Kadant Inc (KAI) 2002 Q3 法說會逐字稿

Good morning and welcome to Kadant third quarter 2002 earnings conference call. At this time, all parties have been placed on a listen-only mode. The floor will be open to your questions and comments following today's presentation. At this time, I would like to hand it over to your host, Chief Financial Officer, Mr. [Tom O' Brian]. Sir, the floor is yours.

Thanks Rahim and good morning, everyone and welcome to Kadant's third quarter 2002 earnings conference call. With us on the call today are Bill Rainville, Chairman and Chief Executive Officer at Kadant and Jon Painter, Executive Vice President of Kadant and the head of our Composites and fiber-based products segment. Before we begin, let me remind you that we may make forward-looking statements during this call. The company's actual results may differ materially from those that may be discussed today. We refer you to our quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2002 which is readily available to the public, but [INAUDIBLE] factors that may cause a material difference in our actual results. We undertake no obligations to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise. And with that, I will turn the conference over to Bill Rainville who will give you an update on Kadant's business and future prospects. Following Bill's remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Bill?

Thank you, Tom and good morning everyone. While the general economy in our primary industry, pulp and paper, continues to pose many business challenges, we are pleased to report progress attained on a number of fronts. What we are doing is concentrating on controlling what we can control, namely our operating costs, capital expenses, and working capital. And we are positioning the company for better times ahead in the global marketplace. Among our achievements during the third quarter are that we met our earnings and revenue guidance. Our operating income steadily improved throughout 2002 from 2.2 million in the first quarter to 4.3 million in the second quarter to 4.8 million in the third, excluding onetime charges. We have lowered the loss of our composite building products business to 376,000 from 1.3 million last year and we continue to maintain a very strong balance sheet with free cash flows of 3.7 million for the quarter and $8.4 million improvement over last year and a net cash position that now achieves total debt by more than $33 million. What we can't control is the timing of recovery in our industry. During the last two quarters, we saw some signs of improvement, but that positive momentum has stalled a bit, and the upturn will most likely be slower than expected. Our customers in the pulp and paper industry continue to restrict capital spending. This has affected our entire paper making equipment segment, but has had the most impact on our recycling systems product line, which is a major component of that segment. Recycling sales are often large orders where complete stock preparation systems that are custom-engineered for specific applications. Timing of these orders can be difficult to project. We are working to mitigate the effect of the uncertain timing we see in this product line by increasing our focus on related aftermarket business, including targeting our sales efforts to include aftermarket parts and services, (inaudible) new aftermarket components that will enhance systems performance and establishing an assembly facility in China to more efficiently support aftermarket sales in Asia. Lower bookings of recycling systems during the third quarter however, largely contributed to 17% decline in our total bookings for Kadant year-to-year. Because of the weak third quarter bookings and the uncertain timing of some significant recycling orders, we expect to earn from $0.15-$0.18 per diluted share in the fourth quarter in 2002 on revenues of $43-$46 million. This has caused us to lower our guidance for the full year to a range of $0.60-$0.63 per diluted share excluding restructuring and unusual charges and gains on revenues of $182-$185 million.

With that said, a strong balance sheet continues to allow us to invest in the business for growth in the long-term. Let me mention some of our internal growth initiatives. First, we continue to focus on emerging markets such as China. China is now the seventh largest economy in the world, fourth largest if you consider Europe as one. Consumption of paper continues to grow along with the general economy. A number of large projects are underway in China. You may recall that we announced 8 million in orders during the second quarter related to two of these projects and received an additional order during the third quarter for $3.7 million in recycling and post flow (ph) systems that will be installed with a new line of board mill (ph) operated by Wanda Paper (ph). Several other major projects are currently on the table. We just received an order related to one of them, but we will not record it in our bookings until we have the deposit in hand. A group of us will also be traveling to China for two weeks next month to visit with our key customers and reiterate our commitment to serving that market. In fact, we plan to establish in an assembly facility for our recycling products near Beijing that will complement our US and European operations. While the initial investment will be modest, the facility could be expanded as market conditions warrant. Aside from more efficiently serving growing Asian market for recycling systems and related aftermarket parts, this investment could also help us trade a low cost base to producing and distributing our accessories and water-management products in the future. We are also shifting the sourcing of certain components from some of our North American suppliers to our own operations in Mexico where we already have a small facility for manufacturing accessories and water-management products.

Second, we continue to be one of the few suppliers of the pulp and paper industry that emphasizes technology development in an effort to provide greater value to our customers. We announced this quarter that we received a US patent for the environmental blade technology featured on a Pro-pay (ph) product, which we developed primarily for tissue producers. We listened to our customers' concerns about varying tissue quality and downtime due to frequent blade changes and responded with a blade that offers greater scrapping consistency and lasts up to five times longer than the traditional steel blades. Pro-pay (ph) is currently being used by two of the world's largest tissue producers. Sales are steadily increasing as this new technology is evaluated and implemented mill by mill. And we are pleased to report a 20% increase in Pro-pay (ph) sales quarter to quarter.

Third our new composite building products business continues to make progress. Third quarter revenues grew up to $2.8 million from $200,000 last year, the [loss or declines] of $376,000 and 1.3 million in 2001. For the fourth quarter, we expect the loss of $300,000 to $500,000 on revenues of $2-$3 million. This keeps us on track to achieve our goal of break-even performance in this business in the first quarter of 2003. Bookings of composite products doubled from last year, but at $1 million, we are down from a record 4.1 million bookings in the second quarter 2002. This was due to extended deliveries and decking systems resulting from the unexpected high demand. Also, some effect of seasonality as distributors reduced their inventories in anticipation of discount programs typically offered in the building industries during the winter months. We recently launched such a program and have already booked more than $1 million in sales since it began on October 1st. We continued to expand our distributor network for our decking and railing systems, which are marketed under the Geodeck (ph) name. And add distribution locations in Arizona, Texas, Florida, and Georgia. We are now working to add distribution in California, Utah, and in the Mid-Atlantic States. Distributor acceptance of Geodeck (ph) should be bolstered by the BOCA evaluation we announced this quarter. BOCA is an acronym for Building Officials [Course] Administrators Organization. Most architects, commercial builders, and local building inspectors require an evaluation report by BOCA before they will recommend or prove the use of a product.

To conclude, we remain focused on supplementing internal growth with strategic acquisitions. I have been spending much of my time exploring potential acquisitions that would complement our existing businesses. While I would like to add more definite news for you, we will not compromise valuable the franchise that Kadant has built over the years and are thoroughly evaluating our options. I can give you a sense of the types of candidates we are considering. Suppliers to the paper industry that broaden markets were already served by adding technology or complementary products. Also, companies outside our industry that could benefit from our process knowledge and take us in the higher growth markets and an example of that could be industrial water. And as the composite business gains momentum, we would explore an acquisition of building industry to add production capacity or distribution. We also continue to strengthen our capital structure by balancing the new [INAUDIBLE] acquisition front with market opportunities that will allow us to pay down our debt. And now, I will turn the call over to Tom for his overview of the financials. Tom?

Thank you, Bill. Let me start by reviewing the [INAUDIBLE] results after which I will make a few comments on the balance sheet and our cash flows. So starting with revenues, consolidated revenues were 50.1 million in the third quarter of 2002, compared to 56.1 million a year ago, a decline of 11%. The weakening US dollar versus the Euro and the British pound that are favorable foreign exchange impact on our revenue to 1.6 million in the third quarter. If I exclude this favorable impact, revenues were down 14% from last year. This revenue performance was slightly higher than the guidance we had given for the third quarter, which was 47-49 million. On a sequential basis, consolidated revenues, again excluding the favorable foreign exchange impact, were 5% higher than the second quarter of 2002, comprising of a 7% increase in the paper making equipment segment and a 16% sequential decrease in the composite and fiber-based product segment. The sequential decline in the composite fiber-based product segment was entirely due to lower sales, as we expected in our seasonal fiber-based range of the business.

So let's turn now to a few more details on revenues in our two reporting segments. Revenues in our paper making equipment segment were 46.3 million or 16% below last year's 55.2 million. All of the favorable foreign exchange in fact occurred in this segment and if I exclude foreign exchange, revenues would have been 19% lower than the third quarter of 2001. Again just to remind you that this reporting segment consists of three major product lines: accessories, recycling, and water-management. Compared to last year, revenues were down in all three of these product lines, although they are only slightly down in accessories, which tend to be less effective by swings in capital spending by our customers. As we have noted in the past, our customers who constitute the world's major paper companies, continue to restrict their capital and even their maintenance budget in response to weak conditions throughout the paper industry. In general, these conditions have led to deferral of capital projects by the paper companies and needed pricing pressure in some of our product lines. The combination of these factors has caused a reduction in our revenues throughout 2002. Now potentially, the picture is somewhat brighter as paper manufacturing equipment segment revenues were up 10% over the second quarter of 2002 with increases involving the accessories and the recycling product lines offset partly by decrease in the water-management product line. Excluding the impact of foreign exchange, revenues were up 7% sequentially as I mentioned previously.

Turning to our other reporting segment, revenues in our composite and fiber-based products business were 3.8 million in the third quarter of 2002, up by a factor of 4, or 2.9 million over last year's $900,000. Both product lines in this segment reported higher revenues in the third quarter of 2002 compared to last year, although a majority of the 2.9 million increase, 2.6 million in fact, occurred in the composite building products business. Looking at that product line for a moment, composite business has strongest revenue performance ever in the third quarter of 2002. Revenues in the current quarter were 2.8 million compared to last year's 200,000. Revenues in this product line have increased in each of the last four quarters largely due to the continued expansion of our distribution network for these products throughout most of the United States. Now, you should also note that the composite revenues of 2.8 million for the third quarter met our expectations for this product line which was 2.5 to 3 million, and that was guidance we had given in July during the second quarter earnings flow.

Now we will return to our product gross margins for a moment. Our consolidated product gross margins were 37.0% in the third quarter of 2002, up 20 basis points over last year, about 180 basis points lower than the second quarter of 2002. Virtually, all of the 180 basis points sequential decline was in the paper making equipment segment, where product margins were 37.8% decline from our second quarter of 2002's 39.6%. We did experience an unfavorable mix of sales in the third quarter of 2002 versus the second quarter of 2002 and this coupled with lower capital equipment margins contributed to the decline. I do want to note we have several initiatives ongoing to will prove our product gross margins, including focusing on the high end margin products in consumable business across all our product lines, outsourcing the manufacture of non proprietary components, lowering our manufacturing overhead costs throughout the business, and as Bill mentioned in his comments, shifting the sourcing of some components from our North American suppliers to our subsidiary in Mexico.

Okay, now let's turn to the operating income. I have a few comments to make on our operating income for the quarter. As you can see in the chart as in the press release, we reported operating income of 4.8 million in the third quarter of 2002 compared to 3.8 million last year. You will also note that we have shown two sets of operating income results in the press release, the second of which adjusts all theories to reflect the true apple-to-apple comparison, that is, we exclude restructuring charges from all periods, and we exclude goodwill amortization from the 2001 period. Of course the goodwill adjustment has the effect of increasing income in 2001. So, making these adjustments, operating income was 4.9 million in the third quarter of 2002 down from 5.2 million last year. On percent sales basis, operating income was 9.7% in the third quarter of 2002 up slightly from 9.3% last year. In paper making equipment segment, operating income was 5.9 million in the third quarter of 2002, 4.8% of revenues compared to 8.1 million last year or 14.8% revenues. The composite and fiber-based product [INAUDIBLE] reported significantly improved results versus last year at a loss of 200,000 in the current quarter compared to a 2.1 million loss last year. The results from this segment include operating losses from our composite building products business of 376,000 in the third quarter of 2002 compared to a loss of 1.3 million a year ago. This is the lowest loss in this product line since inception and represents good progress towards our goal of achieving break-even in this business in the first quarter of 2003. I would like to note that the consolidated operating numbers were off on a sequential basis from 4.3 million in the second quarter to 4.9 million in the third quarter of 'O2. That increase were led by our paper making equipment segment, which was up from 5 million in the second quarter of 'O2 to 5.9 million in the third.

Okay, turning to our EPS results, for the third quarter of this year, we reported EPS of $0.20 per diluted share compared to $0.17 last year. The 2002 results included small restructuring charge and small gains from the repurchases of our convertibles, neither of which have material effect on our reported EPS. The EPS results for the third quarter of 2002 were within the range we gave for earnings guidance in July which was $0.19-$0.21. Now that compared to 2002 with the 2001 results, we need to eliminate the restructuring charges for both periods and we should also increase the third quarter 2001 EPS by $0.05 that represents the goodwill amortization which has now been eliminated in 2002 according to the new accounting rule issued under FAS 142. So making these adjustments EPS would have remained $0.20 in the third quarter of 2002 compared now to $0.24 last year. That variance at $0.04 includes $0.02 due to low operating results in the current quarter versus last year and the other $0.02 is due to higher shares outstanding due to our June 2002 offering. So it is $0.02 due to low operating results and $0.02 due to the higher shares outstanding. Also, included in these EPS results are losses from our composite building products business of $0.02 in the third quarter of 2002 versus $0.06 last year.

Now, we will turn to the balance sheet. We are pleased to report that we had another strong cash performance in the third quarter of 'O2. We ended the quarter with a little under 121 million in cash and short-term investments and this amount exceeded our total debt as Bill mentioned by 33 million. We are net cash positive therefore by 33 million at the end of the quarter and this compares to our net debt position of 5 million at the end of the third quarter 2001. So we had an improvement in our net cash position of almost 39 million over the past 12 months. This 39 million includes approximately 18 million from the net proceeds of our June 2002 offering and approximately 17 million from free cash flows during that period, and that is a number that bears repeating: we have generated 17 million in free cash flows over the past 12 months. Free cash by the way, we define the old fashioned way, which is cash flow from operations less capital expenditures. Free cash flows were very strong in the current quarter versus a year ago. Our free cash flows in the third quarter 2002 were 3.7 million positive compared to negative free cash of 4.7 million in the third quarter last year, which is an improvement of 8.4 million. Free cash flows year-to-date in 2002 were 15 million and already well ahead of calendar year 2001's total free cash of 8 million. We will also give you our D&A for the quarter. Depreciation and amortization was 1.3 million and most of this, about 1.1 million, was for depreciation.

Finally, let me give you a brief update on our debt repurchase program. As many of you are aware, in September 2001, we announced the first of what was to become two separate authorizations from our board to repurchase our debt and equity. These authorizations together totaled 100 million and have so far been used almost entirely to repurchase our 4.5% convertible debentures originally issued in the amount of 153 million in June and July of 2004. Through September 2002, we have repurchased approximately 67 million in principal of these debentures at repurchase prices aggregating slightly less than 65 million, resulting in a gain of approximately 2 million before deferred debt charges and taxes. The average yield maturity on these repurchases has been almost 5.9% and the remaining balance of the debentures at principal is 86 million. Our repurchases on the open market slowed considerably in the third quarter of 2002 to approximately 2 million as a result of low interest rates in the shift by many investors to bonds from equities. We still have approximately 35 million remaining from our board authorization to purchase our debt and our equity. That concludes my review of the financials and I will now turn the conference back to Rahim for our Q&A session. Rahim?

Thank you. The floor is now open for questions. If you have a question or comment, you may press the numbers 1 followed by 4 on your touchtone keypad at this time. And if at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. I do ask while you pose your questions that you pick up the handset to provide optimum sound quality. Please hold while we poll for questions. Thank you. The first question is coming from Michael Hutchison of Barrington Research. Your line is live.

Good morning. I was wondering what are your customers in the core business saying about the near-term spending plans for recycling systems?

It depends on what region of the world. Right now, North America, we continue to see a real tightness on the capital expenditures and on the other hand they knew, this is why we focused on coming up with new components to replace some of the parts that are within the systems that upgrade existing equipment while in this environment, but we see opportunities still off in Asia for us and particularly in China, especially is one where we see a lot of opportunities, we have a lot of proposals out there, the timing of securing some of those orders are more difficult, but we got a very high market share there. So we see opportunity for systems in Asia primarily. Europe and North America are still soft in markets.

And do you think that is going to be more of a second half event or first half event next year or ...?

Mike, I get so hesitant to call it that, I've been saying for so many times, we have been saying we have been on a trough and I see an uptake, I think and we have seen this happen this last year, I mean the first half, we start to see some signs of improvement and then a slow down occurred in that improvement. On the other hand, I think the paper companies in general are in better health than they have been for a number of years in North America, which is a big market for us. I certainly see, I would hope to see some improvement next year.

If I could, one more question. With the added distribution in the Southern States, what is the [studio] near-term outlook for the composite building for products business?

I am going to let Jon handle it, Mike.

The principle advantage of the Southern States of course is that they go through the winter, so it should mitigate some seasonality of the overall business. That sounds positive for the fourth and first quarters.

So, does this improve the outlook on an annualized basis because you will be getting a lot more in sales in those cold months?

Well, frankly when we built our plan, we intended to add distribution in the South, it really is more or less on track where we thought we would be because the Northern people want to bring inventories down in the winter months.

Okay, thanks.

Thank you, Mike.

Thank you. The next question is coming from Claudia Shake of J.P. Morgan. Your line is live.

Good morning, [Claudia].

Hi, how are you guys?

Just fine, thanks.

I have a question on the composite wood products as well. And I was curious with lumber practices as low as they are, I was wondering if you are seeing any impact on that division in terms of sort of reduced substitution or pricing pressure?

There are a couple of answers to that, actually. One, it is important to note that our product goes on pressure treated lumber, so when the pressure treated prices dropped down, it does drop the prices in overall deck down, so that, in some ways, is helpful. In terms of our cost relative to pressure treated lumber, we are already substantially more than the pressure treated lumber and the people who are buying composites for whatever reason decided not to use pressure treated lumber and it is not so much a price issue frankly comparing the two.

Okay, and I was also just wondering if you could maybe talk a little bit about the fiber-based [granules] business and just the seasonality on that and sort of what can we expect in the fourth quarter and the third quarter...?

We will let Jon handle that one as well.

The fiber-based [granule] business as you can imagine being in the agriculture business is focused around getting ready for the spring planting season. We are sort of in the beginning of the change. So our strong quarters are really the fourth and first, those kind of quarters, the third where our products are actually out there in the field, that typically is our worst, our lowest quarter.

Okay, thanks.

Okay, thank you, Claudia.

Thank you and the next question is coming from [Jim Markins] of Wasatch Advisors. Your line is live, sir.

Thank you. I just wanted to get some more details on the balance sheet, I don't know if I missed some of these in your comments, but if you can give me Total Assets, Receivables, Inventory, Goodwill, and then break down your debt for me?

Okay, thank you, Jim. I am going to let Tom respond to that.

Well actually Jim, we haven't filled those numbers out yet, we typically do in the queue, but I can refer you back to some of those in the press release. We have total cash of 121 million, our total short-long term debt is 87, total shareholder investment is 210 million and I suppose our total assets are 358 million. Inventories are down about 5 million or so from the beginning of the year. Is there something else that you needed?

Receivables?

Receivables, are also down from the beginning of the year about 9 million to about 30 million total. We are very pleased with some of the progress we are making on the balance sheet. We had good churns, inventory churns this quarter and we had improvement as well in our agings (ph).

Can you just give a few more comments about the [M&A] pipeline and just give us some color on the kind of businesses you are looking at?

Okay Jim, what we are looking for are companies that would complement what we now are doing and also would, companies that primarily have had a good parts business around the consumable business in the paper industry because we believe that certainly in the longer term that is going to be much more beneficial and also a company that we could add a lot of value with our global distribution.

And so I think about these as being companies that maybe are offering some type of a system or more of a specialty product or parts...

More a specialty product-related than entire systems, more on something that would be complementary to what we are doing. I have ongoing conversations with companies consistently on that basis. We have looked at a number of them and again we have some pretty high standards and we are not going to compromise, but there are some potential out there for us to look at, it is the timing that is difficult to call. Also, within the other businesses that we are looking at is that we really explored this a number of years ago and we are looking again very hard at industrial water, which we believe we have technology that can apply in other industries. And so, on acquisition in that field that would have market presence would be beneficial for us. On the other one which is probably a little bit truly downstream, however, is in the building area, something that would complement what we now have and we are now building a compository (ph), which we are getting a lot of confidence and then market as we continue to gain momentum.

Right, and I missed some of your comments earlier about sort of Asia versus the US, just a little bit of color there, I would appreciate?

Okay, Jim. What we are doing in Asia is that right now on the bigger systems that we have, we see this going on in Asia, especially China. We are putting in, and really developing a very modern paper industry in China and as her needs in [GVP] grows, the paper needs growth. There is very high market share there and we have been, what we see as an advantage for us is to better serve their market and put up an assembly facility that we could serve the aftermarket far better in terms of parts and components that they're going to need. And also some of the things that we now outsource, some of the components in our systems that we now outsource in North America might be much more beneficial to us to outsource some of those goods in China.

Okay, very good. Thanks a lot.

Okay, Jim, thank you.

Thank you, once again, if you have a question or comment, please press the number 1 followed by 4 at this time. As a reminder, if you are having difficulties entering the queue, you may press *0 at this time. The next question is coming from (inaudible) with (inaudible). Your line is live.

Just wanted to congratulate you on your solid performance on free cash flow numbers for this environment.

Thank you.

I have some other questions. You mentioned that you are looking to make acquisitions. I have seen some other companies that make acquisitions. Many times they don't work out. How can you assure shareholders that you won't overpay or we won't have to write-off from down the road?

Why, I think one of the things we can look at is that [INAUDIBLE] some comfort changes at this time that we have taken, and we have been looking at acquisitions now in this [INAUDIBLE] market for quite a while and we are patient. And what we have as a hurdle is that one of the things that we have to have is a very high level of confidence, at least a 25% return on invested capital within a 3-5-year period. And so, we are very cautious because it stopped generating the cash flow that we have in this market and we treated it very carefully and so what we wanted to do is have something that is going to be not [dilute] where we are going and certainly give us an opportunity to grow business in the future. So, we are very cautious in what we are doing.

Another question I have regarding the number of shares fully diluted. I see that they are up 11% from last year. What is the cause of that?

I am going to let Tom address that.

You may remember we did an offering in June of this year under the requirements of our Spin-off from our former parent company. In that the number of shares we issued in June of 1.3 million shares, what you are seeing is the weighted average effect of that. We are going through the different periods of P&L.

Okay, that is no trend or anything like that.

No, no, no. That is over with. That was the facility requirement associated with the Spin-off of the Thermal and that is over with.

And then a last question on the convertible debenture. You are obviously buying it and doing a great job there. How far down you expected to pay that down?

Well, as I said, we have another 35 million remaining in our authorization and we are continuing to purchase those debentures on the open market when we can.

Do you have any, like a goal in terms of your debt structure like where you want to be, how low you want to be?

Well, first of all we haven't said these debentures have to be paid off by July 2004, so it will be 0 by then. What we are trying to do is balance a couple of objectives. One is we want to maintain enough cash to execute our acquisition strategy down the road and at the same time, we want to take advantage of economic opportunities that are presented to us by virtually of this dimension. We are paying 4.5% of the debenture and then we are not earning 4.5% on our investment cash, so it will be [advantageous] to us if we purchase those debentures back so we are balancing both of those two objectives and we will continue to do that until these are paid off in 2004.

Great, and keep up the good work.

Thank you, Jim.

And the next question is coming from [Claudia Shake] of J.P. Morgan. Your line is live, [Claudia].

Hi, just have one more question on capital expenditure. And I guess capital expenditure I think in the composite business kind of increased significantly quarter on quarter. I was just wondering sort of what was driving that increase and what can you look for on the capital expenditure front going forward?

Okay, Claudia, I think our capital expenditure in total in the third quarter was relatively light; it was a little under 900,000.

Yeah, I just meant the composite number.

The composite number of 583 most of which was in the composite business so, you compute the total year number year-to-date is 1.2 million. We would expect it to pick somewhere between another 0.5 million or 600,000 for the rest of the year. And that will be slightly more than 50% or less than what we spent last year on composites, so we spent a lot of on composites this year than last year, although we have accelerated slightly during the second half.

Okay. Thanks.

And Jon, you wanted to add ...?

One that is really relating to, it is just tuning up the plan, getting more efficient, we get more capacity out of what we have on the ground.

Great. Thank you.

Thank you.

Thank you. We also have a follow-up coming from Michael Hutchison of Barrington Research. Your line is live, Mike.

I was just wondering if you could comment about next year's earnings and your comfort level with next year's earnings at a consensus I see at $0.95.

Well really, I guess I can comment on that a little bit, but really am intending on giving some guidance for next year in February when we will have more visibility, but I can tell you a couple of things. One is that we do expect bookings to be stronger in the fourth quarter. We expect to go into the year with more strength. If you just take a look at the composite business which has been certainly a drain on our earnings in the last couple of years, it is going to be contributing next year and that in itself could make a very decent difference. So we are just trying now in this economic time, we are just trying to get a little bit more visibility and we will have much more visibility on that at the end of the year, but our expectations are for a stronger fourth quarter.

Okay. I just have one last question for Jon. What is the total count for distributors and retail outlets in the composite building products business?

Right now, on distributors, we are about at 23. That is why, I mean distribution locations. The count on dealers is a much more fluid number, but my estimation is that our product is being shown or stocked at around 500.

500. And that is a constantly changing number, of course.

This is the season that they go out and really make an effort to get more of those stocking dealers [INAUDIBLE].

Okay. Well, thanks.

Okay. Thank you.

Thank you. There are no further questions at this time, Mr. O' Brian.

Okay, what I think I will do then is close the meeting. I would like to say, just remind everyone the economic times are trying and the industry condition is certainly challenging, but we have a solid business that we have been able to effectively manage through prolonged industry down cycle. We are profitable, we have a strong balance sheet, and we are committed to using all our resources to create long-term growth. We are going to stay committed to this growth. I would like to thank all of you for your ongoing support and for joining us on this call today. Thank you.

Thank you. That concludes today's Kadant's third quarter 2002 earnings conference call. You may disconnect your lines at this time. Have a wonderful day.