Earnings Call Transcript - KAI Q4 2020

Mike McKenney, CFO

Thank you, Gigi. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 2020 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2020, 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'll 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 measure 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 in the Investors section of our website at www.kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following the remarks, I will give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeff?

Jeff Powell, CEO

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 2021. I'll begin by discussing our operational highlights and our fourth quarter financial results. The fourth quarter was a solid finish to a challenging year. Despite the uncertainties brought about by the pandemic, we had solid execution during the quarter and generated strong cash flow while safeguarding our employees. Strong capital project activity across all our operating segments and robust demand for our Parts & Consumables led to record bookings and cash flow in the fourth quarter. I'll provide more details about this activity when I discuss the results of our operating segments. Our balance sheet remains healthy and our liquidity position has strengthened throughout the year. Robust cash flows have always been a strength of Kadant, and we expect this will continue as economies recover from the effects of the pandemic. Turning now to our Q4 performance. We achieved a notable turnaround from the prior quarter's weak business levels. Our Q4 bookings were a record $197 million, up 23% compared to the prior year, with our Industrial Processing segment driving this growth. Strong demand led to a 9% sequential increase in Parts & Consumables revenue, which made up 67% of total Q4 revenue. Total revenue was down 8% compared to the fourth quarter of 2019. We were particularly pleased that our adjusted EBITDA margin increased to 19.1%, and our free cash flow was up 7% to a record $38 million in the fourth quarter. Overall, the quarter was better-than-expected and I'm pleased with how our employees delivered these solid operating results. While 2019 was a record year on many fronts, and we began 2020 with positive momentum, no one could have anticipated the full impact that the pandemic would have on the world and the global economies. Full year revenue declined 10% to $635 million, while our bottom line performance benefited from a favorable product mix along with cost containment measures and government assistance programs. Cash flow from operations strengthened throughout the year, and free cash flow was near a record $85 million for the full year 2020. Our diluted EPS was $4.77 and on an adjusted basis, declined 7% to $5 compared to our record of $5.36 per share in 2019. Our workforce around the globe deserves a tremendous amount of credit for these results as they adapted to a new way of work and performed exceptionally well under very challenging circumstances. I'm extremely proud of our talent and dedicated employees for the work they've done and continue to do to serve our customers. Next, I'd like to review the performance of our 3 operating segments. Our Flow Control segment benefited from a rebound in capital project activity in the fourth quarter, which led to bookings increasing nearly 9% compared to the prior year period. Our quarterly bookings performance moved in the right direction as the year progressed and positions us well for a solid start to 2021. Our Parts & Consumables revenue was up 5% sequentially and made up 68% of total Q4 revenue. As many of you know, our aftermarket parts business has a more favorable margin profile compared to capital business, and the product mix combined with improved operating leverage led to a 13% increase in adjusted EBITDA compared to Q4 of 2019 and represented 26% of revenue. Looking ahead, we expect the first quarter of 2021 to show stability in terms of both capital project bookings and demand for Parts & Consumables. We believe market conditions are improving and will continue to strengthen as the COVID-19 vaccine becomes more widely available and businesses are permitted to fully reopen. Turning now to our Industrial Processing segment. We continue to experience strong demand for our wood processing equipment and also for our stock prep equipment, with capital bookings in this segment more than doubling compared to the prior year. This demand was largely driven by two factors. One was a robust U.S. housing market, which saw single-family homebuilding, the largest share of the housing market, increase 12% in December. The other was a significant increase in our stock prep capital project activity in China and North America, which more than doubled compared to the prior year. Revenue in this segment declined 13% to $69 million year-over-year, but increased 11% sequentially. Parts & Consumables revenue was up 12% compared to the same period last year, and made up 70% of total revenue in the fourth quarter. A favorable product mix and good execution led to a 250-basis point improvement in our adjusted EBITDA margin. While government assistance programs were significantly reduced in the fourth quarter, we did have some remaining benefit that helped allow us to retain our talented workforce. In our Material Handling segment, we continue to see relatively stable yet moderate order activity. Revenue was down 7% to $39 million, and Parts & Consumables revenue in the fourth quarter made up 58% of total revenue. Capital bookings in our Material Handling segment increased 23% compared to the same period last year and were up 18% sequentially. We are encouraged to see our customers showing increased confidence in the economic outlook by awarding us these larger capital orders. As in all other segments, we are seeing increasing market activity. Looking ahead to 2021, we believe this segment will continue to strengthen throughout the year. As we look ahead to the first quarter of 2021 and the full year, we are seeing signs of increased project activity and expect industrial production to continue its modest rebound. Our strong cash flows combined with a strengthening balance sheet have us well-positioned to capitalize on opportunities that may emerge with the improving global economy. While we are hopeful the worst of the pandemic is behind us, there is still a great amount of uncertainty, particularly in Europe, regarding how economies will respond to the pandemic given the unevenness in the vaccine distribution. This uncertainty limits our ability to forecast the timing of orders and as a result, we will not be providing guidance at this time.

Mike McKenney, CFO

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter. Consolidated gross margins were 44.1% in the fourth quarter of 2020 compared to 40.9% in the fourth quarter of 2019, up 320 basis points. The increase was primarily due to higher gross margins on Parts & Consumables in the quarter and a higher percentage of Parts & Consumables. Our overall percentage of Parts & Consumables revenue increased to 67% of total revenue in the fourth quarter of 2020 compared to 60% in the fourth quarter of 2019. Also contributing to the increase in gross margins was approximately 50 basis points due to the receipt of government assistance benefits related to the pandemic. SG&A expenses were $47.4 million in the fourth quarter of 2020, down $0.2 million from the fourth quarter of 2019. SG&A expense as a percentage of revenue was 28.1% in the fourth quarter of 2020 compared to 26.1% in the fourth quarter of 2019. There was an unfavorable foreign currency translation effect, which increased SG&A expenses by $1.1 million, and we received government assistance benefits of $0.4 million in the fourth quarter of 2020. Excluding these items, along with backlog amortization and the SG&A from our acquisition, SG&A expenses for the fourth quarter of 2020 were down $1.3 million or 3% compared to the fourth quarter of 2019, primarily due to reduced travel-related expenses. Our GAAP diluted EPS was $1.40 in the fourth quarter compared to $0.76 in the fourth quarter of 2019. Our GAAP diluted EPS in the fourth quarter includes $0.12 from an intangible asset impairment charge, $0.01 of restructuring costs and $0.01 of acquired backlog amortization. In addition, our fourth quarter results included pretax income of $1.2 million or $0.07 net of tax attributable to government employee retention assistance programs. Our tax rate in the fourth quarter was 20.4% and included approximately $0.12 of tax benefits related to the following items. A reversal of tax reserves associated with uncertain tax positions, the exercise of previously awarded employee stock options and return to provision adjustments. Excluding these items, our tax rate would have been 27%. For the full year 2020, gross margins increased 200 basis points to 43.7% compared to 41.7% in 2019. Excluding the government assistance benefits, which contributed approximately 60 basis points to the 2020 gross margins and the amortization of profit and inventory in 2019, gross margins were up 90 basis points, primarily due to higher gross profit margins on Parts & Consumables and a higher overall percentage of Parts & Consumables. Our percentage of Parts & Consumables revenue increased to 66% in 2020 compared to 63% in 2019. SG&A expenses decreased $10.6 million or 6% to $181.9 million in 2020 compared to $192.5 million in 2019. As a percentage of revenue, SG&A expenses were 28.6% in 2020 compared to 27.3% in 2019. We had $0.6 million of SG&A from our acquisitions in 2020 and incurred acquisition-related costs of $1 million and $2.2 million in 2020 and 2019, respectively. In addition, there was a favorable foreign currency translation effect of $0.4 million and we received government assistance benefits of $2.2 million in 2020. Excluding SG&A from our acquisition, acquisition-related costs, the impact of foreign currency translation and government assistance benefits, SG&A expenses were down $7.4 million or 4% compared to 2019, primarily due to a decrease in travel-related costs. Our GAAP diluted EPS in 2020 was $4.77, up 5% compared to $4.54 in 2019. Our GAAP diluted EPS in 2020 includes $0.12 from an intangible asset impairment charge, $0.07 of restructuring costs, $0.04 of acquired backlog amortization, $0.03 of acquisition costs and $0.03 from a discrete tax benefit. In addition, our 2020 results included pretax income of $6.1 million or $0.39 net of tax attributable to government employee retention assistance programs. In the fourth quarter of 2020, adjusted EBITDA was $32.1 million or 19.1% of revenue compared to $32.2 million or 17.6% of revenue in the fourth quarter of 2019. On a sequential basis, adjusted EBITDA increased 7% due to increased profitability in our Material Handling segment. For the full year, adjusted EBITDA was $115.9 million or 18.3% of revenue compared to the record set in 2019 of $127.1 million or 18% of revenue. In the fourth quarter of 2020, operating cash flow was a record $40.3 million and included a positive impact of $12.8 million from working capital compared to operating cash flows of $39.2 million in the fourth quarter of 2019, which included a positive impact from working capital of $17.9 million. For the full year, operating cash flow was $92.9 million, down 5% compared to the record of $97.4 million in 2019. We had several notable nonoperating uses of cash in the fourth quarter of 2020. We repaid $30.1 million of debt, paid a $2.8 million dividend on our common stock and paid $2.2 million for capital expenditures. For the full year, we repaid $72 million of our debt. Free cash flow was a record $38.1 million in the fourth quarter of 2020, increasing 69% sequentially and 7% compared to the fourth quarter of 2019. For the full year, free cash flow was $85.3 million, down $2.2 million or 2% compared to the record of $87.5 million in 2019. Let me turn to our EPS results for the quarter. In the fourth quarter of 2020, GAAP diluted earnings per share was $1.40 and adjusted diluted EPS was $1.54. The $0.14 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.01 and amortization of acquired backlog of $0.01. The $0.12 intangible asset impairment charge is associated with our timber harvesting product line, which is part of our Wood Processing Systems business. This is an ancillary product line that was part of our acquisition of NII FPG's Forest Products business in 2017 and represents less than 1.5% of our consolidated revenues in 2020. We experienced a decrease in demand for these products in 2019, which continued into 2020 due to several factors including a general softening in demand for equipment used in steep slope logging due to reduced availability of timber, higher stumpage fees and the resulting closure of some sawmills in Western Canada. We evaluated the recoverability of the intangible asset related to this business, which resulted in a pretax impairment charge of $1.9 million in the fourth quarter of 2020 and $2.3 million in the fourth quarter of 2019. After these impairment charges, the remaining intangible asset for this product line is $0.5 million. In the fourth quarter of 2019, GAAP diluted earnings per share was $0.76 and adjusted diluted EPS was $1.32. The $0.56 difference relates to a $0.55 charge for the settlement of a pension plan, an intangible asset impairment charge of $0.16, and restructuring costs of $0.01, which were partially offset by a $0.16 tax benefit associated with the exercise of previously awarded employee stock options. The increase of $0.22 in adjusted diluted EPS in the fourth quarter of 2020 compared to the fourth quarter of 2019 consists of the following: $0.21 due to higher gross margins, $0.15 from a lower recurring tax rate, $0.07 due to government assistance programs, $0.06 due to lower interest expense, $0.02 due to lower operating expenses and $0.01 from the operating results of our acquisition. These increases were partially offset by $0.29 due to lower revenue and $0.01 due to higher weighted average shares outstanding. Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the fourth quarter of 2020, compared to last year's fourth quarter due to the weakening of the U.S. dollar. Now turning to our EPS results for the full year on Slide 17. We reported GAAP diluted earnings per share of $4.77 in 2020, and our adjusted diluted EPS was $5. The $0.23 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.07, amortization of acquired backlog of $0.04, acquisition costs of $0.03 and a discrete tax benefit of $0.03. We reported GAAP diluted earnings per share of $4.54 in 2019 and our adjusted diluted EPS was $5.36. The adjusted diluted EPS excludes $0.55 from a pension settlement charge, $0.32 for the amortization of acquired profit and inventory and backlog, an intangible asset impairment charge of $0.16, acquisition costs of $0.06, $0.01 of restructuring costs and $0.29 of tax benefits from the exercise of previously awarded employee stock options. Decrease of $0.36 in adjusted diluted EPS from 2019 to 2020 consists of the following: $1.87 from lower revenue and $0.05 from higher weighted average shares outstanding. These decreases were partially offset by $0.45 from lower operating expenses, $0.39 from government assistance programs, $0.35 due to lower interest expense, $0.33 from higher gross margins, $0.03 from the operating results of our acquisition and $0.01 from a lower recurring tax rate. Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.04 in 2020 compared to 2019. Now let's turn to our liquidity metrics, starting on Slide 18. Cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 125 at the end of the fourth quarter of 2020, down from 140 at the end of the third quarter of 2020, but up from 104 days in the fourth quarter of 2019. The increase in cash conversion days from the prior year was driven by a higher number of days in inventory and lower number of days in accounts payable due to a number of factors, including delays in capital project deliveries, weakness in capital project activity and delays in maintenance spending by our customers. As I've noted on past calls this year, our subsidiaries managed their inventory supply to ensure that critical components are available for our customers as needed and the timing of these purchases has been difficult to predict in the current environment. Working capital as a percentage of revenue was 14.2% in the fourth quarter of 2020 compared to 15.6% in the third quarter of 2020 and 12.2% in the fourth quarter of 2019. Net debt, that is debt less cash, at the end of 2020 was $166.8 million compared to $232.8 million at the end of 2019. We were able to lower our net debt by $66 million due to the excellent free cash flow generated in 2020. Our interest expense decreased 42% or $5.4 million to $7.4 million in 2020 compared to $12.8 million in 2019 due to our ability to successfully leverage cash generated around the world to pay down debt and lower interest rates. Our leverage ratio calculated defined in our credit agreement was 1.61 at the end of the fourth quarter of 2020, down from 2.03 in the fourth quarter of 2019, as we continue to make excellent progress in paying down debt. Regarding guidance, our current environment continues to make forecasting difficult. Given the current uncertainty, we will not be providing formal guidance at this time for 2021. We will reevaluate providing guidance as we progress through the year. While we are not providing guidance, I would like to provide a few directional comments on our outlook for 2020. We had a significant increase in demand for our Parts & Consumables and especially our capital products in the fourth quarter, and we anticipate an overall increase in bookings in 2021. We currently anticipate an overall increase in revenue of 9% to 12%, with stronger performance in the second half of the year. We anticipate the first quarter will be our weakest quarter and the fourth quarter will be our strongest. I would caution here that this is predicated on the COVID-19 vaccination rollout improving business conditions in the second half of 2021. We also anticipate the mix will be weighted more towards capital in 2020. Excluding the government assistance programs, our gross margins came in at 43.1% in 2020. For 2021, despite the heavier mix towards capital, we anticipate gross margins will be close to this level. As a percentage of revenue, we anticipate SG&A will be approximately 27% to 28%, while the percentage of R&D expense will be the same as 2020. Overall, we expect minimal benefit from government assistance programs in 2021 compared to the $0.39 we received in 2020. We expect our recurring tax rate will be approximately 27% to 28% in 2021. Our recurring tax rate in the first quarter of 2021 may be lower than the remaining quarters as we anticipate receiving a tax benefit from the vesting of equity awards. We anticipate CapEx spending in 2021 will be approximately 2% of revenue. In addition, we expect depreciation and amortization will be approximately $30 million to $31 million in 2021. We hope these directional comments will help provide insight into how we see our current business environment. That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session.

John Franzreb, Analyst

Thanks for the color. I'd like to start with Industrial Processing orders. Just talk a little bit about it on a relative basis maybe back to the 2018 timeframe when things were stronger in the housing market and how it looks today on a comparative basis, and maybe the sustainability that you're hearing from the customer base for the balance of the year?

Jeff Powell, CEO

Yes. So as you'll recall, John, '18 was a record year for us in that segment. And we really expected things to quiet down a little bit in '19 and '20 as the industry has kind of absorbed all the new equipment and the new capacity that they were bringing online. But of course, the pandemic really changed kind of the way, I think, we look at our homes, and now they've become more than just a home, they've become our workplace, our entertainment place, our dining and everything else. So obviously, housing has been quite strong, and our business has experienced very, very strong demand as the year progressed. And I would say that's continued into the first several weeks of the New Year here, very strong in that market. So if you look at what the experts are forecasting, in addition to the social shift associated with the pandemic, the millennials are really now starting to hit that age where they're buying homes. And the millennials are a very, very large group. And so most of the experts predict that for the next several years. I mean there certainly will be, I think, some ups and downs, but assuming interest rates stay at a reasonable level, I think experts are predicting that in the next several years, housing demand will be very strong. And the problem we're really facing is a lack of availability, a lack of supply. Land is hard to get in many parts of the country. And frankly, labor is hard to get for building homes. So I think the big challenge is supply, not demand.

John Franzreb, Analyst

Got it. And just to shift a little bit, I want to talk a little bit about raw materials. How are input costs on the commodity side looking for you? Also, considering the materials segment, does the outlook for that business improve with a better commodity environment? With that, I'll get back in the queue.

Jeff Powell, CEO

Yes. You broke up a little, but I believe you were inquiring about how our input costs are being affected by commodities. Our main commodity is sheet steel, primarily stainless, with some carbon steel, but mostly sheet steel. The price of that has certainly increased. However, when you consider the price increase as a percentage of our overall costs, it's still relatively small. We do raise prices as necessary to cover the costs of our raw materials. We manufacture a large portion of the content we supply and have minimal buyouts. Therefore, when steel prices rise, we need to pass those costs on to our customers, and we usually do. I think your second question was regarding the Material Handling segment, but I wasn’t entirely clear due to the connection issues. This segment has likely been the most affected by the pandemic since many of our customers were not categorized as essential and were shut down. Consequently, this market has been somewhat slower to recover and did not gain the same benefits from the pandemic as many other markets. However, the infrastructure needs remain, and there is significant discussion, particularly with the new administration, about a forthcoming infrastructure stimulus bill. I understand the President met with union leaders recently to discuss the necessity for infrastructure. Thus, we certainly anticipate increased investment in infrastructure moving forward, along with the demand tied to the housing market growth in the U.S. We believe that conditions for that segment will improve in the future.

Chris Howe, Analyst

So a great quarter from a free cash flow perspective and through the pandemic in this fiscal year, you were able to post adjusted EBITDA improvement over the prior fiscal year. You mentioned some directional comments and outlook about Q4 being the strongest quarter. As we get closer to that time, whether it's Q4 or another quarter, can you talk about your expectations for margin improvement as revenues and the top line increase back to a normal and better than normal level?

Mike McKenney, CFO

Yes. Chris, I think our expectation is, as we get growth in the top line, we're going to be able to leverage our operating costs, specifically SG&A better, and that will contribute to improving EBITDA margins.

Chris Howe, Analyst

Okay. On that same topic, if we look at the different segments, adjusted EBITDA for Material Handling came in at 18.3%, most heavily impacted by the pandemic. I would assume on as infrastructure spending gets underway, we're not sure of the dynamics or the certainty of how that will impact the segment, but it should be a benefit, nonetheless, and the pandemic being put behind us, I would assume there's some opportunity for segment-specific margin accretion in Material Handling?

Mike McKenney, CFO

Yes. We would agree with that, Chris.

Chris Howe, Analyst

Okay. Lastly, could you provide an update on the stock prep capital equipment orders in China? Also, can you comment on the situation outside of China regarding the fiber shortage in that region and provide a current update on this matter?

Jeff Powell, CEO

Sure. As of the beginning of the year, there's an import ban in place, which means no wastepaper is being imported into China. For the past few years, they have been exploring other supply options, such as processing waste paper in Southeast Asian countries and the U.S. They are also investing in virgin pulp mills in China to source fiber locally. All three strategies are still active, and it's unclear which will become the primary source. Southeast Asian countries are questioning the value of importing waste for minimal processing before sending it to China. Negotiations continue, and U.S. companies are setting up facilities to process waste paper for export to China, while Chinese companies are also investing in the U.S. However, our Chinese customers have faced challenges due to different regulations and costs in the U.S., which has caused them to reconsider some plans. They are exploring various sources for fiber, and while some are importing fiber directly, others are bringing in containerboard. The situation remains fluid, and as mentioned previously, it will likely take a few years to stabilize.

Kurt Yinger, Analyst

I just wanted to start off on the strength in capital equipment bookings. I mean realizing it's impossible to quantify, how do you think about the Q4 result in terms of pent-up demand after a challenging year? And as we look into the first part of 2021, I mean, it sounds like the markets are generally improving and activity is increasing. Should we be looking at sequential improvements off this high watermark here in Q4 or maybe year-over-year growth in terms of, I guess, registering that improvement?

Jeff Powell, CEO

Kurt, I can say that we are definitely focused on year-over-year growth rather than sequential growth. The fourth quarter was a record for us, with several large orders booked. We also observed a solid return of base level capital business. Therefore, I don't expect to see sequential improvement, but we do anticipate year-over-year growth.

Mike McKenney, CFO

I think you remember, we announced a couple of quite large orders that don't happen every quarter. So I think that we'll see those on occasion, but they won't be every quarter. And that's really helped the Q4 with 2 very large projects.

Kurt Yinger, Analyst

Right, right. Okay. That makes sense. And turning to the revenue outlook. Could you just talk a little bit about the underlying assumptions there in terms of growth in parts versus capital equipment? And whether there's any FX tailwinds assumed in that 9% to 12% range?

Jeff Powell, CEO

Yes. As you can see from our reports and likely from many others, the dollar weakened throughout 2020. We have incorporated that into our outlook for 2021, and I believe it will benefit us. Regarding parts and capital, we are focusing more on capital strength. The Parts & Consumables business performed well for us in 2020, but I expect growth in that area will be slower. The higher growth rate will come from the capital business.

Kurt Yinger, Analyst

Okay. Got it. That's helpful. And you obviously had the benefit from a higher proportion of Parts revenue on the gross margin front, but you also talked about improving gross margins on that Parts business. And I was wondering what was really driving that and whether that was something that you could kind of sustain going forward?

Jeff Powell, CEO

I believe the margins we achieved on the Parts and Consumables are sustainable. The increase has been primarily driven by price increases and the product mix within the Parts and Consumables revenue stream.

Mike McKenney, CFO

We have a couple of internal initiatives aimed at reducing costs across the board to enhance our margins. As we continue to implement these programs in more divisions, we are beginning to see some positive results from them.

Kurt Yinger, Analyst

Got it. All right. And last one for me. You touched on it a bit in the segment commentary, but I was hoping you can maybe walk us through and maybe you rank from end market and geographic perspective, where you're seeing the most strength versus where activity is still subdued or you're not seeing that same type of sequential improvement?

Mike McKenney, CFO

Right now, the Wood Processing segment in North America and Europe is performing exceptionally well, nearing or even surpassing historic levels. This is our strongest area. We experienced solid growth across all geographic regions in the fourth quarter, both sequentially and year-on-year, which pleased us. None of the regions particularly stood out; they are all showing improvement, except that the Wood Processing segment, especially its support for the North American housing market, is surprisingly returning to historic levels. This surge in demand is one reason lumber prices are currently at record highs. Forest products companies were unable to anticipate this demand and did not have their production prepared, so they are now working to catch up by bringing mills back online, adding shifts, and hiring staff. However, these record prices are unlikely to be sustainable in the long term as they are quite elevated. We anticipate more capacity will come online, which will likely lead to some price moderation, though prices should still remain strong. Overall, while all businesses have improved throughout the year, Wood Processing truly stands out.

Walt Liptak, Analyst

I wanted to follow up on the previous discussion about the strong housing market and wood processing. Do you have an estimate of how much capacity will be added in 2021? Is there a pipeline of projects that are expected to arise during this year?

Jeff Powell, CEO

Yes. I believe there are still some idle facilities that will likely come back online. While we cannot disclose specifics about some of them, we expect some idle capacity to become operational. Additionally, there is potential for new mills to be established. In terms of dimensional lumber, there has been significant capacity ordered in recent years, and that will continue to be brought online. On the OSB side, fewer new sites have been planned or launched in the last couple of years, but OSB is currently at record levels. Therefore, we think there is a good chance that any remaining idle capacity will begin to operate again, along with possibly some new facilities if demand remains strong. We anticipate some additional capacity coming online.

Walt Liptak, Analyst

Okay. Great. In the other parts of the process, the OCC and paperboard, prices are up in 2021. Is there new capacity that's in the funnel? Or is it still too early for capacity to get added there?

Jeff Powell, CEO

In China, we announced a significant order in the fourth quarter, and we are still surprised by the number of projects currently in the discussion stages there. They consistently impress us with their ability to bring more capacity online and effectively absorb it. Additionally, there are discussions about further conversions in North America. It's clear that the pandemic and the growth of at-home markets have provided considerable benefits, leading to substantial growth. Retail growth has accelerated this year, and experts predict that this trend will likely continue even after the pandemic subsides. There is certainly a demand for packaging, along with discussions regarding more conversions to satisfy that demand.

Bill Hyler, Analyst

Also congrats from making that Newsweek Responsible company list for ESG performance in 2021. I thought that was good.

Jeff Powell, CEO

We're pleased to have received a couple of sustainability awards recently. People and industries are starting to recognize our efforts and focus.

Bill Hyler, Analyst

Yes, definitely. Okay. Yes, great, interesting fourth quarter. I know you addressed these strong capital bookings, but I was hoping you get a little more color on that. $197 million, which I assume, is a record for the company historically. And it looks like 39% or $77 million came from capital projects and that's important, because that fuels your Parts & Consumables growth long term. So it's a great thing to see. Can you provide any regional color on the bookings? It looks like a lot of it came from the Industrial Processing business, which I guess is mostly recycled paper, paperboard, timber. Was there any specific areas of strength that you can highlight?

Jeff Powell, CEO

I agree with you, Bill. The biggest part of the $197 million growth was in Industrial Processing. We had two product families in that category, both performing very well. The Stock prep was the stronger of the two in the fourth quarter, while Wood also showed significant strength in capital bookings.

Mike McKenney, CFO

Stock prep is our paper recycling piece.

Bill Hyler, Analyst

Right.

Jeff Powell, CEO

And then I would say we had good activity in our Flow Control business also, but that was really predominantly driven on the Parts & Consumables side.

Mike McKenney, CFO

With the strong balance sheet you've observed in recent years and the growth in free cash flow, could you provide some insight into the current state of the acquisition market? I understand that valuations have been quite high, which can pose challenges. Are you noticing any potential opportunities that you are considering?

Jeff Powell, CEO

Yes. I would say our business development group spends most of their time focusing on that. Right now, they're telling us that activity level probably is the highest it's been in recent memory. So as you would expect, there was kind of essentially very little deal transactions that occurred last year, so you've got kind of that backlog, if you will. And in addition to companies wanting to disrupt the balance sheet and companies just kind of refocusing on the strategies, yes, the deal activity level is very, very strong right now. And as you pointed out, the challenge is always to find one that first fits our strategic criteria. It's a good fit for cadence, and then also one that we think is properly valued. And so that's always the ultimate challenge we have in looking at opportunities. But the number of opportunities out there that we're looking at is at a very, very high level.

Bobby Eubank, Analyst

Congrats on a strong quarter. You mentioned kind of discussions around kind of bookings, and I think the word discussion with clients or customers came up several times. How would you characterize the momentum of bookings continuing into Q1 and kind of converting some of those discussions into actual bookings?

Mike McKenney, CFO

You want to take it?

Jeff Powell, CEO

Well, Bobby, the fourth quarter was a record as we were happy to report at this point going into the first quarter that we've continued to see good strength in the order flow front. Again, as we discussed earlier, we don't think sequentially, we're going to be up because we had some very large projects that don't tend to reoccur quarter-to-quarter. But we have seen very good activity in the first quarter thus far.

Bobby Eubank, Analyst

That's great. And if I can follow-up on Bill's question on the M&A market. Is there any particular segment that you would see more likely to see activity in 2021 in kind of converting some of the things that you've been looking at for the last couple of years and actually sign contracts?

Jeff Powell, CEO

We evaluate acquisitions across all three of our operating segments. At any given time, we may be in discussions with a few hundred companies, which quickly narrows down to a select group that we believe aligns well strategically and might be available. Typically, we consider opportunities in all three of our core segments. For example, in our Wood Processing division, we hold a very high market share, ranging from 70% to 90%. Consequently, there are fewer opportunities in that area compared to the Material Handling sector, where our market share is about 40% to 60%. The number of potential opportunities differs based on the competitive landscape, but we are generally focused on finding prospects in all three core segments.

Operator, Operator

At this time, I'm showing no further questions. I would like to turn the call back over to Jeff Powell, President and CEO, for closing remarks.

Jeff Powell, CEO

Thank you. Before wrapping up the call today, I wanted just to leave you with a few takeaways. First, the health and well-being of our employees was our top priority in 2020, and it will continue to be our top priority as we work through the pandemic. As we look ahead and beyond the immediate health crisis, we will focus on meeting our customers' needs as we seek to accelerate revenue growth in our core markets. Our financial health is excellent, and our liquidity position is stronger today than it was when the crisis began, with a debt leverage ratio now at 1.61. Our ability to generate strong free cash flow remains a cornerstone of our business model, and we expect to continue with the reopening of the economies around the world and look forward to a stronger 2021. With that, we want to thank you for joining us today, and please stay safe.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.