KWS Manufacturing Company, Ltd. (KAI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Kadant acquisition of KWS Manufacturing Company 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, operator. Good afternoon, everyone, and welcome to Kadant's conference call to discuss its acquisition of KWS. 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 KWS are forward-looking statements for purposes of the safe harbor provisions under Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known, 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 31, 2022, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. With that, I'll turn the call over to Jeff Powell, who will discuss the acquisition. Following Jeff's remarks, we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone, and thank you for joining the call today. As you read in our press release last week, we recently acquired KWS Manufacturing. Today, we will provide more information about the acquisition and give you an opportunity to ask questions about this newest addition to Kadant. As many of you know, there are specific attributes we look for in an acquisition. Those include a leading market position high revenue percentage in parts and consumables, strong financial performance, a product offering that's complementary to Kadant's portfolio and a strong management team. I am pleased to say that KWS has all of these attributes, and we are excited to welcome them to the Kadant family. I'd like to start by providing an overview of the company and the transaction. KWS is a leading manufacturer of screw conveyors, feeders, slide gates and bucket elevators among other related material handling equipment. Founded in 1972, the company has established a leading market position in the screw conveyor market and built a reputation for solving complex material handling challenges for their customers. The revenue for the trailing 12 months ended September 30, 2023, was $45 million, with approximately 60% of that being from parts and consumables. The purchase price was approximately $84 million in cash. KWS specializes in custom-engineered products and systems used in a variety of bulk material handling applications across the range of process industries. Company's core product and the one for which is best known, the screw conveyor, is used to transport and blend bulk materials in processing plants. Related equipment includes screw feeders, which are used in applications that require metering of bulk materials and slide gates, which control the flow into and out of screw conveyors. KWS also custom designs and manufactures products for more complex material handling applications where operating temperatures can be extreme for and may be difficult to convey. You can see on Slide 6, the primary industry served by KWS spanned a broad spectrum, including food, chemicals and forest products industries, among others. While many of these industry segments are familiar to Kadant, addition to KWS broadens our footprint in these segments and provides an additional platform for future growth. The company's leading position is screw conveyors, its high aftermarket parts business and its complementary product offerings make KWS an excellent fit with Kadant. We have worked with KWS for many years as a supplier to our businesses and have always admired their ability to engage with customers and solve manufacturing challenges. We believe there will be other opportunity to collaborate across our material handling businesses in the future. As I mentioned earlier, KWS has an experienced management team, and they will continue leading the business as part of Kadant, working to build upon their strong brand and further strengthen their leading market positions. Looking ahead, there are many potential opportunities made possible with KWS now a part of Kadant. One of the more exciting opportunities is for Kadant businesses to leverage the relationships KWS has with large distribution partners as KWS has done an excellent job of establishing a strong position with leading industrial distributors across North America. Similarly, KWS has a potential to leverage Kadant's global sales network and gain access to adjacent markets where Kadant has a strong position. Shared focus provides opportunity to expand our solutions to help our customers maximize production and reduce overall operating costs, which we believe strengthens our respective positions in a variety of material handling applications. Consistent with our decentralized operating model and past practices, Kadant will continue to operate as a stand-alone business under Kadant -- KWS will continue to operate as a stand-alone business under Kadant. We look forward to integrating KWS into our Material Handling segment and exploring opportunities for collaboration and best practices. With that, I'd like to turn over the call to Mike to discuss the key financial metrics.

Thanks, Jeff. I'd like to provide some additional color on the financial metrics associated with this transaction. As Jeff noted, the purchase price was approximately $84 million, subject to customary adjustments. On a trailing 12-month basis, as of September 30, 2023, the business generated approximately $45 million in revenue and $8.9 million of adjusted EBITDA, which translates to an EBITDA multiple of 9.5x. KWS' revenue is approximately 60% from parts and consumables, which should provide a strong recurring revenue stream. And this transaction has very favorable tax attributes which are not captured in the EBITDA multiple. We were able to treat this as an asset deal for tax purposes, which means we will be able to take a tax deduction for the step-up in basis for the acquired assets, including goodwill and other intangible assets. The ability to deduct the amortization of goodwill and other intangible assets will provide a significant cash benefit of approximately $17 million over 15 years. This benefit is worth a little more than 1 turn on the EBITDA multiple. When that is factored in, the multiple is 8.4x. We value businesses on their after-tax cash flow. While EBITDA is a quick way to think about pretax cash flow, it does not capture the favorable tax attributes generated. I'd also note that KWS is an asset-light business with low CapEx requirements. We used some cash on hand to fund the transaction and borrowed $82 million from our credit facility. After this transaction, our borrowing capacity includes $71 million available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. We estimate that our leverage ratio, as defined in our credit agreement, will still be relatively low, and as a result, absent any changes from the Fed, we expect our borrowing rate to be approximately 6.4% to 6.7%. While the valuation of inventory, fixed assets and intangibles is in process, our current estimates are that we will have a meaningful level of noncash intangible amortization expense. We estimate this in combination with the interest expense will make this transaction slightly accretive in 2024 on an adjusted EPS basis after excluding the nonrecurring amortization of profit in inventory and acquired backlog. I would also note that we anticipate KWS' free cash flow should be quite good. As always, we will work hard to pay down debt and drive down our interest cost in 2024. 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 KWS transaction as we are currently in year-end 2023 closing process and I cannot comment on our 2023 results or our guidance for 2024 until we have our upcoming earnings call in mid-February. With that, we'd be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Gary Prestopino from Barrington Research.

A couple of quick questions here. I think, Jeff, you mentioned that your current materials handling area serves all of these industries listed on Slide #6, or is there some industry that RWS (sic) [ KWS ] gives you that gives you a much stronger footprint than what you currently have in certain of these industries?

Yes, I think they're stronger in certain industries, for sure. I would say on the food side that they have a stronger -- that's their biggest market, and so they're stronger there. I would say also on the chemicals side. So it's fairly common one. There is some overlap, but I would say not a great deal. I think that for the most part, they're pretty complementary.