Kadant Inc (KAI) 2005 Q4 法說會逐字稿

Good morning ladies and gentleman. My name is Stacy, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Kadant Incorporated Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Thomas O'Brien, CFO. Sir you may begin your conference.

Thank you operator. Good morning everyone, and welcome to Kadant's Fourth Quarter and Full Year 2005 Earnings Call. With me on the call today is Bill Rainville, our Chairman and Chief Executive Officer. 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 October 1, 2005, 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 principals. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth 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."

With that I will turn the call over to Bill Rainville, who will give an update on Kadant's business and future prospects. Following Bill's remarks, I will give an overview of our financial results for the quarter and we'll then have a Q&A session. Bill?

Thanks Tom. Good morning, everyone. Thank you for joining us today for a review of our 2005 fourth quarter results, some overall comments on the year and our prospects for 2006. First, the quarter. As you can see in the press release our quarterly results came in generally as expected after several factors affected our performance. Mainly, the timing of some large orders, which we discussed in our Q3 earnings call. Our revenues increased by 17.2 million to 63.1 million, approximately 19 million of that was contributed by Kadant Johnson.

Our diluted EPS from continuing operations were $0.07 for the quarter, after several non-recurring items lowered our earnings by $0.06. Our bookings of 76 million in the quarter, were an all-time high, rising 60% over last year's fourth quarter. Even without Kadant Johnson, bookings were up 19%. I will talk more about this encouraging order activity in a minute. We also generated nearly 8 million in cash flow from operations in the fourth quarter, up 19% compared with the same period last year.

Looking at the full year in 2005, our revenues rose by 48.7 million to 243.7 million. Although all of that increase was due to Kadant Johnson. We reported $0.70 for diluted EPS from continuing operations, which reflects the impact of our weak Q4 results and our stronger performance in the first three quarters of the year. We generated 23 million of EBITDA for the year, including 7.2 million from Kadant Johnson. Our strong cash generation in the second half of the year led to 19 million in cash flow from operations in 2005, or 47% increase over the previous year.

And finally, our record bookings performance in the fourth quarter contributed to a 31% increase in annual bookings over 2004. Bookings were up 7% excluding Kadant Johnson. We are very pleased with our record bookings performance, which came primarily from orders from stock preparation systems supplied by North American and European operations. Also included was a $4 million order for a North American mill and a $6 million order from a Middle Eastern customer, as we mentioned in our Q3 earnings call, along with the $3 million order from China that we announced in early January.

In addition, we have strong bookings for Kadant Johnson's fluid handling products in North America. As a result of our booking strength, we ended the year with a backlog of 54 million, 57% higher than 2004 and a 29% increase over the third quarter of 2005. I'm happy to report that yesterday our Kadant AES subsidiary received a $3.8 million order from a North American mill for equipment used in the forming section of a paper machine. This is the largest order ever recorded in history of AES. This morning we were notified of an order for $780,000 worth of doctoring equipment that will be installed on ten new Tissue Machines in Indonesia and China. Our strong bookings will benefit us this year along with the number of objectives achieved in 2005 that we expect will drive earnings growth in 2006 and beyond.

First, and perhaps most significant was our acquisition of Kadant Johnson last May. Since then we have seen the benefits that came on a number of fronts. These fluid handling products, and Dryer Management Systems, are in demand in the US as producers focus on reducing their operating costs, especially energy. These products are designed to provide more consistent drying, leading to lower energy consumption and a better quality end product for the mill. This strong global presence has extended our geographic reach, strengthened the Kadant brand and given us additional opportunities for low-cost manufacturing.

In addition, approximately 35% of Kadant Johnson's revenues are from industries outside of paper, including steel, plastics, textiles, and food and beverage. This gives us new avenues for growth. Also, very important was the restructuring undertaken in France and later in the year at some of our North American operations in response to weak market conditions. With the structure more suited to meeting the needs of those markets, we expect these businesses to regain strength in 2006 and increasingly contribute to our profitability.

Our Kadant Lamort operation in France, which underwent the most significant restructuring, is on track to be breakeven in Q1, and we expect its results to improve as the year progresses. If you recall part of our restructuring in North America involved combining the sales forces of our water management accessories product lines. Our marketing efforts are now more targeted, and each Sales Engineer offers a broader line of Kadant products. I am pleased with the way this team is working with Kadant Johnson as well as stock-prep to develop more complete solutions that meet the challenges, mills face today.

Of course, China is a region to which we've devoted a lot of our attention. We've begun making investments to build our presence in China several years ago, to tap what we believe was a major growth opportunity. Today, Kadant is a leading supplier in China as advanced stock preparation technologies required by major producers of recycled packaging material. That position would be significantly enhanced with our pending acquisition of Huayi.

As we announced in late January, we signed an agreement to acquire this Chinese manufacturer of stock-preparation systems. Huayi is a well respected supplier that serves the large number of local independent mills in China, which should complement our customer base and significantly broaden our addressed market. Huayi also gives us low cost manufacturing base in Asia for stock-prep worldwide and help us to increase sales of aftermarket products to support our growing number of installations there.

In the future this facility could also support production of our accessories and water management products. I am really excited about the new opportunities that we believe Huayi will offer us as we continue to expand Kadant's presence in growing Asian markets. Lastly, but equally important, we continue to develop new technologies that help mills lower their operating costs and improve the quality of their products. The R&D center at Kadant's Johnson, Three Rivers facility is humming with activity. We're constantly testing new designs for rotary joints and siphons and conducting customer trials that replicate drying conditions of specific mill applications.

Drying is the most energy intent stage of papermaking. And we are focused on offering technologies that increase efficiency to reduce energy use. One of the research pilot dryers at Three Rivers, now features our latest doctor blade from Kadant Web Systems, which was engineered for energy efficiency during drying. That so far, have demonstrated that these new low energy blades, require three times less power than conventional fiberglass, reinforced doctor blades, creating significant cost savings for typical paper machines, with 60 or so dryers.

This is also an example of the type of cross-selling opportunities we have as customers are running trials to gauge the energy efficiency of our fluid handling systems can see the impact of our doctor blades and dryer applications as well. It's evident that we've continued to reinvest in the company, and we believe the actions we've taken in 2005 will benefit Kadant for years to come.

A note on our balance sheet, we ended 2005 with 40.8 million cash, and 55.5 million in debt, leaving us with net debt of 14.7 million. During the year, we spent a little more than 9 million on stock repurchases. In fact, we used more than 19 million in cash to buyback our stock since May 2004.

Looking ahead, we believe Kadant is in good position to capitalize on global opportunities in large measure because of the actions we took in 2005. In North America we are poised to benefit from pent-up demand following years of restructuring in the industry. Many of our products are designed to lower energy use, offering a compelling payback for mills that are trying to reduce operating costs.

In Asia's growth markets, we continue to expand our presence, strengthening our leadership there and adding low cost manufacturing that increases our ability to serve local markets and supply equipment and components to North America and Europe. With these advantages and our strong bookings, we expect to report significant improvement in 2006. We expect to achieve GAAP diluted EPS of $1.15, $1.25 from continuing operations for the year on revenues of 290 million to 300 million. For the first quarter, we expect to report $0.17 to $0.19 per share on revenues of 70 million to 72 million.

With that, I'll turn the call over to Tom, to give you more detail on the fourth quarter. Tom?

Thank you, Bill. I'll start with our revenues. Consolidated revenues in the fourth quarter of 2005 were 63.1 million, 37% higher than last year, including a 41% increase from Kadant Johnson and a 1% unfavorable effect from foreign exchange. Kadant Johnson, which we acquired in May 2005, added 19.1 million to revenues in the quarter. The consolidated revenue results slightly exceeded our quarterly guidance. It was 60 to 62 million.

Let's turn to the fourth quarter revenue performance in more detail, starting with our papermaking systems segment. Revenues in the papermaking systems segment were 59.6 million, 35% higher than last year's 44.2 million. The increase includes a 41% favorable affect from the inclusion of Kadant Johnson's revenues and a 1% unfavorable effect from foreign currency translation.

We now report four product lines in this segment; accessories, stock preparation, water management, and fluid handling. The Fluid handling product line includes most of the revenues from Kadant Johnson. Let's take a look at revenues in each of these product lines beginning with accessories. Accessories revenues were 13.8 million, down 12% from last year's fourth quarter including a 2% unfavorable impact from foreign exchange. Revenues were down 10% and 15% in North America and Europe respectively, including a 6% unfavorable foreign currency effect in Europe.

With the extension of our operation in Mexico, our accessories businesses worldwide have remained soft throughout the year in both the consumable and the capital portions of this product line. Our US business was especially affected by a significant amount of unscheduled down time by one of our largest customers during the fourth quarter.

Turning to our stock print product line, revenues here were 20.2 million in the fourth quarter of 2005, down 2% compared to last year, including a 1% unfavorable effect from foreign exchange. Revenues in China and in Europe were each down 13% from last year, including a 4% unfavorable impact from foreign exchange in Europe. These decreases are almost entirely offset by stronger revenues in North America, which were up 14% to 4Q '04, due to higher revenues of capital products both in stand-alone and system applications.

Revenues in our water management product line were 6.9 million, down 7% from last year, with an immaterial affect from foreign currency. Decline here was due to weak performance in our European operations, which saw a decline of 45% from last year, including a 3% unfavorable impact from foreign exchange. This decline resulted from a lack of larger capital orders and low levels of direct mill spending. On a more encouraging note, we are seeing stronger bookings so far in the first quarter of 2006 in Europe, especially in capital products.

Our newest product line in this reporting segment, fluid handling, reported revenues of 18.2 million in the fourth quarter of '05. Encouragingly, revenues were quite strong in the US, reflecting our customers increasing focus on reducing energy consumption in their manufacturing operations as Bill noted earlier.

Now let's leave the papermaking systems segment for a moment, and turn to the revenue performance in our other categories. Revenues here include are fiber-based products business, which consisted of our GranTek subsidiary as well as the results of Kadant Johnson's casting products operation. GranTek's revenues were 2.5 million in the fourth quarter of '05, up 39% from last year's quarter, mainly due to higher sales of our Biodac granular products, which have seen strong demand all year. Remaining revenues in this category, approximately $1 million were from casting products.

Turning to our product gross margins, consolidated product gross margins were 38.5% in the fourth quarter of 2005, up 210 basis points from last year's 36.4%. In our papermaking systems segment, product gross margins were 39.5%, up 290 basis points from last year due entirely to Kadant Johnson, which increased margins in this segment by approximately 370 basis points. Probably offsetting this were smaller unfavorable impacts from product mix and lower margins on [stairs], consumables and capital products.

Product gross margins in the other category were down from 32.9% in 4Q '04 to 20.1% in 4Q '05, mainly due to the inclusion of the casting products operation, which is a low gross margin business. And to lower gross margins in GranTek, which continued to be negatively affected by higher cost of natural gas used in the manufacturing process. We expect GranTek's margins will continue to be adversely affected by higher energy costs in 2006.

Now, let's look at the SG&A expenses for a moment. SG&A expenses were 21 million in the fourth quarter of 2005, up 7.1 million from last year. This increase includes 7.8 million of SG&A from Kadant Johnson. Excluding this, as well as a small favorable impact from foreign exchange, SG&A expenses were down 0.5 million in fourth quarter '05, compared to the fourth quarter of 2004.

Now our EBITDA results. As I noted last quarter, with the acquisition of Kadant Johnson earlier this year, we are incurring several significant non-cash charges in our consolidated P&L as required by US GAAP purchase accounting rules. Since these charges and the resulting reduction in operating income are in the aggregate material to our results, we believe that reporting our EBITDA performance leads to a better understanding of our operating results. And you'll see the EBITDA numbers and the reconciliation to the most comparable GAAP measure, which is operating income and the table included in our press release.

Consolidated EBITDA was 4.6 million in the fourth quarter of '05, an increase of 1.7 million from last year. Of this increase, 2.2 million was due to Kadant Johnson. Kadant Johnson's quarterly EBITDA excludes 0.6 million of fixed asset depreciation, resulting partly from a revaluation of the assets upon acquisition, 0.5 million of intangible amortization and a non-cash charge of 0.5 million, which represents the write-off of the acquired profit in inventory. This last item is now fully amortized and will not affect our results in 2006. The total of these non-cash charges, which reduced operating income but are added back into the EBITDA results, was approximately 1.6 million in the fourth quarter of 2005.

Our papermaking systems segment had EBITDA of 5.5 million in the fourth quarter of '05, up 39% or 1.5 million from last year. Again, this increase was entirely due to the inclusion of Kadant Johnson's EBITDA of 2.2 million. In our corporate and other category, which includes the results of the casting products business, GRANTEK, and our corporate expenses, we reported an EBITDA loss of 0.9 million, slightly less than last year's loss of 1.1 million.

Our EPS results. We reported GAAP diluted earnings per share including the discontinued operation of $0.03 in the fourth quarter 2005, compared to a loss of $0.38 last year. The discontinued operation incurred losses of $0.04 in both fourth quarter '05 and fourth quarter '04, largely due to R&D provisions in both periods. Excluding the results from the discontinued operations in both periods and a the restructuring cost of $0.44 in the fourth quarter of 2004, both of which were in our Kadant Lamort operation, gives us adjusted diluted EPS of $0.07 in fourth quarter '05 compared to $0.10 last year. You can see these amounts in our reconciliation from GAAP to adjusted diluted EPS in the chart attached to the press release.

The $0.03 reduction in adjusted diluted EPS in 2005 compared to last year, includes approximately $0.02 of dilution of Kadant Johnson due to weak performances in some of the international operations. We are still targeting accretion of approximately $0.25 in 2006 from Kadant Johnson due to operating improvements underway as well as the benefit of having fully amortized the acquired inventory profits I spoke about earlier.

Now, let me add that the fourth quarter '05 adjusted diluted EPS of $0.07 was reduced by approximately $0.05 of non-recurring items, which I mentioned in our November 2005 earnings call. Also, we incurred only $0.01 of the additional $0.05 of restructuring-related costs, which we had estimated at that time, and this was included in our SG&A on the P&L. Importantly, we did take the restructuring actions we had planned for in the fourth quarter of '05, but the cost of those actions were offset by lower restructuring charges and the changes in our estimates of early restructuring costs in Kadant Lamort.

Now, let me spend a few moments on the balance sheet and our cash flows. We ended the fourth quarter with 40.8 million in cash and 55.5 million in debt, leaving us with a net debt position of 14.7 million. Net debt, that is debt less cash, as a percentage of our total capital, is 6.6%, virtually the same as last quarter. During the quarter, we paid off 2.2 million of our debt. We spent 3.7 million to buy our common stock, and we purchased 1.3 million of property plants and equipment. Regarding the share repurchase program, we bought 204,000 shares at an average purchase price per share of 18.04 during the fourth quarter of 2005.

Looking at the sources of cash for a moment, we had strong cash flow from operating activities in the fourth quarter. Operating cash flow was 7.9 million compared to 6.6 million last year and represents the highest quarterly performance since third quarter '03 when we recorded the highest quarterly performance in the history of the Company. For the full year 2005, cash flow from operating activities was 19.1 million, up 47% from 2004.

Before concluding my remarks, I'd like to give you some additional details on the guidance for 2006, which Bill gave earlier. First, although our effective tax rate in 2005 was 28%, this rate includes a tax refund of approximately 0.9 million, which we received from our former parent company under a tax agreement. Excluding this amount as well as several smaller adjustments to our tax expense during 2005, our recurring effective tax rate in 2005 was approximately 35%. And we expect the same rate for 2006, although the rate may vary somewhat from quarter-to-quarter.

Next, in late January 2006, we announced we have signed a definitive agreement to acquire substantially all the assets of the Company in China called Huayi, which produced the stock prep equipment and systems for customers in the Far East. Since we have not yet closed on this transaction, we have not included Huayi's projected revenues or earnings in our 2006 guidance. That said, we do not expect any material accretion or dilution from this acquisition in 2006, although there may be a small dilutive effect in the first few quarters following the closing.

With respect to our quarterly EPS performance in 2006, although it's difficult to be precise here due to the unpredictability of large stock prep orders, particularly from China, which can also entail financing delays, we expect sequential improvement in each of the quarters throughout 2006. CapEx spending was 3.2 million in 2005 or 1.3% of revenues, and we expect approximately the same percentage in 2006 or about 4 million in CapEx.

In our corporate and other category of operating income, which consist primarily of our corporate expenses, but also includes the operating results of GranTek, as well as the casting products operation, we expect operating losses of approximately 1.8 million to 2 million for each quarter in 2006. Next, the Financial Accounting Standard Board has issued a statement, which will require companies to expense the fair value of employee's stock options in 2006 beginning in the first quarter.

This applies only to unvested stock options outstanding at the beginning of the year and of course, to any options granted after that date. Based on the unvested options outstanding at the end of 2005, we expect the impact on diluted EPS in 2006 will be approximately $0.02 that's for the full year and this amount is included in our 2006 guidance. Finally, we expect depreciation and amortization to be slightly over $2 million in each of the quarters of 2006.

With that, I will conclude my review of the financials and turn the conference back to the operator for our Q&A session. Operator?

[OPERATOR INSTRUCTIONS]

Thank you. Our first question is coming from Brent Miley from Rutabaga Capital.

Hi, good morning. I had a couple of questions for you, if I could? One, on Lamort, where are you guys in terms of generally your plan, I think you wanted to breakeven in the first quarter. I think that's on plan, would you just review that with me. And have you guys talked at all about where you think that division might get over time in terms of getting back to sort of, I think, its historic margins were pretty good, any targets kind of longer term on Lamort?.

Sure. Good morning, Brent. Lamort is well on target to be certainly in the breakeven this first quarter and we expect it every quarter this year to gain profitability. Just about all -- the entire part of the restructuring is over with it at this point, we got a few trailing people that are going leaving throughout this quarter, but we see the light at the end of the tunnel. And I think that this is over.

So it's going to be a much leaner operation, and at the same time, we see it getting back to its historical performance. At one time, it was approaching like 12% income of sales. And we think that we certainly have the ability to do that especially, as we're able to even outsource some of the components from China to ensure that.

Okay, great. And with regards to Huayi, can you talk a little bit about the timing of that, and sort of a little bit about the rationale of the seller? Forgive me, if that's redundant and if other folks have already covered that, but if you could just talk a little bit about that acquisition, why they sold and kind of when you expect that might close?

Sure. The first off, why they are selling, basically the Chairman of the Company, which is the major shareholder, is looking forward to retirement. This is -- had been a state owned company, which had been acquired. And when you look at and basically, what he was looking for is liquidity. And I must say that they got -- just kind of add to it, it's a brand-new facility. It's about three years old, the manufacturing facility. So its state of the art, it's ideal for us.

And also they felt that they -- they'd like to expand out geographically into Europe and North America. They sell a fair amount of machinery outside of China as well, primarily in other parts of Asia. We expect that to close sometime early in the second quarter of this year.

And forgive me, what is -- is the seller -- you were saying it was a state owned company and it got privatized? Is this a Chinese owner, is it a foreign owner, who owns it now?

It was originally a state owned company, but it was bought out by the Chairman turned it private back probably, about five, six years ago and a number of the employees in management had stock in it at that time.

Okay. And the biggest opportunity there -- you mentioned that they target, it sounds like they have a better local business with some of the independent mills, you guys have always obviously followed some of the larger customers who have expanded there -- sort of the US, the Europeans. Is the opportunity to sort of sell in to their customer base? Or is it really a manufacturing opportunity or --?

I'll tell you that's good -- it's actually both, because their technology really is suited for what I would call the smaller, slower mills of which there's a number of them that exist throughout Asia. And where in the past, perhaps they could not afford Kadant Technology, that's really well suited for a larger, faster, modern operating ridge.

So I think that it expands our addressed market because as they sell equipment into the other tier mills, there is also an aftermarket stream, which can come from that as well. And so we see that as a benefit and also their penetration in other parts of Asia that we have not yet penetrated. That gives us access in not only into the China, but other Asian markets.

The other real big advantage that we're going to receive from them is low-cost manufacturing, because we have been shipping from the US, from a high-cost area into a low-cost area into China. And even doing that this is concerning our stock prep operation -- even doing that we've been enjoying the same margins as we do anywhere else in the world. This provides us with a real margin opportunity.

As well as we traditionally, have outsourced a fair amount components out of Europe and out of North America, and now we will be able to outsource those components out of our own facility within China itself. So that should also give us some real margin opportunity throughout the entire organization. And as a model, we -- Johnson has been doing this very successfully, out of their operation near Shanghai, where they are even supplying components into North American and Europe.

Okay, great. And Tom, one question for you. How is the systems integration going with Johnson, in terms of getting all the appropriate accounting and operating systems into the acquired company?

It's going much better Brent. They are actually using -- I think I might have mentioned this last time, but they're using the same consolidation software in -- at their headquarters in Three Rivers that we are using here. For the -- for our corporate consolidation they also are using that software as well in Europe, where they do kind of a sub-consolidation of the European subsidiaries as well. So I think with a lot of hard work from the people out in Johnson, and also a lot of support with the folks back here at corporate, we've made significant progress there on the financial system side.

Great. Okay. So that is Asia. When will that be all wrapped up or is that pretty well done at this point?

Well, I think every quarter it will get better and better, but I think it's -- most of it is behind us.

Okay, great. Appreciate it. All right. Thanks very much.

Thank you, Brent.

Thank you. Our next question is coming from [Tyler Oal] from JP Morgan.

Good morning.

Good morning, Tyler.

I just had a couple of quick questions. First, it looks like North America was particularly, strong in the fourth quarter. And I was wondering and to what degree is that reflecting stepped up spending on energy efficiency projects or are we actually beginning to see more of a border based pick-up in CapEx?

The majority of that is coming from energy related projects. Where they are trying to reduce energy but on the other hand, we've also starting to see it pick-up in other areas just as represented by this order we got from AES yesterday, that they are starting to release some CapEx and beyond energy as well. But the focus I will think -- I think is going to continue on energy at this point.

Okay. And then sort of looking at Canada specifically, could you comment a bit on what you're seeing in terms of CapEx trends there, particularly given I guess the capacity closures?

Yes, Canada is a different story. Canada -- our expectations are that it's going to remain depressed as it has been for the last couple of years. We don't see any real signs of life on CapEx in Canada. And so -- although from time to time, we get some but it's not going to be a big capital equipment market for us. On the other hand, certainly our consumables and aftermarket -- our parts market has continued to do okay up there.

Okay, great.

Canada is becoming less of a factor for Kadant.

What percent of revenues, again, do you get from Canada?

It's about 6 -- 5% or 6%.

Okay. And then just if you could elaborate a bit more on the restructuring, and I guess you've guided to about $0.05 hit from restructuring turns out it is only one. Could you just reconcile that, what didn't get spent and why?

Okay. I think it was really an over. I think at the end of the day, we arrived where we wanted to arrive, and taking the number of people out and restructuring the business, I think what -- our French operation overestimated the cost because it is very difficult to try to finalize what the actual cost would be because some of that was dictated by governments and negotiations with the unions. But I think they did a good job in holding back the cost.

Okay. And then in North America, is that restructuring complete?

Yes, the restructuring in North America is complete at this point. One thing I would add is that we're always looking at operations, because as you could see, we are shifting more and more attention into growth markets. That's one of the advantages that Kadant has. We are a global company. So we -- our additions have really gone on in Asia at this point, but we continue to look at operations from time to time. But we don't see any major restructuring at this point.

Okay. So you are still on target for that 2.4 million in cost savings in North America?

Absolutely. Yes, sir.

Okay. That's a run rate by the end of '06?

No, we should start benefiting from that the first of the years.

Okay. And then just one more quick question. How much do you have available under your credit agreement for potential share repurchase?

I'm going to let Tom address that Tyler.

I think we have about 7 million left. But I should also add that under that credit facility, which is a five-year facility, we can add to that and what we can add is 50% of our net income over that period of time. So say for example, taking, say, the midpoint of our guidance and just working back, say, from the midpoint of that guidance, it would suggest the we would have another 8 million that we could add to that during 2006 if we were to attain that.

Okay, great.

So we have 7 million left under the facility itself, and then we will be able to add to that 50% of our net income as we go forward, and taking 2006 our guidance that would suggest that we could add another 8 million to that 7 over the course of the year.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

Sir, there appears to be no further questions.

Okay. At that point, operator, I just have a few closing remarks. Certainly, I think we are off to a very good year in 2006. We have a number of positive trends going for us. For example, our bookings are at a much higher level going into 2006 than we've seen in prior years. The integration of Kadant Johnson is well underway and will be a significant contributor to growth. And our profitability should improve as restructuring efforts in France and North America take effect.

Also our presence in China continues to grow and would be further strengthened with the acquisition of Huayi. And we also continue to develop technologies that help our customers improve their operations, as demonstrated by the products that we have, which will help them reduce their energy costs. I look forward to reporting on our progress as the year unfolds. I'd like to thank you for joining us today and supporting Kadant.

This concludes today's Kadant Incorporated conference call. You may now disconnect your line at this time. And have a wonderful day.