Kadant Inc. (KAI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Kadant to acquire Voestalpine BOHLER Profil Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Shannon. Good morning, everyone. Welcome to Kadant's conference call to discuss its proposed acquisition of Voestalpine BOHLER Profil. 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 proposed acquisition of Voestalpine BOHLER Profil, 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 our remarks, we will have a Q&A session. Jeff?

Thanks, Mike. Good morning, and thank you for joining us today. We announced last week that we've entered into an agreement to acquire Voestalpine BOHLER Profil. Today, we'd like to share some details on the transaction and the company. The company is located in Bruckbach, Austria is over 150 years old, and they manufacture high-quality precision components that go into technically challenging applications and they possess unique expertise and patented processes as well as the history of innovation. Revenue for the fiscal year '25 was EUR 51.5 million. They produce near net shape products that reduce the amount of downstream machining and processing, thereby lowering the total cost of production. Kadant has sourced components from BOHLER for more than 30 years including knives for our wood processing businesses. They also manufacture components that go into turbine engines and a broad range of industrial applications. BOHLER has been at the top of our acquisition target list for more than 10 years. As I mentioned, we have worked with them for 30 years, and they have been instrumental in helping us develop products components for our wood processing businesses. They have an excellent management team that we have worked with and know very well. 100% of their business is parts and consumables, and that is, as most of you know, a key strategic focus for Kadant. BOHLER will continue to operate in their current location as a stand-alone division and will be part of our industrial processing reporting segment. The business will go forward as Kadant Profil GmbH & Co KG. With that, Mike will give you more details on the financials and the unique attributes of this transaction. Mike?

I'd like to provide some additional color on the financial metrics associated with the proposed transaction. Purchase price is approximately EUR 157 million, subject to customary adjustments and the company had approximately EUR 52 million in revenue for the fiscal year ended March 31, 2025, which is 100% from parts and consumable products. This company is a valued supplier to several Kadant businesses and approximately 45% of their '25 revenue represents this activity. I want to highlight that once this company is part of Kadant, the revenue generated from other Kadant businesses will become intercompany revenue and therefore, not part of Kadant's reported revenue. While the externally reported revenue will be smaller, both gross margin and EBITDA margins under Kadant will benefit from the combination. The timing of this benefit, however, may vary by quarter as the recognition of the gross margin related to intercompany sales to Kadant businesses is dependent on the ultimate shipment to third-party customers. In addition, I wanted to note that our Kadant businesses will initially be using any on-hand inventory purchase prior to the closing of the acquisition to fulfill shipments to third-party customers before the new post acquisition purchases are consumed. These factors, along with normal acquisition fair value accounting, will make this acquisition dilutive in 2026, while we'll incorporate this acquisition -- we will incorporate this acquisition into our '26 guidance after the closing occurs. The company had approximately EUR 15.6 million of adjusted EBITDA in fiscal year 2025 with the resulting EBITDA multiple on the transaction of about 10x. In addition, beneficial tax attributes associated with the transaction are worth approximately 1.5 turns on the EBITDA multiple. With that, factored in, the multiple is about 8.5x. We plan to fund the acquisition primarily through borrowings under our revolving credit facility in Europe. We estimate that our leverage ratio, as defined in our credit agreement will increase to just above 2 after the transaction closes. And as a result, we anticipate our borrowing rate to be approximately 3.5% for this debt in '26. 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 proposed transaction, as we are currently in the fourth quarter '25 closing process and cannot comment on the fourth quarter '25 results or our guidance for '26 until our upcoming earnings call later this month. With that, we'd be happy to take your questions. Shannon?

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

Can you just elaborate a little further on kind of the attractiveness of this asset and why the parent wanted to sell?

Yes. From our perspective, as I mentioned, Ross, we've worked with these guys forever. And as Mike just indicated, about 45% of their business is with us. So they've become a bigger, bigger supplier and a more and more critical supplier to us. They have a very specialized processes that they have patented, they use for making their components. And so we, for more than 10 years, really have continued to expand our relationship with them and have really thought that they really would be a great fit within the Kadant organization. So we're very pleased that we were able to acquire them. I think their parent company, of course, Voestalpine is a very, very large, one of the biggest companies in Austria. And this was a smaller division for them and maybe slightly non-core. And so as it became more and more important to us and the relationship continues to grow and develop, I think we both concluded that it would be better probably as part of the Kadant organization. So we feel very fortunate that we were able to reach an agreement with the parent company to purchase this. As you know, all of the components are tend to be mission-critical and they tend to be alloy and metal based, and that's what these guys really specialize is making critical components. And because they have this near net shape technology it really reduces the downstream cost and processing time for a finished product. So they'll be able to help a lot of our Kadant companies, we believe over time.

Okay. No, that's very helpful. And then maybe just on the initial dilution dynamics, Mike, if you could maybe just help us kind of think through, I mean, it's definitely accretive on a margin basis, but something along the lines of the inventory, maybe some FIFO is going to impact near term?

Yes. Exactly, Ross. That's what -- so I was trying to give that color. So folks would be aware. Of course, as I mentioned on the call, roughly half the revenue is with Kadant. So once they become part of Kadant, that revenue will become intercompany revenue and we'll eliminate it. So we won't be able to recognize the profit on those intercompany transactions until that product is delivered to a third-party customer. And the additional little bit of color on that and why we're going to -- why I mentioned the dilutive impact is because in the short run here, we already have components that we've purchased from this company, and we're going to need to work through that inventory, just as you said, on a FIFO, we need to work through that inventory before we start consuming the inventory that will have been purchased post acquisition. So until we get through that, the profit on those intercompany transactions will be, so to speak, deferred. And I think that will be a few quarters because we -- these are important components, and we have a few quarters' worth stocked.

That was very helpful. And maybe just 1 more and I'll pass it along. You kind of hinted that SG&A or not SG&A, but R&D synergies. Is there anything else we should think of or any buckets that stand out near term once you own this asset?

Well, as you know, we have a key strategic focus on parts and consumables, and this is a 100% part consumer business. So we will work with them to continue to try to expand their non-Kadant business around the world. But also they'll work with all of our other divisions to try to find opportunities to sell into our other divisions that they haven't done before. So -- it's just -- we really think there's unique opportunities here with their manufacturing and their specialized expertise to really expand our market share globally outside of Kadant and even within Kadant more opportunities. So it's like every other kind of acquisition that we make, we integrate them into our global network, our direct sales network around the world and work with them to try to expand their market opportunities.

And maybe just what was the feedback from your sales force when you brought...

They're very happy. I would tell you that there were 2 divisions within our company, that you asked the presidents what kept them up at night, they would tell you it was this relationship with this company because we have become very dependent on this company for key components. And because of their patented process, they're really the only company in the world that can provide it. And so it was something that kept a few of our guys up at night. And so having them in the family now is, I think, is a great relief and a great acquisition for us.

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

Just a couple of questions here. Just so I can understand this. You're buying this company. You're going to have intercompany revenues. So it actually will be less the 45% on what you're supplied from the company itself. But what about the impact on to adjusted EBITDA on that? Would you still be able to get the full adjusted EBITDA margin impact from all of the sales that you're getting from this company?

Yes. Good question, Gary. Yes. We will realize that, and that's part of the messaging I was giving here in terms of the intercompany activity. But recognition of that will be delayed until we work through the current inventory on hand for the intercompany, the pieces that now become intercompany. But yes, we'll realize all the margin benefit.

And how quickly will that -- once you work through that FIFO impact? How quickly is that inventory turn?

It turns quickly. These are -- it's parts and consumables. But as I said, I think it may take us a good part of '26 to work through it a few quarters to work through inventory on hand, and then -- and when we finally closed the transaction and we have another call, I'll give a little more color on what we think the timing is going to be for that turn.

Okay. That's very helpful. And then you mentioned something the company produces products for technically challenging applications. And you mentioned something about some kind of patents they have or patented technology. Could you just go over that so I can understand some of the competetive advantages it has?

Sure. So they've developed processing lines that make these critical components. They actually developed and built a processing lines themselves, and they patented them. And as I mentioned earlier, they make near net shape. So when you think of a lot of components and products, they'll start out as, say, bar stock or maybe an ignite of, say alloy and alloy, and it gets processed gets heated up, it gets formed, gets pressed and there's often an awful lot of machining that goes on to get to your final component shape and profile and characteristics. They have developed processes that get you much closer to that final shape than many, many companies currently have the ability to do. And therefore, it really reduces the machining time. In some cases, they can make things with their patented process lines, where there's almost nothing, no post-processing required. And so it's just a very cost-effective way to get to a final shape or a near final shape, and they develop these process lines themselves, they built in themselves and they patented them.

That's interesting. And then it looks like, are they making the fan blades for jet engines when you look at the picture of aviation and marine. Is that part of...

I think they make the stators that go on the engines. So they make particular -- they're not making the turbine blades itself, but they're making other parts of the turbine engine.

[Operator Instructions] Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just one question. Going back to kind of the customer base and maybe widening that out. Does the company also kind of sell to your competitors? And I guess, how does that factor in terms of, I don't know if it's a dis-synergy risk or maybe a point of friction going forward with kind of that rest of the third-party sales?

Yes. I mean we have many of our companies that sell to people that we also compete with, Kurt, and this will be no different. They'll continue to serve everybody. They'll continue to supply to the entire industry just as our companies do now. And so there are probably a couple of places where they will be selling to people that we also compete with. But that's not new to us. Like I said, many of our divisions do that now, they'll sell to their competitors. Sometimes we'll be spec-ed in from the end customer, but other times, we just have a relationship with our competitors, and there are certain things that we do better, and we supply to them. So I don't expect this to be any different than that.

[Operator Instructions] And we have a follow-up question from the line of Ross Sparenblek with William Blair.

Just one quick follow-up. Can you maybe provide the end market mix there? I assume wood is probably 45% since you're the main customer, but on the aviation, marine and industrial and then kind of just the growth profile there?

Yes. So obviously, we're the biggest part, no less than half. And then it gets diluted down and it's pretty diverse after that, Ross. So I wouldn't say that there's any other particular market that is, for instance, 20% or 30%. I mean they supply into a lot of broad industries. They supply into the aviation industry. They provide some in the automotive industry and just industrial machinery in general. So it's a pretty broad mix that they supply into after you get away from Kadant.

Okay. I just didn't know if there's anything tied to like Airbus that we should be calling out? And then maybe just growth rate historically from the other customers?

In the near term, Ross, the last 2 years, they've grown in the 8% range. And if I go back a little further, say, 5 years, it's been about 10%. Of course, we're conservative and we didn't model a high single-digit growth.

And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Jeff Powell for closing remarks.

Thank you. Well, I just want to thank everybody for joining us today. We look forward to reporting on the progress. We're really pleased and welcome the BOHLER family into Kadant, and we look forward to talking about it and presenting in the future. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.