Kadant Inc (KAI) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kadant first quarter earnings call. [Operator instructions] It is now my pleasure to turn the floor over to your host, Mr. Thomas O’Brien. Sir, you may begin.

Thomas O’Brien: Thank you, operator. Good morning, everyone, and welcome to Kadant’s first quarter earnings call. With us on the call today are Bill Rainville, our Chairman and CEO; and John Painter [ph], EVP.

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 annual report on form 10-K for the fiscal year ended January 1, 2005, which is on file with the SEC and is also available in the investor 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 may 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 first quarter earnings press release issued yesterday, which is available in the Investor section of our website at www.kadant.com under the heading “News Releases.”

Our comments today may also include references to the proposed acquisition of the Johnson Corporation announced on April 7, 2005. The completion of the acquisition is subject to customary closing conditions, including regulatory approvals and the approval of Johnson’s stockholders as well as Kadant securing at least $55 million in financing.

Let me also remind you that all amounts referred to in discussing our financial performance this morning, unless noted otherwise, will be for our continuing operations. Our continuing operations exclude the results of our composites building products business, which is recorded as a discontinued operation in the financial statements.

With that, I will turn the call 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 of the quarter, and we will then have a Q&A session. Bill?

Thanks, Tom. Good morning, everyone. Thank you for joining us today. Our first quarter results were better than we expected. We’re especially pleased to report some top-line growth and very strong bookings to start the year.

Let me get right to the financials. Our revenues increased 7%, and that includes a 2% benefit from currency translation. Our adjusted diluted EPS was $0.16. This excludes the $0.06 tax gain. While this is down from last year’s $0.19, it was a penny better than our guidance. Our earnings continue to be affected by our operation in France, which I’ll talk about in a minute.

Bookings increased by 13% over last year, our best quarter for bookings in five years. The backlog for the quarter rose significantly, up 26% since the end of 2004. The revenue growth, and much of the bookings increase, was a result of higher demand for our stock-preparation products -- specifically, Chemi-Washer Systems provided by our North American stock-prep business. As we highlighted in the press release, we received orders totaling more than $11 million for these systems in Q1 from major multinational pulp producers. The Chemi-Washer system removes impurities during the chemical pulping process. The end product, chemical cellulose, or dissolved pulp, is used to make paper as well as a range of other products, including textiles, food, chemicals, and plastics. We believe the increased interest in our Chemi-Washer technology is tied to our customers’ current focus on lowering their operation costs by reducing their use of energy, chemicals, and water.

The Chemi-Washer offers a compelling payback on their investment for a number of reasons -- our proprietary technology combines simple operation with high washing efficiencies, allowing pulp producers to lower energy consumption and use significantly less water. Also, the system offers a single-machine approach to pulp washing that simplifies the process. And, the entire unit is self-contained to prevent emissions and provide an environmentally sound pulp-washing solution.

Like the Chemi-Washer, our product offerings are designed to help pulp and paper producers meet the challenges they face in today’s highly competitive market, including reducing the cost of energy and raw materials, also meeting increasing environment regulations, and significantly improving the quality of their end product.

To meet these challenges, US producers are ramping up capital spending. A survey of more than 20 US companies in the latest issue of Pulp and Paper Week reported a 23% increase in planned capital expenditures compared with 2004. This would be the first significant increase in US industry capital spending since 2000 and the biggest gain in more than a decade. This rise in CapEx reflects a modest increase in demand and improved earnings performance by a number of major paper producers.

As I said before, while the domestic pulp paper industry may not be adding capacity, it needs to remain globally competitive with our extensive install base of equipment in North America, which will become significantly larger once the Johnson acquisition is completed. We are well positioned to provide the replacement parts, retrofits, and other after-market components our customers need to remain competitive.

Over the years, we have developed and acquired a breadth of technologies from large capital systems to consumables and rebuilds to meet the needs of various applications and geographic markets. The large Chemi-Washer orders we received helped to offset lower revenues and bookings from China in Q1 compared with last year. So, although many of the systems we sell are large, and orders can be lumpy, our breadth and geographic diversity help smooth this out.

Regarding China, we have a number of major contracts in the pipeline, and we believe they will be recorded as revenue later in the year, once our customers receive financing approval.

The market in China, of course, continues to be a much different story than the US. There, the demand for capital system remains strong as paper producers build the infrastructure needed to add 30 million tons of capacity in the next five years.

We are working to increase after-market sales to China as well as we continue to build an install base in that region. Follow-up on sales of after-market products will create a long-term opportunity. Once we complete the Johnson acquisition, we will further expand our presence in China through their install base of equipment. In addition, Johnson’s local operations, including a major manufacturing plant near Shanghai, will strengthen our ability to support the market through additional cost-effect manufacturing, sourcing, sales, and service.

A couple of words on the situation in France regarding our Kadant Lamort subsidiary. As you know, our team there is implementing a major restructuring, which is quite an involved process in France. Kadant Lamort’s management is working with employees’ representatives and a workers’ council, and we believe they’re on track with the process. Once this is behind us, we believe this business will regain profitability in the second half of the year. As we said previously, the changes there should strengthen Kadant Lamort’s competitiveness -- and, since it represents about one-quarter of our paper-making system segment, will have a significant positive impact on our total operating performance.

We are also moving forward with the closing of the Johnson acquisition, which we expect to complete in May. We’re very excited about the opportunities the addition of this company will bring to Kadant through its complementary fluid-handling technology, its large after-market business, and its geographic presence. We’ve had positive responses from our customers in the paper industry, who view this combination of two well-respected complementary suppliers as a real benefit. Once we’ve integrated the Johnson business, our customers will have access to a much greater portfolio of technologies and services from Kadant. We also look forward to the prospects for results that Johnson will bring outside the paper industry through their involvement in markets such as textiles, steel, food, and plastics.

A quick comment on composites. As you know, we have decided to sell the composite building products business. We’ve engaged an investment banker, and are now conducting an auction. We have distributed an offering memorandum and have received indications of interest from a number of parties. We’re in the process of presenting an overview of this business to those parties and arranging site visits.

Looking ahead to Q2, we expect to report GAAP-diluted EPS of $0.19 to $0.21, taking into account the continued operating loss in France. Our revenue guidance for the second quarter is from $54 to $56 million. For the full year, we have increased our guidance and now expect to report GAAP-diluted EPS of $0.86 to $0.96, after factoring in the $0.06 tax gain, on revenues of $205 to $215 million. Just a reminder -- this guidance does not include results from Johnson, which we said previously should be accretive to earnings by $0.05 to $0.07 in 2005. We plan to update our annual guidance on our Q2 earnings call.

I’d like to add that, even after the acquisition of Johnson, our balance sheet will remain strong. We expect to have a debt-to-total-capital ration of approximately 14%, which is below our targeted upper limit of 20%. This continues to give us several options for investing in the company, including internal development and stock buy-backs, although we are subject to some restrictions.

With that, I’ll turn the call over to Tom to review the financials. Tom?

Tomas O’Brien: Thank you, Bill. Let me start with the revenues. Revenues were $50.7 million in the first quarter of 2005, 7% higher than last year, including a favorable foreign currency effect of $1 million, or 2%. Our revenues in the first quarter exceeded our guidance, which was $47 to $49 million, largely due to stronger revenue performances in our stock prep and fiber-based granular product lines.

Let’s look at the quarter’s revenues in more detail, starting with our paper-making equipment segment. Revenues in the paper-making equipment segment were $47.6 million, 4% higher than last year, including a 2% favorable effect from foreign exchange. Now, we have three product lines in this segment -- accessories, stock prep, and water management. Starting with accessories, revenues in our accessories product line were $15.3 million, down 4% compared to the first quarter of 2004, including a 3% increase attributable to foreign currency. The percentage shortfalls were approximately the same in both North America and Europe, and reflected timing of orders in the capital component of this business. Bookings were actually up 6% compared to the first quarter of last year, an encouraging sign which points to stronger revenue performance in the second quarter of ’05.

As I mentioned earlier, our stock prep revenues of $24.5 million in the first quarter of 2005 were better than we had expected, and were up 13% from last year, including a 2% increase from foreign currency translation. This increase was largely due to our North American-based stock prep revenues, which were 34% higher than last year due to significantly higher sales in our Chemi-Washer product line. European stock prep sales were also encouraging, up 20% over the first quarter of ’04, including 7% from the favorable effect of foreign exchange.

Partially offsetting these increases were sales in China, which were down 15% from last year due to continued customer delays in obtaining financing approvals. As we’ve noted in the past, our China business, which is a high proportion of large capital orders, can vary considerably from quarter to quarter.

Revenues in our third product line in the paper-making equipment segment, the water management business, was $7.4 million, down 3% from last year, including a 1% favorable effect from foreign currency. Bookings in this product line were essentially flat with last year, and, much like our accessories business, growth here continues to suffer from sluggish capital orders.

Now, let’s turn to the revenue performance in our fiber-based business. Revenues in this business were at a record quarterly high of $3.2 million in 1Q ’05, and increased 64% over last year’s $1.9 million. Virtually all this increase was due to sales to an existing customer who is now utilizing our Biodec granules on one of its home, lawn, and garden products called Preem [ph], one of the leading granular herbicides on the market. Remember that Biodec is our family of biodegradable granular products that we produce from paper-making byproducts.

Turning to our product gross margins, product gross margins were 37% in the first quarter of 2005, down from last year’s 41%. This decline was entirely attributable to lower product gross margins in our paper-making equipment segment. Product gross margins in this segment were 36.6%, 470 basis points lower than last year. This decrease was largely due to lower margins from sales of our capital products, mainly in our stock prep business. Our Kadant Lamort subsidiary in France, which is undergoing a major restructuring of their business, was responsible for 270 basis points of the decline, most of this in stock prep.

Product gross margins were also lower due to an unfavorable mix to lower-margin capital products. Product gross margins in China, which, as I’ve noted, are heavily weighted towards capital products, are also lower than last year.

Product gross margins in our fiber-based products business were up substantially in the first quarter of ’05 to 42.9% from last year’s 34.3%, largely due to better fixed-cost absorption as we operated the plant virtually around the clock all quarter to meet the record demand.

Now, let’s work our way down the P&L a bit and look at SG&A expenses. SG&A expenses were $14.9 million in the first quarter of 2005, up $1.1 million from last year. This increase includes approximately $300,000 due to the unfavorable impact of foreign currency translation. In addition, last year’s SG&A was lowered by approximately $1 million due to a one-time gain which resulted from renegotiating a series of agreements with one of our licensees.

Turning to operating income and our EPS results, we reported operating income of $2.8 million in the first quarter of 2005, down $2 million from last year’s reported operating income. Excluding the one-time gain, which I referred to previously, of $1 million in the 2004 period, adjusted operating income decreased by $1 million from last year. This decline was entirely attributable to the paper-making equipment segment, where adjusted operating income was down $2 million from last year. Approximately $800,000 of this decrease occurred in our Kadant Lamort subsidiary, which, as we have noted before, is undergoing a significant restructuring of its operations.

Corporate expenses and other were lower than last year by approximately $1 million due to higher operating income in our fiber-based products business and, to a lesser extent, lower corporate expenses.

On EPS, we recorded GAAP-diluted earnings per share, including the discontinued operation, of $0.19 in the first quarter of 2005, equal to last year’s EPS performance. Excluding the after-tax losses of the discontinued operation in both periods, diluted EPS from continuing operations was $0.22 and $0.23 in the first quarter of ’05 and the first quarter of ’04, respectively.

The 2005 period includes income of $0.06 resulting from a payment received from our former parent company, Thermo Electron, associated with certain income tax matters during tax years in which we were included in Thermo’s consolidated tax returns. The 2004 period includes a gain of $0.04, which resulted from renegotiating a series of agreements with one of our licensees.

Excluding these gains from both periods, adjusted diluted EPS was $0.16 in the first quarter of ’05 compared to last year’s $0.19. You can see the reconciliation from GAAP to adjusted diluted EPS in the chart attached to the press release. The $0.03 reduction in adjusted diluted EPS from 2004 to 2005 consists of approximately $0.04 due to higher losses in our Kadant Lamort subsidiary, offset slightly by higher net interest income of $0.01. The impact from foreign exchange was immaterial.

Now, let me spend a few moments on the balance sheet and our operating cash flows. We ended the first quarter with $80.5 million in cash and no debt. Our consolidated cash position, including the discontinued operation, declined by $1.6 million in the first quarter of 2005 compared to the balance at the end of 2004, mainly due to negative cash flows in the discontinued operation as they prepare to meet the demands of the spring building season.

Cash flows from operating activities, which only includes our continuing operations, were approximately $400,000 in the first quarter of ’05 compared to last year’s $2.3 million. Historically, the first quarter is our weakest quarter for operating cash flows, and the first quarter of 2005 was further negatively affected by higher usage of working capital for several large orders which we expect to shift in the next few quarters.

Despite this investment in working capital, our position there remains stronger than this year. For this measurement, where a lower percentage denotes better performance, we entered the first quarter of 2005 with working capital as a percentage of the last 12 months’ revenues of 13.7%, down 150 basis points from last year. And just as a reminder, our definition of working capital here excludes both cash and debt as well as the working capital of composites.

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 instructions.] Thank you. Your first question is coming from Claudia Shank with JP Morgan.

Hi, how are you?

Morning, Claudia.

Just wanted to ask a little bit about the fiber-based business, which has had a very strong quarter. Wondered a couple of things. I guess, one, how much of this is expected to go on, looking forward? And then, two, is there any way we could maybe get into the profitability of that segment, because I know it’s lumped now with the corporate expense?

I’m going to turn this over to John Painter, Claudia.

Thanks.

Hi, Claudia. That business has been-- they’re making home, lawn, and garden products and ag carriers; it is seasonal. So they work very hard round the clock in the first quarter and have a fairly busy second quarter, but then their third quarter is often a lot slower. So this isn’t really reflective of the whole year.

Claudia Shank. Okay. But it should persist in the second quarter?

Yes. Typically, the first quarter is the strongest and the second will be weaker. And regarding profitability, we don’t really get into the profitability of just individual segments like that.

Okay, thanks. And then, the other question I had was just if you could maybe give us a little bit more color on the China orders, and have any of these orders that have been delayed been booked? And what sort of the situation is like there?

So far, the ones we have in the pipeline, we’re still waiting for financing approval. We added a small one to that waiting line, I guess. And, again, in some of those cases, we have contracts for them; we’re just waiting for them to secure financing. So we feel that, certainly, we should benefit from those orders this year. And we still expect China to have a very good year for us. But it’s so difficult to really place exactly the timing of them, because they are lumpy orders, because they’re large capital orders.

Right. And then, what’s the status of your plant that you’re building in China?

The status of that is that we now have-- we’re going to be actually on schedule, we believe, to have that plant completed in the second half of this year. So we’re going to be proceeding with construction.

Okay, thanks.

Thank you, Claudia.

Thank you. [Operator instructions] Thank you. I’m showing no further questions at this time. I would like to hand the floor back over to you for any closing remarks.

All right, thank you, Operator. I just want to-- just in our closing comment, I’d like to add that we’re off to a good start to the year with the high level of bookings and backlog we had in Q1. And this, along with projected increase in CapEx in the US and continued growth in China, should contribute to improved performance in 2005. In addition, the acquisition of Johnson creates numerous opportunities for Kadant and, most important, will allow us to generate shareholder value over the long term.

Thank you for your interest in Kadant.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.