Kadant Inc. (KAI) Earnings Call Transcript & Summary

Hello, and thank you for standing by. Welcome to the Kadant Acquisition of Clyde Industries Conference Call. [Operator Instructions] I would now like to hand the conference over to Michael McKenney. You may begin.

Thank you, Towanda. Good morning, everyone, and welcome to Kadant's conference call to discuss its acquisition of Clyde Industries. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, including the expected benefits of the acquisition of Clyde Industries, are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. With that, I'll turn the call over to Jeff Powell, who will discuss the acquisition. Following Jeff's remarks, we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to discuss the acquisition of Clyde Industries. Clyde is a leading manufacturer of boiler efficiency and cleaning system technologies. They are based out of Atlanta. Like many of the Kadant companies, they are over 100 years old. They have major operations in addition to the U.S. and Brazil, Southeast Asia and Europe. They're a market leader in recovery boilers in the pulp and paper industry, but they also provide this technology to the general industry anywhere that you have a boiler operating where the residue and ash builds up and requires cleaning. The revenue for the last fiscal year, which ended February 28, was approximately $92 million, and we paid approximately $175 million for the company. Clyde's core product is a boiler cleaning technology. As I mentioned, boilers that are fired with fuel over time have residue that builds up ash, silt, hydrocarbon materials, and it needs to be cleaned to maintain the efficiency, the heat transfer efficiency of a boiler, but also the safe operations of a boiler. If you allow this to build up, not only do you reduce the energy efficiency, so you consume more fuel, but you also have the potential for fires and even explosions. And so it's a very core technology that is required when you're operating boilers. Clyde specifically has leading technology called SMART Clean, which instead of just periodically on a time schedule cleaning actually has sensors that measure the buildup in a boiler and therefore, only go and clean the system when required. They also have technology that uses low-pressure steam, which is a much lower cost. And so the combination of the 2 technologies can generate energy savings in a given year for a large operating boiler of $2 million to $3 million in energy savings and equally important, can reduce CO2 emissions by up to a couple of hundred thousand tons. So this technology is, like I said, is state-of-the-art and really plays well into Kadant's overall sustainability and energy saving initiatives. In addition to the sootblowers, we also manufacture electrostatic precipitators and other energy recovery technology that goes into general industrial applications. As you can see on this slide here, these sootblowers actually can be quite large. And a large boiler nowadays might have up to 200 of these in a particular installation. These are kind of hot corrosive environments, a lot of moving parts, and therefore, they generate a lot of aftermarket opportunities. The industries they serve, really anywhere where there's boilers operating, but they really are particularly strong in the pulp and paper area where you use recovery boilers for the production of pulp, power generation as well as general industry. This picture here on general industry is actually, I think, a sugarcane operation in -- probably in South America, where they provide this technology. We specifically like Clyde because it's an industry leader, has industry-leading technology. It has very strong financials. Approximately 75% of the revenue is aftermarket. They have a first-class management team and a very experienced management team with a very strong technical know-how. So they had all the attributes that we like, all the attributes that we think fit very well within the Kadant organization. So we're very, very pleased that they have joined our company, and we think it's a great opportunity for Kadant as well as for Clyde. As many of you know, we operate a decentralized operating structure. And so they will continue to operate as a stand-alone business. They will have access to Kadant's global manufacturing footprint. They'll have access to Kadant's global sales force and service network and also all of the best practices that we employ within Kadant, things like 80/20, lean and other initiatives that we have found to be very valuable within the Kadant operating structure. So I think that they'll find as they get to know the organization that there are many opportunities for them to collaborate with our other divisions around the world. With that, I will turn it over to Mike, who will discuss specific details of the transaction. Mike?

Thanks, Jeff. I'd like to provide some additional color on the financial metrics associated with this transaction. The purchase price was approximately $175 million, subject to customary adjustments. For the fiscal year ended February 28, 2025, Clyde had approximately $92 million in revenue and $21.4 million of adjusted EBITDA, which translates to an EBITDA multiple of 8.2x. And factoring in some modest favorable tax attributes, the multiple is just below 8x. I would note that Clyde's revenue is 75% from parts and consumables, so a strong recurring revenue stream, and they're an asset-light business with low CapEx requirements. We funded the acquisition primarily through borrowing under our revolving credit facility. We estimate that our leverage ratio, as defined in our credit agreement, will still be relatively low at approximately 1.5. And absent any changes from the Fed, we expect our borrowing rate to be approximately 5.4%. While we're still working on the valuation of intangibles that will be amortized for book purposes, our current estimates are that we will have a high level of noncash intangible amortization expense. We estimate this in combination with the interest expense will make this transaction slightly dilutive in the fourth quarter of 2025 on a GAAP EPS basis. However, on an adjusted basis, we estimate it will be slightly accretive and free cash generation should be quite good. As always, we'll work hard to delever and drive down the interest cost. I'm going to now turn the call over for questions. But before we start, I should mention that the Q&A session is specific to the Clyde transaction, as we are currently in the third quarter '25 closing process and cannot comment on the third quarter '25 results or our guidance for '25 until our upcoming earnings call near the end of October. With that, we'd be happy to take your questions. Towanda, operator?

[Operator Instructions] Our first question comes from the line of Ross Sparenblek with William Blair.

It'd be great to get a sense of just how you guys source this deal and kind of impetus for the family making a decision to pass this along.

Yes. So they spun off from a European operation a few years ago. We actually looked at the opportunity back then and for various reasons, made the decision not to pursue it at that time. So they were purchased by a private equity and came to market again. And we've known the business. We like the business a lot even back then. And so when the opportunity came to look at again, we made the decision to pursue it and are very pleased that we were ultimately successful in being able to acquire the company.

Okay. And then can you just give us a sense of maybe what the growth profile has been for this company as well as maybe the margin profile in the last 5 years?

Yes. Ross, over the last 3 to 4 years, the CAGR has been about 7% to 8%.

Wow. Anything to call on like the specific drivers there, just broader adoption, maybe some R&D on the new tech?

Yes. I mean the -- what's happening around the world is you're seeing new, very large recovery boilers going in for pulp production, Southeast Asia, South America. And so -- and they're particularly strong in that market. So they've secured most of those orders. And so it's just the world is driving towards larger, more efficient operations with bigger and bigger systems, and they've been very successful in capturing the majority of that market share.

Our next question comes from the line of Gary Prestopino with Barrington.

Series of questions here. First of all, as I look on Slide 9, the main products here are these sootblowers, correct? Is that -- and then airport cleaners, those would be the main products that you guys are -- this Clyde company produces?

Yes.

Okay. So the question I would have is, what is the aftermarket part component of these things? If you put a sootblower, they have 200 on a machine. Is the useful life of these things 3 months and you have to replace the whole sootblower? Or is there something internally in the sootblower that needs to be replaced?

Yes. So there are -- as I mentioned, these things move in and out and rotate around as they're conveying the steam. So there's a lot of moving parts. So things do wear out. So there are many, many parts. There's the drive mechanisms. There's the actual lance that moves in and out of the boiler. There are several parts that have to be replaced over time. They can -- there will be times where they'll replace the entire structure, the canopy and everything. But more often, they're replacing particular parts as they wear out during the operations.

Okay. So that's what I'm getting at.

Yes.

Okay. So really, this is a great razor blade business in a sense, once you're on the system, you're going to get the aftermarket sales, right?

Yes. Yes. For the most part, that's accurate. Yes.

Okay. I noticed it looks like it's margin accretive on an adjusted EBITDA basis. And then you cited a CAGR of 70% revenue over a 3- to 4-year basis. Is that...

7% to 8% growth over the...

7% to 8%. Okay. I didn't -- I must have cut out there. 7% to 8%. I was wondering, wow, that's huge growth.

Okay.

Okay. Are most of the products that are manufactured, are they manufactured in the U.S. and then shipped across the world? Or how -- what's their manufacturing footprint look like?

So they have a big footprint in Atlanta, and they have a big footprint in Brazil. And then they have smaller kind of weld shops in other parts around the world, but the primary manufacturing footprint for the majority of the products is the U.S. and Brazil.

Okay. And then lastly, who is the main competitor in this business for you?

There's a company called Diamond. That's the main competitor. And they have -- there's maybe some smaller regional very small players, but the other big player is Diamond.

Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just 2 quick ones. I guess, Jeff, would you mind providing just kind of end market split and maybe geographic split of sales? I mean it sounds like it's very concentrated in pulp and paper, but any color there would be great.

Sure. On the geo revenue, 55% North America, rest of world because of their footprint in Brazil is 20%; Asia, 18%; and Europe, 7%. And then on the end markets, approximately 60% pulp and paper. On power gen, the revenues, it's in the low 20s. And then on the remainder industrial is in the high teens.

Got it. Okay. Perfect. And then not to get too far ahead of ourselves, but you kind of mentioned some of these large recovery boiler installations of late. I guess, how do you think about kind of the cyclicality of that, how it might impact next couple of years relative to at least the growth you cited in the 7% to 8% range?

So first of all, as we mentioned, 75% of the business is aftermarket. And so that obviously doesn't have near the cyclicality that the capital would. But there have been a lot of large new systems brought online that -- and so they'll start to generate parts going forward here for the next few years. And so that's where the bulk of the growth, we think, is going to come from is all of the aftermarket associated with a lot of these large installations that have come online in the last few years and are still in the process of coming online.

Our next question comes from the line of Walter Liptak with Seaport Research.

Congratulations. I wanted to ask just a follow on to that last one. And just -- so this is a similar business to what you guys already do with capital projects versus aftermarket, which is great. But with that 7% to 8% CAGR that you've seen in the last 3 or 4 years, are we going -- are we kind of coming out of a stronger capital period going into a weaker capital period? Or how do you see the capital projects doing? Like what's the funnel looking like? What's their orders and backlog looking like for capital projects?

Well, we certainly wouldn't model 7% to 8% going forward. As you know, we're pretty conservative when it comes to our planning and our modeling. And so I would say we tend to kind of model around GDP plus or minus a little bit. So obviously, it will be fantastic if they continue to grow in the high single digits. But certainly, our planning has been growing more in the lower single digits.

Okay. Great. And that's because of the mix of maybe more aftermarket, less capital than what you've seen.

Yes. There's a lot of big large projects that have come online that they've won. But as you know, those things tend to have a cyclicality to them. So we wouldn't expect that kind of growth over the next 5 years, although it could happen, but it's certainly nothing that we're budgeting for or planning for at this time.

Okay. Great. Okay. It sounds like you've got a great team with this acquisition. And so I wondered, as you think about this as more of a stand-alone business with access to the Kadant global networks, are there any cost synergies or sales synergies that you're thinking about for the future growth or profits?

Well, that's something that we'll look at. As you know, Walt, one of the things we never do is to model synergies into our acquisition models. And so our returns and our expectations are always unsynergized. We do know we have some synergies, and they tend to vary quite a bit from acquisition to acquisition. And so I think that's something to still be explored. But I will say that we do have, as you know, a manufacturing footprint all around the world. So they will have available to them the ability to manufacture some parts of their systems if they choose to in other places around the world. As far as sales synergies, probably less so there because, as you know, Kadant is more on the recycled side and not on the virgin pulp side of the business. But I will say that we just bought, as you know, Babbini a couple of months ago, and they're very strong in the sugar beet market. And so there might be some opportunities there. These guys are starting to penetrate the sugarcane market with their technology. And it's still yet to be seen where there might be some opportunities on the sugar beet side, where Babbini pretty much is involved in a majority of the sugar beet operations around the world. So there might be some synergies there for new market opportunities. But I would say it's a little too early for us to fully understand what they may be.

Okay. Great. Okay. And then maybe the last one for me is 80/20 is clearly like a core value and strength for Kadant. How do you approach acquisitions now with 80/20? Do you introduce them to them early? Or do you wait until they're part of the family for a while, the group for a while and then introduce them to 80/20?

So traditionally, we have a fairly light touch starting out. We like them to get settled and there are some integration, even though we run a decentralized model, certainly on the financial side, as you know, there's a lot of integration because they got to report quarterly. So we typically like to let the dust settle and for them to get used to the new procedures and comfortable with that before we start to look at it. But we will introduce it to them and they can kind of guide us on their interest in it and what they think the timing might be for that. So some of our businesses want to get involved in that sooner and some want to start it after they've had a period of time to fully integrate in. So that's a discussion we'll have with them. And together with them, we'll make a decision on when the timing might be appropriate. But we do believe, as it has been with every other company within Kadant, we do believe there's good opportunities there.

We have a follow-up question from the line of Ross Sparenblek with William Blair.

Can you hear me?

Yes, we can hear you.

Okay. Perfect. Yes. On the parts consumables and just thinking about the order cadence, is that primarily book and ship? Or is there a lag in the backlog there, similar to like Flow Control?

They've got -- some of their products are a little more standardized. So -- and one of the things they specialize in, I think, is quick turnarounds. That's one of the ways they maintain market share and go after market share is on delivery and quick turnaround. So they maintain a decent inventory of a lot of the standard products and really try to get -- service the customer and get them out to them pretty quickly.

Okay. Is there a backlog associated with this we should be aware of?

Yes. They currently have a fairly decent backlog, Ross, in terms of -- on the revenue recognition front. We think this will be -- we'll recognize this upon shipment. It's not going to be over time. So -- but the -- when they do these projects, where they're may be supplying 100 or 200 units, those will -- they'll be shipping those as they manufacture them.

Okay. Just you conceptualize a project of that size, is that like a 3-year project?

No, no, I don't think so. I think they ship -- they can assemble them, build them and get them out much sooner than that.

Okay. And then just on the footprint, I mean it is somewhat larger than what you guys have historically acquired. SG&A, is that accretive or dilutive to the overall company?

On an overall basis, I think it will be accretive, but it's quite modest. And Ross, I'd say one thing that we're still working on is the intangibles. So a component here is contingent on where the valuations land.

Our next question is a follow-up from the line of Gary Prestopino with Barrington.

Yes. Mike, just a quick question. I kind of calculate the adjusted EBITDA margin from the numbers you gave us at about 23%. Is there any reason why that would not hold going into 2026 just for modeling purposes?

Yes. Nothing comes to mind, Gary, that should change that particular metric in the short run.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Jeffrey Powell for closing remarks.

Again, I want to thank everybody for joining us today. As you can see, we're very excited. We think this is a great addition to the Kadant family. We're very excited that they're joining us, and we look forward to reporting on their progress going forward. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.