Good day, and thank you for standing by. Welcome to the Kadant's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [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, sir.

Thank you, Norma. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 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 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. 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 the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at 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, we are 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'll give an overview of our financial results for the quarter and the year and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our fourth quarter and full year results and discuss our business outlook for 2023. I'm pleased to report that, fourth quarter was a strong finish to a record-setting year for Kadant. Despite the challenges brought about by macroeconomic headwinds and lingering supply chain constraints, we had another well-executed quarter. We generated record adjusted EBITDA, which contributed to solid cash flow in the fourth quarter. Strong capital project activity in the first half of the year and robust aftermarket demand led to record revenue in the fourth quarter and the full year. We continue to deliver on our mission to provide technologies and engineered solutions to help our customers advance their operational performance, with product innovations that reduce waste or generate more yield with fewer inputs. At the end of 2022, we were honored to be named by Newsweek Magazine, as one of America's Most Responsible Companies for the third consecutive year. It's rewarding to be recognized for our efforts in this area. Next, I'd like to review our Q4 financial performance. Q4 revenue was up 6% compared to the fourth quarter of 2021 to a record $232 million. Organic revenue, which excludes acquisitions and the impact of foreign currency translation was up 13% compared to the same period last year. Despite a larger portion of our Q4 revenue being capital shipments, excellent execution drove our EBITDA margin to a record 21.3%. This record-setting performance was led by our Flow Control segment, and I'll provide more detail on the operating segments in a few minutes. Our strong quarterly earnings performance contributed to exceptional full year performance, which I'll review next on slide 7. Strong demand we experienced in the first half of 2022 moderated in the second half…

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter, which includes some notable records. Gross margin increased 70 basis points to 43.1% in the fourth quarter of 2022 compared to 42.4% in the fourth quarter of 2021. Our gross margin in the fourth quarter of 2021 was negatively affected by the amortization of acquired profit and inventory, which lowered gross margin by 90 basis points. Excluding this impact in the prior year's quarter, gross margin was down 20 basis points due to a higher mix of capital revenue. Our overall percentage of parts and consumables revenue decreased to 60% of total revenue in the fourth quarter of 2022 compared to 63% in the fourth quarter of 2021 due to significantly higher capital revenue at our Flow Control segment. As a percentage of revenue, SG&A expenses decreased to 24.5% in the fourth quarter 2022 compared to 26.4% in the prior year period. SG&A expense decreased $1 million to $56.8 million in the fourth quarter of 2020 compared to $57.8 million in the fourth quarter 2021. The fourth quarter 2022 included a $3.3 million favorable foreign currency translation effect and a $1.5 million decrease in acquisition-related costs compared to the fourth quarter of 2021. Partially offsetting these favorable effects was $0.7 million of expense from an indemnification asset reversal related to the release of tax reserves. Excluding all these items, SG&A expense increased $2.1 million, due to additional headcount within selling and increased travel costs related to sales and service. Our effective tax rate in the fourth quarter was 29.2% slightly higher than our forecasted rate of 28%, due to the timing of certain incentive compensation payments. Our GAAP diluted EPS increased 8% to $2.23 in the fourth quarter compared to $2.07 in the fourth quarter 2021…

Thank you. [Operator Instructions] And our first question comes from Kurt Yinger with D.A. Davidson. Your line is now open.

Great. Thank you, and good morning Mike and Jeff.

Good morning Kurt.

Hi, Kurt.

I just wanted to start out on aftermarket demand, which looks like it continued to perform pretty well in Q4. And if I look at North America, you have the containerboard guys taking some pretty significant market related downtime with demand challenge. And on the Wood Processing side it's a similar story including a growing list of curtailment. So would just love to hear your thoughts as to why that hasn't seemed to have much impact on the aftermarket business, recognizing you service a lot more customers than those I just mentioned?

Yeah. I mean, you're right Kurt that there has been some softening and there's been some lower utilization rates. But as you're also aware in the last couple of years, many of those customers were running full out, not taking normal scheduled downtime or outages and they ran the equipment pretty hard and there wore a lot of it out. So I think what we're seeing a little bit right now is they made a lot of money during those periods of time. They ran the equipment hard and cut back on some of the typical maintenance and now they're taking the opportunity with a little bit of a slowdown to repair and maintain their equipment and get ready for the next big increase that likely come as the interest rates start to drop off again. So I think we're just seeing a little bit of neglected repair and maintenance during the very busy times and they're trying to catch up now.

Right. Okay. That makes sense. And it ties into my next question and I mean you look at CapEx budgets at least here in North America, and they're still at relatively high levels, which I suspect gives you some confidence. Do you think that's a testament to the windfall that some of the -- your customers have seen in the past few years and their financial strength, or do you get the sense that your customers expect this downturn in demand to be pretty short-lived. Then if that doesn't come to fruition they may look to reassess?

So as I mentioned a moment ago, they ran the equipment pretty hard. They made a lot of money. I do think that they -- most people expect this recession to be short and maybe not as severe as certainly the crisis that we've had in the past. And the underlying fundamentals of their business and of our business are strong. If you look out the next many years, the fundamentals and the forecast are for good activity levels. So I think they're getting prepared for that. And you're right if the recession is longer or deeper then there could be some further slowdown. But as you know these projects tend to be large and they take a while and so they're not quick to shut these things down once they get started. But I think, there -- if you look at most of the companies that are indicating their outlook over the next say five years, it's pretty positive.

Right. Okay. And then, just lastly for me. You touched on 80/20 and some of the success you were having there. I was hoping, you could just give, a few examples of maybe where that's been particularly successful in different divisions? And beyond 80/20, are there any other kind of notable margin initiatives you're looking at here in 2023?

Well, I'd say Kurt, right now we have about -- if you look at it on a revenue basis about half of our revenue is in the program. And some of course, are in the earlier stages and some in the -- have had in place for a few years, and we've seen very good benefits. And I'd say, in particular when I look across the segments, one of the first operations was in Flow Control. We've had a few more in Flow Control that have also joined in. So, we've seen some very good progress on the -- in Flow Control and also we're starting to see some nice traction in Industrial Processing.

As far as the other programs, we always have kind of ongoing continuous improvement. Lean is a big focus of ours, that you never kind of finished there. So we always have other programs going on trying to optimize, our operations but 80/20 has certainly been the probably, the biggest investment and probably, we've seen the most encouraging results from that over the last few years.

Got it. Thanks for all the details.

Thank you [Operator Instructions] And at this time, I'd like to turn the conference back over to Mr. Powell, for any closing remarks.

Thank you, Norma. Before we wrap up the call today, I just want to leave you with a few takeaways. 2022 was a record-setting year for Kadant and our employees deserve a lot of credit for achieving these excellent results. I really want to thank our employees around the world, for the dedicated efforts to serve our customers' needs. In 2023, we will continue to seek new opportunities to create value as we focus on meeting our customers' needs, with innovative technologies and solutions that drive sustainable industrial processing. Our financial health is excellent and our ability to generate strong free cash flow remains, a cornerstone of our business model. We expect to deliver exceptional value for our stakeholders again, in 2023. We want to thank you for joining the call today, and stay safe.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.