Kadant Inc (KAI) 2003 Q3 法說會逐字稿

Good morning and welcome to the Kadant Third Quarter 2003 Earnings Conference Call.(Operator’s Instructions)At this time, it is my pleasure to turn the floor over to your host, Tom O'Brien, Executive Vice President and CFO of Kadant. Sir you may begin.

Well, thank you operator. And good morning everyone and let me welcome you also to Kadant's third quarter 2003 earnings call. With us on the call today are; Bill Rainville, our Chairman and Chief Executive Officer and Jon Painter, an Executive Vice President of Kadant's and the Head of our Composite and Fiber-Based Products segment.

Before we begin, let me read the Safe Harbor Statement. Various remarks that we may make today about Kadant's future expectations, plans, and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from these forward-looking statements, as a result of various important factors, including those discussed in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2003 which is on file with the SEC and is also available in the "Investors" section of our website, at www.kadant.com, under the heading "SEC Filings".

In addition, any forward-looking statements, we make on this call, represent our views 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 estimates change and you should not rely on these forward-looking statements as representing our views on any date after today.

During this call, 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 third quarter earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading News Releases.

And with that, I'll turn the call over to Bill Rainville, who'll give you an update on Kadant's business and future prospects. Following Bill's remarks, I'll 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. Thanks for taking the time to join us today. We are pleased to again report solid earnings performance for the quarter. In fact, slightly ahead of our guidance, as you can see in the press release, GAAP EPS was 19 cents in the third quarter including a penny of restructuring charges versus 20 cents in 2002. Net income was $2.7m in both periods.

Continued softness in the paper industry in many parts of the world did affect out top line results. Revenues were down for the quarter at $45.9m compared with $50.1m a year ago. The good news here is that orders were strong during the quarter. Our total bookings grew by 15% over last year and were up nearly 9% compared with the same quarter of this year. Most of the order activity was in our stock-preparation product lines, in fact, stock-prep bookings were up 34% over last year with increases is in both Europe and China.

We are also very pleased with our cash flow performance during the quarter. We have generated a record $17m of operating cash, all from our core paper making equipment segment. This contributed to a cash balance of $66m at quarter-end, an increase of more than $21m since the beginning of the year. I would also like to note that this cash translates to approximately $4.75 per share outstanding. These results are especially gratifying in light of continued industry softness in North America and Europe and weak performance in the composite building products business, which reported a loss of $771,000 in the quarter on sales of $2.6m.

Let me spend a few minutes on composites which did have a disappointing third quarter. We began 2003 with positive momentum in composites that led us to feel pretty optimistic about the business for the upcoming year. However, the second half has proven to be very challenging for two primary reasons.

First, we are experiencing reduced sales and lower capacity utilization at our Green Bay plant as our distributors and dealers continue to work through their inventory. You will recall that inventory levels rose because the start of the building season was delayed by bad weather. While reduced demand is being felt across the composite decking markets, we believe that end-user demand continues to be strong and that inventory levels are dropping, although dropping more slowly than we expected.

Second, the working costs in our decking materials that we began to incur last quarter were higher than expected. We are confident that we fixed the problem, which was excessive contraction that occurred with some larger installations but the claims are still lagging to fix. We expect some warranty claims to continue through next year, although they should begin to taper off.

As we move into Q4 we face seasonally weak sales and lower pricing due to [winter buyer] discounts, and reduced production to match demand. As a result, we expect revenues from the composite business of 1.8 to 2.3m for the fourth quarter and a loss in the range of $1 to $1.3m. For Kadant overall, this leads us to expect fourth quarter GAAP EPS results of 15-17 cents on revenues of $45 to $47m, and for the full year GAAP earnings of 84 to 86 cents on revenues of $198 to $200m. Although the composites business is still working to gain traction, we continue to believe that the market presents a good growth opportunity.

Demand may fluctuate at times due to weather and other factors, but overall the composites piece of the $4b U.S. [factory] market should continue to grow. Our main focus in this business for the rest of the year and going into 2004 is to continue to expand our dealer base. We firmly believe that if customers have a chance to see our products and compare them with others, we will come out ahead.

We have recently launched an incentive-building program geared to the signing of new dealers. Building a dealer network is a long process, but it will benefit us for years to come. This along with the release of several new decking products, increasing sales of our slate roof tiles as well as the introduction of our new [inaudible] tiles should lead to improvements in this business in 2004. As we pursue the composites venture, we are fortunate to have built a strong core business that continues to deliver solid results despite of ongoing industry pressure. Kadant's global presence continues to be a key advantage for us as market needs change in different parts of the world.

China remains an important market; for the first 9 months of this year our bookings from China were more than 80% higher than the same period in 2002. Most of these orders are for systems that recover fiber from moist paper for the production of recycled container board that is used for packaging. Equally significant we are building a large base of installations in China and this gives us an excellent platform for introducing ongoing after-market products and services. The new facility that we are establishing in Beijing will provide an added advantage in that growing market by lowering our production costs and giving us a strong and local presence. Although North America and parts of Europe continue to be soft, we are focusing on after-market opportunities in those markets that add value for our customers in terms of quality and production improvements and create a quick return on their investments.

We are using our global reputation as leverage in certain geographic markets where we've historically had less market share in some of our product lines. An example would be China; we had very strong market presence and stock preparation, [far less owned] accessories and water management.Our intention is to take the strong market presence and name recognition we have and introduce our other products to that very important growing market and there are other examples. The same is true concerning opportunities in various paper grades where process knowledge gives us a competitive edge. For example it would be a fishing market when where we have a very strong presence in [inaudible] as well as in liner board. And we intend on capitalizing on that as we have in the past.

We've forged strong relationships with major paper producers during our many years in the industry that now help us as we pursue new avenues of growth, whether it is developing new products or offering more services. We work closely with our customers to determine what they need and where we can best add value. Any industry recovery will obviously be an added benefit. One point that I want to reiterate -- not only do we have multiple opportunities to grow, but we also have a strong balance sheet to help support that growth. Our balance sheet gives us numerous options including internal development, acquisitions, stock buybacks that we continue to evaluate based on current market dynamics. With that I’ll turn it over to Tom to give the financial reports. Tom.

Thank you Bill. I'm going to review our P&L performance in the third quarter and then discuss the balance sheet and our cash flows. So beginning with revenues; consolidated revenues were $45.9m in the third quarter of 2003, down 8% from last year. The consolidated revenues include a favorable foreign currency translation effect of $2.2m or 5% in the quarter.

With the continued strengthening of the Euro versus the dollar compared to last year, over 80% of our revenue translation gains occurred in our euro-based businesses. Our revenues of third quarter were at the upper range of our guidance which was $44 to $46m. Now let's look at revenues at our two reporting segments beginning with our core business, paper making equipment. Revenues in our paper making equipment segment were $42.0m, 9% lower than the third quarter of 2002.

This decline includes a 5% increase from the favorable effects of foreign currency and a 14% decline in the segment's revenues, which was entirely attributable to our stock prep product line. Stock prep sales were weaker than the third quarter of last year in North America, Europe, and China; although I want to add that for the first 9 months of 2003 our sales to China are up almost $12m over last year. Encouragingly, bookings in the stock prep product line in the third quarter of 2003 were up 34% over last year, led by solid increases in both China and Europe.

This bookings increase does not include the $3.5m order, which we've just announced in our earnings release since this order was recorded in the fourth quarter of 2003. Looking at our other two product lines in this segment, the combined revenues in our accessories and water-management product lines were up 5% over last year due entirely to foreign exchange. These product lines continue to be negatively impacted by capacity reductions and spending restrictions by our customers especially in North America.

Turning to our other reporting segment the composite and fiber-based product segment; revenues in this segment were $3.9m, 3% higher than last year. This segment includes our composite building products business where revenues were $2.6m, down 8% form the third quarter of 2002 and lower than our third quarter '03 guidance of $3 to $4m. The revenue shortfall from the guidance was caused in part by certain of our distributors who chose to work down their inventory levels in response to weaker than expected market demand throughout the year. Our fiber-based granular products business had revenues of $1.3m in the third quarter of 2003, an increase of 36% over last year. The revenue performance here was led by stronger sales of our bio-deg granular products, especially to international markets.

Turning to product gross margins; consolidated product gross margins were 39.5% in the third quarter of 2003, up 250 basis points over last year’s 37% and it represents our highest consolidated gross margin performance since the first quarter of 2000. Looking at the reporting segments, the entire increase over last year is due to strong product gross margins in our paper making equipment segment. Product gross margins in this segment were 42.1% in the third quarter of 2003, compared to 37.8% last year or an increase of 430 basis points. This increase is primarily due to higher capital margins particularly in our stock-prep product line and to a lesser extent from a favorable product mix; that is to say a larger proportion of relatively higher margin parts and consumables revenues compared to last year. We continue to execute our plans to improve product gross margins throughout the papermaking equipment segment including increasing sales of the relatively higher margins parts and consumables products, outsourcing the manufacture of non-proprietary components, and shifting production to lower cost or more efficient locations especially to our subsidiaries in Mexico and the UK and, once completed, to our assembly facility in China.

Looking at our other reporting segment, product gross margins were down significantly in our composite and fiber-based products segment from 26.8% last year to 11.2% in the third quarter of 2003. Most of this decline was due to lower product gross margins in our composite building products business which were affected by higher warranty costs, lower sales, and lower production utilization. Product gross margins in our fiber-based granular products business were down due to higher costs of natural gas compared to last year.

Now let's work our way down the P&L a bit, and spend a few moments on our selling, general, and administrative expenses. SG&A expenses were $12.8m in the third quarter of 2003. an increase of approximately $300,000 over last year. The increase was due to the unfavorable impact of foreign currency translation of approximately 600,000 offset in part by internal SG&A expense reduction of 300,000 compared to third quarter of '02. This reduction in internal SG&A from last year results from our ongoing efforts to control spending levels and demonstrate the earnings leverage we would expect in an industry recovery.

SG&A as a percentage of revenue was 27.8% and 24.9% in the third quarters of 2003 and 2002 respectively. The increase in 2003 resulting from lower revenues compared to last year. And a little further down the P&L, you will notice a small restructuring charge of 157,000 in the third quarter which occurred in one of our European businesses.

Now let's turn to our operating income and EPS results. On a GAAP basis, consolidated operating income was $4.1m in the third quarter of 2003, down $700,000 from last year. Approximately $400,000 of this decrease is due to higher operating losses in our composite building products business compared to last year. Operating income in our core papermaking equipment segment was $5.7m in the third quarter of '03, down slightly from last year's $5.8m. On a more positive note, operating income in the papermaking equipment segment as a percentage of revenues was 13.6% in the third quarter of 2003, up 100 basis points over the third quarter of 2002. This represents the highest quarterly percentage performance since the fourth quarter of 2000.

Now for EPS; we reported diluted EPS of 19 cents in the third quarter of 2003 compared to 20 cents last year. Included in the 2003 results are restructuring costs which reduced EPS by 1 cent. Excluding this effect, adjusted diluted EPS was 20 cents in both the 2003 and 2002 quarters. You can see the reconciliation of the GAAP to the adjusted EPS in the table in the middle of the chart attached to the press release. Although the adjusted diluted EPS was 20 cents in both periods, there were several factors that affected the comparison between the 2003 and 2002 results. On the positive side EPS increased 3 cents through the shift from net interest expense in the third quarter of ’02 to net interest income in the third quarter of ’03 and this in turn was due to the repurchase of our convertible debentures in 2002. Another one cent increase was due to foreign currency translation gains in the 2003 period. These combined improvements of 4 cents were offset by 1 cent due to higher diluted shares outstanding in the third quarter of 2003 and by 3 cents due to lower operating results. Of the 3 cents in lower operating results 2 cents was due to higher after-tax losses in our composite building products business.

I’ll conclude my review with a few comments on the balance sheet and our operating cash flows. We ended the third quarter with $65.7m in cash and $600,000 in total debt giving us a net cash position of approximately $65m. This net cash position represents approximately $4.75 per share based on the shares outstanding at the end of the quarter. Our net cash position has improved by over $21m in the first 9 months of 2003 and is up almost $32m in the last 12 months. [inaudible] Spin-off from Thermoelectron over 2 years ago, we have increased our net cash position by slightly more then $70m, $17m of which is attributable to our public offering in June 2002. Our cash position was enhanced by record operating cash flows of $17m in the third quarter of 2003. The highest quarterly performance in the history of the company. Over the past 12 months, we have generated almost $30m in cash from operating activities. All of which was derived from our papermaking equipment segment.

We continue on several fronts to improve our working capital management and those efforts took root in the third quarter. Working capital as a percentage of the last 12 months revenues was 13% in the third quarter of 2003, down from 19% in the second quarter of 2003, and from 20% in the third quarter of last year. This is our lowest, that is to say our best, working capital percentage since the third quarter of 1999.

That concludes my review of the financials and I will now turn the conference back to the operator for our Q&A session. Operator.

Thank you. The floor is now open for questions.(Operator’s Instructions) Thank you. Our first question is coming from Michael Hutchison of Barrington Research. Your line is live sir.

Good morning.

Good morning Mike.

I was wondering with the decline in revenues in the core business, could you talk about the health in each of your major markets in that business, I’m kind of just wondering, you know, where you’re seeing each of these markets going in the near term and where you expect the growth from capacity or replacement, that type of thing?

Okay Mike that’s a good question. We look at, you know, in our core business -- like the good news is that the bookings, even though the revenues were down in the third quarter, the bookings were up substantially 15% over last year and 9% over the second quarter. And where we see the growth opportunities right now is in China, on stock preparations. I mean if we take a look, you know, basically our bookings there are up over 80% from the previous year. So that obviously has been a growth market for us. But we see North America and Europe where we have large installed base, there it's mining the installed base that we have with replacement parts and components and that's where we get our Blade business from. And if I look ahead a little bit, you know, certainly somewhere down the road eventually we are going to get a rebound in the industry and North America and Europe will strengthen up. I think we are going to be well positioned to take advantage of that and that represents a great growth opportunity because we've invested R&D in products that would help, you know, those customers get a quick return on their investment and enhance their investment in paper machinery.

So, right now we see the opportunities where people putting on -- adding capacity certainly in Asia. We see some pockets in Eastern Europe that are starting to put on some capacity. And then from time to time Latin America outside of that we see managing or just optimizing the install base we have in more than the term markets.

So where do you see the North America growing over the next say 12 months or so?

It's a good question. I’m a little reluctant to call it, you know, it’s certainly -- paper historically has tracked with GDP -- in fact it used to be one of the leading indicators. What happens is especially in box -- corrugated box plants. However, that has changed somewhat over the past couple of years. And because again there is lot of products that are coming into United States from elsewhere, we have taken advantage of putting equipment in -- like in China and so forth. So, it's more of difficult call. But I would think certainly that over the next couple of years that in some of the paper companies corporations have announced this publicly, is that they have to increase their spending. In other words as a percentage of depreciation. And it doesn’t take much of a change for a company like Kadant to benefit and I think we are well positioned to do it. It’s just that the timing is so difficult to call.

Okay. Well thank you.

All right, thanks Mike.

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

Hi.

Good morning Claudia.

Just a couple of questions, one just similar I guess to Michael’s is -- in terms of -- for the accessories and the parts and consumables business are you seeing a pick up in any particular grade versus more containerboard or more tissue than something else maybe?

What we have seen Claudia is there’s probably been more pressure on container board. The tissue market for us -- and we have strong positions in both those markets -- and then the tissue market, you know, we continue to see you know some improvement and some investment going into those markets, certainly in North America. And so for us it would be tissue of which we have very strong global presence on.

Okay, And just in terms of the composites business. You had spoken I guess, last quarter and the quarter before a bit about [inaudible] and just sort of an update on where [inaudible] are, if you have seen some alleviation on that front. And then also in that business I was just curious now that sort of the CCA ruling is coming into effect, I guess at the end of the year. Are you getting any sense of that sort of contributing to maybe improvement in demand for your product?

Thank you Claudia, I’ll turn this over to John Painter who will respond to that.

Sure Claudia, you might recall that in the spring we did have a spike in [inaudible] costs and those -- that pricing has really returned to what I would call traditional levels. So we were impacted by the third quarter by higher [inaudible] since our production was down it wasn’t as big as the other warranty and generally having lower production levels.

Okay.

The CCA thing -- at the end of this year they will, you know, -- they're not going to sell any more CCA, and I do think that we'll have a benefit -- the whole composite industry, I think, in general has benefited from an overall awareness of the problems, you know, that the pressure treated lumber may have.

Okay. And then just one more thing about foreign exchange, did that have any EPS impact on the quarter?

I am going to let Tom respond to that Claudia.

It had 1 cent impact on volumes so --

Okay.

So 1 cent favorable.

Thanks.

Okay.

Thank you Claudia.

Thank you. Our next question is coming from Brent Miley of Rutabaga; your line is live.

Yes good morning, I had a few questions for you if I could, the margins in the quarter on the paper side -- you mentioned that they were at very healthy levels, was that mostly mix or is there something else going on there and is that sustainable kind of as you look into the backlog and so forth?

Good morning Brent, I am going to let Tom handle that although I will say this is that we have been -- we certainly -- our margins have been improving within the stock prep line, which is our capital goods as well. And this is due to the fact both on -- we have had some cost reduction as well as some price increases in that, that we really -- which really reflects I guess the high quality of our technology to be able to do that in this type of market, but I'll let Tom address that question.

Hi Brent, I think when you look at the two factors, you mentioned mix and really, price. I mean I think the by far the most important factor this quarter was that -- it was price base, basically we had higher margins resulting from better margins in our capital business and most of that was in our stock prep business, which is very encouraging. We had higher margins in China and we really did well across the board in our capital margin, which is very encouraging factor given the weakness in the markets. Now we also had a favorable impact from mix but that was less of a factor, and that being the fact that we had a higher proportion of parts and consumables as a percentage of total than we did last year. But far and away, the most important factor was that our capital margins were up and most of that was in stock prep.

And you see --

Is that sustainable -- I think that’s there are some good signs there, because you know we --as Bill is mentioning we made a lot of progress in certain of our units in terms of, you know, reducing our warranty cost, gaining efficiencies, outsourcing to lower source vendors or in some cases to lower source countries, we have a lot of incentives going on in terms of improving our margins and we hope to able to continue, although maybe not at the same level in the fourth quarter, but we do hope that we can continue with these improvements.

Okay great. A question a little bit related to the first question you folks got the -- it sounds like obviously in stock preparation you are raising prices and doing well there but you are clearly holding or gaining market share. How about in water systems and on the accessories side -- I assume that there's probably no share degradation but I -- are you gaining any market share; is it steady, kind of -- can you give us a feel for how you are doing versus the competition?

Brent, in the matured markets, we are really holding our market share and we really put on a campaign to grow market share where -- in markets that we paid less attention to in the past, we’re very lucrative in North America and pockets of Europe. We -- I won't say we neglected but we didn’t focus on some of pockets of opportunities which we now are and those include Eastern Europe. And we also have other pockets like I mentioned in China will be very strong presence with stock prep but far less so on accessories or water management and our intention is to take advantage of our market presence and expand other product groups into that. And market share in general, we really haven’t lost any market share anywhere. We are on a path now where we think we have pockets of opportunities to grow market shares.

Great. Let's see, on the-- it’s perhaps a silly question on China, who is the main buyer there? Are those actually private state joint ventures or are they all state purchases kind -- I mean who owns the equipment after you sell it, I mean, who is your buyer there?

The vast majority are privately owned companies.

Okay. So, they are essentially run for profit?

Run for profit companies, yes. And we tend to do very well on those and I have to tell you that they really have done their homework in trying to assess where they can buy the best technology and the best equipment as they put it in. And in that market, we are fortunate that Black Clawson had been in there for couple of decades. Now we have a very strong market presence.

Great. Are you seeing much pressure there in terms of other folks chasing a growing market?

Oh yes,--yes . We see all the same competition that we see worldwide. But, we have a very good head start on it.

Fair enough. On the composite side of things, you guys have mentioned -- I know you are moving into the roofing part. Is that actually commercial now and I know that there is some art and learning curve to the production process. Where do you guys stand in terms of actually making that, I assume you are making that also in Green Bay, but can you give me a little feel for kind of where you are on the roofing side and kind of if you have had any production issues or whether that's smooth or -- that kind of thing?

Sure. Those are -- those are good question [Brent] and I am going to let John respond to that. But it is commercial at this point and John wanted to--

Yes. I think right now we are on probably in the slate roof 25 houses in that range and on the Roman tiles maybe double that. We are currently getting ready really for a more significant expansion of sales in 2004 and a lot of what we are doing right know in terms of refining the manufacturing is to get our cycle time, our speeds up in these injection-molded materials to produce more with a given mold and that’s progressing very well.

Do they have their own lines basically up in and -- are they made in the same plant?

They -- we actually outsource the injection molding. It’s a different process actually. It’s injection molding versus extrusion.

Okay.

We make the compound in Green Bay and then we outsource the injection molding.

Okay. You guys are pretty -- you are pretty convinced that your outsourcers can ramp if and when you need to next year?

Yes. I mean the level -- like I said, a lot of what we are working on right now is making changes to the mold and that kind of thing in order to get them to increase their cycle path.

I got you. Okay. Fair enough. I appreciate it. Thanks a lot. That's all I've got.

Okay. Thanks [Brent].

(Operator’s Instructions) Our next question is coming from Dan Vandy (ph) of Integrity Asset Management. Your line is live.

Thank you. Hi. I was wondering if you could just work us from the $4.1m in operating income to the $17m in cash flow?

Well all right. Thanks Dan, and I am going to let Tom O’Brien respond to that.

Yes. Let me try to do this for the year, okay. For the year we’ve generated $20m in operating cash and very simply you take our net income close to $10m, $9.5 to $9.6m. So that's -- just take a rounding here, say $10m out of net income and there’s about another $5m, maybe a little bit less than that, $4m for deprecation and amortization. So it's 14 and then the rest came from working capital. And, most of that working capital reduction was in receivables, although in the small amount from inventory. Okay, so we generated $20m for the year, first nine months in operating cash. $10m from net income, 4 from deprecation and amortization, and the rest from working capital and most of that working capital reduction was in receivables.

And was most of that done during this quarter?

Right. $17m of the 20 was in this quarter, right.

And just going forward, I mean, on that working capital basis do you see these levels or these, ratios as sustainable or is it just more of a -- just an oddity in terms of time of closing and sales?

Well I don't think the 13% working capital to revenues will continue at the 13% level revenue.

Okay.

That is a very, very outstanding result and we did benefit somewhat from timing of collections throughout the business. So, this was an extraordinary quarter for us. It was a record quarter, but nevertheless we have all -- we said all along that we thought that we have good cash flows for 2003 and I think we can say with a little confidence that we will have good cash flow through 2003. It is going to be a very good year for cash flows.

Great. Thanks a lot.

Okay.

Okay.

Thank you. Our next question is a follow-up coming from Michael Hutchison of Barrington Research. Your line is live sir.

Thanks.

Hi Mike.

Hi. With the slowdown in demand in the composite building products industry, does this change your plans for manufacturing capacity additions in the near-term here or --?

We are -- certainly as you know Mike we are very conservative on how we invest the investor cash. We watch it very carefully. I think it is more a question of timing for us at this point. So certainly we are going to be delaying any commitment and next year, we don't see any major capital investment in the composite business, if anything it might just be some minor tooling that's all.

Okay and then in that vein -- well go ahead.

Because we -- again I should point out that we were successful in ramping up costs, up to $20m in Green Bay and we did that very successfully this year so now we have the capacity to -- I think to satisfy next year's needs.

Okay, and then as you continue to build this strong cash position what does your pipeline for acquisitions look like?

Well. I spend a great deal of time as you can imagine looking at where we can grow this business and we do look -- we are looking but certainly within the paper industry and companies that could [inaudible] complement what we are now doing. We could add some value perhaps on our great global network and the other area that we are looking at is even industrial water, with our water management systems, business and filtration and handling great volumes of water. So we starting to explore some industrial type opportunities in the water management. As well as in the building area if we could find a company that would enhance a dealer and distribution network and the composites that would also add some value to us. So we are looking very carefully; we talk to companies as you can imagine, obviously we say no a lot because we have high standards which we don't want to compromise. On the other hand, we are very actively looking.

Okay. Thanks.

All right. Thank you Mike.

Mr. O'Brien I am showing no further questions at this time.

Okay. I think we have a closing statement, operator, from Mr. Rainville.

Alright. I would like to again thank everyone for listening in. And I just want to make a couple of comments. You know as we complete 2003, I am optimistic about Kadant's future for a number of reasons. We have a very healthy base business that will continue to build on its global and technology streams, and we are well positioned for an eventual recovery in the paper industry in North America and in Europe. Our composites business although experiencing some bumps in the road should help us tap into new large and growing markets because we really believe that we have the best product in the marketplace today. We also continue to have a strong balance sheet. We have $66m in cash, and have generated approximately $30m in cash in the last 12 months that will fund our plans for future growth. One final point I would like to make, our adjusted EPS which provides an apples-to-apples comparison is up 50% so far this year. On a GAAP basis our earnings are up even more, on that note again I would like to thank you for joining us today.

Thank you. This does conclude this afternoon's teleconference. Please disconnect your lines and have a wonderful day.