Kadant Inc (KAI) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kadant Incorporated second quarter 2005 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to introduce Thomas O'Brien, Chief Financial Officer. Sir, the floor is yours.

Thank you. Good morning, everyone and welcome to Kadant's second quarter earnings call. With us on the call today are Bill Rainville, our Chairman and Chief Executive Officer, and Jon Painter, Executive Vice President. 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 of 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 April 2, 2005, which is on file with the SEC and is also available in the Investors section of our web site 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, as well as directly comparable GAAP measures, is contained in our second quarter earnings press release issued yesterday, which is available in the Investor's section of our web site at www.kadant.com, under the heading News Releases. Let me also remind you that in discussing our financial performance, all references are to our continuing operations and do not include the performance of our discontinued operation, the composite building products business, unless we expressly state otherwise.

And 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 will then have the Q&A session. Bill?

Thanks, Tom. Good morning, everyone. Thanks for joining us today. We had a good quarter. We met our financial targets, and we're making steady progress on a number of business objectives, positioning Kadant for growth going forward. The second quarter of financial highlights -- our revenues increased 24%, to 65.1 million. 21% of that, 11.1 million, was contributed by newly acquired Kadant Johnson, and 2% was from FX.

Our $0.22 GAAP diluted EPS for the quarter, included $0.03 of accretion from Kadant Johnson, even though it's part of the company for little more than half of the quarter. Without the results from Kadant Johnson, we still met our revenue and earnings expectations, although at the lower end of our guidance. We finished the quarter with a healthy balance sheet, just a few months after making a major acquisition, with more than 46 million in cash and 61 million in debt, resulting in net debt position of only 15 million. During Q2, we also repurchased $2.1 million of our stock.

At our annual meeting in June, I outlined six specific goals that we intend to accomplish by the end of this year. Integrate the Kadant Johnson acquisition, penetrate new markets outside the paper industry, open the stock prep production plant in China, increase after market sales, complete the Kadant Lamort restructuring, and sell the composites business. Halfway through 2005, I'm pleased to report that we are well on our way to achieving these important goals.

As you know, we completed the acquisition of the Johnson Corporation in May. Now known as Kadant Johnson, and have begun the integration process. At this point, we are focused on introducing our financial reporting systems and other business procedures, and also have our sales and marketing people working together to take advantage of synergies in the market place. Kadant Johnson greatly increases our footprint in the paper industry, both in terms of products and services, as well as geographic coverage.

We added a full range of fluid hamming technologies that enable our customers in the paper industry to improve drive performance, by lowering energy consumption. We now also have a product line that helps improve process efficiencies in industries outside of paper, such as steel, textiles, rubber, plastics and food.

In addition, our global market reach has been strengthened through Kadant Johnson, with its major operations in North and South America, Europe, and Asia. For a company our size, Kadant covers a broad range of geographic markets, with an extensive portfolio of products. This is especially important in today's global business environment, where customers want suppliers who can respond to their needs wherever their mills are located. We've demonstrated this very well in China, where we've established Kadant as a leading supplier of stock preparation systems.

Our long-term customer relationships and strong local presence there, have now been further augmented to Kadant Johnson's well-respected products and base of operations. As I've commented in the past, China is expected to add capacity at a rate of approximately 30 million tons over the next five years, to meet increased demand for all paper grades. But primarily linerboard and other packaging materials needed for shipping.

Our advanced stock preparations systems, which recover usable fiber from recyclable materials, are playing a key role in the process of major producers in China ramp up production of recycled linerboard. During the quarter, we announced an order for approximately $4 million worth of equipment from a first-time Kadant customer that is adding a new linerboard machine. After quarter end, we received stock prep orders totaling approximately 7.5 million, including the $5 million order we announced in July, for systems to process both recycled and virgin pulp.

This customer will be using our equipment for the production of coated white board, which is a high quality grade of packaging material that you see in printer with color graphics, such as computer boxes. These major contracts have been in our pipe -- pipeline awaiting financing approval from the Chinese government. Financing delays continue to make the timing of orders unpredictable. And Q2 revenues from China were significantly lower this quarter, compared with 2004.

However, we still have a number of orders in line for financing, and based on the level of order activity, we expect strong bookings from China in Q3. As we build our install base in China, we're also creating an ongoing opportunity for higher margin after market sales in that region. In North America and Europe, where we have a large existing base of installations, we continue to focus on increasing sales of after market products and services. We are developing new bolts and retrofits throughout our product lines, that allow our customers to make quality and productivity upgrades, with relatively low capital investment.

Overall, the domestic pulp paper industry is continuing to experience sluggish demands, with very little improvement in key paper and packaging grades. To compound that, the major paper producers, most of whom are our customers, continue to face rising operating costs.

As industry analysts noted after the current round of earning calls, while the cost of fiber seems to be abating, there's no relief in sight with energy or chemical costs. While this environment certainly poses its share of challenges, in general, our products enable pulp and paper producers to combat higher operating costs, by lowering energy consumption, conserving water, reducing the use of chemicals, recovering more high quality fiber from increasingly lower quality waste paper, and keeping their paper machines running 24/7.

Moving to France for a minute. As you know, our Kadant Lamort operation there had proposed a major restructuring plan to strengthen its competitive position in the European market. This business has continued to report losses, lowering our EPS by $0.05 in the second quarter. I'm pleased to report that our management team in France has completed the necessary consultations with the workers council, and is now beginning implementation of the plan.

We expect the restructuring to be substantially completed in the fourth quarter, which is when we would begin to see the benefit. This would put Kadant Lamort on track to regain profitability by the end of this year, and have a significant positive impact on our overall operating performance going forward.

I'd like to comment at this point, that although demand is continuing to be soft, we're mixed at best in North America and much -- much of Western Europe. What's really happening here is a shift in global production. Lack of growth in those markets is being offset by Asia, but most of the capacity will be added in the next decade. Let me remind you that global demand for paper and board is predicted to rise by 17% over the next five years. That's an increase of 62 million tons, for approximately two-thirds of U.S. production today. With our international recognition and growing presence in Asia, Kadant is well positioned to benefit from this global opportunity.

Shifting gears a bit. Another key item on our to do list, is the sale of composite buildings products business. And we continue to make steady progress there. We had strong interest in this business from several potential buyers, and we're very pleased with the bids we received following our auction process initiated in May. The auction has been completed and we now have a Letter of Intent from the strongest bidder, for an amount in excess of book value.

Looking ahead to Q3. We expect to incur another operating loss from Kadant Lamort, at a level similar to that in the second quarter. Factoring this in, we expect to report GAAP diluted EPS of $0.19 to $0.21, from continuing operations on revenues of 65 to 67 million. For the full year, we are nearing our EPS guidance, based on the better visibility we have at this point in the year. We expect to report GAAP diluted EPS of $0.92 to $1.00 for 2005, on revenues of 250 to 260 million. With that, I'll turn the call over to Tom for his financial report. Tom?

Thank you, Bill. I'll start with our revenues. Consolidated revenues were 65.1 million in the second quarter of 2005, 24% higher than last year, including a 21% increase from the acquisition of Kadant Johnson, and a favorable effect from foreign currency translation of 2%. The acquisition closed on May 11, 2005, and we have therefore included seven weeks of their results in our 2Q '05 consolidated financial statements.

Kadant Johnson's revenues, both of which are included in our pulp and paper-making systems segment, were 11.1 million in this seven-week period. Excluding Johnson, of which we did not give quarterly guidance, our revenues in the second quarter were 54 million, which was at the lower end of our guidance of 54 to 56 million. Let's look at the quarter's revenues in more detail, starting with our paper-making systems segment.

Revenues in the paper-making systems segment were 62.5 million, 23% higher than last year, due to the favorable effects from the acquisition of 21%, and 3% from foreign exchange. With the acquisition of Kadant Johnson, we will now report full product lines in this segment. Accessories, stock preparation, order management, and fluid handling. Fluid handling will include most of the Kadant Johnson revenues, with a small portion of the specialty castings business included in our other segment.

So, beginning with accessories, revenues in our accessories product line were 15.3 million, down 4% compared to the second quarter of 2004, including a 3% favorable impact from foreign currency. Excluding foreign exchange, revenues were down 6% and 8% in North America and Europe, respectively, mainly due to soft demand in the capital portion of this business. Our Canadian operation has been especially affected of late, as paper companies there struggle to deal with the challenges of lower newsprint demand, and a strong Canadian dollar, which impacts their exports.

In our stock prep product line, revenues were 29.2 million in the second quarter of 2005, up 9% compared to last year, including a 2% increase from foreign currency translation. Due to the relatively larger order sizes in this product line, it is not uncommon for revenues in different geographic territories to vary considerably from quarter-to-quarter, and this was certainly the case in the second quarter of '05.

In our North America based operations, stock prep revenues were exceptionally strong, up 120% over last year's second quarter, primarily due to higher revenues in our chemi-washer product line. European stock prep revenues, on the other hand, were down 14% compared to last year, including a 6% favorable effect from foreign exchange. This follows a very strong first quarter in European stock prep revenues.

And finally in this product line, stock prep revenues in China were 37% lower than last year, due to the timing of several large orders, and in particular, an unexpected delay by a customer in obtaining financing approval for a 2.7 million order, which we now expect to take as revenue in the third quarter of 2005. As we noted, after quarter end, we received approximately 7.5 million in orders from China, not including the 2.7 million I just mentioned. With several other prospective orders nearing the end of the pipeline, we expect a good bookings performance in China in the third quarter.

Revenues in our water management product line were 7 million, down 10% from last year, including a 2% favorable effect from foreign currency. Revenues in this product line were quite weak in Europe, down 26% from last year, including a 4% favorable effect from foreign exchange. Revenues here continue to suffer from sluggish capital orders. Our newest product line in this reporting segment, fluid handling, which includes most of Kadant Johnson's business, reported revenues of 10.6 million in the seven weeks since the acquisition. Over 60% of the revenues in this product line were outside the U.S., illustrating Kadant Johnson's strong international presence, especially in Europe and the Far East.

Now let's turn to the revenue performance in our other segment. Revenues here include our fiber-based granular product line, as well as the result of Kadant Johnson's specialty casting operation. Revenues in our fiber-based granular product line were 2.1 million in the second quarter of 2005, up 19% over last year's quarter. This follows a record revenue performance in the first quarter of 2005, where revenues increased 64% over the prior year.

As was the case then, most of the increase was due to sales to an existing customer, who is now using our biodeg granual -- granuals on one of its home lawn and garden products, called Preen, one of the leading granular herbicides on the market. The remaining revenues in this segment, approximately 0.5 million, were from the speciality castings business. Turning to our product gross margins, consolidated product gross margins were 38% in the second quarter of 2005, down slightly from last year's 38.7%.

In our papermaking systems segment, product gross margins were 38%, flat with last year. We had two major write-ins that affected the 2005 margin results. First, the inclusion of Kadant Johnson with its stronger product gross margins, increased the segment's margins by approximately 300 basis points, in the second quarter of '05. This increase was largely offset, however, by lower margins in our Kadant Lamort subsidiary, which reduced margins in the segment by 200 basis points.

The implementation of Kadant Lamort's restructuring plan is now underway, and we expect improved margin performance over the next several quarters. Product gross margins in our other reporting segment were down from 44.7% in the second quarter of '04, to 37.2% in the second quarter of '05, mainly due to the inclusion of Kadant Johnson's specialty casting business. Now, let's look at our SG&A expenses for a moment. SG&A expenses were 18.5 million in the second quarter of 2005, up 3.9 million from last year. This increase includes approximately 4.1 million, due to the acquisition, and another 0.4 million due to the unfavorable impact of foreign currency translation.

Excluding the amounts for Kadant Johnson and foreign currency, SG&A expenses were down 0.5 million, compared to the second quarter of 2004, largely due to 0.4 million in severance costs reported last year.

Let's turn to our operating income and EPS results. Operating income was 5.0 million in the second quarter of 2005, down slightly from last year's 5.2 million. In our papermaking systems segment, operating income was 5.9 million, compared to last year's 6.2 million.

Once again, offsetting factors affected the overall results here. Kadant Lamort had an operating loss of $1 million in second quarter of '05. This was more than offset, however, by the strong performance of Kadant Johnson, which contributed 1.5 million in operating income for the quarter. I should add that the Kadant Johnson results included approximately 260,000 in amortization of acquired intangibles, required as part of the purchased accounting for that business, as well as a provision of approximately 200,000 to write-off the manufacturing profit in Kadant Johnson's inventory at the time of acquisition, again, required by accounting standards.

Despite these P&L provisions, which of course have no impact on cash flows, the fluid handling business achieved operating income to sales of 13.8% in the first seven weeks of ownership, a very encouraging start. In our corporate and other segment, which now includes the results of the Kadant Johnson speciality castings business, plus our fiber-based granular business and our corporate expenses, we reported an operating loss of 1.0 million, slightly higher than last year. The result of the speciality castings business were immaterial this quarter.

We reported GAAP diluted earnings per share, including the discontinued operation of $0.24 cents in the second quarter of 2005, compared to $0.26 cents last year. Excluding the after tax results from the discontinued operation in both periods, and a gain of $0.03 cents in 2004, associated with a reduction in our tax reserves, adjusted diluted EPS was $0.22 cents and $0.24 cents in the second quarter of '05, and the second quarter of '04, respectively.

You can see these amounts in our reconciliation from GAAP to adjusted diluted EPS in the chart attached to the press release. The $0.02 cent reduction in adjusted diluted EPS from 2004 to 2005, consists of approximately $0.05 cents attributable to higher losses in Kadant Lamort subsidiary, offset partly by $0.03 cents of accretion from the Kadant Johnson acquisition. This accretive amount associated -- or attributable to Kadant Johnson, includes the lower interest income and higher interest expense associated with having made the acquisition.

The impacts to EPS from foreign exchange, lowered diluted shares, and a slightly lower recurring effective tax rate, were all immaterial in the second quarter of 2005. I'll conclude my remarks with a few comments on the balance sheet, and our operating cash flows. We ended the first quarter with slightly more than 46 million in cash, and 61 million in debt. Leaving us with a net debt position, after the acquisition of Johnson, of 15 million. Net debt as a percentage of our total capital is now 6.5%, which is below, that is better, than what we had expected post-acquisition.

To briefly recap the acquisition financing, on May 11, 2005, we completed the acquisition of Johnson for approximately 102 million in cash, 3 million of acquisition costs, and a 4 million Letter of Credit. The LC relates to anticipated tax benefits of Kadant Johnson, the value of which will be received by Kadant over the next several years. To fund a portion of the acquisition, we entered into a credit agreement with a group of banks led by J.P. Morgan Chase, for 85 million, consisting of a 60 million, 5-year term loan, and 25 million revolver.

The 60 million term loan consists of a 36 million portion, which through an interest rate swap, carries a fixed interest rate of 5.11%, and the remaining 24 million consists of two separate traunches, which float with LIBOR. Our weighted average annual rate for the entire term loan is 4.83%. Cash flows from operating activities of 4.4 million were up from the first quarter of 2005, as we expected, although below last year's 6.0 million. And finally, with the edition of Kadant Johnson, we expect depreciation and amortization to be approximately 7 million in 2005. And with that, I will conclude my review of the financials, and turn the conference back to the operator for our Q&A session. Operator?

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is from Claudia Shank of J.P. Morgan.

Morning.

Good morning, Claudia.

How are you? Just a couple of things. One, with regard to the composite sale, is there any color on the timing of when we might get some more detail about that?

Yes. Go ahead, Jon. Jon has been working that, so I'm going to have Jon --

These are always difficult to say how it -- how it's going to go, and negotiations and what have you. But, we signed a Letter of Intent a couple of weeks ago, and we're really -- they're just starting their detailed due diligence process. So, that's probably about as much color as we can give you. I mean, I don't have any reason to think it's going to go slower than a typical acquisition at this point, but we're pretty early in the -- in the more detail process.

Okay, but it wouldn't be unreasonable to think by sort of year end --

No, that wouldn't be unreasonable. I'd be disappointed with that if it took that long.

Okay. And then, just with regard to the French operations. Is it now just a matter of really executing the head count reductions that are left? Is that pretty much it? And then should -- I think in the past you said pretax savings of sort of 5 to 7 million, is that still the expectation here as this all goes through?

Yes, Claudia. It is. We're in the process now. It is execution now. We have -- we started the -- started the removal of personnel and that's going to take us a couple of steps and be completed in the fourth quarter. And, we still expect to get the $5 to $7 million. Still on target to do that. And the important thing is it took us so long to get to this process where we could start implementation, and I'm very pleased that it's finally -- although disappointed in timing, I'm very pleased that it's finally started.

And then I think at your annual meeting you sort of outlined some targets for the company for '06 and '07, and obviously there's been a bit of -- the French operation has been a bit slower in terms of getting back to speed, but are those still sort of out there as your targets, looking forward in terms of revenue and earnings going forward?

Yes, we are, and we expect that Lamort to be contributing to that as well, at that point. But yes, those targets are still -- still very real to us as goals.

Okay. And then just the only other question I sort of had was just obviously, in the last couple of weeks in the North American paper and porous products spector, there have been a lot of announcements about restructuring efforts, and some sort of relatively radical decisions by some of the companies in this space. How do you see that sort of playing out in terms of your products, and your role in terms of the North American industry?

Well, I think what has happened is with some of that restructuring, Claudia, it certainly has affected it on the timing of these capital orders. Which we still expect to benefit from yet this year. But, on the -- as long as the operating rates remain where they are, we expect -- we don't expect any erosion from where we are at this point. I think the changes we -- some of those changes, I think, in the long run will be good for us. But, we also -- offsetting that we see some of the big U.S. producers now looking overseas.

Yes.

And in the Asian market, for example. And we hope to participate with them in -- as they start producing in -- in other countries.

Thanks. Oh, and how's the after market facility that you're building in China? Any update on that?

For the stock prep?

Yes.

We're just in the -- in the process now of finally getting approval on -- because the zone we were in was -- was held at a delay. Not -- not -- we weren't singled out. It was the zone that was delayed. But, my understanding is now that the approval is imminent on that.

Okay. Great. Thank you.

Thank you, Claudia.

Thank you. Your next question is from Michael Hutchison of Barrington Research.

Good morning.

Good morning, Mike.

Hey, Mike.

I was wondering, you said Lamort should regain profitability by the end of the year. But, your third quarter guidance would suggest a strong rebound on the margins during the fourth quarter. Could you reconcile that for us?

Well, what we're really saying is that in the fourth quarter, we expect them to be -- be profitable. And that it's not going to make up really for the third quarter -- quarter loss. But it will be profitable in the fourth quarter. And we'll be certainly going into next year with a much sounder Lamort than we had the past.

So, you're saying that you believe that Lamort will actually start contributing a lot earlier in the quarter, just from the way the press release read, it said by the end of the year. And I just took that to mean by the end of the -- end of the fourth quarter. And you're saying it actually would be earlier?

Yes. The fourth quarter will be profitable, yes.

Okay.

And then -- and it will really be picking up steam going into next year. The good thing about Lamort issue is that's something that has been in our hands to change, rather than impacted by the market place. So, I mean, that's the positive side to the Lamort restructuring.

What kind of -- what kind of visibility do you have with China in terms of booking revenues? It sounds like it's getting a little bit better. Do you have any sort of projection you share publicly, in terms of what you think annual revenues would be from that country?

Well, in the past we've had some very good revenues, which we expect -- we expect that pace to really pick up over the next five years, especially if they go ahead with the tonnage that they intend on putting in. And we also see, like in the third quarter, we're off to a good start, for example, and we see some very strong bookings in the third quarter of this year. And we see the bookings in general to be, compared to last year, probably a little bit higher, at least at the same level.

So, is the government actually letting some of this -- the financing through now? Are you seeing an improvement at this point or --

Yes. They're letting some through, but it's difficult for us to predict the timing on when it happens, because the process is -- I really don't understand, but I guess it's rather complicated, because some projects seem to go through quicker than others. I'm not sure what hurdles that they -- they're looking at from the Chinese government point of view. And that -- and to some extent, that's somewhat frustrating, because we see them in the pipeline and in some of those case -- many of those cases, we actually get the order. We don't recognize it, we don't book it until financing is secure and then we get Letters of Credit, and so forth. But, the encouraging thing on that is that eventually they do come through.

One last question, if I could.

Sure.

How long -- how long do you expect it'll take to pay -- pay off your debt? I mean, it looks like net debt position, you're in a great place. But, if you were to pay off your debt, how long would that take? Probably not too many quarters, I would think.

Yes. In fact, it shouldn't be that long and we'll be actually net-debt free.

We have a couple of other things coming down the pipe. Obviously, we have to finance the restructuring in Lamort. That's going to take a little bit of cash. Some of the cash is overseas, like about half our cash of 46 is -- is in the U.S. We want to use some of that obviously for other things, like stock repurchases, and -- and perhaps other acquisitions down the road. So, we'll actually pay off about -- within the next 12 months, we're scheduled to pay off $9 million of that debt. But, obviously this is our 5-year term facility. We just did it. We've got a great rate there. I mentioned 4.83% is our weighted rate right now. And so, right now, I think it's -- we've done quite well by that credit -- that credit facility.

Sure.

Yes, and as Tom said, that gives us the means to still look out for strategic acquisitions.

Okay. Well, thanks a lot.

Alright. Thank you, Mike.

Thank you. Your next question is from Wayne Archambo of BlackRock.

Yes, good morning.

Good morning, Wayne.

Morning. On the composite business, you mentioned generally you sold the assets, or you've got a Letter of Intent I should say, above book value. Could you give us any more specifics on that, as to roughly what the you did -- what the proceeds were for that business?

Given that it is a competitive process, and for some reason we hit a bump in the road with this -- with this buyer, we'll be talking to the -- to the other bidders. It's probably best not to talk too much about exactly what the pricing is.

Yes. I would add that we are pleased that the offer that we have and the Letter of Intent does exceed --

Yes. We're happy with the pricing in general.

We're happy with the pricing in general, right.

And, this may have been asked earlier, but could you give us some ballpark as to when that -- would that be finalized by the end of the year, will it be finalized sometime in the third quarter?

Well, we certainly expect it to be finalized before the end of the year, but it -- it's difficult to really call.

Right. I mean -- it's a --

It's a process.

Yes. It sort of -- it depends a little bit on how quickly the buyer moves. They seem to be moving quite expeditiously. So, I think -- I would be disappointed, as I said earlier, if it took till the end of the year. I would hope we would be done sooner than that.

Do you set a deadline as to when they need to finalize their --

Yes. They have exclusivity for a certain period of time. Again, the contents of the Letter of Intent are confidential, so we're bound by that with them. But yes, as in most Letters of Intent, there is an exclusivity period that's not unlimited.

And this was a bidding process, and they were the high bidder?

Correct.

And the proceeds of that sale will do -- what will you plan to do with the proceeds?

Proceeds of that sale will come into our general corp -- we can use those proceeds under our credit facility if we so chose to do an acquisition without any other restrictions, or we could use it for, as I just mentioned, stock repurchases, or other investments in the business, pay down a debt, whatever cooperate purpose.

Yes, I'm aware of all your options. I'm just asking you what's the top priority for those proceeds?

Well, I think we've -- we don't have any target for those specific proceeds. They would fall into the categories as I mentioned, and whichever one presents the best opportunities for us is the one we pursue.

Well, that's what I'm asking you. Is it there a -- is there priority on those proceeds? You're saying there is not.

In terms of the options I just outlined, I don't think we have specific priority at the moment. No.

No. No, not at the moment. We're evaluating, yes.

We always have different options that we're looking at.

When do you think you'll have some answer for shareholders, as to what -- what the priority is for those proceeds?

Well, if it was just status quo and everything were not to change, I mean, we'd look at stock repurchases, look at paying down debt, and we may even look at some small acquisitions. It depends when -- when an acquisition opportunity may arise within the confines of doing repurchases of the stock and paying down some of the debt.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from [Brent Filey] of Rutabaga Capital.

Hi. Good morning. Question for you to follow up on Claudia's question. The IP announcement, does that actually impact your sort of backlog in any way? In other words, I guess more specifically, with some of the announcements of the closures and changes and so forth, does that look like that's going to impact any actual orders for you in the near term?

In the near term, frankly, Brent, the assets that are going to be sold would be put in -- would be sold to other paper producers. In a large part of every structure impacted timber as well as a number of corrugated plants, and others which we really don't do any business with. So, we don't see any major impact. Although I will say that the IP is a good customer of ours, and certainly our revenues coming from IP and issues like doctor blades and so forth, would be impacted. But, hopefully that would be transferred over to the new owners of the mills.

No, I understand. I just wanted to see if there was some of the closures and so forth. It doesn't sound like you've got a lot of exposure there.

No.

Okay. The other question -- you guys mentioned you -- obviously, you don't want to talk about specific price on the composites. I think you've -- have you disclosed book value in the past? If you have, can you just tell me what that is? I know that you were talking about in excess of. Can you give me book?

We -- Brent, we've disclosed the range in the past. Obviously it changes from period to period.

Sure.

But, 10 to 12 million. Now, you also have to recognize that -- you have to know exactly the details of the deal. What assets we're actually selling, what liabilities we're retaining.

Okay.

But, in general the book value of that business is between $10 and $12 million.

Fair enough. Have you guys also -- would it be fair to say that when you did the auction process, that there were both financial and strategic buyers? I don't know whether you would like to characterize the leading contender at this point, as one or the other?

It's yes and no, I guess. We're both and we probably shouldn't --

Okay. Fair enough.

Only because we haven't asked them what we could say about them. I'd rather say nothing.

Okay. Very good. And then, one other question, if I could. On the Lamort swing kind of year looking at into next year and into the fourth quarter, it sounds like you guys have talked about $5 to $7 million in pre-tax savings. Which -- Does that actually get Lamort -- if I use that type of number say for next year -- does that actually take Lamort back to prior margin levels, or is that simply the swing you guys expect from the cost savings, and there could be a little more juice there as things go back to more historic level. I'm trying to figure out whether that incorporates the entire recovery or not.

That's really the cost savings that we're looking at, and the entire recovery, we're going to start getting it on track certainly next year to get it back into --

So, that --

Traditional performance. But, certainly that's going to be a big Delta for us in comparison in 2006 to 2005, taking it from a loss and getting it well on track and to -- because -- into former levels of profitability.

Yes, I know. Absolutely. But that doesn't actually get you all the way back. There's still -- there's still more room there to --

There's still more to be had. Right, there's still more to be had.

Okay. No, great. That's helpful. And then, I guess other than that, you mentioned some of the -- Tom, you had gone over some of the quarterly flows and how they were varying by -- obviously by geography and so forth. Was there any particular area that was kind of disappointing, or where things got pushed out, or were those kind of just normal flows as you talked about, kind of -- you had some up -- up 120s, some down 30s, ex currency, that kind of thing. Is that just normal quarterly? Was there anything in that mix that was sort of either disappointing or encouraging, one way or the other, or is that kind of normal business flows?

Well, it always -- as I said, in the stock prep especially, we have -- we have swings geographically because of the size of the business. But, I'd say the one major positive in there was the North American based stock prep business was up 120%.

Yes.

Due partly to the -- the chemi-washer orders that we took in the first quarter. So, We were very pleased with that. And I would also say in China, we -- as Bill mentioned, we should have a better second half in China on revenues, as we start to take many of these orders that we've just announced on percent complete. Some of them will even ship in the -- in 2005. So, the second half should be stronger for revenues in China than the first half as well.

How about the chemi-washer business overall? I know that those orders are pretty lumpy. Is that something where you're still optimistic for the future, or is that sort of where we've had a real good run and maybe that'll bounce around a bit?

Well, we -- we had a good run here, and I expect that will bounce around a bit. But -- and it's hard to call when we do get these orders. But, it 'll certainly contribute in the future, but I would say that we were very fortunate to get the orders that we did so quickly in the year.

Okay. Great. Thanks a lot.

Thank you, Brent.

There are no further questions. I would like to turn the floor back over to management for closing comments.

Alright. Thank you, Jackie. Just a couple comments. I have to say that we're very pleased to have closed the Kadant Johnson acquisition. And more so very pleased with their performance in the short time that they've been part of the company. We're excited about the new opportunities this acquisition brings in the paper industry, as well as other process industries. We're also moving ahead on a number of initiatives that will position Kadant for future growth, and look forward to giving you an update next quarter. Thanks for joining us today.

Thank you. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.