Participants

Michael Mckenney; Chief Financial Officer, Executive Vice President; Kadant Inc

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

Ross Sparenblek; Analyst; William Blair & Company

Gary Prestopino; Analyst; Barrington Research

Kurt Yinger; Analyst; D.A. Davidson Companies

Walter Liptak; Analyst; Seaport Research Partners

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to Kadant first quarter 2025 earnings conference call. (Operator Instructions). I would like now to turn the conference over to Michael McKenney, executive Vice President and Chief Financial Officer. Please go ahead, sir.

Michael Mckenney

Thank you, Michelle. Good morning, everyone, and welcome to Kadant first 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, future plans and expectations, financial and operating results.
And prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements.
As a result of various important factors including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024 and subsequent filings with the Securities and Exchange Commission.
In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures for the most directly comparable GAAP measures is contained in our first quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the investor section of our website at kadant.com.
Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjust the EPS on the 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 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

Jeffrey Powell

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our first quarter results and discuss our business outlook for 2025. Before I get into my remarks on our Q1 performance, I'd like to take a few minutes to outline the actions that we've taken so far to understand the implementation, the implications of the tariffs on our industries, supply lines.
Customs and how we might respond based on a variety of scenarios we considered. Each of our operating teams is assessing their supply chain vulnerability to understand our exposure to potential tariffs and the impact it could have on our operations. This assessment includes potential changes in cost, impacts on production and lead time, and how we would address these factors.
I should note that one of the strategic benefits of our decentralized structure is our ability to respond quickly to changing economic circumstances. We are also exploring alternate supply sources with the feasibility of switching suppliers in response to changed trade relationships and tariffs.
While we have a good handle on the known alternatives, the fluidity and the trade policies make decision making more complicated in the short term. We are fortunate to have experienced operations leaders around the globe who base decisions on local conditions and information from our global network of companies.
Based on our analysis to date, we believe we are well positioned to react to changes in trade policy and relationships while maintaining our high level of support to our customers. As Kadant, with few exceptions, manufacturers in the regions we sell in. Currently, we do not believe any of our competitors gain a benefit from the tariffs.
Later in our review, Michael will provide our estimate of the financial impact tariffs could have on our business. Now let's go into the first quarter performance. I will begin with our operational highlights. Despite the high level uncertainty fueled by the global tariffs and stiff economic headwinds in Europe and China, our first quarter came in as expected across most financial metrics.
Demand for aftermarket parts was robust and our operations teams around the globe once again executed extremely well in a challenging environment and delivered high value to our customers. This led to strong margin performance and solid free cash flow. Turning now to our first quarter financial performance and slide six, I'd like to highlight a few metrics that I believe are fundamental to our growth story.
First, our new order activity was up in the first quarter, despite the relatively low capital business. Uncertainty created by the rapidly evolving tariff situation has delayed capital equipment orders as our customers assess the potential impact on their businesses. Aftermarket parts bookings represented 74% of our total bookings and was a record $190 million.
As many of the first quarter of the year is often our strongest quarter in terms of parts bookings as our customers prepare for annual maintenance shutdowns. This strong demand benefits from our large installed base and our ability to deliver exceptional value to our customers. Second, our free cash flow remained healthy at $19 million.
Our asset-like operating model enables us to capture solid cash flows even during challenging and volatile economic times. Revenue in the first quarter declined 4% compared to the same period last year due to weaker capital shipments in our industrial processing segment. Our aftermarket parts revenue made up 75% of Q1 revenue and was up 5% to a record $179 million. Well, our gross margin performance was excellent.
Our adjusted EBITDA $48 million was down 8%. And lower operating leverage led to a decline in the adjusted EBITDA margin of 100 basis points compared to the same period last year. Next, I'd like to discuss the performance of each of our three operating segments, beginning with the flow control segment.
The flow control segment experienced solid demand in the first quarter, led by North American businesses. Bookings of $100 million were up 6% compared to Q1 of last year. Q1 revenue increased 7% to $92 million with strong performance in our fluid handling product line, which includes our most recent acquisition.
Aftermarket parts revenue made up 76% of total Cuban revenue and is expected to remain stable as the year progresses. A high percentage of aftermarket parts revenue helped drive adjusted EBITDA up 8%, resulting in adjusted EBITDA margin of 28.3%. We expect to deliver strong performance again this year in our flow control segment, despite transitory headwinds being introduced by the current geopolitical climate.
Turning now to our industrial processing segment and slide eight, our aftermarket parts business was relatively stable, which helped to offset the weaker capital business in the first quarter. G1 revenue declined 15% compared to then record $106 million set in the same period last year.
This was largely due to a significant decline in capital shipments that was expected based on the relative softness in capital projects through 2024, particularly in our wood processing product line. Aftermarket parts revenue of Q1 made up a record 80% of total revenue in the segment. Q1 bookings on the other hand, were up 3% compared to the prior year period to $92 million.
There continues to be significant capital project activity developed in this segment, though the current chaotic geopolitical environment makes the timing of these orders even more uncertain. The weaker revenue volume led to reduced operating leverage and adjusted EBITDA margin of 24.2%. Overall, our first quarter performances segment was soft.
This segment has high exposure to large capital business and the elevated uncertainty in global trade policy has significantly impacted the timing of capital projects. In our material handling segment, we experience solid demand for aftermarket parts which helped to offset a softer capital environment in the first quarter. Revenue of $57 million was up slightly compared to the prior year period with aftermarket parts making up 65% of Q1 revenue.
Demand for capital equipment was down from the prior year period and overall bookings were flat. We're seeing growing activity in this segment, particularly in our high performance Below product line, and expect the number of capital projects to be executed in the coming quarters, although the timing can be somewhat uncertain. Adjusted EBITDA margin of 20.2% of revenue was flat compared to the same period last year.
Despite the geopolitical and trade uncertainties, the outlook for this segment remains positive as the end markets we serve, such as aggregates, mining, waste management, recycling are fundamentally strong. As we look to the second quarter of 2025 in the full year, we remain focused on strengthening our businesses around the world and adapting to navigate these challenging times.
Despite the increasing uncertainty that limits our visibility. The longer term underlying fundamentals of our markets remain strong. Our aftermarket business continues to provide strength and stability even as capital project activity is affected by global trade and tariff uncertainties. We are confident in our ability to deliver our value proposition. Our balance sheet remains healthy.
Our ability to generate strong free cash flow is solid. And with that, I'll turn the call over to Mike.

Michael Mckenney

Thank you, Jeff. I'll start with some key financial metrics from our first quarter. Gross margin was 46.1% in the first quarter '25, the highest gross margin since 2017. Gross margin was up 150 basis points compared to 44.6% in the first quarter '24. Over half this increase relates to the negative effect of acquired profit and inventory amortization, which lowered gross margin in the first quarter '24 by 90 basis points.
The remaining increase is primarily associated with a higher overall percentage of aftermarket parts, which represented 75% in the first quarter '25 compared to 69% in the prior year. We only had a minor impact in the first quarter from tariffs. I'll discuss the prospect, prospective tariff impact when I review the guidance.
SG&A expenses as a percentage of revenue increased to 29.8% in the first quarter '25 compared to 28.2% in the prior year period, primarily due to the comparatively lower revenue performance in '25. SG&A expenses increased $0.9 million or 1% to $71.2 million in the first quarter '25 compared to $70.3 million in the first quarter 24.
This included an increase of $3.2 million from our acquisitions, partially offset by a $1.4 million favorable foreign currency translation effect and a $1.2 million decrease in acquisition related costs. Our effective tax rate in the first quarter was 24.3% and included tax benefits related to the vesting of equity awards, which lowered the effective tax rate by 1.3%.
Our GAAP EPS decreased 3% to $2.04 in the first quarter, and our adjusted EPS decreased 12% to $2.10 which exceeded the high end of our guidance range by $0.05. Adjusted EBITDA decreased 8% to $47.9 million compared to $52.2 million in the first quarter of '24, principally 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% compared to 21% in the first quarter '24. Operating cash flow at $22.8 million was flat compared to the first quarter '24. Free cash flow increased 15% to $19 million in the first quarter '25 compared to $16.6 million in the first quarter '24. First quarter tends to be the weakest cash flow quarridor, as was the case in '24, due in part to the payment of management incentives.
Other non-operating uses of cash in the first quarter of '25 included $14 million of repayments on our debt, $3.8 million for capital expenditures, $3.8 million for dividends on our common stock, and $6 million for tax withholding payments related to the vesting of stock awards. Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.28 from $2.38 in the first quarter of '24 to $2.10 in the first quarter '25.
This included increases of $0.08 due to a higher gross margin percentage, $0.07 due to lower operating expenses, $0.05 from the operating results of our acquisitions, and $0.05 due to lower net interest expense. These increases were offset by decreases of $0.52 due to lower revenue and $0.01 due to a higher non-controlling interest expense.
Collectively included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.08 in the first quarter '25 compared to the first quarter of last year due to the strengthening of the US dollar. Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable.
Increased to 130 at the end of the first quarter '25 compared to 128 at the end of the first quarter '24. Working capital as a percentage of revenue was 16.8% in the first quarter '25 compared to 15.7% in the first quarter of '24. Our net debt, that is debtless cash, decreased$ 10 million sequentially to $183 million at the end of the first quarter of '25.
Our leverage ratio calculated in accordance with our credit agreement decreased to 0.95 at the end of the first quarter '25 compared to 0.99 at the end of '24. At the end of the first quarter '25, we had $133 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Before I review our guides for '25, I'll make some comments on tariffs.
As you are well aware, in the first quarter, the Trump administration-initiated tariffs, modified tariffs, added new tariffs, and then reduced tariffs for 90 days on most countries while leaving a baseline tariff rate of 10% in place in addition to the tariffs put in place on steel and aluminum. The administration has imposed a very high tariff rate on imports from China, with China initiating a retaliatory tariff on US exports to China.
Among the various impacts from the announced tariffs, the most significant impact kadant related the import of products from China and tariffs on imports of steel and aluminum. Specific to the steel and aluminum tariffs, the impact on steel is important to us. We noted that regardless of the country of origin, steel prices in the US increased 20% to 30%, essentially right after the tariffs were put in place.
We believe we'll be able to mitigate the impact of the steel price increase by working with our suppliers and cost sharing with our customers. The China tariffs will impact us over the short term while we work to realign our supply chain. We are estimating incremental material costs of approximately $5 million to $6 million or $0.32 to $0.39 per share in our April forecast associated with tariffs that cannot be mitigated in the short term.
The majority of this impact is occurring in the second and third quarter prior to the full benefit of mitigation efforts being realized. This estimate is obviously subject to change based on the ongoing tariff negotiations. We 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 manufacture components at different kadant facilities. Another significant impact related to tariffs is the resulting uncertainty in the market which has impacted our customers' decision making process for our capital equipment. We have a very healthy level of 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 purchase, they are delaying placing the order until there is more certainty and stability in the markets they serve. Some projects have already been delayed into the back half of '25 or into next year.
That this is especially true for larger projects and greenfield projects where it is critical for the customer to understand how tariffs may impact future input and output costs. This environment has made it extremely difficult for our operations to forecast the timing of capital orders requiring significant judgment on order timing 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 the new regulations. As a result of these tariff-related impacts, we are revising our full year '25 guidance. We now expect revenue of a billion $20 million to a billion $40 million in '25 revised from our previous guidance of a billion $40 million to a billion $65 million.
And we now expect adjusted EPS of $9.05 to $9.25 which excludes $0.08 of acquisition related costs revised from our previous adjusted EPS guidance of $9.70 to $10.05. The revised adjusted EPS guidance includes a $0.32 to $0.39 impact directly from tariffs. The remainder of the guidance change is due to delays in capital orders as a result of the uncertainty created by the tariffs.
Looking at our quarterly revenue and EPS performance in '25, we expect that the second half of the year will be significantly stronger than the first half. Our revenue guidance for the second quarter '25 is $243 million to $250 million and our adjusted EPS guidance for the second quarter is $1.90 to $2 which excludes $0.01 of acquisition related costs.
The second quarter adjusted EPS guides includes an estimated $0.14 to $0.18 impact from tariffs. We now anticipate gross margins for '25 will be 44.2% to 44.7%. As a percentage of revenue, we now anticipate SG&A will be approximately 27.2% to 27.7%. For '25, we now anticipate slightly lower net interest expense of approximately $12 million to 12.4 million. And we now expect our recurring tax rate will be approximately 26% to 27%.
In addition, the following guidance estimates remain unchanged for '25. R&D expense will be approximately 1.5% of revenue, depreciation and amortization expense of $49 million to $50 million and CapEx spending of $24 million to $26 million. That concludes my review of the financials, and then I will now turn the call back over to Michelle for our Q&A session. Michelle.

Question and Answer Session

Operator

Thank you. (Operator Instructions). And our first question will come from Ross Sparenblek with William Blair. Your line is open.

Ross Sparenblek

Hey good morning gentlemen.

Michael Mckenney

Morning Ross.

Ross Sparenblek

Hey, maybe just starting high level on the order book, I can appreciate it sounds like there's a bit of a pause. It also sounds like you guys have some pretty strong visibility to maybe just 20 million to 25 million of orders, being deferred in the 2026.
Kind as we think about your customer conversations, and the sensitivity to that that push out, is there anything else we should look for, be aware of that might, cause further or deferrals in the next year and you get the sense that the overall kind of project funnel is still, pretty strong, or is there any risk of contraction here?

Jeffrey Powell

Yeah, Ross, one of the issues, of course, is that the projects get pushed off a quarter to the revenue recognition sometimes pushes it into the next year, and that's part of what we're dealing with here. I would say the discussion level and the activity level actually is reasonably strong, and before the craziness of these tariffs kicked in, several weeks ago, we, there was a, I would say an increase in activity.
We signed a nice order, early in the second quarter, a big capital order, and we're in discussions on a few more. So, I think it's still yet to be seen, how much of a pause the current environment will will cause. I think. We haven't seen any projects canceled. I think it's just an issue that, they just say, okay, I'm going to wait another two weeks here and see where things fall out.
So, I would tell you that, and we've been saying this for some time that we're really in the beginning of the third year of what we consider to be a capital equipment recession started really in second quarter of '23, and our experience, in this business for our companies have been around for 100 plus years.
We know that you can't continue to go without investing new equipment, and so they're going to have to start making these investments. One of the reasons we're still booking record levels of parts and consumables, even though the operating rates aren't at record levels right now, is because they're running old tired equipment, and it's taken a lot more parts of consumables to keep it running.
So they're going to have to start to invest in the business and we thought that this year, certainly the back half of the year, that was going to be the case. And it still might be, but there's just an added level of uncertainty now with all the chaos that this, these trade, negotiations is causing, and as you obviously know, they, depending on the day and the time of the day, they're different everywhere.
So it's just a very chaotic time right now, but we don't see any signs that projects are going away. If they get delayed a quarter, it can, push back our revenue recognition by [25%] on them, and some of that if it comes late in the year we'll slip into next year.

Ross Sparenblek

Yeah, I know that that's a good segue here. I mean, kind of thinking about that maintenance cycle. I mean, I believe last year the order book on the capital equipment side was a lot more greenfield related. Do you have a sense, I mean, is this, a year, two years of excess demand for kind of the maintenance spend?
Are we, yeah, is the average age of the installed base elevated by an excess couple of years, and then are we still kind of thinking 10% to 20%, order growth for 2025 and the capital equipment.

Jeffrey Powell

Well, we know that the average age of our equipment is older than historical norms, which is often the case when you get economic uncertainty, where everybody pulls back, and so, we are benefiting from, our parts consumable, aspect because of that, but I think, we also put a lot of brand new capital out, and, in '21, '22, and it takes a couple years before that starts to generate parts business.
And so we will start to see, over the next couple of years, I think we'll start to see that new all that new installed equipment that we booked and sold, in 2021 '22, we'll see that start to generate parts as it starts to get some age on it. Consumables will pick up, of course, if operating rates start to pick up. They're kind of a function of economic activity and operating rates.
But what we really, so I don't, we don't expect a big drop off in parts of consumables, but what we do expect is to see an increase in capital because capital is clearly performing below market, and they can't do that forever. And so, it's just a question of, when they start to get the comfort level to start to make those investments.
And as I said, we we're seeing a little activity, we booked a big project a couple weeks ago and we're in discussions on a few more, so we're seeing some activity, just a question of timing.

Ross Sparenblek

Awesome, I'll hop back into you. Thanks guys.

Operator

And the next question will come from Gary Prestopino with Barrington. Your line is open.

Gary Prestopino

Good morning, Jeff and Mike. Mike, would you have the percentage of the revenue of consumables by segment for last year's first quarter, handy?

Michael Mckenney

Yeah, See in in flow control. It was 74%. In industrial processing it was 69% and material handling 62% and then overall as I mentioned in my comments 69%.

Gary Prestopino

Okay great. You know everything's in a quandary here because of these tariffs and I guess do you get the sense that. Once there's clarity on these tariffs. If there ever will be that your at least discretionary capital projects will then kind of move ahead or is there any potential that some of these things could just overall be canceled just because the tariffs become so onerous.
Just trying to get an understanding of what your your in markets are feeling doing and saying.

Jeffrey Powell

Yeah, it's really, it's pretty rare for projects to get canceled and we do see projects, every few years you'll see a project go away, but as far as as significant, a large number of projects getting canceled, it just doesn't happen, in this business. It's very, even in [0809], we had the financial crisis, things got put on hold for a couple of years, but then it came back pretty strong after that.
So they just now, is it possible that you know that the tariffs so disrupt global trade? Yeah, but you know what's going to happen is, of course, they're going to source from other places and because we're, international, we operate in every country in the world, we'll be, we'll pick up that business elsewhere, if it's not being produced and in Europe.
Then it'll be produced in the US or if it's not being produced in China, it'll be produced in Europe. So we'll chase that business because we're active everywhere in the world, to the extent that there's still global growth, we'll we'll benefit from that, although there could be some disruptions and relocations, associated with this.

Gary Prestopino

Okay, so very few of these things ever do get canceled then it's unusual.

Jeffrey Powell

Normally when things get canceled, it's because, frankly, it's been in the developing world and it's mainly been because of lack of financing not so much demand.

Gary Prestopino

And most of this impact on the capital side is going to be felt in the industrial processing segment this year.

Jeffrey Powell

If you look at the first quarter, flow control had a very good first quarter, really, and material handling was flat. It was really industrial processing on the capital side.

Michael Mckenney

That's the segment where we believe we'll have the strongest level of capital bookings this year.

Gary Prestopino

Okay thank you appreciate it.

Operator

And the next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Kurt Yinger

Great thanks and good morning everyone I I just wanted to start off, if we look at the Q2 guide and and some of the pressures there, how much of that is, maybe bookings in Q1 that that some of those projects have been deferred in the back half and and you have pretty good visibility at this stage and then I guess as we think about the ramp.
That's kind of assumed in the back half for for sales. What would that suggest in terms of, the level of capital bookings that you'll need to see kind of in Q2 and Q3?

Michael Mckenney

Yeah, you're right, Kurt, that the weakness here in the first quarters really has impacted some of what we thought we'd start to see some revenue in the second quarter along with good bookings in the second quarter, which would really lead us to a very strong second half. So I think when you, looking at what we're looking at currently.
On the bookings front, we are going to really need, you've heard me mention kind of that 10% to 20%. We are going to need, I'd say 15% to 20% order flow on increase in order flow on the on capital to really make those, make the back half of the year, as Jeff said, there are, we've seen some good activity thus far in the second quarter, so. And we have a number of projects that we're tracking.
So we know they're there. I think my overarching concern, and you saw that in the guidance, is I think we could end up with a case where we actually get the orders, but because they have incrementally moved out, they'll, it'll get pushed to revenue in '26, so we could end up with a year with really quite good orders, but. Some of that revenue is going to be a '26 revenue.

Kurt Yinger

Got it okay and I guess generally since you know the big tariff announcements at the beginning of this month, have you seen, a little bit of shock and awe at the start from customers and maybe some acceptance and realization that it's not the end of the world.
Let's continue to move forward, or I guess what are you hearing in those conversations in terms of the push out you've already seen, and maybe what gives you confidence that those are still on the board this year?

Jeffrey Powell

Yeah, it's, you're exactly right. Everybody's, kind of still in shock, so I don't know if they fully informed their thinking right now, because it changes, every day, literally. I remember we were in a meeting two weeks ago and we went in in the morning and we had one tariff for the project, and we came out in the afternoon and we had a different set of tariffs for the project.
So literally the cost input costs changed in one day. So it's, I think it's just that right now people are still trying to figure out, exactly what's going on and as it's just human nature when there's that kind of uncertainty. You just don't do anything.
And so they're just even things that were very close to being let, they just are sitting on their hands, okay, we got the contract, we're negotiating the contracts, we're waiting for the signatures. They're just signatures are coming more slowly because everybody's saying, Well, let's let's understand what all this means. So it's, I think it's just the chaotic nature of it that that I think is causing the pause, but I think that.
Most of our customers believe ultimately this as we do, frankly, that this is going to get sorted out, there probably will be some tariffs that do survive and we'll have to, try to mitigate those as much as possible, but I think people think that it probably is going to get sorted out. The issue you have now though, of course, is you saw that they just released the first quarter GDP and it was down.
And so, that clearly, and this chaos kind of started really late, right in the quarter, although there were some hints that it was coming. So now the question is, are we going to see a further economic slowdown in the second quarter because of all of this, and I wouldn't be surprised if we do.
And again, that always, it adds another layer of, to the decision-making process, okay, now we're in a re technical recession, how does that factor into our thinking? But as I said a few minutes ago, these projects, our equipment tends to be part of a very expensive project, we're a small piece of it. We're, $5 million or $10 million in a $200 million or $400 million project.
And so normally when these things get started. Yeah, these guys are long term planners just like we are and they don't let short term disruptions kind of totally stop the project. They just slow it down.

Kurt Yinger

Okay. That makes sense and then just with the revision to guidance, Mike maybe you could just update us in terms of kind of what you're assuming in terms of parts versus capital mix in terms of sales this year and.
I guess implicit in that question would be, do you accept, expect the strength and parts and consumables that you saw here in Q1 to persist or maybe, was there any pull forward benefit, given that maintenance dynamic or even maybe some anticipation by customers that that prices for parts and components would go up and maybe a little bit of an inventory build.

Michael Mckenney

Yeah, I do think Kurt, that there was some folks who pre-bought, when I talked to the people in the field, I. There was some of that, but I think it ended up just really, being a few million, it wasn't anything that I felt like I really needed to, I better, make sure this is in the call and that of course is factored into our guides for the second quarter, but to on the, on your question in regards to parts and consumables.
It relates to percent of revenue going forward. In the back half of the year where we hope to have better capital revenues than in the first half. I'm looking at, I have right now, third and fourth quarter at 68% and 64% and the year on parts and consumables coming out at 69%.
So, as you recall, some of the businesses we bought, were heavy parts and consumable business, so that is giving us a little bit of a uplift here. We finished out last year at 66 and if our forecasts are correct, we'll end up this year at 69.

Kurt Yinger

Okay, excellent appreciate the colour guys thank you.

Michael Mckenney

You're Welcome.

Operator

(Operator Instructions). And the next question comes from Walter Liptak with Seaport Research. Your line is open.

Walter Liptak

Hey, good morning, guys. So, Martin, so Trump just started a cabinet meeting, so maybe the tariffs will change again, by lunchtime.

Jeffrey Powell

We were thinking about putting the tariff charge in on all of our prices, but after he hammered Amazon yesterday, we rethought that and said, okay, we probably won't show the tariff impact on our pricing doesn't seem to like that.

Walter Liptak

Oh, alright, well I wanted to ask about that specifically. You called out some numbers I think $36 million and you put an EPS bracket around it. What is that exactly? Is that, prices that tariffs that you're expecting that you're going to have to absorb into the margins, or is that, selling prices that you're expecting, I guess, or is that volume?
That you don't think you'll get because of the tariffs. what is in that estimate of the tariff hit that you presented?

Michael Mckenney

Yeah, that it's a so it's $5 million to $6 million and that will be included in our material cost. So and it's, these are, it's the direct impact of the tariffs that as best we can estimate we will end up having to incur before our mitigation efforts are completed.
So kind of when you look at the guidance, we're down, say on the low end, $0.65 on the high end, $0.80, and roughly half that decrease on those is the impact of what we believe we'll have to pay in tariffs as we procure material for for jobs.

Walter Liptak

Okay, but won't you, as you invoice customers, put in a surcharge or something for those incremental costs?

Michael Mckenney

Yes, we have a number of levers we're pulling surcharges will be one of them, but the issue is that that isn't instantaneous. So although the divisions have those plans and will execute on them. Most of the units are saying we'll start to have traction. I mean, frankly, they've, I believe, essentially already addressed the steel issue, which was, that that was a blow in and of itself with prices going up 25% to 30%.
So now we're down to the, I'll say the rest of the tariffs and where you're sourcing from and again they can't be mitigated instantly. So what we're planning on doing, hoping to do is we'll pull the levers and as we go through the year, hopefully we'll, by the time we get to the end of the year, we'll have large, we'll be able to largely mitigate any impact of the tariffs on a go forward basis.

Walter Liptak

Okay, do you with the tariffs, you would you hope to be, I guess tariff price/cost neutral by the end of the year is so this is just a catch up or do you think you'll have to absorb some of those tariffs permanently?

Michael Mckenney

Yeah, it's a great question. I mean, it kind of remains to be seen, but our goal, of course, is to be neutral. But you know that remains to be seen as Jeff mentioned, we think our competitors are essentially in the same boat as us, so we don't think we're at a competitive disadvantage.

Walter Liptak

Okay, alright, I appreciate that and then just one follow up for me on understanding the. The back half and the full year guidance, so in the guidance you're expecting that there's going to be some recovery in capital projects, but it sounds like you need to get some of those projects that are in the funnel right now to get.
Let go or you know to get awarded to you by in the second quarter or we'll be looking at the numbers coming down again for the back half of the year is that right?

Michael Mckenney

Yeah, I, we do need some to come in here in the second quarter for sure, some, and then we need that activity on the capital side to continue in the third and fourth quarter. So and that's, I, we took down the revenue is really by the, on our guidance ranges buying the low end $20 million, the high end $25 million.
Because, basically in the first quarter we had very soft capital activity, but the projects are still there and now we are seeing some projects, better activity here in the second quarter. So, but that even just that delay, that as I said, answering a question a little bit earlier, that's my kind of my overarching concern is we may end up having a great booking year on capital, but it may come in later, late enough that it causes the revenue to go into '26.

Walter Liptak

Okay, right, because of the percentage of completion for the long cycle projects.

Michael Mckenney

We. Well, that's, it's a good comment on your part, on the percent complete or now they call it over time that is really largely in our fiber processing. So when you hear us say oh we got a fiber processing order those tend to be on an overtime basis but on the other.
Areas like I'll say wood products where we see a number of good order possibilities those will be point in time which basically means we're going to recognize revenue when we ship it and that's my concern if those projects say move out a few months or a quarter then instead of it being delivered in the fourth quarter '25 could be first quarter '26, so.

Walter Liptak

Okay, got it. Okay, thank you.

Michael Mckenney

Yeah.

Operator

And our next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Kurt Yinger

Great thanks appreciate it. Just two quick follow ups the $5 million to $6 million I guess if we were to think about the overall cost impact without mitigation efforts and kind of the current tariff environment what would that kind of total additional cost be?

Michael Mckenney

Well, it's $0.32 to $0.39.

Jeffrey Powell

No we're mitigating a lot of the tariffs 5 to 6 is what we haven't mitigated. Do we know what the total care.

Michael Mckenney

Excellent question, Kurt, and the people in the field were swimming upstream to keep up with all the changes, so we, I boiled down the request to just tell us what you won't be able to mitigate immediately, in the near future immediately, and we'll put that into our guidance.
So I don't, I can't tell you it's twice this number. But, like I said, the steel is 25% to 30%, and I think our folks have largely addressed that.

Jeffrey Powell

That's our single biggest cost, single biggest input cost to steel.

Kurt Yinger

Got you, so it's more of a steel dynamic as opposed to, some of the imports versus China. The steel would be the much larger bucket of those two. Is that the right way to think about it?

Michael Mckenney

Well, overall, steel is significant. It's significant to us. When I, when we look at sourcing, of course the in terms of what hasn't been mitigated yet, the biggest piece of that is from is both coming in from China and stuff from US to China.

Jeffrey Powell

We were surprised. I was surprised at how much we still sell into China from from here when we started looking at the numbers, and we know. I knew we were going to have the tariff hit for the things we bring in from our from our divisions there. You, you'll remember that about 80% of what we build in China stays in the China market, and then they may about 20% they build for their sister divisions.
Some in the US, and that's where we're getting the hit. But I was a little surprised actually how much because China put a reciprocal tariff on. I was surprised at how much that was for stuff we're sending to China still. It was a lot more than I would expect it. So, to the extent that, the US and China can get this under control, that would be pretty impactful for us.

Kurt Yinger

Right, and not to get too sidetracked, but in terms of what you might be making here and shipping to China, would that primarily be related to, acquisitions you've done over time where you've leverage some of the sales force there and, brought businesses that that previously weren't international over there or is that maybe too general?

Jeffrey Powell

Well, there's some critical parts that we still make here that that that our Chinese divisions incorporate into the into their products. There's some technology that we've kind of safeguarded here that, they don't engineer that we send over fully built, as just as an IP protection standpoint. So that's a lot of it.

Kurt Yinger

Yeah got you. Okay, perfect. And then, thinking ahead potentially a little bit, do you, I guess size for us, how much of Carmana's business that's manufactured in in can kind of ultimately get shipped down to the US and I mean it doesn't seem like any of that's exposed to tariffs at this stage but you know if something were to change, how would you think about kind of framing that?

Michael Mckenney

They, the capital equipment, the machines that are made are made at in Canada, and they come in under the USMCA, so they're, there, there's no tariffs on those currently.

Jeffrey Powell

I mean, but if you know if they, if something was to go with, if it was to flip on the USMCA, then you know they would, it would be impacted by that and if it was if we thought it was long term, then we'd have to look at, other alternatives. But as of right now they're they they qualify under the you know our our trade agreement.

Kurt Yinger

Got it. Okay, thank you.

Operator

(Operator Instructions) I am showing no further questions at this time. I would now like to turn the call back over to Jeff Powell for closing remarks.

Jeffrey Powell

Thanks, Michel. So before we wrapping up the call today, I just want to leave you with a few takeaways. The newer activity was up for the start of '25, and it was kind of broad-based. There's still a lot of discussions going on around new projects, although the timing of these projects is more uncertain than normal because of the issues that we've just discussed here today.
Despite the continued geopolitical and trade policy uncertainty, our employees around the globe continue to focus on meeting our customers' needs and finding new ways to deliver long term value to our to our stakeholders. And lastly, our financial health is still excellent.
We still have strong free cash flows. Our balance sheet is in very good position, and we look forward to delivering good value to our stakeholders again in 2025. So with that, I want to thank you for joining us today and we look forward to talking to you in the future.

Operator

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