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DATE

  • Wednesday, July 30, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

  • President and Chief Executive Officer — Jeff Powell
  • Executive Vice President and Chief Financial Officer — Michael McKenney

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RISKS

  • Management repeatedly highlighted uncertainty regarding the timing of capital equipment orders, driven by "evolving US trade policies and the ever-changing tariff environment."
  • Adjusted EBITDA declined 15% to $52.4 million in the second quarter of FY2025, mainly due to "lower capital revenue at our Industrial Processing segment, which led to reduced EBITDA performance."
  • Michael McKenney noted a 3.5 percentage-point increase in SG&A as a percentage of revenue in Q2, reaching 29% due to foreign currency headwinds and acquisition costs.
  • Revenue decreased 7% in the second quarter, which management attributed to "softer capital orders in the back half of 2024, which led to fewer capital shipments in the first half of this year."

TAKEAWAYS

  • Bookings: Bookings increased 7% to $269 million in the second quarter, led by capital performance and stable aftermarket demand.
  • Backlog: Backlog at the end of the second quarter was $299 million, up 16% over 2024; major capital bookings expected to convert to revenue in 2026.
  • Revenue: Revenue totaled $255.3 million in the second quarter, a 7% decrease compared to 2024; management cited prior softness in capital orders.
  • Aftermarket Parts Revenue: Record aftermarket parts revenue reached $181.8 million in the second quarter, driven by demand from the aging installed base.
  • Gross Margin: Gross margin was 45.9% in 2025, up 150 basis points from 44.4% in the second quarter of 2024, reflecting higher aftermarket mix.
  • Adjusted EPS: Adjusted EPS was $2.31 in the second quarter, down 18% from 2024; exceeded the upper end of guidance by $0.31, driven by aftermarket strength and gross margin outperformance.
  • Adjusted EBITDA: Adjusted EBITDA decreased 15% to $52.4 million in the second quarter, compared to $61.8 million in 2024; margin was 20.5% versus 22.5% in 2024, due to lower capital revenue in Industrial Processing.
  • Operating Cash Flow: Operating cash flow increased 44% to $40.5 million, compared to $28.1 million in 2024, fueled by higher customer deposits.
  • Free Cash Flow: Free cash flow increased 58% to $36.5 million in the second quarter, compared to $23.1 million in 2024.
  • Net Debt: Net debt was $151.7 million in the second quarter, reduced by $31 million sequentially and by over $100 million from the prior year.
  • Flow Control Segment: Revenue increased 4% to $96 million in the second quarter; aftermarket accounted for 75% of segment revenue. Bookings rose 9% year over year to $105 million.
  • Industrial Processing Segment: Revenue declined 16% in the second quarter as a result of weaker capital shipments; aftermarket parts business was up 7% compared to the second quarter of 2024.
  • Material Handling Segment: Bookings grew 16% to $71 million in the second quarter; revenue fell 6%, mirroring trends in other segments.
  • SG&A Expenses: SG&A expenses increased by 6% to $73.9 million, compared to $70 million in 2024; foreign currency and acquisitions contributed $3.7 million in incremental costs.
  • Leverage Ratio: Leverage ratio decreased to 0.86 at the end of the second quarter, compared to 0.95 at the end of the first quarter, reflecting net debt reduction.
  • Outlook/Full Year 2025 Guidance: Revenue of $1.02 billion–$1.04 billion for FY2025; adjusted EPS of $9.05–$9.25; anticipated gross margin of 44.8%–45.3% and SG&A at 27.8%–28.3% of revenue.
  • Acquisition Update: Integration of Dynamic Ceiling Technologies completed; Babini acquisition closed after the second quarter and is expected to be modestly dilutive to EPS initially.
  • Tariffs: Major impact from steel and China tariffs; management expects continued volatility, noting the Trump administration doubled U.S. steel tariffs to 50% in June.
  • Book-to-Bill Ratio: Maintained above 1.0 for the second consecutive quarter, indicating sustained order inflow over shipments.

SUMMARY

Kadant (KAI -1.83%) reported sequential improvement in capital project bookings and record aftermarket parts sales in the second quarter, supporting future revenue and backlog expansion. Management cited tariff-induced market uncertainty as a constraint on near-term revenue conversion, with gross margin benefiting from an elevated aftermarket mix but expected to moderate to the 44% range as capital equipment orders increase in the second half, per guidance. The company closed the Babini acquisition, targeting strategic integration in upcycling and dewatering, and stated it will be initially EPS dilutive. The flow control segment achieved 4% revenue growth and a 28.9% adjusted EBITDA margin, while industrial processing's 9% bookings growth contrasted with a 16% revenue decline, highlighting the lag between orders and shipments. Capital project activity is forecast to recover, particularly in fiber processing, with large projects in the pipeline for late 2025. Cash flow and net debt improvement provide operational flexibility, with over $360 million in borrowing capacity reported as of the second quarter.

  • Powell said, "our strong gross margin performance in the quarter is a result of these efforts," referencing productivity initiatives.
  • McKenney stated, "Despite the impact from incremental tariffs, our gross margin was close to 46% in the second quarter of FY2025, marking the second consecutive quarter at this level," illustrating margin management under cost pressures.
  • Material handling's 16% bookings increase in the second quarter was led by bulk material handling, but revenue lagged due to shipment timing.
  • Aftermarket parts mix rose to 71% of total revenue in the second quarter, up from 63% in the same period of 2024, contributing significantly to margin outperformance for the quarter.
  • Powell explained, "we would expect operating rates to be up," as customers deploy new and replacement capital equipment post-uncertainty.

INDUSTRY GLOSSARY

  • Book-to-Bill Ratio: The ratio of new bookings received to the amount of revenue billed within the same period, used as an indicator of near-term demand strength.
  • Aftermarket Parts: Replacement or consumable parts sold by the manufacturer for existing equipment, typically generating higher margins than original equipment sales.
  • Upcycling: Industrial process that converts waste or by-product materials into new, higher-value products or applications.
  • Fiber Processing: The transformation and treatment of raw fibers into intermediate or finished products, typically a subsegment within industrial processing.

Full Conference Call Transcript

Michael McKenney: Thank you, Daniel. Good morning, everyone, and welcome to Kadant Inc.'s second 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 Inc.'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 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 second 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 site at kadant.com.

Finally, I want 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 Inc.'s business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?

Jeff Powell: Thanks, Mike. Hello, everyone. Thank you for joining us this morning. I will review our second-quarter results and discuss our business outlook for 2025. I'll begin by reviewing our operational highlights. I'm pleased to report that we had solid demand for aftermarket parts and a healthy increase in capital equipment orders during the second quarter. Overall market demand, particularly in North America, was near a historical high in the second quarter across all our operating segments. Our commercial teams did an excellent job at winning new business in a challenging environment. This performance against the backdrop of continued trade policy uncertainty and global trade tension is noteworthy.

I want to congratulate our management teams around the globe on their strong performance. Our operations continue to focus on meeting our customers' needs and implementing process improvements to increase productivity. As we will discuss this morning, our strong gross margin performance in the quarter is a result of these efforts. Turning next to Slide six, I'd like to review our Q2 financial performance. Bookings in the second quarter increased 7% to $269 million, led by strong capital performance and stable demand for aftermarket parts. The capital project bookings were particularly encouraging to see as the economic environment remains at a high level of uncertainty. Revenue decreased 7% compared to the record revenue achieved in 2024.

This decline was largely the result of softer capital orders in the back half of 2024, which led to fewer capital shipments in the first half of this year. Based on our high level of project activity, we expect sequential improvements in the coming quarters. Adjusted EBITDA was $52 million, down 15% from the then-record in the prior year period. Our adjusted EPS was $2.31, down 18% compared to 2024.

Michael McKenney: We have a growing backlog and expect strong bookings in 2025. Capital project activity remains good. But I want to note that the timing of these orders is less certain. This uncertainty is amplified by evolving US trade policies and the ever-changing tariff environment. I'll provide more details on that when I review our operating segments. I'll begin with our flow control segment. As you can see in slide seven, our flow control segment had solid bookings in 2025. We benefited from strong aftermarket demand, while capital project activity was softer compared to the prior year period. Revenue in the second quarter increased 4% to $96 million, even as weaker manufacturing activity in Europe and China dampened our results.

Our aftermarket revenue remained strong in the second quarter, making up 75% of total revenue. Solid operating performance led to an adjusted EBITDA margin of 28.9%. As we look ahead to 2025, we expect demand to improve as the year progresses.

That said, the frequently changing global trade discussions and tariff targets may impact capital investment activity. Before leaving this segment, I wanted to share that the integration of our Dynamic Ceiling Technologies, which was acquired in June 2024, is now complete, and we are pleased to have this leading producer of Fluid Rotary Unions and related flow control products fully integrated into Kadant Inc. The diversity they bring to Kadant Inc. in terms of new markets and access to new customer segments greatly expands our opportunities as we pursue growth within our flow control operating segment. In our industrial processing segment, new order activity was up 9% compared to the same period last year to $105 million.

This booking performance was led by a significant increase in capital orders for our wood processing equipment from three North American producers of engineered wood products. Revenue decreased 16% compared to the record revenue achieved in 2024. This decline was due entirely to weaker capital shipments, as our aftermarket parts business was up 7% compared to the second quarter of last year. Adjusted EBITDA and adjusted EBITDA margin declined due to lower revenue volume and the lack of operating leverage. Looking ahead to 2025, we expect capital project activity to strengthen in this segment, particularly within our fiber processing product line where a number of large capital projects are in the pipeline. Turning now to our material handling segment.

We had excellent bookings performance in the second quarter of $71 million. The 16% increase over the prior year period was led by our bulk material handling product line, and we had solid growth from our Beller product line. As was the case with our other two operating segments, weaker capital shipments were the primary contributor to a 6% decline in revenue in the second quarter. Business activity remained high with a number of larger capital projects under discussion, although the timing can be uncertain as to when these projects are executed.

As I conclude my prepared remarks, I want to emphasize how pleased I am with our operations teams as they continue to execute the strategic initiatives to create and capture more value. Looking ahead to 2025, we believe industrial demand will strengthen relative to the first half of the year, especially once the global trade issues get worked out. Our backlog is improving, and we are well-positioned to capitalize on new opportunities that may emerge as the year unfolds due to our ability to generate strong cash flows.

And with that said, I'm pleased to announce that shortly after the close of the quarter, we acquired Babini, a small company in Italy that manufactures dewatering equipment for the food and paper industry. We were a licensee for their technology. I'll now turn the call back over to Mike for a review of our financial performance in Q2 and our guidance outlook for the remainder of the year. Mike?

Michael McKenney: Thank you, Jeff. I'll start with some key financial metrics from our second quarter. Our second quarter revenue was $255.3 million, which included record aftermarket parts revenue of $181.8 million. Gross margin was 45.9% in 2025, up 150 basis points compared to 44.4% in the second quarter of 2024. Despite the impact from incremental tariffs, our gross margin was close to 46% for the second quarter in a row. This increase is primarily associated with a higher overall percentage of aftermarket parts, which represented 71% in 2025, compared to 63% in the prior year. SG&A expenses as a percentage of revenue increased to 29% in 2025, compared to 25.5% in the prior year period.

SG&A expenses increased by $3.9 million, or 6%, to $73.9 million in 2025 compared to $70 million in 2024. The weakening of the U.S. Dollar resulted in a $1.9 million increase in SG&A expenses, including a $1.2 million impact resulting from the change from foreign currency gains in the prior period to losses in the current period and a $700,000 unfavorable effect of foreign currency translation. In addition, we had incremental SG&A expense of $1.8 million related to our acquisitions. Our GAAP EPS decreased 17% to $2.22 in the second quarter, and our adjusted EPS decreased 18% to $2.31.

The 2025 adjusted EPS exceeded the high end of our guidance range by $0.31 due to higher revenue and better gross margin than forecast. The higher revenue in the second quarter was driven by our record aftermarket parts revenue. All of our segments had higher-than-expected gross margin due to the mix of aftermarket parts in the period. In addition to the revenue beat and gross margin performance, we had strong cash flow performance in the quarter, which I'll discuss further in detail on the next slide. Adjusted EBITDA decreased 15% to $52.4 million compared to $61.8 million in 2024 due to lower capital revenue at our Industrial Processing segment, which led to reduced EBITDA performance.

As a percentage of revenue, adjusted EBITDA was 20.5% compared to 22.5% in 2024. As outlined in the chart, our cash flow increased significantly compared to both 2025 and the prior year period. Operating cash flow increased 44% to $40.5 million in 2025 compared to $28.1 million in 2024. Free cash flow increased 58% to $36.5 million in the second quarter of 2025 compared to $23.1 million in the second quarter of 2024. This strong performance was driven in part by an increase in customer deposits associated with capital bookings in the quarter.

Non-operating uses of cash in 2025 included $34 million of repayments on our debt, $4 million for capital expenditures, and $4 million for dividends on our common stock. Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.50 from $2.81 in 2024 to $2.31 in the second quarter of 2025. This included decreases of $0.56 due to lower revenue, $0.02 due to higher non-controlling interest expense, and $0.01 due to higher weighted average shares outstanding. These decreases were partially offset by increases of $0.21 due to a higher gross margin percentage, $0.12 due to lower net interest expense, and $0.02 from a lower effective tax rate.

There was no foreign currency translation effect on net income in the second quarter as the weakening of the U.S. Dollar caused foreign currency exchange rates to more closely align with the prior period exchange rates. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, decreased to 128 at the end of the second quarter of 2025 compared to 130 at the end of the first quarter of 2025. Working capital as a percentage of revenue was 17.7% in 2025 compared to 18% in 2024. We continue to remain focused on paying down debt as efficiently as possible.

Our net debt, that is debt less cash, was $151.7 million in the second quarter, decreasing $31 million sequentially and over $100 million compared to 2024. Our leverage ratio, calculated in accordance with our credit agreement, decreased to 0.86 at the end of the second quarter of 2025, compared to 0.95 at the end of the first quarter of 2025. At the end of the second quarter of 2025, we had $162 million of availability under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Now I'll review our guidance for 2025.

For the second quarter in a row, our book-to-bill ratio was over one, and the strong bookings in the second quarter led to an ending backlog of $299 million, up 16% over 2024. The majority of the large capital bookings relate to projects which we recognize as revenue from 2026. While there has been some clarity on country-specific tariffs, customers with large capital projects remain cautious as they evaluate how the tariffs will be applied and whether certain tariff costs can be mitigated. The estimated impact from incremental tariffs remains largely unchanged from our prior forecast.

The most significant tariff impact to Kadant Inc. relates to tariffs on the imports of steel, which encouraged domestic suppliers to increase their prices, and on products sourced from our facilities in China. The Trump administration eliminated prior exemptions and applied a uniform 25% tariff on all U.S. steel imports in February and increased this tariff to 50% on June 4. We believe we'll be able to mitigate a large portion of the impact of the steel price increase by working with our suppliers and cost-sharing with our customers. There was a reduction to the recently announced China tariffs from 45% to 30% effective in May.

We will continue to pursue opportunities to reduce the impact of these costs by finding alternative suppliers, through cost-sharing, and, in some cases, making investments to change our manufacturing capabilities and manufacturing components at different Kadant Inc. facilities. While there has been some clarification on certain tariffs, newly announced tariffs continue to create unease and resulting uncertainty in the market, which has impacted our customers' decision-making process for our capital equipment. We have a very healthy level of quote activity for our capital equipment, and we have seen little disruption to capital order activity related to maintenance and mission-critical equipment.

However, if customers have flexibility with the timing for their equipment purchases, some are delaying placing the order until there is more certainty and stability in the markets they serve. This environment has made it extremely difficult for our operations to forecast the timing of capital orders, requiring significant judgment on order timing, revenue recognition, and future material costs. We will continue to monitor these tariff changes and will provide further updates as the year progresses and there is more clarity with new trade policies. We are maintaining our full-year 2025 guidance. We continue to expect revenue of $1.02 billion to $1.04 billion in 2025 and adjusted EPS of $9.05 to $9.25, which excludes $0.16 of acquisition-related costs.

Looking at our quarterly revenue and EPS performance in 2025, we expect that the second half of the year will be stronger than the first half. Our revenue guidance for the third quarter of 2025 is $256 million to $263 million, and our adjusted EPS guidance for the third quarter is $2.13 to $2.23, which excludes $0.01 of acquisition-related costs. We now anticipate gross margins for 2025 will be 44.8% to 45.3%. As a percentage of revenue, we now anticipate SG&A will be approximately 27.8% to 28.3%. For 2025, we now anticipate slightly lower net interest expense of approximately $11.5 million to $12 million, and we continue to expect our recurring tax rate will be approximately 26% to 27%.

That concludes my review of the financials. I will now turn the call back over to the operator for our Q&A session.

Operator: Daniel? And wait for your name to be announced.

Ross Sparenblek: Our first question comes from Ross Sparenblek with William Blair. Your line is open. Hey, good morning, guys.

Michael McKenney: Morning, Ross.

Ross Sparenblek: Hey. Just touching on the demand environment. Forgive me, but I believe you said you guys are expecting sequential order improvement from here.

Jeff Powell: Yes. Yep.

Ross Sparenblek: So now that's help parse out. Yeah.

Jeff Powell: That's you know, we're really talking first half versus back half. But we are looking at both a strong third and fourth quarter.

Ross Sparenblek: Okay. So we think we are closer to $90 million of equipment orders in the second quarter. That kind of the new run rate? Something we did have a benefit from the OSB of $18 million that was announced in May. It feels like run rate was roughly flat just from a demand perspective. When you talk to your customers, you get the sense that, you know, maybe the tariff uncertainty is invading. And just the natural maintenance needs are finally catching up.

Jeff Powell: I would say that it's, you know, as we talked earlier, industrial processing was the segment that we thought we'd have the strongest bookings growth in. And now we've seen some of that, in wood processing, and we think that in the back half, it won't be at the second quarter level. But it'll still be good on the capital side. But, really, where we anticipate strong activity is in the fiber processing product line. There are a number of large projects actually throughout the world. That we have our eyes on, and we hope that the customers will let those orders in the third and fourth quarter.

Ross Sparenblek: Okay. And then just on parts and consumables, you know, the recent strength there, Do you believe that's been restocking? Is that still just the elevated age of the installed base?

Michael McKenney: Or is this kinda a $180 million revenue sustainable on a quarterly basis going forward?

Jeff Powell: Yeah. We think that it's really that you know, it's it's due to the age of the installed base? And that we're anticipating. Although, I'd say maybe a modest movement down because of the summer months here in the third quarter, but very modest. But kinda continuing as we've seen.

Ross Sparenblek: Okay. So if capital equipment orders start to pick up and you guys deliver. The sensitivity we should expect the parts and consumables down mid-single digits? As the installed base, you know, catches up.

Jeff Powell: I mean, you're you're you know, as you're you're talking about when the equipment gets installed and what kind of impact that'll have, now you're you're out 2026. Also, would say that typically happens as the overall operating rate start to increase, you know, as the economy improves. And so, you know, we wouldn't expect to see any noticeable drop off in the aftermarket. Because the overall operating rates will increase, you know, as they get more confident start to make the investments in the new equipment and bring that online, it's normally because you know, the economic conditions have improved. And so we would expect operating rates to be up.

Ross Sparenblek: That's very helpful. Thank you, I'll jump back in queue. Thank you.

Operator: Our next question comes from Gary Prestopino with Barrington. Your line is open.

Gary Prestopino: Good morning, Mike and Jeff. Just trying to get some numbers here. Mike, do you know what the current assets and current liabilities were at quarter end?

Michael McKenney: Sure. Just one second here.

Jeff Powell: He's pulling out trusty notebook here, so just give him a give him a second.

Michael McKenney: As an absolute, current assets were approximately $475 million, and current liabilities were approximately $200 million.

Gary Prestopino: Okay. Thank you for that. And then could we could I just get some more numbers surrounding the parts and consumables? It was in flow control, it was 75% this quarter versus what was it last year at this time?

Michael McKenney: Seventy-two. And I'll just go through them, Gary. So flow control, 75% this quarter, 72% last year. Industrial processing, 76% this quarter, 59% last year, and in material handling, 58% this quarter, 57% last year. So then overall, as we mentioned, 71% this year, this quarter, and 63% the comparing quarter.

Gary Prestopino: Should we given the fact that a lot more of the orders now are capital equipment and you're gonna start seeing that come into the mix when in 2026, really, or is it starting back half of the year?

Michael McKenney: Well, we're anticipating it to come, for capital revenue to pick up in the back half of the year. And as I just was mentioning to Ross, you know, that is really what we're focused on there. Is in the industrial processing segment, in fiber processing. There are some meaningful projects both North America, Europe, and Asia. So know, if you recall, Gary, in fiber processing, for those capital projects, those are largely recognized on an overtime basis. So once we get the orders in, we will start to recognize revenue. So we really need to see those in the back half.

Unlike wood processing where I made a note in my call that you know, those orders that we got in the second quarter in wood processing that will be revenue in 2026 because that is gonna be a point in time essentially when it shifts versus over time for the fiber processing.

Gary Prestopino: I guess yeah. Okay. That's helpful. But just kind of thinking out loud here, would because you're getting more capital equipment into the mix, would you expect to see that percentage of aftermarket parts as a part percentage of revenue jump down sequentially?

Michael McKenney: Yes. It will it will it will moderate and there also should be an impact on the gross margins. It will moderate gross margins also. So we won't be, you know, we won't be running at 46% gross margins. I would kinda anticipate those to drop down into the 44s, actually, if we get if the mix comes in as anticipated.

Gary Prestopino: And can you can you maybe just I don't wanna monopolize the call here, but just can you maybe just talk about some of the bookings that you're seeing? Is you know, what percentage of it is replacement capital? What percentage of it is new capital to you in terms of new business?

Jeff Powell: I would say, you know, what which is often the case that, you know, it's always more heavily weighted towards replacement than it is, you know, new greenfields. Certainly, with the slowdown in Asia in particular, which is where a lot of the new greenfields over the last many years have taken place. But that being said, we're still getting greenfield projects in Eastern Europe, the Middle East, and Asia, you know, outside some outside of China. And then there are some you know, there are there are conversions that are taking place where people are converting maybe, you know, modernizing a plant and putting our technology in, replacing a competitor's technology with ours. So we benefited from that.

A little bit in the last quarter. You know, I would say the one area in the capital that is as we people have heard us say over the last many years, really for the last ten to twelve years, that's kind of overperformed as the engineering wood side. Engineering wood side continues to perform well. They're just finding newer and newer opportunities for the engineered products. And so that's, you know, kind of the fastest growing sector of the wood business. It happens to be one that we're very strong in. So we've really benefited over the years from that. The orders we mentioned that we received this quarter those big orders were all in the engineered wood side.

So you know, that's one that probably has probably some of the best growth opportunities has and will going forward.

Gary Prestopino: Okay. Just one last question in terms of all of this new capital equipment, be it replacement or, you know, a new customer. Is there anything inherent with the newer equipment that would cause any kind of a lessening of the need of the aftermarket business? From running these, this equipment in terms of the parts as far as the build?

Jeff Powell: It depends a little bit on the equipment. If you think on the engineering wood side, as they put this new equipment in, almost everybody's using our new knife design, our new knife technology. Which really increases the aftermarket component of that. On some of the others, you know, we're constantly trying to innovate our products to give, you know, the customer better performance, in some cases, longer life. Now there's a, you know, kind of total cost of ownership calculation that goes in that. Generally speaking, we would not expect to see, you any significant drop off in the parts consumables relative to new technology.

You know, while we're continually trying to improve the performance of it, and so you're not going to see a significant change in the life of that equipment. Even though they it's we constantly try to.

Gary Prestopino: Thank you very much.

Operator: Thank you. As a reminder to ask a question, please press star 11. Again, that is star 11 to ask a question. Our next question comes from Addie Medan with D.A. Davidson. Your line is open.

Addie Medan: Hi. Thank you. It's Addie on for Kurt Yinger today, and just a couple of questions from me. Going off the wood processing question, so, obviously, very encouraging news on that front. But outside of wood processing, how would you characterize the underlying demand for capital equipment bookings and how are the conversations with customers going? Are you seeing customers more confident in placing orders?

Jeff Powell: Well, we so we've you know, going into this year, you know, kind of towards the end of last year and into the beginning of this year, there were a lot of discussions and we had a lot of projects on the board. And what's happened is they we as we said last quarter, you know, many of them were delayed or paused because of all the craziness associated with primarily with the tariffs. You know, the tariffs really created a tremendous amount of uncertainty globally. And so a lot of people, you know, said we're going to we're just going to, you know, sit on the sidelines here until this stuff clears up.

Now this is always the case with these things. There's a winner and a loser. So we have some customers that will be winners associated with these tariffs. Particularly our US customers, you know, that won't be subject to the same pricing pressures from competition. So some of our markets and our customers will benefit from these and others will be impacted by them. But I think what's happened is that there's been essentially kind of a capital equipment recession over the last two years. You know, last the prior eight quarters, you know, we saw a pickup this quarter. Which was the, you know, kind of, you know, the beginning of the third year of that.

So we were pleased to see that. So there's you know, the equipment's getting quite old, and history tells us that they can't delay that forever. The equipment just starts to really, you know, to really be unreliable to them. So there's a lot of project activity out there. I think they're just waiting for, you know, the, you know, these uncertainties to clear up and to get a little more visibility. But there's a fair amount of demand, you know, and many of the markets we're in are forecasted to be quite robust over the next couple of over the next few years, 2026-2027.

In particular, and so, you know, I think people just really want to see that we put the whatever these trade negotiations are. We put them behind us, and everybody says, okay. This is what I have to work with now. We go forward, you know, under those conditions.

Addie Medan: Or weakening demand across the portfolio whether by or by any customer set that you can give us any color on?

Jeff Powell: Well, I'd say, as I mentioned a few minutes ago, you know, we continue to see strength in certain parts of our wood group, in particular, the engineered wood group continues to perform well. And if you talk to industry executives out there, they are quite optimistic about, you know, the next many years, what the engineered wood business is gonna look like. They just continue to find more and more applications for it. The probably the, you know, our slowest market is China.

You know, the other parts of Asia are doing a little better, but China, you know, is quite slow right now, and there's a fair amount of, you know, I would say, economic challenges that they're dealing with right now there. North America is the strongest. And then, of course, Europe is kind of sitting in between. It'll be interesting to see what happens in Europe because they've agreed to increase their deficit spending. They've agreed to increase their military spending by quite a bit. And that should spur, you know, a lot of the industrial base over there.

But you know, we're in the very early stages of that, so it's too early to know what kind of impact that'll have on the market.

Addie Medan: Got it. That makes sense. And in the context of the Babini and GPS acquisition, can you give us an update on tariff impact, FX, organic growth, and acquisition contributions to sales? Just specific to you're talking just the Babini, Addie?

Michael McKenney: Babini and GPS. Yeah. Yeah. So, you know, Babini's revenue in 2024 was about $19 million US. So it's small. It's a smaller transaction.

Jeff Powell: You know, in terms of you know, we completed it actually early here in the third quarter. So

Michael McKenney: I actually didn't bake it into the guidance. It'll have a small impact on the top line. And I would anticipate out of the gate here that it'll be dilutive. We'll probably be dilutive a few cents. In the third quarter and maybe also on the fourth.

Jeff Powell: Yeah. This acquisition was very strategic for us in that we've incorporated their technology into our upcycling business. Which is processing the waste and rejects from industrial processes in particular on the paper side. And so they have probably the world's best technology for dewatering. And so we really and we've had great success. We licensed it a few years ago. We've had great success with that technology.

And so when the family decided they wanted to the owner passed away and his children decided they wanted to divest of all their businesses, including Babini, it really made a lot of sense for us to bring that into the company because it's a key technology, and we actually think it has broader, you know, they principally focus on the food side. That's where they started. And but we think there are opportunities in other dewatering areas. So it was a, you know, it's a very small acquisition, but we think strategically, it'll be a nice addition.

Addie Medan: Got it. That makes sense. And last question for me. How would you characterize your margin profile in the backlog and current bookings relative to the gross margin we've seen over the last few quarters?

Jeff Powell: Yeah. I you know, Addie, I think what's most important there is you know, in the first two quarters, we had very strong parts and consumable mix, which helped drive the gross margin to the 46%. In the back half of the year, expecting the mix to, you know, moderate. And I would say, you know, the parts and consumables probably, you know, say, mid to mid-sixties, sixty-six, sixty-seven. So we'll have more capital in the back half of the year. And that will weigh on the gross margins. And as I was mentioning, to Gary, I'd say, you know, I'm looking at kinda in the 44s. In the back half of the year on margins.

With the capital mix we're anticipating.

Addie Medan: Awesome. Thank you for your time, and good luck here in the back half.

Operator: Thank you. Thank you. Our next question comes from Ross Sparenblek with William Blair. Your line is open.

Ross Sparenblek: Hey, gentlemen. Just a couple of follow-ups if we have a second here. You've kind of ran through some moving parts on tariffs. Can you just help us think about that in framework for your prior guidance around $0.35 as of the first quarter?

Jeff Powell: Yeah. It's

Michael McKenney: you know, Ross, we really it amazingly, frankly, from the standpoint of when we're doing that guidance, the guidance is essentially, it's the same. We're looking at kind of that $5 to $6 million, $0.32 to $0.39.

Jeff Powell: You know, So you know, we're really I'm I was frankly, I was quite amazed when we rolled it up

Michael McKenney: that the folks did such a good job at pegging where it had land.

Ross Sparenblek: Okay. And that's just aluminum offsetting Lower China? Rates? Presumably? Lower China rates?

Jeff Powell: Yeah. I mean, you know, the rates have come down a little bit in China, but you've you know, obviously, now you heard or we're talking about 15% up for all of Europe. We had the steel tariffs double from and so, you know, we've we've had puts and takes here. But, unfortunately, when you add it all up, it hasn't changed much.

Ross Sparenblek: Okay. And then just SG&A, I mean, it looks like it's taken a little ahead of the informal guidance for 2025. I know we have M&A coming in there too. So can you maybe just give us a sense of where that should shake out? Is that closer 28% of sales now?

Jeff Powell: I think in my in the guidance range I gave, you know, we're I said,

Michael McKenney: that we'll come in at $27.08 to $28.03. So, yeah, 28% is probably a good marker there, Ross.

Ross Sparenblek: Perfect. And then just any sense on the TNC mix of the acquisitions?

Jeff Powell: Sorry. What was that? What The parts and consumables mix. I mean, last year, you guys had some pretty phenomenal deals that were highly accretive. It seems like that's been the focus. So

Michael McKenney: This one is really gonna be more towards the capital side.

Ross Sparenblek: Okay.

Jeff Powell: Of course, when we when now that now that we have it, we'll work hard to build that parts and consumables business.

Ross Sparenblek: Absolutely. Alright. Thanks, guys.

Operator: Thank you. Our next question comes from Walter Liptak with Seaport Research. Your line is open.

Walter Liptak: Good morning. I wanted to ask if you had a nice report for this quarter, and it was above your own guidance. And, I think I know what that was why that happened, but I wonder if you could talk about what went well this quarter that put you above guidance.

Jeff Powell: Yeah. The really, the primary driver was the continued strength in the parts and consumable business, and it actually beat our forecast. So the top line beat was driven by parts and consumables, and, of course, that drove a strong mix towards parts and consumables, which drove a strong gross margin performance.

Michael McKenney: So that at the end of the day, that was really what drove that EPS beat.

Walter Liptak: Okay. And is it is was it a market related thing, or is this you know, your people out there to go get you know, more parts and sales market share? What do you attribute it to?

Jeff Powell: Yeah. I mean, as you know, we you know, that's a key focus of ours. So we're you know, every day, our get up, and their primary job is to go out and chase that aftermarket. So, you know, we're constantly trying to prove that. But I would say also that you know, as we said last quarter, the aftermarket is really kind of overperforming the operating rates out there. Relative to where, you know, you would expect them to be, and we think that's the result of not making investments in equipment for the last, you know, two plus years. Know? It's just like you drive an old automobile. You drive it two years past. It's useful life.

You've got to put a lot more parts in to keep it running. So I think it's a combination of both. You know, our guys out there working hard trying to capture every dollar they can find. And having some success in doing that. But also, it's just that there's more to chase out there because you know, the equipment that's running is really getting old. And that's why we think there's going to be a capital buying cycle that has to we had a good start this quarter, but we think there's there should be a pretty lengthened capital buying cycle, you know, whether it continues this year, trips into next year.

They're gonna have to start making investments because they haven't for a few years now.

Walter Liptak: Okay. Got it. Okay. That makes sense. When you're when you're thinking about the third quarter and that parts mix coming down from where it was this quarter, I think that makes sense just because of the know, maybe more capital projects shipping. But did you factor in the third quarter, like, a deceleration in part sales?

Michael McKenney: It was very it's very modest. Walt, and it's really attributed to

Jeff Powell: Summer. Summer. People take vacations. They don't buy it. It's very it's very modest. Exactly in Europe. In Europe, you know, there's they take those extended summer vacations, and so there's nobody there to place orders.

Walter Liptak: Okay. Okay. Good. Okay. I appreciate it. Thank you.

Michael McKenney: No.

Operator: Thank you. As a reminder, to ask a question, please press 11. Again, that is 11 to ask a question. Our next question comes from Addie Madan with D.A. Davidson. Your line is open.

Addie Medan: Hey, just wanted to follow-up on the contributions you're expecting from GPS acquisition. As well for 2025, like, you broke out for Babini. Any color on that?

Jeff Powell: Yeah. So, really, when we say Babini, you know, that we're kinda talking about both of those. GPS is a small manufacturer of gearboxes. That they primarily supply to Babini. They do sell to the outside world, but their principal customer is supplying to Babini. So when we talk about the combinations here, we just could call it Babini.

Addie Medan: Got it. Thank you for that.

Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jeff Powell for closing remarks.

Jeff Powell: Thank you, Daniel. So before wrapping up the call today, just wanted to leave you I always do, with a few takeaways. Despite the weaker economies in certain areas of the world and the global trade uncertainties, the second quarter was strong in terms of capital order activity and relatively stable with respect to our aftermarket demand. Solid execution by our operations teams led to excellent gross margin performance, our commercial teams were very successful in winning key projects during the quarter. We have a strong market position and expect strengthening demand in the second half of the year as project activity gains momentum.

With that, we want to thank you for joining us today, and we look forward to updating you next quarter.

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