Earnings Call Transcript - KAI Q4 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Kadant Fourth Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Michael McKenney, CFO

Thank you, Marvin. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 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's future plans and expectations, financial and operating results, and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or estimates change. During this webcast, we 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-GAAP financial 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 in the Investors section of our website at kadant.com. Finally, I want to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's 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, CEO

Thanks, Mike. Hello, everyone, and thank you for joining us. Today, I'll review our fourth quarter and full year 2025 results and our outlook for 2026. Let me begin with our operational highlights. We closed the year with solid performance despite a challenging macro background that included tariff volatility and continued cost pressures. Our performance led to solid margin results and strong cash flow in the fourth quarter, which I will outline in the next slide. Additionally, at the end of 2025, Newsweek recognized us as one of America's most responsible companies for the sixth straight year, and we're honored to be included on that list once again. Our fourth quarter performance benefited from the acquisitions we completed in 2025 and solid demand in our Flow Control and Material Handling segments. Revenue increased 11% to a record $286 million, led by contributions from our recent acquisitions and record aftermarket parts business. Demand remained solid across all three operating segments, with bookings increasing 12% compared to the same period last year. While acquisitions accounted for most of the growth in the new orders, organic demand was stable year-over-year and improved sequentially. Adjusted EBITDA was up 11% compared to the same period last year, and our adjusted EBITDA margin was 20.3%. Strong execution by our global operations teams played an important role in delivering value to our customers and driving our fourth quarter operating performance. Our Q4 operating cash flow was excellent at $61 million. Next, I'd like to review our full year financial metrics on Slide 7. Stable demand, combined with contributions from our two recent acquisitions, drove solid revenue performance of $1.05 billion in fiscal 2025, with aftermarket parts making up a record 71% of our total revenue. Softness in capital project activity, combined with rising tariffs and other cost pressures, resulted in adjusted EPS of $9.26 a share compared to the prior year record of $10.28 per share. Despite ongoing economic and geopolitical headwinds, our free cash flow increased 15% to a record $154 million. The volatility and magnitude of the tariffs proved to be quite challenging for us in 2025. I'm proud of our employees for the innovative work done to maximize value for our customers and our stockholders. Next, I'd like to review our performance for our three operating segments. I'll begin with our Flow Control segment. Q4 revenue increased 5% to $100 million with strong performance in North America, offsetting weaker performance in Europe. Aftermarket parts revenue was up 9% compared to the prior year period and made up 73% of total revenue. Adjusted EBITDA and margin were down compared to the same period last year due to weaker gross margins related to tariffs and product mix. While bookings were up 7% compared to the same period last year, softness in the manufacturing sector persisted, particularly in Europe and Asia. We believe the long-term market trends impacting industrial markets such as automation, defense, and energy will continue to drive new opportunities for growth, though business activity continues to be influenced by geopolitical and macroeconomic challenges around the globe. In our Industrial Processing segment, capital project activity remained relatively soft throughout 2025 and continued at similar levels in the fourth quarter. Our performance in this segment, however, benefited from the additions of Clyde Industries and Babbini, both of which were acquired in the second half of the year. Integration efforts for these businesses are progressing well, and they are expected to contribute positively in the years ahead. Revenue rose 16% to $118 million compared to the same period last year, and aftermarket parts revenue grew 31% in the fourth quarter and represented 76% of revenue. Adjusted EBITDA margin improved by 90 basis points year-over-year, driven largely by a more favorable product mix. As we look ahead to 2026, there's increasing project activity, and we expect demand for our capital equipment to strengthen as customers move forward with planned capital projects. In our Material Handling segment, we delivered solid year-over-year performance improvement in bookings, revenue, and margins. Fourth quarter revenue increased 11% to $69 million, driven by strong growth in capital revenue compared to the prior year period. Aftermarket parts made up 53% of total revenue and remained steady throughout the year. Margin performance strengthened as well, with adjusted EBITDA margin increasing by 130 basis points to 22.1%. Looking ahead to 2026, we are encouraged by the high level of project activity and are well positioned to secure new business. Ongoing modernization efforts in the recycling and waste management sectors, as well as infrastructure and data center construction, are expected to drive the anticipated increase in order activity. Looking to 2026, capital project activity is looking to improve demand for aftermarket parts and continues to be steady as we start the new year. Although industrial demand is projected to pick up, uncertainty persists regarding the timing of capital orders due to ongoing economic and geopolitical instability. Overall, our healthy balance sheet and ability to generate significant cash flow position us well to pursue new opportunities that develop, and we are committed to achieving improved financial results this year. With that, I'll turn the call over to Mike for a review of our financial results and our 2026 outlook. Mike.

Michael McKenney, CFO

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter. Revenue was a record $286.2 million, up 11% compared to the fourth quarter of '24, including an 8% increase from acquisitions and a 3% increase from the favorable effect of foreign currency translation. Gross margin increased 50 basis points to 43.9% in the fourth quarter of '25 compared to 43.4% in the fourth quarter of '24 due to a favorable increase in the proportion of aftermarket parts, which increased to 70% of total revenue compared to 67% in the prior period. There was a 40 basis point negative impact from the amortization of acquired profit and inventory in both periods. As a percentage of revenue, SG&A expense increased to 28.3% in the fourth quarter of '25 compared to 27.3% in the prior year period. SG&A expenses were $80.9 million in the fourth quarter '25, increasing $10.3 million or 15% compared to $70.6 million in the fourth quarter '24. The increase in SG&A expenses includes $7 million in SG&A expense related to our 2025 acquisitions and a $1.7 million unfavorable effect of foreign currency translation. Our GAAP EPS was $2.04 in both periods, and our adjusted EPS increased to $2.27 and was just above the high end of our guidance range of $2.05 to $2.25 in the fourth quarter. Adjusted EBITDA increased 11% to $58 million and represented 20.3% of revenue. For the full year, revenue was $1.052 billion compared to $1.53 billion in '24, including a 3% increase from acquisitions and a 1% increase from the favorable effect of foreign currency. Gross margin increased 90 basis points to 45.2% compared to 44.3% in '24 due to a favorable increase in the proportion of aftermarket parts, which increased to a record 71% of total revenue compared to 66% in 2024. Gross margin included a negative impact from the amortization of acquired profit and inventory of 20 basis points in '25 and 40 basis points in '24. Excluding this impact, gross margin was up 70 basis points over '24. As a percentage of revenue, SG&A expenses increased to 28.7% in '25 compared to 26.6% in '24. SG&A expenses were $301.9 million in '25, increasing $21.9 million or 8% compared to $279.9 million in '24. Approximately 60% of this increase relates to our acquisitions, which had SG&A expenses of $13.2 million in '25. The remainder was primarily due to a $2.2 million unfavorable effect of foreign currency translation and higher compensation-related costs. Our GAAP EPS was $8.65 in '25, down 9% compared to $9.48 in '24, and our adjusted EPS was $9.26, down from $10.28 in '24. Now turning to our cash flow performance. We finished the year with very strong cash flow. As you can see from the chart, we had stronger operating cash flow in the last two quarters of '25 compared to the first two quarters. For the full year, operating cash flow increased 10% to a record $171.3 million, compared to $155.3 million in '24. Our free cash flow was also a record at $154.3 million in '25, increasing 15% over '24. We had several notable nonoperating uses of cash in the fourth quarter of '25. We paid $173.7 million for the acquisition of Clyde Industries, net of cash acquired. We borrowed $170 million to fund this acquisition, and we repaid $53.7 million of debt in the quarter. In addition, we paid $6.1 million for capital expenditures and a $4 million dividend on our common stock. We continue to focus on utilizing our strong cash flows to accelerate the paydown of debt, and I'm pleased we were able to repay $122.2 million this year or approximately 42% of our outstanding debt at the end of '24. Turning to adjusted EBITDA. In the fourth quarter '25, adjusted EBITDA increased 11% to $58 million compared to $52.4 million in the fourth quarter '24. As a percentage of revenue, adjusted EBITDA was 20.3% in both periods. For the full year '25, adjusted EBITDA decreased 6% to $216.3 million or 20.6% of revenue compared to record adjusted EBITDA of $229.7 million or 21.8% of revenue in '24. The weaker performance in '25 is due in large part to lower capital revenue, which was down 16% compared to the prior year. Let me turn to our EPS results for the quarter. Our adjusted EPS increased $0.02 from $2.25 in the fourth quarter of '24 to $2.27 in the fourth quarter of '25. This includes increases of $0.17 due to higher revenue, $0.15 from the operating results of our acquisitions, excluding the associated borrowing costs, and $0.09 due to higher gross margins. These increases were partially offset by $0.22 due to higher operating expenses, $0.10 due to a higher tax rate, $0.04 due to higher interest expense, and $0.03 due to higher noncontrolling interest. Our tax rate was 30% in the fourth quarter of '25, higher than we anticipated due to the impact of global minimum tax regulations as well as a change in geographic distribution of earnings. Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.04 in the fourth quarter of '25 compared to the fourth quarter of last year. Now, turning to our EPS results for the full year on Slide 17. Our adjusted EPS decreased $1.02 from $10.28 in '24 to $9.26 in '25. This includes decreases of $1.06 from revenue, $0.70 due to higher operating expenses, $0.13 due to a higher tax rate, $0.07 from higher noncontrolling interest, and $0.02 due to higher weighted average shares outstanding. These decreases were partially offset by $0.46 from higher gross margin, $0.27 in lower interest expense, and $0.25 from the operating results of our acquisitions, excluding the associated borrowing costs. Collectively, included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.01 in '25 compared to '24. Now, let's turn to our liquidity metrics on Slide 18. Our cash conversion days measured as days in receivables plus days in inventory and subtracting days in accounts payable increased to 130 at the end of the fourth quarter '25 from 122 days at the end of '24. The increase in cash conversion days was principally driven by a higher number of days in inventory. Working capital as a percentage of revenue increased to 18.5% in the fourth quarter of '25 compared to 15% in the fourth quarter of '24 due to the lack of full-year revenue for our 2025 acquisitions. If you exclude the impact of our 2025 acquisitions from this calculation, it would be 15.5%, which is slightly above the end of '24. Net debt, which is debt less cash at the end of '25, was $251.8 million compared to net debt of $131.1 million at the end of the third quarter '25. Our leverage ratio, calculated as defined in our credit agreement, increased to 1.33 at the end of '25 compared to 0.94 at the end of the third quarter '25. At the end of January, we announced that we had entered into a definitive agreement to acquire voestalpine BÖHLER Profil GmbH for approximately EUR 157 million, subject to certain customary adjustments. The closing is subject to certain Austrian regulatory approvals and the satisfaction of customary closing conditions. We anticipate that our leverage ratio will increase to just above 2 with the increase in our outstanding debt once this transaction closes. We had $383 million of borrowing capacity available under our revolving credit facility at the end of '25, which will be reduced by the anticipated acquisition borrowing. Before I review our guidance, I want to remind you that our 2026 guidance does not incorporate any assumptions related to the pending acquisition. We anticipate that the closing will occur in the first quarter of 2026, and we will revise our 2026 guidance as part of our next earnings call. For the full year 2026, our revenue guidance is $1.160 billion to $1.185 billion. Our adjusted EPS guidance is $10.40 to $10.75, which excludes $0.13 related to the amortization of acquired profit and inventory. Looking at our quarterly revenue and EPS performance in 2026, we expect that the first quarter will be the weakest quarter of the year. This is primarily related to soft capital bookings in the back half of 2025. Our revenue guidance for the first quarter of 2026 is $270 million to $280 million, and our adjusted EPS guidance for the first quarter is $1.78 to $1.88, which excludes $0.09 related to the amortization of acquired profit and inventory. 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 highlight that due to the delayed timing of capital orders, we have a number of large capital projects where we have been actively working with customers and have provided proposals with a cadence solution to meet their needs. We have taken a conservative approach to our 2026 guidance given the order delays we experienced in 2025. These orders are waiting for customers to have enough clarity in the economic environment to commit to these capital expenditures. As soon as the customers place these pending orders, we will be able to determine the timing of the associated revenue recognition, which provides upside potential for our 2026 guidance. We anticipate gross margins for 2026 will be approximately 45.2% to 45.7%. As a percentage of revenue, we anticipate SG&A will be approximately 27.7% to 28.3% and R&D expense will be approximately 1.4% of revenue. In addition, we anticipate net interest expense of approximately $15.5 million to $16 million for 2026, which does not include any estimated interest expense related to our proposed acquisition. We expect our recurring tax rate will be approximately 27.3% to 27.8% in 2026, and we expect depreciation and amortization expense will be approximately $60 million to $61 million. We anticipate CapEx spending in 2026 will be approximately $23 million to $27 million. That concludes my review of the financials. But before we go to our Q&A session, I want to discuss our plan starting in the first quarter of 2026 to add back recurring intangible amortization expense in our adjusted EPS calculation. Many of you have suggested that we add back noncash amortization expense in our adjusted EPS calculation. Historically, we have only added back intangible amortization expense related to acquired backlog, which amortizes relatively quickly in the post-acquisition period. Recurring intangible amortization expense has grown steadily given our significant acquisition activity with a projected annual increase of 22% in 2026. These acquired intangible assets are initially recorded as part of purchase accounting and then reduced via a noncash amortization expense for periods which can extend over 15 years. With this change, our adjusted EPS will be more consistent with our adjusted EBITDA and cash flow metrics, which are not impacted by intangible amortization expense. We believe that the exclusion of this expense from adjusted EPS will allow for more consistent comparisons of our operating results over time with peer companies. Now I will summarize the 2026 adjusted EPS guidance and comparative 2025 information with this change. For 2026, recurring amortization expense is $33.4 million or $25.1 million net of tax and represents $2.13 per share. Our adjusted EPS guidance presented today and in yesterday's earnings release was $10.40 to $10.75. After adding back recurring intangible amortization expense, our adjusted EPS guidance for 2026 is now $12.53 to $12.88. For 2025, recurring intangible amortization expense was $27.4 million or $20.6 million net of tax and represented $1.75 per share. Our previously reported EPS of $9.26 for 2025 is now $11.01. Recurring intangible amortization expense is $0.53 and $0.40 for the first quarters of 2026 and 2025, respectively. Our adjusted EPS guidance for the first quarter of 2026 is now $2.31 to $2.41, and our previously reported adjusted EPS for the first quarter of 2025 of $2.10 per share is now $2.50. We will be issuing an SEC Form 8-K filing shortly with formal reconciliations of prior period information. I'll now turn the call back over to the operator for our Q&A session.

Operator, Operator

Our first question comes from Gary Prestopino of Barrington.

Gary Prestopino, Analyst

Mike, just a couple of housekeeping things here. Do you have the numbers for current assets and current liabilities at year-end, Andy?

Michael McKenney, CFO

Yes, I do. Hang in there and let me look that up. Current assets are $542 million, and current liabilities are $228 million.

Gary Prestopino, Analyst

Okay. And just I was going through this as you were talking, given your narrative, but consumables in Flow Control were 73% of revenues, Industrial 76% of revenues and material handling, 53% of revenues. Is that right?

Michael McKenney, CFO

Yes. Yes.

Gary Prestopino, Analyst

Okay. And then you're seeing a lot more increased demand for consumable products. Now some of that is a function of your acquisitions, right? But are you still seeing that your customers are running their equipment really hard and using a lot more consumables in their processes, and that leads you to feel that the capital projects will get better as the year goes on in 2026?

Jeffrey Powell, CEO

Yes, Gary, throughout much of last year, we indicated that our aftermarket performance slightly exceeded our expectations based on operating rates. Traditionally, our aftermarket is linked to operating rates, which were quite low globally in 2025. However, the parts business consistently outperformed that scenario. This suggests that customers are operating their equipment more intensively. Some capacity has been taken offline, and customers are trying to compensate for that. Overall demand increased last year in most markets, even with some capacity issues. Consequently, customers had to push their existing equipment harder, which is aging due to nearly three years of underinvestment. The consistent overperformance of our aftermarket despite lower operating rates can be explained by this increased intensity of use and the older equipment.

Gary Prestopino, Analyst

And lastly, there was a lot of confusion regarding tariffs as we entered 2025 last year. What is your customers' current thought process? You mentioned that capital projects are expected to start increasing in 2026. Have they essentially come to the conclusion that tariffs will settle around 10% to 20%, motivating them to revive their capital projects?

Jeffrey Powell, CEO

Yes. The volatility and weekly changes from early last year surprised many and led to a wait-and-see approach. However, things have stabilized, and businesses understand they must continue operations and investments to maintain competitiveness. As they have adapted to tariff impacts, there’s a shift towards improving efficiency and outputs. Currently, the primary focus is on enhancing productivity and reducing costs rather than expanding capacity, although some markets are still increasing capacity. Overall, the emphasis is on maximizing existing operations for greater efficiency and productivity.

Operator, Operator

Our next question comes from the line of Ross Sparenblek of William Blair.

Ross Sparenblek, Analyst

A couple for me here, and I'll pass it along. Did you guys give a backlog figure? I may have missed it and then also the equipment backlog when we include the Clyde acquisition?

Michael McKenney, CFO

Yes, I can give you a number here. When we brought in Clyde, they had a backlog of about $30 million, just as a reference point for you. Our backlog currently at the end of the fourth quarter was $288 million, and the split on that is 60-40, 60% capital, 40% parts.

Ross Sparenblek, Analyst

Okay. That's helpful. And then, I mean, did you guys give organic assumptions within the 2026 guidance?

Michael McKenney, CFO

We didn't, but I'm happy to do that. What it was really, I would say, kind of flat, a little less than 1% to 3% was what we modeled. And the point I was trying to stress is that, as you know, Ross, through '25, we had line of sight on some nice capital projects. The customers have yet to place the orders for those. So the approach we're taking for '26 is those orders are there. We think the customers will place those. They're significant orders. That would be meaningful upside for us, but we did not bake that into our guidance. Of course, at 1% to 3% organic, there's not a lot of big capital jobs in there. But there are big capital jobs that are ready to go. And we're hoping that we're going to get to midyear and customers will have placed some of those orders, and we'll be able to take our guidance up.

Ross Sparenblek, Analyst

Okay. So I mean, I get the sense that most of that organic in the guide is just your confidence around the parts and consumables business.

Michael McKenney, CFO

Yes, the capital has increased, but not significantly. You're right. Our confidence lies in the parts and consumables sector. However, we expect that the single unit capital business will continue to move forward.

Ross Sparenblek, Analyst

Okay. So that seems to imply then that the capital equipment orders is kind of $290 million, $300 million run rate we've had in the last two years that's kind of the static base case with potential for upside from there? No expectation that that's going to be going lower.

Michael McKenney, CFO

Yes.

Operator, Operator

Our next question comes from the line of Kurt Yinger of D.A. Davidson.

Kurt Yinger, Analyst

Mike, you had talked about a large number of capital orders where you've provided proposals and you're sort of waiting to hear back from customers. Can you maybe just talk a little bit about how unique that is in terms of the time that proposals have been outstanding or maybe the typical timeline where you would expect a proposal to turn into a booking and how that's different today than what you've seen in the past?

Jeffrey Powell, CEO

Yes, Kurt. The discussions have been ongoing. Many projects we expected to launch in the latter part of last year are still on the table. However, the unpredictable changes in geopolitical matters, particularly concerning tariffs, have led many to postpone decisions for another quarter or even two. We haven't lost any projects; in fact, some have been ordered but are waiting on letters of credit or down payments before officially being booked. While some activity is progressing, it's taking longer to establish banking arrangements and secure necessary financial assurances. Other projects are also advancing, but at a more cautious pace. Everyone seems to be keen to determine if we've hit rock bottom and if growth will soon follow on a broader scale. The capital business has faced historically slow booking rates, reminiscent of the last major recession. It's surprising to experience this level of softness despite ongoing economic growth, likely due to the uncertainty surrounding tariffs, which has created significant challenges for our customers in terms of management and planning. As I mentioned earlier when Gary asked his question, clients are beginning to feel a bit more settled, allowing them to start planning with the current situation in mind. Notably, many of our clients have been in business for over a century, and history shows they can't indefinitely avoid investing. The markets we serve are still growing, even the paper and packaging sector, which is a significant part of our business, is experiencing modest growth. Thus, underinvestment cannot continue indefinitely, and they will need to start making investments.

Kurt Yinger, Analyst

Okay. That's super helpful. And then thinking about last quarter, you talked about some of those larger fiber processing orders that you could kind of recognize on an overtime basis. Is that kind of the main component that maybe element of conservatism where you just have assumed that those won't necessarily come in, in the guidance? Or are there other percolating areas of kind of capital activity across the portfolio that might be beneficial in there as well?

Michael McKenney, CFO

Yes, you've really nailed it, Kurt. We're being cautious as we approach 2026. Hopefully, we'll gain some good momentum, and by midyear, we'll be able to increase guidance if some of these capital bookings are secured.

Jeffrey Powell, CEO

We are being cautious because we expected things to improve earlier than they have. Initially, improvements were predicted for the end of 2024, but that timeline has now shifted to the end of 2025. As a result, we're approaching the year carefully. We generally aim to set realistic expectations and often exceed them, and we want to maintain that approach. So, we're starting the year with caution, hoping that the anticipated developments will materialize, allowing us to provide an update later on.

Kurt Yinger, Analyst

Got it. Okay. And you talked about how aftermarket has kind of outperformed expectations and it's maybe been consistently surprising. It's interesting, some of the European peers have talked about a greater focus on that area, parts and services. Are you seeing that or hearing from your teams about that kind of showing up in kind of any meaningful change in the competitive environment and maybe any of these smaller kind of parts and consumables category? Or any commentary on that just in general?

Jeffrey Powell, CEO

I would say 2025 was a good year for us. We faced tough competition, but we were able to defend our position. In many instances, when competitors gained a foothold, we were able to turn things around as the year went on. Overall, it was a positive year for us. Our relationships with customers are strong and have been stable over a long time. A number of our companies achieved record revenue percentages for aftermarket services, which is very encouraging. Our team performed well globally, and every day they focus on the challenge of serving customers in the aftermarket sector to help them operate as efficiently as possible. This has been our primary focus, and I think our team did a great job in 2025. We always face competition, whether from large companies in Europe or regional players who can be quite aggressive on price. It’s a daily challenge, but we are satisfied with our performance.

Kurt Yinger, Analyst

Perfect. Okay. And just last one, Mike, if you have it in front of you. Can you just give us kind of organic parts and consumables versus capital kind of sales and bookings for Q4?

Michael McKenney, CFO

Yes. Did you want both revenue and bookings on that, Kurt?

Kurt Yinger, Analyst

Yes, it's possible. I realize it's a lot of numbers, but...

Michael McKenney, CFO

No, that's okay. Organically, for the fourth quarter, parts on the revenue side are up 3%, while capital on the revenue side is down 7%. Overall, that results in flat growth. On the bookings side, parts are up 4% and capital is down 6%. However, with the weighting on parts, it gives us a 1% increase in bookings organically.

Operator, Operator

Our next question comes from the line of Walter Liptak of Seaport Research.

Walter Liptak, Analyst

I wanted to follow up on the last question about the aftermarket competition emerging from Europe. If that's true, how are they competing? Is it based on the quality of the aftermarket, or is it more of a pricing strategy? Have you noticed any changes in the marketplace for aftermarket products because of that?

Jeffrey Powell, CEO

When someone tries to take market share from us, if our customers are satisfied with our product and service, their main strategy is typically to lower prices. Our customers will inevitably seek to reduce their costs, which is a common tactic. In the markets where we operate, we usually rank first or second and maintain strong relationships with our customers while effectively serving them. The only viable way for competitors to gain entry into these markets is by significantly reducing their prices. European companies typically have a cost structure similar to ours, which means they can only compete by accepting lower profit margins. As you may observe, many of our European competitors do earn considerably less because they attempt to cut our prices. However, there's much more involved; total cost of ownership is essential, and the technical services we provide are valuable. Our team is actively engaged in supporting our customers on-site, which helps us defend our position and even gain market share in some instances. This situation isn't new to us. If it's not the large competitors going after us, we often face challenges from smaller regional companies that disrupt the market by pricing aggressively. We strive to fully understand our clients' operations and assist them in creating value, remaining competitive, boosting their productivity, and minimizing costs. That is our value proposition and our ongoing mission, which our team executes exceptionally well.

Kurt Yinger, Analyst

Okay. Great. Okay. And during your prepared comments, Jeff, I think you commented about a good funnel for projects in recycling and waste and data center. And I wonder if you could talk a little bit about those, especially the data center part.

Jeffrey Powell, CEO

Yes. As you know, the housing market has declined, but data center construction is thriving. These are large facilities, and all the materials used to construct them involve our material handling group. This includes aggregate, sand, concrete, copper, and aluminum. Everything required to build these structures originates as a natural resource that is mined, processed, screened, sized, and cleaned. Our material handling group operates in all these sectors. Looking at some of our major customers, such as Martin Marietta in the sand and gravel industry, they are performing well partly because they supply the materials needed for these facilities. The demand for copper in these projects is significant, and we support copper mining operations globally. The volume of concrete used in building data center farms is enormous; these are some of the largest structures I've ever seen, seemingly endless in size. Ultimately, all of that material must be processed using equipment we manufacture or that of our competitors.

Operator, Operator

And our next question comes from the line of Ross Sparenblek of William Blair.

Ross Sparenblek, Analyst

Can you just give us a sense on where the OSB segment shook out within Industrial Process for the year?

Michael McKenney, CFO

Well, I will say, Ross, we usually don't split that out. We typically talk about wood and fiber processing. However, that's actually a positive area for us in wood processing. The debarking business that supports dimensional lumber and North American housing is currently quite soft on the capital side. But the OSB segment continues to perform well and is doing fantastic.

Jeffrey Powell, CEO

They are finding that we supply them globally, and we're one of only two companies doing that. They are discovering more applications and uses for the product, which means it continues to grow.

Ross Sparenblek, Analyst

Okay. That's good to hear.

Jeffrey Powell, CEO

Siding is moving into higher value, higher dollar applications and exploring new uses. They are even starting to apply it to dimensional and structural elements, considering it for products that would typically be laminated. We continue to see increasing demand.

Ross Sparenblek, Analyst

Okay. And then one of your competitors recently called out the vertical integration of the pulp and processing market in China as a secular opportunity over the coming years. Anything you can speak to as to like cadence, content or how you guys argue that market today?

Jeffrey Powell, CEO

Yes. When establishing pulp mills, one significant concern is the recovery boilers. Clyde, who recently joined us, serves that market and provides much of the technology for the Chinese market as these pulp mills are being constructed. Historically, China relied almost entirely on recycled fiber. However, after the Chinese government banned the import of waste paper, they needed to find alternative sources of fiber. As a result, they are building these pulp mills. Clyde is supplying boiler cleaning technology for those applications.

Ross Sparenblek, Analyst

Okay. And then maybe just one last one on your 80/20 expectations this year, you guys usually target two to three divisions. Anything more material to call out as like the mix within the segments?

Jeffrey Powell, CEO

We are continually working to expand our team that oversees these initiatives and to establish more companies. Progress is ongoing, and we expect to see some results from the businesses we began working with late last year by the end of this year. Other companies are just beginning or are scheduled to begin this process. Typically, in the first year following acquisitions, we focus on stabilizing and integrating them, helping them understand the programs, and deciding when they want to take on new initiatives. For some of the newer companies, those initiatives are still in the planning stages. However, our team is improving in implementation, and this will remain a key internal focus for us in the years ahead.

Operator, Operator

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

Jeffrey Powell, CEO

Thanks, Marvin. Before wrapping up the call today, I just want to leave you with a couple of takeaways. We finished the year with improving business conditions. We acquired two great companies in the second half of 2025, and the integration of this business into the Kadant family is going well, and I'm confident that they'll make meaningful contributions in 2026 and beyond. The outlook for 2026 is optimistic with expectations of increased project activity and stable aftermarket demand. And we look forward to maximizing the value that we create for our customers and for our stockholders in 2026. And with that, we want to thank you for joining us today.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.