Good day, and thank you for standing by. Welcome to Kadant's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Olivia. Good morning, everyone, and welcome to Kadant's Third Quarter 2025 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 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. 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 third quarter 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 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 we'll then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. I'll begin with our third quarter highlights. We had solid earnings performance in the third quarter and benefited from record aftermarket parts revenue. As you know, our aftermarket parts business is one of our core strategic development areas, and it is encouraging to see this part of our new business continue to thrive. This is especially true in volatile times like now where economic headwinds are strong and global trade tensions remain high. Overall, market demand for capital equipment continued to be sluggish, though we are seeing increasing activity early in the fourth quarter. As has been the case throughout 2025, our operations teams around the world delivered exceptional value for our customers. I want to thank them for their outstanding effort and the results they generated during these challenging times. Turning next to Slide 6. I'd like to review our Q3 financial performance. Q3 revenue and earnings performance continued to improve sequentially from Q1 to Q2 despite softness in our capital business. Revenue was flat compared to the prior year period at $272 million and benefited from record aftermarket parts business, which was up 6% compared to the third quarter of last year. Solid execution contributed to an adjusted EBITDA of $58 million and adjusted EBITDA margin of 21.4%. Cash flow from operations and free cash flow in the third quarter was $47 million and $44 million, respectively, demonstrating the continued strength of our business model. Bookings were relatively flat compared to the same period last year due entirely to a sustained weakness in capital project orders, which has been in a lull since 2023. While capital project activity and quoting remains…

Thank you, Jeff. I'll start with some key financial metrics from our third quarter. Our third quarter revenue of $271.6 million included record aftermarket parts revenue of $188.4 million. Gross margin was 45.2% in the third quarter '25, up 50 basis points compared to 44.7% in the third quarter '24. Our parts and consumables revenue increased to 69% of revenue in the third quarter of '25 compared to 65% in the prior year. Gross margin included amortization expense associated with acquired profit and inventory of $0.5 million and $1.2 million in the third quarter of '25 and '24, respectively. Excluding this negative impact in both periods, gross margin was up 10 basis points over the third quarter of '24. For the first 9 months of '25, gross margin increased 120 basis points over the corresponding prior year period and 70 basis points after excluding the impact of acquired profit and inventory in both periods. This demonstrates our ability to maintain our gross margin profile despite various cost pressures, including the recent tariff challenges. SG&A expenses as a percentage of revenue increased to 27.9% in the third quarter of '25 compared to 25.4% in the prior year period. SG&A expenses were $75.8 million in the third quarter of '25, increasing $6.8 million compared to $69 million in the third quarter of '24. This includes $1.2 million from unfavorable foreign currency translation, $1.3 million in acquisition-related costs and $0.8 million from our recent acquisition. The remaining increase is primarily associated with incremental compensation-related costs. Our GAAP EPS decreased 12% to $2.35 in the third quarter, and our adjusted EPS decreased 9% to $2.59 in the third quarter of '25 compared to a record $2.84 in the third quarter of '24. The third quarter '25 adjusted EPS exceeded the high end of our…

[Operator Instructions] First question coming from the line of Gary Prestopino with Barrington Research.

Just as I usually ask here, Mike, do you have on the segment basis, the percentage of aftermarket parts revenue for this quarter versus last quarter or last year at this time?

Yes. I can walk through that, Gary. For Flow Control, current quarter, 74% prior year quarter, 70%, for Industrial Processing, 76% this quarter, comparing quarter, 67%, and for Material Handling, this quarter, 52% comparing quarter, 55%. And then as we stated on an overall basis, 69% for this quarter compared to 65% last year.

Okay. That's very helpful. And then just a little bit -- I'm a little bit fuzzy on what you're talking about or you're talking about that orders are being pushed back into 2026 for capital bookings, particularly in the Industrial Processing but then you expect stronger capital equipment demand in the fourth quarter. So maybe could you kind of square what's going on there? And then I'd have another follow-up after that.

Gary, so we have several projects that are in the late stages that we expect to book. And so the question becomes we've got essentially whatever the rest of this quarter to get these things booked. And in some cases, it requires down payments. In some cases, it requires letters of credit to be established. So there's some administrative things that go on after we receive the official contractor order. And so the question is, will we be able to get all of those administrative things taken care of this year and get those actually booked. We have fairly stringent booking requirements concerning down payments and letters of credit and bank credits and things like that. And some of those are out of our control. When you're talking about foreign orders in, say, Northern Africa or somewhere going to take quite a while to get some of that administrative work from the banks signed off on. So there's some several large orders out there and just a question of whether we will book them this quarter or those strip into the beginning of next year. But we're encouraged by the activity level we're seeing and the opportunities that we're seeing now on the capital side, particularly on the Industrial Processing business.

Okay. And then just in terms of the challenges the sales force has been having in terms of just the worldwide -- the tariffs issues and things like that. Is that more or less in the rearview mirror in your opinion and the future capital equipment needs across all 3 segments? Have the clients come to realize that this is going to be the case for a while, and we need to order new capital equipment because we're running our old hard.

Well, I think it's certainly better than it was earlier in the year but it's not settled. I mean just this week, Trump got upset with Canada over a commercial they ran and said he's going to put another 10% tariff on them. He's meeting with China, I think, today to try to hammer out a deal there and maybe reduce some of the tariffs. So I would say there's still a level of uncertainty and volatility that's going on. It's less -- I would say it's less chaotic than it was 6 months ago but it's still not settled. And I think, as you said, some people are starting to realize, okay, this is the new environment we're living in, and we've got to move forward with our business. And that's why we think we're seeing some activity level. But it's not where it needs to be. It's not -- we really need to get this sorted out and kind of everybody agree on what it's going to be, so we can all work accordingly. So it's improving, but it's not where it needs to be yet.

Our next question coming from the line of Ross Sparenblek with William Blair.

Maybe just sticking on the order disruption. Can you maybe help us think through kind of sizing the range of outcomes for the fourth quarter and maybe also thinking through like this to Gary's point, brownfield, greenfield, what's kind of the near-term driver?

I'll answer the latter part first. So some of the opportunities are brownfields, their existing plants with upgrades. And then in the developing world, as is often the case, there will be greenfields. There'll be kind of new opportunities in the developing world. So it's kind of both. As far as the range, we really don't kind of give bookings range. So I don't know what you want to say there, Mike.

All right. I think we kind of lost you there for a second. But it looks like one of your peers called out maybe some disruption for several quarters, presumably because of tariffs. I mean those are larger greenfield orders. So you're not really seeing that level of impact or potential impact going into 2026.

I think the impact we see from tariffs is just the uncertainty that it creates. And so our customers are more cautious and move more slowly as they try to better understand what the environment looks like going forward. So I would say it has impacted the timing on a lot of our projects. But the projects that we're tracking I don't think we've seen any of them that we think are going to go away or be extended for years. I mean I think the ones we're tracking that we have kind of building our business strategy around, we think will occur over the next short period of time.

Okay. That's really helpful. One more question, I'll hop back in queue. Can you just give us a sense of factory utilization rates globally and how we should think about the parts and consumable mix here as we look at the year?

Yes. Well, so as we've said all year long, we had another record parts quarter. Our parts are overperforming relative to the operating rates, and that's because the equipment is getting quite old and it's just taking a lot more parts to keep it running. So the operating rates, it kind of depends on the business you're looking at, whether you're talking about the wood processing side or the or the paper side. But in the U.S., operating rates are higher than the rest of the world. I would say they're higher here, maybe in the kind of in the wood side, maybe in the low 80s -- or I'm sorry, on the paper side in the low 80s. The wood side, it's a little less clear. Those they can kind of curtail very quickly. And so it's a little harder to keep track of those. But they're certainly running at a reduced operating rate and taking downtime. China, I would say, still in the 60s percent operating rates and Europe is in the kind of the 70s. So it really hasn't changed much throughout the year.

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

Just wanted to stick on the capital equipment side and understanding we're not going to kind of guide to a Q4 bookings number. If we were to look at the Q3 performance, kind of low $60 million in capital equipment bookings, the last 2 years have kind of been in the low 70s. I guess my question is, when we think about these larger fiber processing orders that you seem to have visibility to, but maybe kind of still pushed out, like are those sufficient to really pick things up relative to maybe what we've seen versus the last 2 years? Or is it just kind of helping get back to that baseline relative to the weak Q3? How would you kind of frame that for us?

I think it would be a step change for us. It would be very, very helpful. These are projects that will be processed over a number of quarters, and we'll be able to recognize revenue on a percent complete basis. So as they get processed over, say, 3 or 4 quarters. I did -- on the -- and we usually kind of stay away from trying to forecast bookings but I can give you a little color on what we're looking at by the segments. If I look at capital activity in Flow Control compared to what -- to the prior year period, so fourth quarter of '24, we're looking for capital activity to be up 3% or 4%. So somewhat modestly in Flow Control. And in Material Handling, I'd say kind of same boat, up about 3% to 5%. And interestingly there, I want to clarify that isn't on the capital side. That's in parts and consumables, whereas flow control is on the capital side. But going to the -- I think the big wildcard is really in industrial processing. On the capital side there, wood is looking to be up, say, 3% or 4%. But the big difference maker is, as we've been discussing in fiber processing. So it could be up significantly compared to, frankly, many periods. There are a number of really nice projects that we're hoping will come in, I'd say, over the next quarter to 3 quarters. So first half of '26 to the fourth quarter of '25. But that's really the big wildcard for us. There's a number of good projects there. They haven't gone away. We feel we're well positioned, and we're just waiting for the order to be finally booked.

Got it. Okay. That's super helpful. And maybe bigger picture, the multiyear targets of 3% to 5% kind of organic top line growth, do we need a more broad-based recovery expanding past just some of those fiber processing orders? Or would those be kind of sufficient to help you get back into that range from what you can see?

I would say we do need a more broad-based to really get back to that.

In particular, housing. We need to see the housing environment improve because, as you know, that drives a lot of the economy and it drives a lot of our businesses. So a pickup in housing, I think, is quite important, not only to us but to the general economy.

Right. Okay. That makes sense. And then switching over to parts and consumables. That's obviously been a nice consistent performer here. How should we think about price versus volume kind of contribution so far this year? And then as we just kind of look across the backdrop, a lot of closures in the pulp and paper space, probably more to come on the wood processing side. Does that give you any concerns about potential deceleration there even? Or is kind of that older age of installed base still supporting pretty healthy demand?

Yes. I would say that on the -- a lot of those closures, of course, you've got to kind of look at the details of those. They may not be -- if it's a pulp plant, of course, as you know, we -- until the recent acquisition of Clyde, which mainly focuses on the new mega plants, we've not had a lot of business on that. So when they announced closures of some of these mills that are virgin mills, that has less of an impact. It's not 0 but it has less of an impact on us. But I think we tend to look at the global market. In the global production, global demand is continuing to grow somewhere between 1.5% and 2.5%, depending on where you're at around the world right now. And so because we operate pretty much in every mill in the world, what you're seeing is you're seeing a shifting of the production to meet that demand growth. And we work very hard to make sure we're there so that we kind of -- if it's something shuts down in Georgia and something opens up in Turkey or Algeria, we're there to capture that. And so we think that for the most part, our -- as long as global demand continues to grow, our parts business, which is a function of operating rates and total production demand will be okay.

Okay. Okay. That makes sense. And Mike, as we think about the Q4 revenue guide, can you just put a finer point, I guess, around how much contribution you expect from Clyde and Babbini and then the overall kind of organic growth assumption in there?

Yes. So for -- it's a good question, Kurt. For Clyde and Babbini, I'd say we're anticipating revenue in the $23 million to $25 million for those combined. I actually in mine -- I'm kind of the lower side of that to the $23 million. But a couple of comments I want to make on that. You can -- you'll be able to see, you heard in our comments, what you saw in our press release, Babbini had a very good third quarter. They shipped $5.9 million. You saw on the graphic, the chart we put up, that's $0.05 without interest cost. But a note of clarification there. Their third quarter tends to be their strongest third quarter. And of course, we've just brought them into the fold and haven't been able to -- we are working on but it will take us a little time to get them reoriented towards a parts and consumable business and capturing that flow. I think the management team there is very excited about doing that and changing their business model, not being as focused on capital equipment. But for capital equipment in the fourth quarter, there -- it's quite weak. Frankly, it's quite a weak quarter for them. On the Babbini front -- or excuse me, on the Clyde front, we had said their revenues were about $92 million. So if you divided that by 4, you'd say $23 million, and they actually would have been pretty close to that. But they pulled a capital order into their third quarter. So they're a little -- they're going to be a little under that $23 million because they shipped an order a little bit earlier. It was scheduled for the fourth quarter. I think they would have come in pretty spot on, on the '23, but they're a little lighter than they would normally be. So that's some color on the top line. And what was your -- what else? So I'll stick to -- you can see -- you saw for the third quarter, the $0.05. If we allocate the interest to that, that would be $0.04 for Babbini. And interestingly enough, with their weaker top line fourth quarter with interest allocated, they'll be dilutive $0.04 in the fourth quarter. So they'll be for the year breakeven but in the fourth quarter, dilutive $0.04 on our adjusted EPS. For Clyde, we have them right now at being dilutive of $0.02 with the interest charge in there. Excluding the interest charge, they'd be accretive $0.3 -- so if I took then both of those, Babbini, Clyde, with interest allocated to them, they're actually a dilutive $0.06 in the fourth quarter for us.

Got it. Okay. Perfect. And then just last from me on kind of run rate SG&A, if we were to back out some of the onetime acquisition costs and whatnot, is a good kind of go-forward quarterly number in the $80 million range or even a little bit above that?

Well, I want to be -- we're working through the valuation. So we just have markers in currently. I think we'll run a little bit lower than that but you're not far off the mark there. But I think it will run just modestly lower than that. So maybe it's in the somewhere between the 78 to 80.

[Operator Instructions] Our next question coming from the line of Edward with Boston Partners.

I just had one here. When you talk about delayed bookings, what's the sort of quantum of official orders that you've received and that are just waiting for administrative to include relative to just conversations that are being had that are kind of still up in the air. Could you provide any color around that?

Yes. I mean we really -- because we don't kind of give bookings and they haven't officially been booked, I can't give you a number. I can just tell you that we're in discussions, the final discussions on some of these larger projects. And I said in some cases, we might have some of the paperwork but we're waiting for down payments where we can officially book it or we're waiting for a letter of credit. So I mean, there -- in some cases, they're very far along. So we feel quite confident about them, but they just haven't met our bookings requirements so that we can actually book it and disclose it. We just -- as I said, we stay pretty disciplined on that and make sure that we check all the boxes before we actually call the bookings.

No worries. And then just one thing I might have missed it earlier. In terms of price and consumables performance, how much of this was driven by price versus volume this quarter?

I'd lean more towards the volume side of it.

Our next question coming from the line of Ross Sparenblek with William Blair.

A couple of questions. Can you help me pinpoint what the backlog was? I'm around like $260 million and also on the equipment side, I know there's some moving parts.

Yes, Ross. The -- we ended the third quarter with backlog at $273 million and capital in that is about 60%, so about $163 million.

Okay. And then is there any margin differential within that backlog versus the run rate for the year?

No. I think it's fairly consistent.

Okay. And then now that you've had some time with Clyde, what should we expect for that backlog contribution going into the fourth quarter? I know you said it was fairly strong, $92 million of revenue. I mean, where should that be shaking out as we think about modeling orders?

I have that here somewhere, Ross. I think it's a little over $30 million. So use $30 million as a marker.

Okay. And then is it all primarily -- it was not book and ship. There's about $25 million that's equipment but sales similar to orders for Clyde on a quarterly basis? Is that kind of the assumption?

Sorry, Ross, what was that? What's the -- I didn't catch...

When we include Clyde, are the orders going to be similar to what we should expect on the top line for revenue contribution, kind of a one-for-one. Everything goes through the order book?

Yes. Everything is going to go through the order book is a certainty. Yes. Everything will be through the order book. 75% of the business is parts and consumables. What I can't give you right now because we're acclimating ourselves the business is exactly that turn cycle.

Okay. And then just one last one on the margins. Can you give us a sense for Clyde, where the D&A, SG&A, R&D, gross margins all shifted out after you finish your accounting?

Well, I can talk to the margin profile. And one thing I'd say is broadly, it fits very well in the Industrial Processing segment. So what you see for metrics in Industrial Processing, this will fit really well, both on the gross margin and EBITDA margin front.

Okay. So nothing really to do there, pretty similar to the existing [ aftermarket. ]

Yes, it fits very nicely in that segment.

[Operator Instructions] Our next question coming from the line of Edward Odre with Boston Partners.

Just one more thing from me. Just regarding the Clyde acquisition, I wasn't able to see this in the release but how much cash do you acquire with that business?

We always do it -- we do all our things net of cash because we're just going to -- at the end of the day, the only cash that's going to be left is operating cash. I can do it off from the top of my head but it's -- to be quite honest, it's somewhat irrelevant because we'll sweep it and just pay down debt and just have operating cash there.

Thank you. And I'm showing no further questions at this time. I will now turn the call back over to Mr. Jeff Powell for any closing remarks.

Thanks, Olivia. Before we wrap up the call today, I just wanted to leave you with a few takeaways. The second half of 2025 is expected to show solid improvement compared to the first half across a wide range of metrics despite the turmoil in global trade policies and other societal challenges that we're currently facing. As we look ahead to the fourth quarter of 2025, we expect demand for capital equipment to improve and strong aftermarket parts order activity. We made solid progress this year in our efforts to drive operational improvements, which includes our 80/20 performance enhancement program and other initiatives to maximize value despite the continuing challenging macroeconomic environment in various regions of the world. And lastly, we look forward to updating you next quarter on the integration of Clyde Industries and our other recent acquisitions. Thanks for joining today, and we wish you the best for the rest of the day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.