Participants

Michael McKenney; Executive Vice President, Chief Financial Officer; Kadant Inc.

Jeffrey Powell; President, Chief Executive Officer, Director; Kadant Inc.

Ross Sparenblek; Analyst; William Blair & Company

Kurt Yinger; Analyst; D.A. Davidson & Company

Gary Prestopino; Analyst; Barrington Research Associates

Walter Liptak; Analyst; Seaport Global Securities LLC

Presentation

Operator

Good day and thank you for standing by. Welcome to the fourth-quarter and full-year 2024 Kadant earnings conference call. At this time, all participants are on a listen-only mode. After the speakers' 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.

Michael McKenney

Thank you, Daniel. Good morning, everyone. Welcome to Kadant fourth-quarter and full-year 2024 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 30, 2023, and subsequent filing for 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 our 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-GAAPfinancial 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 on 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're 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 Kadan't 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?

Jeffrey Powell

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 2025. I'm pleased to report the fourth quarter was a solid finish to a record-setting year for Kadant. Despite the continued economic headwinds in many regions, industrial activity in the fourth quarter was relatively stable both year-over-year and sequentially. We had another well-executed quarter which led to solid margin performance and strong cash flow in the fourth quarter.
At the end of 2024, we were honored once again for our sustainability efforts and named by Newsweek magazine as one of America's most responsible companies. This marks the fifth consecutive year of being included on this list, and it's rewarding to be recognized for our efforts in this area.
With that, I'd like to review our Q4 financial performance. Fourth quarter performance benefited from stable demand throughout the second half of the year and the acquisitions we completed in 2024 had revenue and bookings growth of 8% and 10%, respectively. Adjusted EBITDA was up 8% compared to the same period last year, and our adjusted EBITDA margin was 20.3%. Solid execution by our operations teams around the world played an important role in delivering value to our customers and driving our operating performance in the fourth quarter. Our Q4 cash flow was strong at $52 million.
Overall, the fourth quarter financial performance contributed to record full-year financial results, which I will review next with slide 7. Stable demand and a strong backlog fueled record revenue performance of $1.05 billion in fiscal 2024 with aftermarket parts making up 66% of our total revenue. Adjusted EPS increased to a record $10.28, exceeding the prior record set last year at $10.04 per share. Our full-year adjusted EBITDA was a record $230 million and a record 21.8% of revenue.
Our strategic focus on improving our margin performance through internal initiatives, people development, and customer-focused innovations delivered results across a variety of metrics. Our workforce around the globe performed exceptionally well throughout a challenging year, and I am proud of our employees for the innovative work they have done and continue to do to serve our customers.
Next, I'd like to review our performance in our three operating segments. I'll begin with our flow control segment. Q4 revenue increased 8% to $95 million with strong performance in North America offsetting weaker performance in Europe. Aftermarket parts revenue was up 12% compared to the prior period and made up 71% of total revenue. Adjusted EBITDA was up 15% and adjusted EBITDA margin increased 170 basis points to 28.7% in the fourth quarter compared to the same period last year.
While bookings were up compared to the same period last year, softness in manufacturing sectors persisted in most regions, particularly during the second half of 2024. We believe the long-term market trends impacting industrial markets such as decarbonization, automation, and a focus on energy savings will continue to drive new opportunities for growth, though business activity continues to be influenced by geopolitical and microeconomic challenges around the globe.
Turning now to our industrial processing segment, our performance in the fourth quarter was strong despite slower activity in some of our end markets. Revenue increased 17% to $101 million compared to the same period last year led by contributions from our recent acquisition and capital shipments of our fiber processing equipment. Aftermarket parts revenue was up 24% and represented 67% of total revenue in the fourth quarter. Adjusted EBITDA margin declined 150 basis points compared to the prior year largely due to lower capital equipment margins.
Looking ahead to 2025, we expect demand for our capital equipment to strengthen particularly in our wood processing product line where capital project activity was relatively soft in 2024.
In our material handling segment, Q4 revenue declined 4% to $62 million compared to the then record fourth quarter of 2023 when we made the final shipment of a large capital order for the world's most technologically advanced bulk material conveying system. Aftermarket parts revenue was strong and represented 61% of total revenue of the quarter. Adjusted EBITDA margin declined 130 basis points compared to the prior year. This decline was largely attributed to decrease in operating leverage associated with lower capital revenue.
Looking ahead to 2025, we believe this segment will benefit from planned infrastructure projects as well as the modernization of assets in the recycling and waste management sectors, particularly in the second half of the year.
As we look ahead to 2025, project activity is looking more favorable as the year progresses and demand for aftermarket parts has been stable as we enter the year. The strong and likely strengthening U.S. dollar is expected to negatively impact our foreign currency translation, particularly if the industrial activity rebound is stronger in Europe and Asia relative to the U.S.
Our balance sheet is in great shape and our ability to generate robust cash flows have us well-positioned to capitalize on opportunities that may emerge as the year unfolds. And we will work to deliver solid financial performance again this year.
With that, I'd like to pass the call over to Mike for his review of our financial performance and our outlook for 2025. Mike?

Michael McKenney

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter. Revenue was $258 million, up 8% compared to the fourth quarter '23, including a 14% increase from acquisitions and a 1% decrease from the unfavorable effect of foreign currency translation. Gross margins increased 70 basis points to 43.4% in the fourth quarter of '24 compared to 42.7% in the fourth quarter '23 due to a favorable increase in the proportion of aftermarket parts which increased to 67% of total revenue compared to 60% in the prior period.
Fourth quarter gross margin of 43.4% included a 40-basis-point negative impact from the amortization of acquired profit and inventory. Excluding this impact, gross margins were up 110 basis points over the fourth quarter of '23.
As a percentage of revenue, SG&A expenses increased to 27.3% in the fourth quarter of '24 compared to 25.1% in the prior-year period. SG&A expenses were $70.6 million in the fourth quarter of '24, increasing $10.7 million or 18% compared to $59.8 million in the fourth quarter of '23. The $10.7 million increase in SG&A expenses was almost entirely due to the inclusion of $10.3 million of SG&A expense related to our 2024 acquisitions.
Our GAAP EPS decreased 12% to $2.04 in the fourth quarter of '24 compared to $2.33 in the fourth quarter of '23. And our adjusted EPS was down 7% to $2.25 from $2.41. Fourth quarter '24 adjusted EPS of $2.25 exceeded the high end of our guidance range by $0.15, principally due to lower-than-anticipated SG&A expenses.
Adjusted EBITDA increased 8% to $52.4 million and represented 20.3% of revenue. For full year, revenue was a record $1.53 billion, up 10% compared to '23, including a 12% increase from acquisitions. We had record adjusted EBITDAin '24, which I'll cover in the next slide along with our cash flow performance.
Full-year '24 gross margin exceeded 44% for the first time since 2017. Gross margins increased 80 basis points to 44.3% compared to 43.5% in '23 due to a favorable increase in the proportion of aftermarket parts which increased to 66% of total revenue compared to 62% in '23.
The '24 gross margins of 44.3% included a 40-basis-point negative impact from the amortization of acquired profit and inventory. Excluding this impact, gross margins were up 120 basis points over 2023.
As a percentage of revenue, SG&A expenses increased to 26.6% in '24 compared to 24.7% in '23. Approximately half of this increase is due to non-cash intangible amortization expense associated with our acquisitions. SG&A expenses were $279.9 million in '24, increasing $43.7 million or 18% compared to $236.3 million in '23. The majority of this increase relates to our '24 acquisitions which had SG&A expenses of $35.6 million in '24 and an increase in acquisition-related expenses of $4.7 million. The remainder was primarily due to annual wage increases.
Our GAAP EPS was $9.48 in '24, down 4% compared to $9.90 in '23. Our adjusted EPS was a record $10.28, up 2% compared to $10.04 last year.
In the fourth quarter '24, adjusted EBITDA increased 8% to $ 52.4 million compared to $48.5 million in the fourth quarter of '23. As a percentage of revenue adjusted EBITDA was 20.3% in both periods.
For the full year '24, adjusted EBITDA was a record $229.7 million and a record 21.8% of revenue compared to adjusted EBITDA of $201.3 million or 21% of revenue in '23.
Our industrial processing segment had record adjusted EBITDA of $110.8 million in '24 and a 250-basis-point improvement in adjusted EBITDA margins compared to the prior year. Our flow control segment also had a record adjusted EBITDA of $106.9 million in '24.
As you can see in the full-year chart, our adjusted EBITDA has increased in each of the last four years, leading to an increase in our adjusted EBITDA margin from 18.3% in 2020 to 21.8% in '24. Part of this increase can be attributed to the benefits of our 80/20 program.
Adjusted EBITDA is an important financial metric that presents our financial results excluding certain non-cash expenses like intangible amortization expense. Our 2024 intangible amortization expense increased 57% compared to 2023. While this negatively impacted our EPS performance, our acquisitions contributed to our strong cash flow and adjusted EBITDA performance.
As you can see from our cash flow chart, we had strong operating cash flow in the last two quarters of '24 compared to the first two quarters. For the full year, operating cash flow decreased 6% to $155.3 million compared to a record $165.5 million in '23. Our free cash flow of $134.3 million in '24 compared to $133.7 million in '23.
We had several notable non-operating uses of cash in the fourth quarter of '24. We repaid $33.1 million of debt and paid $5.6 million for capital expenditures and a $3.8 million dividend on our common stock. For the full year, we paid $300.3 million for acquisitions funded through borrowings. We continue to focus on utilizing our strong cash flows to accelerate the paydown of debt. And I'm pleased we are able to repay $124.5 million this year or approximately 41% of our '24 borrowings.
Let me turn to our EPS results for the quarter. In the fourth quarter of '24, GAAP earnings per share were $2.04 and adjusted EPS was $2.25. The $0.21 difference relates to $0.16 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary.
In the fourth quarter of '23, GAAP earnings per share were $2.33 and adjusted EPS was $2.41. The $0.08 difference relates to $0.10 of acquisition costs, $0.04 of other income related to our facility project in China, and $0.02 of restructuring costs.
The decrease of $0.16 in adjusted EPS in the fourth quarter of '24 compared to the fourth quarter of '23 consists of the following: $0.36 due to lower revenue, $0.20 due to higher interest expense, $0.02 due to higher operating expenses, and $0.01 due to a higher recurring tax rate. These decreases were partially offset by 26 sets of income from the operating results of our acquisitions excluding the associated borrowing costs and $0.17 due to higher gross margins.
Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.02 in the fourth quarter of '24 compared to the fourth quarter of last year.
Now turning to our EPS results for the full year on slide 17. We reported GAAP earnings per share of $9.48 in '24 and our adjusted EPS was $10.28. The $0.80 difference relates to $0.74 of acquisition-related costs and $0.06 of non-cash expense associated with the liquidation of a small dormant subsidiary.
We reported GAAP earnings per share of $9.90 in 2023 and our adjusted EPS was $10.04. The $0.14 difference relates to $0.10 of acquisition costs and $0.04 of restructuring costs.
The increase of $0.24 in adjusted EPS from '23 to '24 consists of the following: $0.88 from higher gross margins, $0.87 from the operating results of our acquisitions excluding borrowing costs, and $0.02 from a lower recurring tax rate. These increases were partially offset by $0.72 from higher interest expense, $0.54 from lower revenue excluding revenue from acquisitions, $0.24 from higher operating expenses, and $0.03 due to higher weighted average shares outstanding.
Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.08 in 2024 compared to 2023.
Now let's turn to our liquidity metrics starting on slide 18. Our cash conversion days calculated by taking days in receivables, plus days in inventory, subtracting days in accounts payable was 122 at the end of the fourth quarter of '24, down from 129 days last quarter and 130 days at the end of '23. The decrease in cash conversion days was principally driven by a lower number of days in inventory.
Working capital as percentage of revenue decreased to 15% in the fourth quarter '24 compared to 17.2% in the third quarter of '24, but up from 12.8% in the fourth quarter of '23.
Net debt that is debt less cash at the end of '24 was $192.6 million, a decrease of 19% or $44.1 million from the net debt of $236.7 million at the end of the third quarter of '24.
Borrowings made in '24 to fund our acquisitions contributed to an increase in our interest expense which totaled $20 million in '24 compared to $8.4 million in '23. Our leverage ratio, calculated as defined in our credit agreement, decreased below 1 to 0.99 at the end of '24 compared to 1.13 at the end of the third quarter of '24. We have $122 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity.
Now I'll review our guidance for '25. For the full year, our revenue guidance is $1.40 billion to $1.65 billion and our adjusted diluted EPS guidance is $9.70 to $10.05 which excludes $0.07 related to the amortization of acquired profit in inventory and backlog.
Looking at our quarterly revenue and EPS performance in '25, we expect that the first quarter will be the weakest quarter of the year due to the timing of capital projects. And the second half of the year will be significantly stronger than the first half as a result.
Our revenue guidance for the first quarter of '25 is $235 million to $242 million and our adjusted diluted EPS guidance for the first quarter is $1.85 to $2.05 which excludes $0.04 related to the amortization of acquired profit in inventory and backlog.
I should caution here that there could be some variability in our quarterly results due to several factors including the variability of order flow and the timing of capital shipments.
I wanted to outline a few points related to our full-year guidance. Our revenue guidance is negatively impacted by a $23.5 million unfavorable foreign currency translation effect based on exchange rates at the end of '24. After excluding this FX impact and a small amount of acquisition revenue, our organic revenue growth would be 2.5% at the top end of our '25 guidance range. This FX impact is subject to both upside and downside risk as the year progresses.
Our adjusted EPS guidance of $9.70 to $10.05 for '25 includes a $0.32 unfavorable foreign currency translation effect. If you exclude the FX impact from the top end of our adjusted EPS guidance range, we would be at $10.37, up modestly from '24.
The softer capital bookings we experienced throughout '24 will have a meaningful impact on the revenue and earnings performance in the first half of '25, resulting in tough quarterly comparisons. Our projected increase in capital bookings in '25 are expected to lead to much stronger financial results in the second half of the year.
Before continuing my comments on '25 guides, I also wanted to provide some information related to the new tariffs proposed by the Trump administration which are quite fluid at the moment. That the proposed tariffs on the import of goods from Canada and Mexico were delayed for 30 days. In '24, less than 1% of our cost of sales were related to goods we imported from Canada and Mexico, so a very small percentage. If these tariffs were to take effect, we would look for ways to mitigate the impact, including finding alternative suppliers and cost sharing.
Our Canadian business is also selling to the U.S. to third-party customers. We are currently working on assessing the impact, but we believe our competition would also be subject to tariffs.
Effective February 4, '25, an additional 10% tariff was imposed on the import of goods from China. We estimate that this will result in incremental material cost of $1.6 million in '25 and that approximately 75% of these costs can be mitigated by finding alternative suppliers and passing costs on to our customers.
In addition, the Trump administration just announced an incremental tariff on the import of steel and aluminum. We're currently working on assessing the impact of this new regulation.
Guidance does not include an estimated impact related to any of these new tariffs. We will continue to monitor these tariff changes, and we will provide further updates as the year progresses and there is more clarity with the new regulations.
We anticipate gross margins for '25 will be approximately 44.5% to 45%. As a percentage of revenue, we anticipate SG&A will be approximately 26.5% to 27% and R&D expense will be approximately 1.5% of revenue.
As a result of the significant paydown in debt in '24, we expect a 30% decrease in interest expense. For 2025, we anticipate net interest expense of approximately $13 million to $13.5 million. We expect our recurring tax rate will be approximately 27% and depreciation and amortization will be approximately $49 million to $50 million. And we anticipate CapEx spending in '25 will be approximately $24 million to $26 million.
That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session. Daniel?

Question and Answer Session

Operator

(Operator Instructions) Please stand by while we compile the Q&A roster.
Ross Sparenblek, William Blair.

Ross Sparenblek

Good morning, guys.

Michael McKenney

Morning, Ross.

Ross Sparenblek

Just thinking about the organic order growth, we've been on a downward trajectory since around 2022. But are we right to think that the base is kind of in around that $240 million to $250 million level per quarter? And just thinking about the second half step-up in sales, how should we think about the sizing of the coming acceleration orders that you're anticipating?

Michael McKenney

Well, I'd say, of course, Ross, on the order front, we're really looking for a significant delta on capital. So I'd say we're really -- you pointed out that $240 million to $250 million, we're looking at that improving quite a bit for our capital goods going forward. We've been running in that, I'll say, low $70 million. And we really need to see that improved by, say, 10% to 20% and that's really kind of what we're forecasting for '25.

Ross Sparenblek

Okay. I mean, can you give us a sense of where the capital backlog was at year end? I think we're around $180 million, call it.

Michael McKenney

The backlog all-in was $257 million and capital is 57% of that.

Ross Sparenblek

Okay. And is there a mix between maintenance or greenfield? I think 2024 is more like a maintenance story that was being deferred. So presumably, this is going to be an easier setup going into 2025 just given the visibility around that.

Michael McKenney

I would say it's more in what's in -- currently, it's more on the maintenance mode. And you're right, on the go-forward, they'll be, of course, the maintenance and then new projects.

Ross Sparenblek

Okay. Then just one more for me if I can. It's still difficult to parse out this environment. You had a peer announced a large order this morning which seems to support the market sentiment that there's this large project funnel in 2025. But at the same time, we're also seeing more facility closures that were announced. So I'm just trying to reconcile the moving parts as it relates to cadence. And if there's anything you guys can call out as it relates to customer conversation that give confidence for this at least greenfield aspect of the capital orders acceleration.

Jeffrey Powell

I think, of course, as we've talked about for the last seven quarters, capital has been slow. We had that record quarter, first quarter of '23, and capital orders really started to turn down after that with interest rates going up and have been pretty soft since then. That's one of the reasons why our parts and consumables has been so strong because people are running equipment longer than they normally do and it requires more maintenance and parts.
But as we've said for some time now, the projects and the Board discussions are pretty active. Everybody's just waiting for more clarity. And we were hoping to get that. But of course, the last three weeks has been kind of crazy. So there's, I would say, more uncertainty and more lack of clarity specifically around these tariffs. And I think people are still trying to sort through. But project activity is there. They can't go forever without replacing equipment. And so it's just a question when the cycle starts again.
I'm not sure who you're referring to on the large order, but if you look at, for instance, the housing, our wood products side has been pretty soft the last -- really, the last couple of years. Housing starts around $1.3 million last year, which is pretty soft. I see that the CBO just came out with a 10-year forecast. It has $1.6 million start for the next 10 years. So that would be quite strong and quite good, I think, for our business, assuming that we see that happening. But it's interest-rate sensitive, of course. And as I said, a little bit of the uncertainty that's occurring right now, I think has frozen interest rates.
But capital will have to come back, and we've been in this game for a very long time and we know you can only delay making those investments for so long. And so things will start to strengthen. And as Mike indicated, right now, we think second half of the year, we're expecting to see some strengthening in these projects.

Ross Sparenblek

Yeah. That all makes sense. Thank you, guys.

Operator

Kurt Yinger, D.A. Davidson.

Kurt Yinger

Great. Thanks. And good morning, everyone. I just wanted to dovetail on some of the prior questions just in in terms of the uplift on the capital side into the back half. Is your sense that it's really just getting some of these tariffs settled in, maybe some hope around some relief on interest rates that would catalyze some of these discussions turning into bookings, or is there anything else specifically from a macro perspective that you're really keying in on here?

Jeffrey Powell

Well, of course, the interest rates are always a key metric that impacts, but also, it impacts economic activity. And I think that's really what our customers are looking for. They're looking for a better visibility and a sense of where the economic activity is going to be.
I would say we had some projects that we've been talking to our customers about that we thought might happen quickly here. And I would say there's a somewhat chaotic environment right now, I think, to say the least, with what's going on in Washington. And all that does is add more uncertainty. And these guys just say, well, we're going to wait another month to see how this sorts out. I think it's -- we need stability -- We need economic growth to start to accelerate and stabilize, but we need some stability. I think that's what they're waiting for and hoping for.
And as I mentioned just a few months ago, you can't delay investing in your business forever. At some point, we know we've been in this downcycle for two years now on the capital side. And history tells us that, essentially, another buying cycle is going to occur. We expected it, frankly, to happen earlier than it did. Interest rates have stayed higher than I think people would expect it. Economic activity around the globe, I mean, North America has been reasonably strong for us, but Europe's particularly weak, China's weak. And for us, what we really like to see is some stability and some growth starting to accelerate in Europe and Asia.

Kurt Yinger

Got it. Okay. That all make sense. And you touched on the wood product side, there's a number of OSB projects out there, new strand-based EWP project. It seems like there's pretty good visibility to the capital side in that market. Beyond that, are are there any specific areas or geographies where you feel like the visibility is really there on the capital side and and you think -- or you're pretty confident in an inflection coming or how are you thinking about that?

Jeffrey Powell

Well, certainly, our OSB business has held up surprisingly well. I would say that on our consumable business, on the sawmills, that's softened. And the debarkers, our debarking business has been pretty soft now for a while. We had a very strong couple of years there and built up a very large backlog. And I think the industry is absorbing that and things have been quite soft. But again, we think, based on discussions with our customers, that things are going to start to improve there as the year progresses.
And certainly, if we get housing starts, in fact, I saw that starts I think were $1.5 million in December, if we can average anywhere near that this year, you're going to see a much better market condition for our customers which utilizes parts and consumables from us and also allows them to make some investments in the business.
Europe has been turned on its head a little bit because of the Russia situation. And that's slowly sorting itself out. The capacity has had to move around. And so, we're hoping to see some stability and growth there. I think the best thing that could happen for us in Europe would be for this Russia-Ukraine war to stop. Then I think you're going to see significant demand. You've got an entire country to rebuild. Possibly, some sanctions, I suspect, would be included in any peace agreement, sanction relief in Russia, which would be very good for us. So that's something that we're really hoping for is that they're going to be able to stop this conflict. And if they do, I think there will be significant demand that will come out of rebuilding Ukraine, in particular.
So those are things that we're hoping for. But even without that conflict resolving itself, I think you're seeing some shift and stabilization in the market over there. It's taken a few years to sort that out.

Kurt Yinger

Okay. And if we were to think about the 2028 targets you laid out in December and put that together with the outlook here for 2025, recognizing acquisitions are a key factor and hard to predict, should we be thinking about a meaningful acceleration in 2026 well above target organic growth period? Or how would you frame that in light of the multi-year targets?

Jeffrey Powell

We work with economic groups that give us -- they look at our industries and our particular metrics and give us their thoughts and their data on it. And if you look at the material handling side, if you look at the wood side in particular, they're talking about an acceleration of growth starting back half of '25, certainly hrough the next few years, through '27, say, '28. So we do expect to see an acceleration in most of our key markets. Packaging tends to be a little more stable. It's talking about growing 3% or lower than 3% over the next several years. But on the material handling side, on the wood side, they're talking about a re-acceleration in growth. And that's what we would expect.

Kurt Yinger

Okay. And then if I could just sneak one more in on the gross margin side. With the softness in capital, at least, here early in the year, could you talk about some of the puts and takes around gross margins? I would think mix is going to be a benefit. But is there any offset as well from margins on capital orders maybe starting to be less favorable than you've seen over the last couple quarters?

Michael McKenney

It's a good question, Kurt. As you said, the mix is going to be helpful, especially in the front half of the year, right? And then specific to capital gross margins, I would say, on smaller capital or replacement capital where we, I'd say, we have a little bit of the upper hand, those margins should be good. The larger projects are the ones that can be more competitive and you get pressure. So I would have to say we'll have to wait and see how those shake out. So that's my view. It's a good question because we are anticipating some larger projects coming in. So depending on how those land that we'll certainly see the impact in our gross margin performance.

Kurt Yinger

Okay. Makes sense. Appreciate all the color. Thank you.

Operator

Gary Prestopino, Barrington.

Gary Prestopino

Good morning, Jeff and Mike. Could you, maybe just for me, let's talk a little bit about on the capital project side across all your three business lines? Where are you seeing the most sluggishness at least in the first half of this year? And then where's going to be the most significant snapback as you get into the back half of 2025?

Michael McKenney

Well, I'd say, Gary, overall, the segment that has the most favorable outlook for us is industrial processing with wood leading the way and stock prep also participating in that. So that's the segment where we are anticipating the best growth. And then right after that, I would say, is in material handling whereas Jeff mentioned, we feel that as we move towards the back half of the year, we start to see a nice recovery there.

Gary Prestopino

Okay. And then just maybe a comment on the acquisition pipeline and I guess given that there's generally a consensus here that the economy is going to strengthen, things are going to get better, are you seeing that reflective in your discussions with potential acquisitions in terms of pricing?

Jeffrey Powell

I would say the -- as we said, most of last year, the activity level has been quite strong. Our corporate development team has been quite busy, an awful lot of opportunities that we've looked at and been in discussions with. And so the pricing is always driven by, frankly, the private equity guys. They set pricing. And their pricing is somewhat set by interest rates and how much leverage they can get. And so that's really what impacts pricing more so than, say, a more favorable economic environment. But the activity level, we think, is going to be very strong again in '25. That's what we're hearing from the bankers. And that's what our corporate development team is experiencing as they (inaudible) any given time, we're talking to 200 or 300 companies. And I think everybody's -- just like we're expecting things to strengthen as the year progresses, they are too. And so I think that is feeding into, I would say, the increased discussions that we're having with everybody.
Pricing is still yet to be seen. I would say pricing maybe did stabilize a little bit. But what we really saw last year was a much larger percentage of busted deals, deals that didn't happen. Probably the most I've seen in a long, long time where they would enter into an agreement and then it would not close. And I think that was a function of pricing and sluggish performance where things just didn't improve as much as people were hoping for last year. So that's where we really have seen it. So I think pricing is always a challenge, especially for us, because we tend to be very, very disciplined in our pricing strategies. But I would say we're reasonably enthusiastic about the environment we're seeing and the number of deals that we think are going to come to market.

Gary Prestopino

Thank you.

Operator

(Operator Instructions)
Walt Liptak, Seaport Research.

Walter Liptak

Thanks. Good morning, guys. One, just dialing a little bit more on the industrial processing and the outlook for the wood products because it sounds like that's where you've got the best chance of getting some capital projects. So in the quarter, the bookings looked good. What was the mix of that in terms of capital projects versus aftermarket parts?

Michael McKenney

We had some decent activity on the capital side. First, I'd say parts has been where we're good. But we also had some activity on the capital side, I'd say, more towards stock prep in the quarter. So that was a positive spot for us in the quarter.

Walter Liptak

Okay. Great. And so then when you think about I guess industrial process including stock prep but also wood processing, what are the pluses and minuses? Do we need to see that housing recovery that you alluded to, the $1.5 million, or is it lower interest rates or is there something in the pipeline that says that someone's got to replace some of their capacity?

Jeffrey Powell

It's interesting, of course, because as you know, housing drives more than just wood consumption. It really is a key component of the entire economy. Packaging is tied to housing in a big way. And so what we really need to see is the housing starts to -- I mean, we're not coming close to meeting demand out there. Demand is very high. The demand gap continues to grow. We've built $1.3 million-plus last year when we really probably should have been $1.6 million, $1.7 million. So that's a key component of it, I think. And that, of course, is tied to interest rates. If interest rates come down, housing becomes more affordable. So that's a big component.
Housing also, of course, affects our material handling group, right? All the concrete, steel and aggregate, and everything else that goes into that. So it is a major driver of the U.S. economy. And so if it does increase from this low -- I mean the production was very low last year. It was near -- other than the '09 crisis, it was near, on average, a 30-year low. So we do expect that's going to improve. The forecast all indicates they think things are going to strengthen and that will. Both of our sectors, but the wood group we'll see it first, for sure.

Walter Liptak

Okay. Great. Appreciate that. And then just changing gears to geographic, I think you commented that Europe is sluggish. How about Asia and any of the trends that are happening in China?

Jeffrey Powell

Well, China has been very slow on the industrial side. The government continues to put more and more programs in place to try to spur some growth there. They're having to continue to increase the amount of money that they're going to invest. So it's slow. I would say, Asia, it kind of depends on which country you're looking at. But certainly, Germany is struggling right now. The German economy is very much tied to automotive exports. They're losing big market share in China right now, and so that's hurting them. And so they've got to sort through that. But in general, I would say, the activity level has been sluggish in most of Europe. What's interesting enough, what they call the PIGS countries doing a little better than the more established ones. Spain, Italy, are doing a little better than, say, Germany and France. And the UK is still sluggish. So Europe has some work to do, I think, to get their economies back accelerating again.

Walter Liptak

Got it. Okay. I appreciate the answers. Thank you.

Operator

Ross Sparenblek, William Blair.

Ross Sparenblek

Thanks, guys. I just wanted to follow up on some of the margin sensitivities. Parts consumables are seeing stable demand. But where do you think we are in the restocking cycle there? And if there's anything different to call out from what you already said about the geographic dynamics as it relates to factory utilization rates?

Jeffrey Powell

I would say, I think that destocking and restocking played itself out. I think we're seeing good, strong parts. In great part because the equipment is old and worn out. They just haven't made the investments in the last couple of years. And just like if you drive a car too long, you start to put a lot more money and keeping it running. So I think that's why if you look at the parts demand, it's a little better than you might normally expect relative to the operating rates. It tends to be a function of operating rates. But I would say it's particularly strong relative to the operating rates. In part because they haven't made the investments, the maintenance investments and the things that they often do. But I think as far as the -- as I said, destocking, restocking, I think that's played out now. And going forward, it's just going to be tied to operating rates and the age of the equipment.

Ross Sparenblek

Okay. So as we think about parts in consumables, I think orders are up 600 basis points P&C mix of orders this year versus last year. Do you think half of that's structural from recent M&A and the other half's just older equipment and as you deliver more passing and replacement equipment and maybe it's not as beneficial?

Michael McKenney

I'd say, really, the transactions that we did had a high focus on parts and consumables, Ross. So all-in, that's what you're seeing the benefit of the businesses we acquired. If you go down to organic, it's more to what Jeff was talking about, I would say, organic has been flat, relatively flat which, given operating rates, et cetera, is a little bit of a surprise to us, a good surprise.

Ross Sparenblek

Okay. And then just to put a finer point on the 2025 guidance, everything's static on the macro that you talked about. What is kind of the internal assumptions on P&C mix capital equipment?

Michael McKenney

We are projecting the mix to be a little -- a tick above where we finished this year. So we are 66% on parts and consumables this year. We're looking at 67% next year or this year, actually.

Ross Sparenblek

And then just one more really quick on 80/20, it changes every year, what's the primary focus when we think about the segments for 2025?

Jeffrey Powell

As you know, we have a list of companies and start dates scheduled for them. So our 80/20 teams continue to execute those. And of course, as new companies join the Kadant family, they get on the list. And so it'll be a never-ending effort. But we have several companies that are starting 80/20 this year both in North America and Europe.

Ross Sparenblek

All right. Well, thank you, guys.

Operator

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

Jeffrey Powell

Thanks, Daniel. So before wrapping up today, I just want to leave you with a couple of takeaways. 2024 was another record year for Kadant. Our employees once again performed at a very high level to achieve these results. While we expect continued uncertainty and volatility in various regions around the world in 2025, we believe our decentralized operating structure and our global presence will help mitigate the risks associated with this, and we look forward to maximizing the value we create for our customers and our stockholders in 2025. With that, we want to thank you for joining the call today. Have a great day.

Operator

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