Kadant Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Strong demand for aftermarket parts and a healthy increase in capital equipment orders during Q2. Overall market demand, particularly in North America, was near a historical high across all operating segments.
• Commercial teams did well in winning new business in a challenging environment. Operations focused on meeting customers' needs and implementing process improvements to increase productivity.
• Integration of Dynamic Sealing Technologies (acquired in June 2024) is complete, expanding Flow Control opportunities. Acquired Babbini, a small Italian company manufacturing dewatering equipment for the food and paper industry.

Segment Performance

• Flow Control: Bookings were solid in Q2 2025. Revenue increased 4% to $96 million. Aftermarket revenue was strong, making up 75% of total revenue. Adjusted EBITDA margin was 28.9%.
• Industrial Processing: New order activity was up 9% compared to the same period last year to $105 million. Revenue decreased 16% due to weaker capital shipments, but the aftermarket parts business was up 7% compared to the second quarter of last year.
• Material Handling: Bookings in the second quarter were $71 million, a 16% increase over the prior year period. Revenue declined 6% due to weaker capital shipments.

Guidance

• Maintained full-year 2025 guidance: revenue expected to be $1.20 billion to $1.40 billion, and adjusted EPS $9.05 to $9.25.
• Anticipate sequential improvement in orders, with strong third and fourth quarters.
• Q3 revenue guidance: $256 million to $263 million, adjusted EPS guidance: $2.13 to $2.23.
• Gross margins expected 44.8% to 45.3% of revenue, SG&A approximately 27.8% to 28.3%, net interest expense ~$11.5 million to $12 million, and recurring tax rate ~26% to 27%.

Risks

• Uncertainty in U.S. trade policies and tariff environment impacting capital investment activity.
• Evolving global trade discussions and tariff targets affecting market confidence and customer decision-making.
• Impact of steel tariffs and changes in China tariffs on costs and supply chain.

Question and Answer

Q: Touching on the demand environment and expecting sequential order improvement.

A: Expecting strong third and fourth quarters, with the fiber processing product line having large projects in the pipeline.

Q: About the strength and sustainability of parts and consumables.

A: Due to the age of the installed base, a modest movement down is expected but parts and consumables will continue as seen.

Q: Current assets, current liabilities, and parts and consumables percentages by segment.

A: Current assets were approximately $475 million, current liabilities approximately $200 million. Flow Control: 75% in Q2 2025 vs 72% in Q2 2024; Industrial Processing: 76% in Q2 2025 vs 59% in Q2 2024; Material Handling: 58% in Q2 2025 vs 57% in Q2 2024.

Q: Bookings breakdown of replacement vs new capital.

A: Heavily weighted towards replacement, but there are some greenfield projects and conversions.

Q: Impact of new equipment on aftermarket parts need.

A: Depends on the equipment, but generally, no significant drop-off expected.

Q: Demand across portfolio by geography.

A: Strong in North America, Engineered Wood Group performing well; slow in China; Europe in between.

Q: Impact of Babbini and GPS acquisitions on guidance.

A: Babbini is small, likely dilutive in third and fourth quarters; strategic addition for the Upcycling business.

Q: Margin profile in backlog and current bookings.

A: Mix will moderate, with parts and consumables mid-60s and capital in the back half weighing on gross margins.

Q: Reasons for Q2 EPS beat.

A: Strong parts and consumables business, beating forecast, driving top line and gross margin.

Q: Deceleration in part sales in Q3.

A: Very modest, attributed to summer vacations.