Good day. And thank you for standing by. Welcome to the Q1 2022 Kadant Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's program may be recorded. I’ll now hand the conference over to your first speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Peter. Good morning, everyone, and welcome to Kadant's first quarter 2022 earnings call. 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, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended January 1, 2022 and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we made 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. During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website@www.kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share, or EPS and adjusted EPS on this call, referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant’s business and future prospects. Following Jeff’s remarks, I will give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our first quarter results and discuss our business outlook for 2022. We had an excellent start to 2022 with high demand for our parts and robust capital project activity, which led to record bookings revenue and adjusted EBITDA in the first quarter. Business activity was strong in most regions of the world, and new order activity was driven by solid demand across all our operating segments. Capital project activity continued its momentum from last quarter. And this was especially true in our industrial processes segment, which had another great quarterly performance. I'll provide more details on that when I review our operating segments. Overall, our healthy balance sheet and strong cash flow have us positioned well to capitalize on growth opportunities. Before moving on to our Q1 financial performance, I want to comment on the global supply chain and how we are continuing to manage this complex situation. Ongoing constraints throughout the global supply chain have continued to push out expected deliveries of materials and components. These challenges have been further affected by the more recent shutdowns in China, with that country's busiest ports severely limited for an extended period. While our decentralized structure helps us to alleviate these temporary shutdowns and logistical delays, the interconnected global supply chain continues to be a challenge, creating significant work to keep our delivery promises to our customers. Operations teams are proactively managing these issues and working tirelessly to meet our customers’ needs. This resilience is reflected in our first quarter operating results and the solid execution by our businesses. Turning now to slide 6 and our Q1 financial performance. You can see we had significant increase in across these financial metrics compared to Q1 of last year. One of…

Thank you, Jeff. I'll start with some key financial metrics for our first quarter. Consolidated gross margins were 43.4% in the first quarter of 2022, down 50 basis points compared to 43.9% in the first quarter of 2021. This decrease was due to a lower overall percentage of parts and consumables revenue, which represented 65% of revenue in the first quarter of 2022 compared to 68% in the prior year, partially offset by higher gross margin profile from our acquisitions. SG&A expenses were $59.2 million in the first quarter of 2022, an increase of $9.8 million, compared to $49.4 million in the first quarter of 2021. The first quarter of 2022 SG&A includes $6.1 million in SG&A from our acquisitions, $1.3 million of non-recurring non cash acquisition related costs, and a $0.9 million favorable effect from foreign currency translation. The remaining increase in SG&A is primarily associated with increased compensation expense related to wages and additional headcount and increased selling costs associated with improved business conditions compared to the first quarter of 2021. As a percentage of revenue, SG&A expenses decreased to 26.1% in the first quarter of 2022 compared to 28.7% in the prior year period. Our diluted EPS was $3.53 in the first quarter, compared to $1.43 in the first quarter 2021. Our diluted EPS in the first quarter of 2022 includes $1.30 gain on the sale of one of our Chinese facilities related to a relocation project, $0.04 in acquisition related costs and a $0.01 impairment charge. As we outlined in our February earnings call, we reached an agreement with the local government in China to buy our existing facility that supports our stock preparation product line. And over the next two years, we will build and move to a new facility. Final down payment related to…

[Operator Instructions] And your first question will come from Chris Howe with Barrington Research.

Good morning, Jeff. Good morning, Mike. As it relates to the business outlook for fiscal year ‘22. Whether qualitative or quantitative, you discuss again the different challenges that we're seeing in this environment as it relates to order flow, and the timing of capital shipments, supply chain constraints, foreign currency, geopolitical, and then lastly, the zero COVID policy leading off with the zero COVID policy. Can you kind of describe what your thoughts are in the region? And what you're hearing from on the ground? Is potential for worsening there as it relates to China in the zero COVID Policy? Or what's the latest on that?

Yes, I know, it's very interesting, Chris, because we have, as you know, a very large employee base over there. I don't know what this count is now, but probably over 400 employees. And we don't, to our knowledge, we've not had a single employee get COVID, of course, we're here in the US, the rest may be 60% of the population is contracted COVID. So they have really adhered to pretty strict program over there that as soon as an individual test positive, they get isolated. And it's common for them to isolate the town in the region if they have a bit of an outbreak. So it's a challenge, if you think about our, we may have suppliers that are in a region that is under quarantine for a period of time, so it's slowing down the delivery of materials that we need. Also for workers be they our workers or workers of our suppliers. If there's an outbreak in your apartment complex, you're quarantine for two to four weeks, they don't leave the complex. So it's fairly, I would say draconian relative to the rest of the world. I guess it's been effective if your goal is to have zero COVID infections, well within our employee base, they've achieved that, but you do it at some cost, which is slowing and interruptions within the economy. So it's something that is a challenge for us. Our employees so far have done a great job in finding alternative suppliers. And working around and through this, trying to stay ahead of our material needs from an inventory management standpoint. But, it's just so uncertain, you just don't know where and if an outbreak is going to occur, and how that might impact you going forward. So it's probably one of our biggest uncertainties I would say around the world right now is the China COVID policy.

That's very helpful. And then staying along general themes. You mentioned in the industrial processing segment, the transition from OS to OSB from MDF, as it relates to furniture. You mentioned six stranding systems being put into place nine existing, a total of 15. How should I rightly think about this long term opportunity for furniture?

So I would say we're in the somewhat early stages of them evaluating this, we sold our first systems in there, I think, in around 2013. And we've got some subsequent orders from that customer. And now it seems to be started, and then it was -- there was a lot of activity before COVID hit, then when COVID had things got quiet for I would say two years, and then all of a sudden, they started back up again, and is often the case in China, when things get moving, they can go quite quickly. So all of a sudden, the activity level has been quite high with these orders, the six systems that we've booked so far this year came quickly, and some of them actually weren't even in our pipeline, they weren't on our radar. So it's one of these things where once China decides because they have such a massive manufacturing base there, once they decide to do something, the order flow can be, has the potential to be quite significant. So we're in the early stages, but I think we're quite encouraged. We do think OSB is a better product and MDF, it's wider, it's steadier. And there's a lot of pluses to that. And so we think there is the potential for them to continue transitioning over to that as a material construction for furniture. And it has the potential of being quite large, if they were to fully embrace it, and really start to convert a lot over, it could be a fairly significant new market for us.

And my last question, before I hop back into the queue. Mike, you mentioned the Q2 gross margin pressure, just based on higher capital orders. There was a change to the revenue guidance to the upside. As we look at the -- as we look at the last nine months of the year. Any change to the commentary you previously stated on the last conference call as it relates to revenue. First, you mentioned even split between the first half and second half, with the strongest quarters being Q2 and Q3 in combination, as well as better operating leverage in the second half. Is that still consistent?

Good question, Chris. Yes, I would say the update on that is now that the second half of the year has really firmed up. So whereas and when we gave the guidance in February, it was relatively evenly split. Now the second half of the year is stronger. And the operating margins as a result of the better operating leverage have also improved. So the back half of the year is going to be stronger force than the front half year.

Your next question will come from Bobby Eubank with Chevy Chase Trust.

Good morning, guys. Congrats on a solid execution in a very challenged environment. And appreciate the conservatism in your commentary. Look, you've talked in the past about your 80:20 pricing, can you kind of walk through what type of inflationary inputs you're seeing and your ability to continue to pass through this extreme raw material increases? Thanks, guys.

Yes, thanks, Bobby. So as you know the 80:20 program kind of looks at your profitability by product and by customer and you take some pricing action as a result of that. But what we've experienced, I think what you're alluding to right now is that we're in an unusual period, certainly for the last 30 or 40 years where we're seeing fairly significant cost increases on our raw materials. As I've said before, we always work very hard to try to minimize the cost that we have to pass on to our customer, that's part of our value proposition. And because we manufacture everything from basic raw materials, we don't buy, we're not that somebody that buys sub-assemblies and just assembles them, we're primarily manufacturing, we have a little more control over that than you might have, if you're selling a lot of your manufacturing out to others. That being said, we certainly have experienced cost increases and in many cases we've had to pass those on to our customers. Our customers, of course, are experiencing that across the board. And so it's not a big surprise, they too are passing on their cost increases to their customers. So we're just in this general environment right now, where inflationary pressures are really increasing kind of pricing across the board throughout the supply chain. And I think they understand what we're dealing with, as I said, we work hard to try to minimize the impact of that. But they certainly understand that there are instances where the costs have gone up considerably, and we have no other alternative other than to pass those costs on to them.

Makes a lot of sense. Could you maybe give some high level commentary around expectations for material handling segment in the second half of the year and maybe into 2023? We have the infrastructure bill here in the US, of course, the recycling components of that has been very strong, but more on the maybe mining and aggregate side and the outlook there.

Yes. So we had a very strong first quarter on that particular side of the business on the mining and aggregate side. And I think the general sentiment from our operating team there is that there's a sense of optimism, there is the new infrastructure bill that is, as a lot of money has not been spent yet. But people are getting prepared for that. And so they're starting to make investments in their operations, so they can meet the demand when that does occur. And so I think there's a kind of, as I said, a level of optimism that we're going to see some increases in demand over the next few years. The other thing has happened is, of course, with the Russia-Ukraine conflict, a lot of raw materials come from that region. And with the sanctions on those, we're seeing customers have to start to make investments and ramp up production to replace that lost supply chain. So things like potash, there's certain raw materials that Russia and Ukraine are major exporters of when that goes away, the rest of the market has to try to ramp up their production to replace that loss. And so we're starting to see that our customers are starting to put make some investments, and we're in discussions with customers on projects that are really the result of that conflict. So that's kind of a market disruption that will force some increase in production and some shifting to production.

Yes, makes a lot of sense. And my kind of final question, and I have maybe one follow up to that. But the acquisition pipeline remains healthy, any kind of near term things that we should be expecting?

Well, we're always, as you know, we're always, our corporate development team is always very busy looking, and talking to as many sometimes tracking as many as a couple 100 companies trying to find ones that are a good strategic fit for us. We have two fairly high hurdles, one, it has to be a good strategic fit for us. And second is it has to be an acquisition that we think we can create value with through the combination of the price we pay, and the improvements we might be able to make in the business, they're fairly high hurdles. And so that a couple 100 companies quickly gets funneled down to a much smaller number. That being said, our balance sheet is in good shape, we're generating a lot of free cash. And there's a fairly healthy pipeline of opportunities out there. During the pandemic, of course, things were quite slow for a year and a half or so. So there was some deals that came to the market that were just sitting there waiting for things to recover. And then of course, companies are operating at a fairly high level. And some people want to take advantage of their good performance to sell the business. So there's a healthy activity level out there. The challenge for us is always find something that's a good fit at a reasonable price. And we're working hard on it. We never really slow down that effort. It's kind of a continuous effort.

Makes a lot of sense. And last, you mentioned the challenges of operating factories all around the world. Is there any trend between you and your customers on kind of evaluating supply chains or near shoring or anything like that? Thanks so much.

Well, when you get into environments like this, everybody's searching for supplies everywhere in the world. So you get quite flexible and where you're going to get things. So I would say there's the principal concern our customers have right now is can you meet deliveries? In some cases can you deliver it all, because they're running very high operating rates? So they're consuming a lot, there's a lot consumables and a lot of parts that are being used up. So the first thing they want to know is just to make sure that we can continue to supply them. In some cases, we'll run a higher inventory level to give them assurance. In some cases, they're running higher inventory levels, so they know they have more parts and consumables on the shelf available when needed. So yes, I'd say there's a lot of discussion, a lot of activity going on between us and our customers, when you're in an environment like this.

Your next question will come from Walter Liptak with Seaport.

Hey, good morning, guys. Great quarter. Let me try a couple of follow ups when I'm pricing seems like price costs, the inflation, you guys are doing a great job with it. So I wonder if I could ask about, how are you doing your price increases? Because I think we, in the industrial landscape, we see all kinds of things, surcharges, annual price increases, periodic or related to projects. Yes, I wonder if you could give us some insight into how you're doing it because you're making it look easier than what we've seen from some other companies.

Thanks Wal. Well, we're, some of those things you mentioned are exactly what we're doing. Our folks are very connected to their input costs. They monitor that very closely, and are making adjustments accordingly, including things that you just noted. Putting in place, trying to contractually limit the amount of time, quotes are available and putting in place surcharges, where those will adhere, I think, for us, our parts and consumables turned quite quickly. So they don't sit in backlog very long. And that's the area that is we can quickly adjust to the area we probably have the most exposure on is in capital where you, we can take an order and even though we've limited the amount of time that the quote is open for to protect ourselves, and when we get the order, we will try to lock in pricing for the material. But if that order, isn't in our backlog for six to nine months, and we haven't been able to secure all the components, we do have some exposure there. So but we are -- our folks are working all the levers. And there it's quite a dynamic environment. So they are monitoring it closely, continuously.

Yes. And Wal, I might add also that this is where our decentralized structure really helps us. Because as you might imagine, supply chain issues and even inflationary issues are quite different around the world, South America versus Asia, Europe, and North America. So with our decentralized structure, we've got all of our divisions focusing on this every day, based on the local conditions they're experiencing on the ground. And so you've got, it's kind of like a force multiplier, you've gotten a large number of people around the world that are focusing on this every day, that kind of makes it a little more manageable for us.

Okay, great. Thanks for that. And then just the last one on the -- those OSB projects out in China, can you give us a ballpark of what the value of like one OSB mine would be?

They obviously, as you might imagine, it kind of depends on everything they buy with them, but they can be a single, often buy two strands at a time. But normally our orders tend to fall between $2 million and $4 million per order for OSB stuff tends to be the case sometimes a little less, depending on the options are picking up with it.

And I'm showing no further questions at this time. I will now hand it back over to Jeff Powell for closing remarks.

Thanks Peter. Before wrapping up the call, I just wanted to leave you with a few takeaways. The first quarter was an excellent start to 2022 with high demand for our parts and robust capital project activity which led to record bookings and revenue. And although there are increasing economic and social political headwinds present, our employees around the globe continue to focus on meeting our customers’ needs with innovative technologies and solutions that drive sustainable industrial processing and deliver long-term value to our stakeholders. Our financial health is excellent and our ability to generate strong free cash flow remains a cornerstone of our business model. We look forward to delivering exceptional value for all our stakeholders again in 2022. We want to thank you for joining the call today and please stay safe.

This concludes today's conference call. Thank you for participating. You may now disconnect.