Kadant Inc (KAI) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Janelle and I will be your conference facilitator today. At this time I would like to welcome everyone to the Kadant earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Thomas O'Brien, CFO. Sir, you may begin.

Thank you, operator. Good morning everyone and welcome to Kadant's first-quarter 2006 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 annual report on Form 10-K for fiscal year ended December 31st, 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 will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first-quarter earnings press release issued yesterday which is available in the investor section of our website at www.kadent.com under the heading news releases.

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 for the quarter and we will then have a Q&A session. Bill?

Thanks, Tom. Good morning everyone and thank you for joining us for a recap of our first quarter. As you saw in our press release we're off to a strong start this year, even a little better than we anticipated at the time of our last earnings call. Let me get right to the financial highlights for our continuing operations.

Our revenues grew 49% in Q1, to a record $75.6 million. Our operating income rose 71% to $4.8 million. Diluted EPS was $0.20 versus $0.22 last year. Results in 2005 include a $0.06 gain due to a tax refund from our former parent company. We're quite pleased with those results but especially encouraged by the record-breaking order activity we had in the quarter. Our total bookings increased 73% over Q1 last year to $104 million, our highest quarterly level ever. Bookings rose 33% not including Kadant Johnson.

In China alone, we booked $29 million in orders which is more than our total annual bookings there in each of the last two years. This exceptional bookings performance brought our backlog at the end of the quarter to $83 million, also a record and nearly double our backlog compared with Q1 a year ago. All in all an excellent start for us that will contribute to our growth for the year.

Let me spend a few minutes explaining where the growth is coming from and how we're positioning Kadant to benefit from opportunities in some of our key geographic markets. Of course the big news this quarter came from China where sales of our stock prep systems increased 59% over last year. It's clear that demand for paper in China especially packaging materials, continues to be robust. Consumption still far exceeds production capacity. Since China has relatively limited supply of virgin fiber, there is a tremendous market opportunity in recycled paper for both white and brown grades. Our advance stock prep systems are critical to converting waste paper into reusable fiber for paper production.

China's leading paper producers are initiating significant capacity expansion projects to meet growing demand and they are relying and Kadant for innovative fiber processing technologies. In March we received the largest single order Kadant has ever taken for approximately $16 million in stock prep systems from a major linerboard producer. This combined with several other orders including one for more than $7 million that we announced in January and another for over $3 million that we received just before quarter end lead to our strongest bookings quarter ever in Q1.

Important to note, that even with all this activity we still have major orders in the pipeline from that region although we don't expect bookings to continue at this pace. We also booked a number of these orders during the course of the year but timing continues to be difficult to predict. No question we are building an extensive base of installations in China and that gives us several advantages going forward.

The Kadant name continues to gain recognition as we have become the key supplier of stock preparation systems to major producers in China. This will help us to penetrate other Asian markets. Our large install base creates a terrific opportunity for sales of higher margin aftermarket products and services.

We also plan to leverage our installed base by introducing our paper machine accessories and water management products in Asian markets. We have additional opportunities to strengthen Kadant's presence in China which will give us a foundation for increasing our marketshare throughout Asia in all our product lines. First, our Kadant Johnson facility near Shanghai which produces fluid-handling products can eventually serve as a base for our water management equipment and paper machine accessories as well. Also if we complete the proposed acquisition in Huayi we would add a significant manufacturing base in China for stock prep. As you may recall Huayi is a Chinese supplier of stock prep systems for smaller independent mills. Through its facility in Jining we would gain the ability to manufacture and deliver stock prep systems to our local customers more cost effectively; the ability to supply equipment and components produced in China to North America and Europe, again a margin opportunity.

The other major contributor to our success this quarter was the solid performance of Kadant Johnson which we acquired nearly a year ago. Total Kadant Johnson sales were $20 million of our total revenues in the quarter. They also generated 24 million in quarterly bookings with strong sales in Europe and notably North America. Demand for Kadant Johnson fluid-handling products is being driven by the North American paper industry's focus on increasing production efficiency to combat high-energy costs. If you remember, Kadant Johnson's products are used primarily in the dryer section which is the most energy intensive stage of paper production. Of course the need to lower energy consumption is not limited to North America as evidenced by an order we received in the first quarter from a Brazilian mill for a dryer rebuild worth nearly $2 million.

Back to North America and Europe. We are seeing some signs of improvement in those markets in certain paper grades. For example demand for packaging materials such as linerboard has increased slightly while newsprint remains weak leading to ongoing machine shutdowns. This continues to hurt sales of our paper machine accessories and water management products. Despite this ongoing challenge we do have opportunities to increase our marketshare in both of these product lines in other regions. As I mentioned earlier, we plan to leverage our installed base in China in stock prep and fluid-handling to introduce our accessories in water management systems in that market. We also have the potential to build marketshares in parts of Europe including Eastern Europe where we currently have less presence and in our traditional markets in Western Europe and North America.

We're very pleased with our results this quarter and with the tremendous bookings performance we had are looking to a strong second quarter as well. I want to acknowledge that some of the orders we recently secured have a much greater impact on revenues than income as they are primarily for large stock prep systems that typically have lower margins. However, in the long run we will also benefit from sales of higher margin aftermarket products and services necessary to maintain and upgrade this equipment over time.

In addition, I went to mentioned that Kadant Lamort in France which underwent extensive restructuring last year achieved a slight profit in Q1 as we expected. We hope to build on this progress as the year unfolds.

With that, our expectation for Q2 is to report GAAP diluted EPS of $0.34 to $0.36 for continuing operations on revenues of 85 to $ 87 million. Given the continued weakness we are seeing in some product lines in North America and Europe we're looking at the second half with cautious optimism. We are raising the low end of our estimated range for the full year by $0.03 to $1.18 of GAAP diluted EPS for continuing operations and confirming the high end of $1.25. We also now expect to generate slightly higher revenues of 300 to $310 million in 2006.

Now I'll turn the call over to Tom O'Brien for his financial review. Tom?

Thank you, Bill. I'll start with our revenues. Consolidated revenues were $75.6 million in the first quarter of 2006, up 49% over last year. Excluding the 40% increase from Kadant Johnson as well as a 3% unfavorable effect from foreign exchange, revenues increased 12% compared to the first quarter of 2005. Kadant Johnson, which we acquired in May 2005, added $20 million to revenues in the quarter. Our guidance was 70 to $72 million for the quarter and we exceeded this largely due to record quarterly revenues in our stock prep product line.

Now let's look at the revenue performance in our other product lines starting with stock prep. Revenues in our stock prep product line were $30.9 million, up 26% over last year including the 4% unfavorable effect from foreign exchange. Stock prep revenues in both China and North America were up substantially over the prior year, 59% and 43% respectively. As evidenced by the $29 million in bookings in the first quarter we continue to see very strong demand for our recycling systems in China difficult as they may be to forecast. Revenues in Europe were down 9% from the first quarter of '05 including a 10% reduction due to currency translation.

The outstanding performance in our stock prep product line was somewhat offset by continued weakness in our accessories and water management product lines which were down 8% and 12% respectively from the first quarter of '05. As we've noted in other earnings calls, these product lines are being affected by permanent and temporary reductions in papermaking capacity especially in North America.

Our fluid-handling business of Kadant Johnson reported revenues of $19 million in the first quarter of '06. Revenues here have increased sequentially in each of the last three full quarters since the acquisition. Much of the Kadant Johnson's product line is targeted to increase energy efficiency in our customers manufacturing operations, an area which is receiving intense focus of late given the recent large increases in energy costs.

GranTek's quarterly revenues which are included in the other category on the chart attached to the press release, were at their highest level since we acquired this business 10 years ago this summer. Revenues of $3.6 million increased 13% over a tough comparison to previous quarterly high set in the first quarter of 2005. The increase was due mainly to sales of Biodac, our family of biodegradable granular products for home, lawn, garden and agricultural applications that we produce from papermaking byproducts.

Turning to our product gross margins, consolidated product gross margins were 37.9% in the first quarter of 2006, up 90 basis points from last year's 37%. In our papermaking systems segment product gross margins were 38.4%, up 180 basis points from last year. Margins in our fluid-handling product lines which are generally higher than in our other product lines have the affect of increasing product gross margins by 500 basis points in this segment. Partly offsetting this favorable affect were smaller unfavorable impacts from product mix, 120 basis points; and lower margins on spares and capital products, 200 basis points.

Product gross margins in the other category were 28.8% in the first quarter of '06, down from 42.9% last year largely due to the inclusion of the Casting Products operation which is a low gross margin business and to more gross margins in GranTek which continue to be affected by higher cost of natural gas used in the manufacture of our granular products.

Now let's turn to our SG&A expenses for a moment. SG&A expenses were $22.1 million in the first quarter of 2006, up $7.2 million from last year. This increase includes a $7.3 million of SG&A from Kadant Johnson. Excluding Kadant Johnson's expenses as well as a $400,000 favorable impact from foreign exchange, SG&A expenses were up $300,000 or 2% in first quarter of 2006 compared to the first quarter of 2005.

Of EBITDA, consolidated EBITDA was $6.7 million in the first quarter of '06 compared to $3.8 million last year, an increase of $2.9 million or 76%. Our papermaking system segment had EBITDA of $8.5 million in the first quarter of '06, up 88% over last year's $4.5 million. Kadant Johnson's fluid-handling business contributed $3.3 million of this increase. Encouragingly as a percentage of revenues, Kadant Johnson's EBITDA in this segment was over 17% in the first quarter of 2006.

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 $1.8 million compared to last year's $700,000 largely due to higher corporate expenses. During our February 2006 earnings call we said that although the mix may change from quarter to quarter, we expected this category to generate operating losses of 1.8 to $2 million per quarter and these results were within those expectations.

For EPS, we reported GAAP diluted earnings per share including the discontinued operation of $0.19 in the first quarter of 2006 equal to last year's reported EPS. The discontinued operation incurred losses of $0.01 in the first quarter of '06 and $0.03 in the first quarter of '05. Income from containing operations was $0.20 per diluted share in 2006 compared to $0.22 in the first quarter of '05. The 2005 results included a tax refund of $0.06 received from our former parent company.

I should also not note that the first-quarter '06 diluted EPS from containing operations of $0.20 cents includes reductions of $0.04 for the following items -- $0.01 for stock option expense associated with new accounting rules that began in 2006; $0.01 for restructuring expenses which took place in our North American operations; and $0.02 for increased intangible amortization expense due to the acquisition of Kadant Johnson. The effects on EPS from a slightly higher recurring tax rate, lower shares outstanding, and foreign currency translation were all immaterial to the first quarter 2006 as compared to the first quarter of 2005.

Now let me spend a few moments on the balance sheet and our cash flows. We ended the first quarter with $41.3 million in cash and $53.3 million in debt leaving us with a net debt position that is debt less cash of $12 million. Net debt is the percentage of our total capital was 5.4% at the end of the first quarter '06, slightly lower than our position at the end of 2005. During the quarter we paid off $2.3 million of our term loan and we purchased $400,000 of property plant and equipment. We did not purchase any of our common stock during the first quarter of 2006.

As we stated in our press release issued yesterday, our Board of Directors has authorized a repurchase of up to $15 million of our equity securities in open market for negotiated transactions effective May 18th, 2006 which is the day our current authorization will expire. The new authorization will be effective through May 18th, 2007. And finally on this point I went to remind you that our ability to repurchase our stock is somewhat restricted by limits in our credit facility.

Historically the first is usually our weakest quarter for operating cash flows and we'd expect this year will be no exception. Nonetheless, cash flows from operating activities at $1.7 million increased over last year's first quarter by $1.2 million. We recently increased the revolver portion of our credit facility from 25 to $35 million in anticipation of the pending acquisition in China. Also we added Bank of China to our bank group which now includes seven leading international banks led by JPMorgan Chase.

With respect to our capital structure, I'm pleased to announce that today we are signing on a $10 million commercial real estate loan with Citizens Bank of Massachusetts. We entered into this loan in order to take advantage of attractive long-term interest rates and to reduce the interest rate risk in the floating-rate portion of our outstanding term line. As such we intend to use the proceeds of the real estate loan to pay off a portion of our floating-rate debt in the second quarter of 2006.

The key terms of the loan are, it is a 10-year maturity; the quarterly payments are based on a 20-year amortization schedule; it is secured by certain of our real estate properties in the U.S.; and we are fixing the interest rate by entering into a 10-year swap agreement at a fixed rate of approximately 6.6%.

Before concluding my remarks I'd like to briefly expand on our diluted EPS guidance for 2006 which Bill gave earlier. Given the record level of bookings in the first quarter which exceeded our expectations and taking into account the scheduled delivery dates of the larger orders in the backlog, we now expect that the second and third will be our strongest earning quarters in 2006; and therefore, that the fourth-quarter diluted EPS will likely be sequentially lower than the third quarter.

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?

(OPERATOR INSTRUCTIONS) Claudia Shank of JPMorgan.

Hi, guys. How are you? Just curious a little bit on the Huayi acquisition and sort of what the timing is there? I wonder if you have any sense of that?

Yes. You know like anything in China sometimes calling the timing can be a little bit difficult as we go through the various checks on the due diligence and so forth. But we still are expecting and hoping to close that in this quarter.

Okay, great. And then just wondered if you could provide a little bit more color in terms of some of the trends you might seeing in the North American market specifically?

Well, one of the things we see in North America is certainly we're encouraged by the fact that many of our customers are putting in price increases that our holding this time. I think that certainly bodes well for their ability to invest in capital equipment. And I also think that the timing of our acquisition of the Johnson Corporation which is now Kadant Johnson could not have been better with the focus very heavily on energy at this point. And we see a lot of strong activity in that as was reflected in the first quarter and we see that continuing.

In our newsprint we continue to see that diminish as playing less of a role with us in North America as we go on. But the packaging grades, uncoated freesheet and some of the others have got some very encouraging signs as they are operating 95% plus on operating rates. So we see opportunities there and I think that we are certainly armed with the right technology to help because they are really looking at cost per ton issues today. And I think that we have a nice arsenal of technology and products that can help them achieve a lower cost per ton in manufacturing.

Great. And then just curious a will bit about Kadant Johnson's sales to some of the sort of non paper businesses. Can you talk a little bit about the trends you are seeing there? Sort of how that is going?

Well we continue to make progress on that front as we focus on that. And there has been a number of technology developments, they have a very good team in place both for Europe and North America that is addressing that market. And we still view that as a very good growth opportunity for Kadant and not only through the Johnson products but also for -- actually a 37% increase in their business which I think is a pretty good increase. So we see that as an opportunity to giving us more encouragement to introduce some of our other products into their markets as well.

And then how is the overall sort of cross selling going between the Kadant, Legacy Kadant sales force and the Johnson sales force?

That's very good. In fact there was just some recent meetings that were taking place. We had a team of people from representing AES and our water management and our accessory business from North America in China and they did preliminary surveys. The Johnson sales team there because they addressed the paper machines they're talking to the same people. And we've had some very encouraging indications and we also have identified some people from North America that are prepared to spend vast amount of time here to help them penetrate that market.

And that along with the -- when we complete the acquisition of Huayi I think is going to put us in a good position to finally penetrate that market because there you need to be there on a daily basis as you know. So I think were making some big steps certainly on putting the plan together and now it's a question of execution which we intend on doing throughout this year.

Thanks. And just one more thing. I mean in terms of the reaction from some of your Chinese based customers and your Asian based customers who've obviously used your product in the stock prep system. What has sort of their initial reaction to into your growing presence in the Chinese market sort of more downstream towards the accessory line?

Well, I think it's been very encouraging to hear their comments. Because I think we've grown a great reputation for not only having technology but we serve the market very well. We have a lot of application experience and I think they're looking forward to doing this. And one of the things that we found in the initial survey, for example, on accessories is that certainly accessories are being supplied there now and satisfying that need. But is not is the application experience, the technology and the service that we provide and in fact we had -- I just heard the other day that when our team came back they're still getting correspondence from Chinese customers soliciting help in that area.

So I think we're going to have the same advantages that we enjoyed in Western Europe and North America once we really have an established base there.

That is great. Thank you so much.

Thank you, Claudia.

(OPERATOR INSTRUCTIONS)

Are there any other questions, operator?

We have no further questions at this time.

Well, with that just a closing very brief closing comment. We're certainly encouraged by the fantastic start that we had to this year. And our strong first quarter is going to certainly contribute to the growth that we anticipate in 2006. And again, that is due to the steps we've taken to capitalize on opportunities in the global pulp and paper market. And we continue to help our customers in China meet their growing demand and we're pursuing market initiatives in North America and Europe such as addressing energy issues that are very critical and reducing our operating costs. And we have the ability to reinvest in our business to increase our market presence and our product breath.

And I look forth to updating you on our next quarter. Thank you for joining us today.

Thank you. This concludes today's Kadant conference call. You may disconnect your lines and have a wonderful day.