and the last column, what we actually achieved. And frankly, our performance on this 5-year plan, I think, was phenomenal. I will use the phrase we beat the pants off of the adjusted EBITDA and adjusted EPS and free cash flows. Just phenomenal, phenomenal performance on this one. And finally, our last 5-year plan that we set in 2018, and you can see in the last column our performance. Now of course, this 5-year plan was during the pandemic. And I can tell you, as much as Dara would hate to admit it, it was a challenge on the M&A front. Our memories are quite short, but I can remember for 1.5 years or so, it was just Jeff and I going into the office because everybody had to be working remote, which was crazy. But nonetheless, even during the pandemic, we did a couple of transactions, which I think is quite impressive. So we came in a little under on our revenue and adjusted EBITDA dollars targets. But you can see on adjusted EBITDA margin, adjusted EPS and adjusted free cash flow, we are in the target range or above the target range. And interestingly enough, at the end of that 5-year period, we are almost net cash positive. We took care of that quickly in the first quarter of '24 with a couple of transactions. And here's a chart that shows over our last 5-year plan, our revenue and adjusted EPS. I think that's a pretty impressive chart. One of our focus areas has been improving our adjusted EBITDA margins. And you can see here our track record over that 5-year period, where we improved the EBITDA margins by 280 basis points. But I do want to emphasize that that's been on our radar screen for more than just a 5-year period. And as you noticed, that third bullet point, over the last 10 years, we've improved our EBITDA margins by 800 basis points. And here, I'm showing my hand a little bit early for our next 5-year plan, our new EBITDA target will be 23% or better. Now looking at our SG&A spend. As you can see here, we've been able to improve our SG&A, leverage our SG&A much better over the last 5 years, and we've improved by 320 basis points. Again, as was the case with the EBITDA, if you look over a 10-year period, we improved by 880 basis points. Everyone in Kadant is focused on getting better leverage out of their SG&A because if you're going to hit those EBITDA targets, you're either going to have to do it through gross margin, which isn't always totally in your control, or through SG&A, which we do control. So I can tell you in our next 5-year plan, we'll continue to be quite focused on this area. And finally, the moment we've all been waiting for, our new 5-year goals. As I said at the beginning here when I was rolling through our last 3 5-year plans, these are never like falling off a log. These are always a challenge, but we always feel we have a path to get there. So as you can see on the revenue front, our new targets will be to grow to $1.5 billion to $1.8 billion. On adjusted EBITDA dollars, we're targeting to grow to $340 million to $405 million. On our EBITDA margin, we're targeting to grow to 23% plus, as I had covered on an earlier slide. On adjusted EPS, we're looking to grow to $15 to $18 and our adjusted free cash flow, looking to grow to $240 million to $280 million. Now one point that I wanted to make here for the folks who are going to do some modeling off this number; Ross, looking at you specifically. On the SG&A front, currently, at the end of '23, our amortizable amortization expense was about $18 million. That comes from acquisitions. So if we meet these targets, we're projecting from '23, that $18 million in amortization expense will grow to about $63 million. And the reason I make that important point is because in '23, that is $1 a share. By '28, that will be $4 a share of noncash expense. So I want to make sure that people understood that's a significant factor and it has, of course, a very meaningful impact on the EPS range we've put forth here. And finally, this is just a chart that shows our revenue and adjusted EBITDA dollars at the midpoint of the targets we set, what the CAGR would be. So with that, I will turn the floor over to Jeff.

Thanks, Mike. So I just wanted to -- we're kind of at the end of the meeting here. I appreciate everybody again coming. I know that we got into more detail than we have in the past, and we often do, but we thought that there was some value in doing that. So just a quick couple of comments. I hope today, you got a sense of why we're excited about the secular trends, the things that are driving our business that's fueling our growth. As I mentioned earlier, they're all growing, and we're quite well positioned, we believe, to serve those markets as they grow. Our decentralized structure, the great thing about that is these individuals that are running these companies, and you saw many of them today, they get quite excited about growing their businesses. And it's entirely incumbent upon them and their management teams and their employee base to serve these growing markets and make sure we're well positioned. And I can tell you that they take that very seriously and they do a great job of it. At the end of every year, we kind of have a little strategic planning session. It takes about a week. And at the closing dinner, we show the performance of all the different businesses, and we give out numerous awards for performance. And there's friendly competition there, and it is friendly, but everybody wants to do better and everybody realizes it's incumbent upon them and their management teams to continue to improve their businesses, to continue to improve their performance, to optimize their businesses. The decentralized structure, I think, does that. Our employees are very talented. Equally important, they work really hard running their own businesses. You saw in Mike's presentation that we've had good financial performance, but there is still more opportunity to even perform better. And our new 5-year targets require us to continue to improve our operating performance, continue to take advantage of the operating leverage that we have to improve our metrics. Doing that obviously generates a tremendous amount of free cash flow because we don't have to invest much back into our businesses relative to a lot of others. Our product life cycles are very long. Our manufacturing assets can produce a tremendous amount of revenue without a lot of investments in them. So we have great operating leverage. And then, of course, it's critical that you properly allocate that cash and make sure you're getting an above-market return on it. And that's very much a disciplined criteria that we really try to stay focused on. We couldn't do it without employees. You got a sense today of some of the employees. Obviously, we have thousands of employees around the world, these ladies and gentlemen representing them today. I would tell you, and of course, I'm highly biased, but we have really talented people, and they work really hard. They work harder than our competitors, and that's why we perform much better than our competitors. So looking a little more long term, Mike showed you kind of the last 5 years and some of the 5-year plans. But the progress that Kadant has made really in transforming the business, I would tell you, has been pretty, pretty impactful, I think, and quite impressive. So you can see that our EBITDA margin, and of course, '09 was the end of the financial crisis, so it was obviously a little depressed because of that. But you can see that we've made tremendous progress in improving our EBITDA margin. And Mike just showed you that in our next 5 years, we're going to make more progress, get that north of 23%. We have sectors. Our flow control sector's EBITDA margin is about 29%, just slightly under 30%. Our industrial processing, I think, last quarter was above 25%. So all of our sectors have EBITDA margins that are higher than we report as a public company because we've got public company expense. But as we continue to grow and leverage that, our EBITDA margin is going to improve. And we won't be happy in '23, the 5-year plan after that we will have it going even higher. We're always looking to try to optimize our operations, and that's why our SG&A has come down substantially. One of the challenges when you run a decentralized structure, you've got 23 companies all around the world. You have 23 presidents, 23 VPs of sales, engineering, manufacturing. So there's a lot of SG&A associated with that. We believe ultimately that we generate a higher return and it justifies that investment. But that being said, we're always working hard to try to reduce that down. You can see that we've reduced it down substantially over the last 15 years. Again, we'll continue to drive that even lower. I want to take a kind of a longer look at the performance. And you can see one of the things this really demonstrates is the operating leverage that Kadant has. So over this longer period of time, in nearly 15 years, our revenue grew about 11% a year. You can see our adjusted EBITDA grew twice that, grew at 22% a year. So we were able to get tremendous leverage on that revenue growth. But more importantly, our adjusted EPS grew more than 3x that, at over 36% over that period of time. So our business model, our strategies, our structure, the markets we go to, the products, the systems we offer give us tremendous operating leverage and tremendous opportunities to drive more and more profitability, more and more cash flow, which, of course, then we invest back in the business. So this is really the end of the formal presentations. We're going to open it up for questions. I think because we were also showing this as a webcast, we'll take questions in the audience, and then we'll take a couple from people that are participating via the web, and then we'll come back to the audience. And with that, I'd like Mike and maybe Dara to come up to answer questions. We put Dara on the end because she's still slightly sick.

All right. So we've got mics here for anybody that might have questions. Ross?

Ross Sparenblek, William Blair. Thinking about the organic growth targets, could you maybe just piece out the price and the volume contribution there? And then just kind of think about the cadence, I know we're looking for a second half acceleration in 2025. 2024 was down low single digits, implies maybe high single digits in '26, '27, but that pipeline gets pushed out. How does that maybe change your assessment between that 3% to 5%?

Yes. I would say, Ross, the price will be a smaller component of it. I'd lean more towards volume and mix on that.

And then just anything around the cadence there?

Excuse me?

The cadence of it. I mean, I don't expect it to be very linear.

What we gain in '25, picking up '26, '27.

Yes. Of course, end market conditions are going to dictate where we go here. But I think I kind of think of that as standardly, that's how we'll progress, so kind of smooth, of course, it's always in the perfect world.

Our capital equipment business has been, I think, challenged over the last 2 years, last 7 quarters. I almost view it as an industrial recession. If you look at the economies around the world, North America, in particular, is doing pretty well compared to Asia and Europe. But it's been a lot more on the service and the experience side. And if you look at the industrial markets and the capital, it's actually been quite sluggish. Because we have such high parts and consumables, we've been able to do well. And through our optimization programs, increasing our profitability, we've been able to continue to grow and post record results during that period of time. But our capital demand has been pretty sluggish. I think most of our divisions believe that things will start to improve as '25 goes on, more in the back half of the year. And then all the kind of economic forecasters that we work with indicate that from '25, back half of '25 on, things should start to get quite strong again. We monitor the average age of our equipment in the field. It's quite old. And history tells us that, at some point, they're going to have to start reinvesting back in that business again. So we expect a pretty decent acceleration, beginning of next year and going to the following years.

That's very helpful. A question we often get is kind of the internal growth engines for Kadant. And OSB is 10% of sales. I think outlook is for 15% growth, a balanced supply chain there. Can you maybe help frame the OCC contribution to the business and how you guys are thinking about the growth within the U.S. and Europe?

Well, so the fiber recovery, fiber processing part of our business is about 20% of our business. It's probably the largest market globally. It's the most mature market. And so it is, I would say, in many of the markets we're in, one of the slower growing. It's interesting. So '22, coming out of the recession, there was a lot of stocking that took place during the pandemic. And then coming out of that, there was so much buildup inventory, there was a bit of a recession. And for the first time ever, paper demand dropped in '22 and '23. In all the recorded history, we've never seen demand drop. It continues to grow kind of around GDP level around the world, sometimes slightly higher because of kind of the migration away from plastics and non-renewables. So this year, things bounced back a little bit from last year. And the belief is it will continue to grow. But the numbers you see tend to be, I would say, 2.5% to 3.5% organic growth on the OCC side, depending on the region of the world you're looking in. Some places, it's higher. In places like India, it's the fastest-growing economy, it will be higher, but that's a pretty small base. If you look at the mature base, America, Europe, and in particular, China, I think it's growing kind of around GDP level. Gary?

Gary Prestopino, Barrington Research. In your plan, you're about 65% aftermarket year-to-date. So where do you think you'll be in terms of the consumables as a percentage of sales as you project out to 2028?

Good question, Gary. We're, of course, very focused on parts and consumables, and we love to be able to acquire businesses that are accretive to that metric as we did earlier this year with Key Knife. That was basically all parts and consumables, as was DSTI. But they're hard to find. They're hard to find. I think we'll be able to incrementally improve that. So we may get it up a couple of points. But as much as I'd love to see us in the mid-70s or 80%, I think realistically, we're talking about something that maybe we can move to the high 60s. It's a challenge. When you look at industrials, we're a bit of an anomaly in terms of the amount of parts and consumables.

Are you at liberty to kind of tell us what the flow-through is to EBITDA on $1 of consumables versus capital?

I would say no. But broadly, I would say what we get for operating leverage with parts and consumables and capital, with that mix, that blends out at somewhere between, say, 25% to 35%.

Kurt Yinger, D.A. Davidson, maybe three wrapped into one. Mike, just in terms of the M&A contributions, can you talk about what's implicit within that in terms of the multiples you're going to pay, cost to borrow? And second, in the past, part of the margin expansion was assumed to come through some of the acquisitions. Is that the case in this plan? And then third, for Dara, 6% to 8% revenue growth from acquisitions is different in terms of the revenue base today than in the past. What are kind of the key challenges you think to generating that type of deal flow, maybe having to go out and do larger deals to reach those type of numbers?

Okay, Kurt. So let's start with your first one, Kurt, restate that one more time now.

Just in terms of kind of implicit within the EBITDA targets and the acquisition contributions, what kind of multiples are you assuming you're going to pay?

So we've built in the model a multiple of 10. And in terms of cost, we built in the model a 5.4% figure, and there'll be some kind of blend between Europe and North America.

In terms of margin expansion, do you expect any of that to come through the acquisitions? Or is that primarily margin...

I think what we're really counting on is our internal initiatives for margin expansion. It's at the level we've reached and from so many companies that we've looked at. When we did our last one, I did say, hey, half of this will be from accretive transactions. I think it's going to be more from internal initiatives.

And then in terms of the inorganic growth that we're targeting, when they put the plan out and when I saw it, I do think it's very achievable. I also do think, though, as we do larger deals, we will have to pay higher multiples. And I think that's why they raised it to 10x. We're not going to continue to pay 8.8x that we paid over the last 10 years. And the larger deals also, by nature, tend to be the ones that go to an auction process. They'll be harder to get from a proprietary perspective. But we'll supplement those with the kind of the single hits as well. So we'll continue to do both, and that will bring the multiple down.

And it's interesting to see kind of illumen.X across the different business segments and products. I think most of that stems back to Cogent, which wasn't a tremendously large deal. Can you just talk about what that business has brought you guys over the last couple of years, kind of the level of digitalization that you're kind of implementing across the portfolio and whether our customers are adopting that at a high rate?

Yes. So we initially tried to internally develop our own digital platform. We put a group together, spent several years and some money doing that, and realized that we weren't going to get where we want to be doing that. We had known Cogent. Cogent was really strong on the wood side of the business. We had a relationship with them. And even though they were a nice little company on their own, we really acquired them because they were kind of one of the top automation companies in Canada, and we knew they had the capabilities and the base, kind of the bones, of putting together a digital platform for us. We bought them for that reason and have spent a lot of money with them over the last several years developing that platform. I would say almost every division we have has a project, an active project within. We are trying to embed smart technology into all our products and connect them together. Some lend themselves to that more than others. Some are further ahead. Michael showed you that we won a technology award on the OSB system, and we're selling that system now, and it's been very well received. Others are earlier in their process. Some are further along. But it's one of those things where the customers, sometimes they expect it as a feature set, just as you do when you buy a new product, you expect enhanced features. With others, it's pretty innovative and they're willing to pay for it. What we're really trying to do is figure out how to maximize the monetization of it. So for instance, Chad showed you that 42-mile-long conveying system with all those smart sensors. There's 66,000 rollers. We don't make conveyor belts, by the way, we make the rollers those belts ride on. On that particular project, there was 66,000 approximately of those idler cans that it rolls on, and we embedded smart technology in each one of those. They signed up for a 10-year subscription on that. So they're paying an annual subscription fee for 10 years for the management of that data and that software. And we have other projects we've done that, too. So in some cases, we'll monetize it through a subscription. Others, there'll be a one-off sale. And frankly, there'll be others where it will just be a feature set that's expected in the product to stay ahead of the competition. But it's been pretty impactful for us. And as you saw, almost every division has an active project with it.

Nate Burggraf from Capital Group. Two questions. One, I think if I read it right, the working capital target, I think, is 12% to 15% of sales.

Yes. Correct.

Different people include different things in working capital. What is the baseline right now so that we know what that is relative to the current?

Current assets, current liabilities.

That's it. Okay. Just the definition.

And right now, we're probably in that range.

Yes, we're running in that range.

Yes, we're just a little above the 15% currently.

Got it. And then second question is, for each of the different 3 segments, you guys had a chart that had the market trends and had a future CAGR going forward. And every single one of them had above 5% CAGR and your internal projection is not above 5%. Is that just, hey, consultants sometimes are a little overly optimistic? Is it you guys are generally overly conservative?

Well, probably a little all of the above. The last 5-year plan, our assumptions were like 2.5% to 3.5% organic growth. And in fact, I think we grew 6.6% something.

Yes. From '19 forward, we were at 6.4%. From '18 forward, we were at 5.8%. In both of those, we had a headwind of 1% to 1.25% on FX.

So we kind of did probably about twice as well as we had forecasted. So we tried to be somewhat conservative. One thing is, if you didn't follow Kadant for very long, we've been independently public from Thermo for 23 years. We've never missed a single quarter guidance ever. And part of that is because our divisions are really on top of their businesses and their numbers very well. Part of it is we're kind of a fairly conservative organization. Our goal is always kind of under promise and over deliver. And so we build that into our assumptions quite often also.

I'll be thrilled if I'm sitting here a few years from now reporting that we handily beat the 3% to 5%.

Stacy, let's take a couple of the online questions.

Sure. The first question is from William Hyler from WDH Capital. Excluding acquisitions, annual capital spending has remained low for the past 15 to 20 years. Looking forward, is there a need to grow the manufacturing footprint in select divisions or product lines to meet rising demand or optimize distribution? Or is current capacity viewed as adequate? For the right product lines, I would assume this would not be a negative.

Yes. So Mike mentioned that we spend a couple of percent on CapEx. And one of the great things, as I mentioned, we have very long product life cycles. It's not like we're selling products where the customer expects you to reinvent it every few years with new feature sets, new looks, new feel. So our products last 30 years, anywhere from 10 to 30 years. So we're not having to retool our facilities. You put a machine center into your facility, you can spend $1.5 million on it and just run tens of millions of dollars of revenue across it for a very long period of time. So we have great operating leverage, which you saw there in some of our numbers. That being said, we built a brand-new facility outside of Cincinnati a few years ago and consolidated facilities from Alabama and from Sweden into that. We just cut the ribbon in Finland this summer on a major expansion of our manufacturing facility there because of the introduction of the new VFR that Michael talked about, that variable flare reducer. And then in China, we were forced to build an entirely new facility because of residential area buildup around our factory. In that case, the Chinese bought our facility for what it costs to build a new one, but we built a brand-new state-of-the-art facility, which we just opened up in the last year. So we have made selective investments to make sure that we're properly positioned for growth going forward. But we do enjoy the fact that we have great operating leverage. We don't have to invest a lot of money on a given year. You had another question?

Yes, I have a few more. Another one from William Hyler from WDH Capital. Given the substantial multiple expansion of Kadant's shares in the past few years, improved cost of capital, would management be more open to using some equity to finance acquisitions, allowing for more flexibility in pursuing larger deals?

Yes. I would say that's always on the table. And it's actually a very good question given the goals that we've set because I believe, to accomplish those goals, we will have to acquire, I calculate, 2 larger businesses. So we may decide to use equity. But the cost of equity is expensive. Our preference is not to do that. But if we found a great business that we felt we could bring into the Kadant family and create value with, we would certainly consider that option.

Okay. The next question is from Walter Liptak from Seaport Research. Mike, what is your assumption for the 5-year targets for organic sales growth, M&A and FX? What do you assume the gross margin should get to by year 5? What do you see the SG&A percent by year 5 from the 24.5%? Do you want me repeat it?

No. I'll just say any other questions? No, those are all good questions. The organic revenue growth in the plan is 3% to 5%. The M&A is 6% to 8%. So that's going to give you a CAGR of 9% to 13%. Regarding FX, no crystal ball on that. So I can tell you that when we were developing the model, I did think a lot about it because it's been a persistent headwind. So I would say I was a little more cautious on the organic because it's been a headwind for 10-plus years for us. Can you give me, I can tackle the other ones there, give me the SG&A.

I think you talked about M&A, FX. Gross margin, what do you assume the gross margin would get to by year 5?

Gross margin, SG&A, good question. I think that we can get some incremental gross margin expansion. In our last 5-year plan, we really didn't model in any improvement. But in this one, we've modeled in about 100 basis point improvement in gross margins and 100 basis point improvement in SG&A spend. Now keeping in mind, that's to the EBITDA target. And that's why I took the time to mention that our amortizable intangibles in this plan would grow from $18 million to $63 million, and that's $1 to a little under $4 a share. So what you may see then as just a pure percentage of revenue is you may see us kind of maintaining or slightly increasing as a percent of revenue, but a meaningful component of that is noncash. And if you trim that out, we're looking to decrease our actual cash spend by 100 basis points.

Okay. Another question from Walt Liptak from Seaport. Dara, this is an 80/20 process question. Did you create a monthly process for the businesses to run the 80/20 data and report on the 80/20 projects being worked on? Does the 80/20 review process get to Jeff and Mike on a regular basis?

The answer is yes. So all of our businesses that are doing 80/20 report on standardized KPIs that show how they're doing from a revenue perspective, gross margin perspective, numbers of products, customers, et cetera. And as I said, we standardize those KPIs, and we have a quarterly meeting where Jeff and Mike and the rest of the management team, including the sector heads, review those. Was that all the question? Did I get all that?

Yes, monthly process, run the data and reports, projects being worked on, review process with Jeff and Mike, yes. Okay. Another question from Walt Liptak at Seaport. What is the penetration of illumen.X in the Kadant installation base? Are some products automatically sold with it or request only?

So I would say we're in the very early stages of that. So we're not generating a lot of revenue from that. We do have products out there that are running it. In some cases, it's a beta. In others, it actually is commercialized and we're taking orders for them. But generally speaking, we're in the very early stages of our kind of Internet of Things development work. It goes slower than you would hope. And frankly, it gets adopted by the customer base slower than you would hope. They're always cautious, especially when it comes to data, who controls it, cybersecurity, access, all those different things. So it's a process, but we're pleased with where we are in it, but we're definitely in the very early stages.

Okay. Another question from Walt. Is the web shop working? When was it started? What are the sales that are generated from web shop? Are customers using it?

Where is Craig? Craig, we can get you a mic. You can kind of answer that.

So we are at the final stages. We went through an ERP change. And so the web shop talks to the ERP system. And so when we changed the ERP, all of the links, all of the connections fell down. So we've got our final testing next week before we go live. So we had sales through the web shop prior to the ERP change, which was through our agents and distributors, so connected parties rather than external companies. But we will be ready to go live early 2025.

Okay. The next question is from Sid Ramesh from Janus Henderson. Where can SG&A as a percent of sales go to? What are the primary drivers?

Well, as I mentioned, we're looking at trimming 100 basis points out of the spend, excluding the noncash items. And how was that question phrased, Stacy?

How well can it go, I think he said. I think the issue is part of it, as I mentioned, is the public company expense. So as we continue to grow, we'll get leverage, additional leverage from that. There's a certain amount of SG&A just required at the business level to run the business, to make the sales, to count the revenue and report the financials. We're always looking for ways to optimize that. Dara went into great lengths, I think, in talking about how simplification of your business through 80/20 allows you to reduce that cost. But there is some minimum cost that is required to do that. So some will come from the internal initiatives and others will just come from the leverage we get on the public company expense. I would say all of our numbers, be it revenue, profitability, SG&A cost, it's kind of like continuous processes that you have in your manufacturing operation. You're never done. The increments might get smaller, and it gets harder and harder to squeeze it out, but we will never be done trying to increase revenue, increase our profitability and decrease our operating costs. So it's just an ongoing process that never stops.

Those are all the questions I have online. But if there are any others, please submit them.

Thank you. So we'll open it back up for the audience if there's any additional questions.

Kurt Yinger again. Mike, you mentioned maybe 2 larger deals. In terms of platform step-outs, is that a situation where in the back of your mind, you have a product line or an end market that you don't currently serve that you would love to be in? Or is it really business-led where if a Syntron comes along, I don't know if you're thinking about any other type of markets, but how should we think about that going forward in terms of potentially another platform expansion type deal?

Yes. As we thought through it, I think, as you said, it's kind of more business-led. And as I thought through a larger transactions that we've looked at and whatnot, some have been outside, but almost all have been within our current product offerings.

Got it. Okay. And then there's been a tremendous level of consolidation, at least on the Forest Products side over the last number of years. Can you maybe just talk about whether that enhances the relationships that you tend to have with your major customers, maybe how that impacts conversations around exclusivity or usage of Kadant across the entire platform and maybe how that factors into what you see in the future if we were to see that trend continue?

Sure. So there's actually been a decent amount of consolidation in several of our markets. We always say we'd much rather have 10 profitable customers than 20 breakeven. Profitable companies tend to invest in their businesses. And so generally speaking, we're for that. On the wood processing side, specifically that you addressed, we have very, very high market share. You remember, Michael talked about we have 80%, sometimes 90%, market share there. So from that standpoint, we don't believe we're hurt by the consolidation that's occurring. To the extent that, that it better balances supply and demand, makes them more profitable, enables them to invest more back in their business, we actually think it's a positive for us.

And then maybe just one more going back to illumen.X and Cogent. Is that something, over time, obviously, there's a cost impact to adding these features on to different products and whatnot, but where the dollar value of a product just has a natural kind of inflation above and beyond price, where you see that as something that could potentially accelerate organic top line growth to a greater extent than you've seen?

Yes. I mean it's going to be important, and it's going to be expected. I don't know relative to our size and the cost of our equipment that it will ever have an outsized impact on our business. I doubt that's the case. Where I think there is some opportunity is on these monthly and annual subscriptions because that essentially is like a consumable. And anybody who follows the software, the SaaS models or anything, you know that once you get those signed up for, obviously, they're very steady, they commit to long-term contracts. And you don't have a lot of additional selling expense, it's just a maintenance expense with those. So that could be pretty impactful, I think, to the bottom line. But we're so large and our equipment is so large in dollar amount that it's unlikely that we're going to see any of this kind of digital technology start to outweigh what we generally generate with our business. Any others? All right. We got one here. Okay.

Derek Johnston, Conestoga Capital. Just a question on what your customers might be saying about potential tariffs in Canada and the impact on that lumber supply. We have enough housing headwinds from affordability, from higher rates. What could that impact be like?

Yes. I mean, of course, there have been tariffs on wood coming in, softwood coming up in Canada for a long time. In fact, between that and the stumpage fee that the Canadian government is charging and then the pine beetle out in the West, an awful lot of the Canadian mills have moved down or bought companies in the Southeastern United States. So an awful lot of that capacity has already moved down. But it's something to watch. I mean, obviously, we have a new administration coming in and his favorite word other than the border is tariffs. So it's our hope that an awful lot of that is negotiating. He'll use that as leveraging, as bargaining power. But it's something that we always keep a close eye on. But I think the Canadian companies have done a pretty good job in getting assets, putting assets in place in the U.S. to offset that if need be. All right. Well, if there's no more questions, then we do have a reception and product demonstration set up around the corner here. I think there'll be somebody to guide you. If you're available, I would encourage you to stop by. You can talk to some of these subject matter experts that we have here and take a close look at some of the products and just mingle with the crowd. So thank you very much again for coming today. We really appreciate it. We know it was a long day, a lot of information. So we really appreciate you taking the time to do that. We thank you for your interest in Kadant, and we look forward to reporting back over the next many years as we reach our next 5-year targets. Thank you.