Kadant Inc (KAI) 2006 Q3 法說會逐字稿

Good morning. My name is Kathy and I will be your conference operator today. At this time, I would like to remind-- welcome everyone to the Kadant Inc. Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] It's now my pleasure to turn the floor over to your host Mr. Thomas O'Brien. Sir, you may begin your conference.

Thank you operator and good morning everyone and welcome to Kadant's Third 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 quarterly report on Form 10-Q for the fiscal period ended July 1st, 2006, which is on file with the SEC and is also available in the investor's section of our website at www.kadant.com under the heading "SEC Filings".

In addition, any forward-looking statements we make on this call represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. And you should not rely on these forward-looking statements as representing our views on any date after today.

During this call, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release issued yesterday which is available in the investors section of our website at www.kadant.com under the heading "News Releases".

And with that, I 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 thanks for joining us today as we review another outstanding quarter.

As we said on several calls, we expected our second and third quarter to be our strongest this year. I'm happy to report that the third quarter exceeded our expectations. In fact, this is the third quarter in a row we've achieved record quarterly revenues.

Let's look at the financial highlights of our continuing operations. Our revenues for Q3 grew 40% to a record $90.6 million. This compares to $64.8 million in the third quarter of '05. All of our product lines had solid revenue growth in Q3, but particularly impressive results from our stock prep and fluid handling product lines.

Our Kadant Jining acquisition in China also added $3.2 million in revenues for the quarter. Our operating income from continuing operations for the quarter grew 95% to $9.3 million. And our diluted EPS at $0.41, more than double '05.

We also generated $11 million of EBITDA during the quarter, 61% higher than last year. For the second and third quarters, combined EBITDA was almost $22 million.

Our bookings this quarter were $83 million. And we're especially pleased at their scope and geographic distribution.

Just a couple of examples. We won a contract valued at more than $7 million from Sappi in South Africa to supply two Chemi-Washers for use in textile production. This customer has now ordered four Chemi-Washers in the last 18 months. A Chinese customer placed an order for approximately $3 million to produce corrugated container board from recycled fiber.

Our successful performance during the third quarter was due largely to the same favorable factors at work throughout the year. First, as customers continue their focus on reducing energy costs, they continue to generate strong demand for our food handling products which significantly improve energy efficiency in the drying section of paper-making machines. Second, major Chinese producers of high-quality recycled paper products are continuing to expand their capacity, which in turn drives demand for our advanced stock prep systems. Third, there was strong demand for our stock prep and water management products in Europe. Here we saw a solid increases in both capital and after-market sales, signally that some customers are beginning to reinvest in their operations after several years of low spending levels.

So we're broadening our market coverage and I think it's clear our investments are paying off in a stronger Kadant presence around the world. Let's look at a few specifics. Our food handling business again performed well in each of its major geographic areas with EBITDA exceeding 22% of revenues. Kadant Johnson food handling revenues totaled $22 million during the third quarter, up 31% over the third quarter of '05. In fact, Kadant Johnson sales of food handling equipment and controls have increased every quarter since we acquired the company in May of '05.

As I said, we're seeing continued growth and demand for our stock prep systems in China. Their paper companies are expanding their capacity to produce recycled paper. We reported a record $21.8 million in stock prep revenues from China this quarter. Our Chinese stock prep revenues tripled over the prior year. We are pleased with both the magnitude and the distribution of these revenues which were derived from 11 different large orders. For the first three quarters, our stock prep revenues in China were slightly over $52 million, already more than doubling the entire year's stock prep revenues in China for 2005.

We believe the Asian markets present a sustained opportunity for us over the long run. There are several reasons for this. First, we've established a leadership position in stock prep. We have a proven track record of successful installations in China making us the safe choice for customers wishing to add capacity. Second, these capital equipment orders expand our install base which will present opportunities for after-market sales. Third, the addition of our manufacturing facility in Jining significantly expands our presence in this market. We now have almost 700 employees working in five facilities throughout China, about a third of our total employment. Finally, beginning in early 2007, we expect to begin manufacturing accessories and water management products in China to serve the broader Asian market.

Although we reported great third quarter performance, there are still areas in which we can improve our performance and strengthen opportunities for future growth. As I said, we intend to leverage our install base in China to increase after-market sales. We're also working to increase sales of our paper machine accessories and water management products in Asia because our market share there is still considerably smaller than it is in North America and Europe. We intend to source more components from our operations in China and Mexico, which will improve our margins throughout the world. And we're continuing to search out applications for our products beyond the paper industry.

This year we have consistently forecasted a sequentially lower quarter in GAAP diluted EPS-- fourth quarter in GAAP-diluted EPS given our very strong first half bookings performance, particularly in China. That performance contributed to our record sales levels in the second and third quarters. Although bookings were strong in the third quarter, as we expected, they were not at the same levels as earlier in the year.

For the fourth quarter, we expect to report GAAP-diluted EPS from continuing operations of $0.24 to $0.27 on revenues of $82 to $84 million. For the full year, we're increasing the lower end of our guidance and now expect to earn $1.25-$1.28 of GAAP-diluted EPS from continuing operations from an earlier estimate of $1.20 to $1.28. We are raising our 2006 revenue guidance to $338 to $340 million.

Now I'll turn the call over to Tom for more detailed review of the financials. Tom?

Thank you Bill. I'll start with our revenues. Consolidated revenues were $90.6 million in the third quarter of 2006, up 40% over last year's $64.8 million. These results include internal growth of 32% and a 5% increase from our newest acquisition Kadant Jining, a supplier of stock preparation systems located in the Shandong province of China. Also a weaker U.S. dollar compared to the foreign currencies or the major foreign currencies in which we operate led to a favorable foreign exchange effect of 3% in the third quarter of '06 compared to last year.

Encouragingly, every product line in the paper-making system segment reported increases in revenues over last year; 71% in stock prep; 31% in fluid handling; 24% in water management; and 6% in accessories.

Now let's take a look at those increases in more detail starting with stock prep. Stock prep revenues were $41.4 million, 71% higher than last year, including a 13% increase from Kadant Jining and a 2% favorable effect from foreign exchange. Stock prep revenues in China, which now include the results of Kadant Jining, were a record $21.8 million in the third quarter of '06, more than triple the level achieved in the third quarter of 2005. We were quite pleased both with the magnitude and the distribution of these revenues which were derived from 11 different large orders recognized as revenue under the percentage of completion method.

The strong performance in China was coupled with an equally encouraging set of results in our European-based stock prep operations where revenues grew 49% over last year including 7% from exchange. Stock prep sales in North America were down 5% from last year, although we recorded a 5% increase in sales of after-market products and services.

Turning to water management, revenues in this product line were strong for the second quarter in a row. Revenues here were $8.8 million, up 24% compared to the third quarter of 2005, including a 1% favorable effect from foreign exchange. Revenues increased 15% in North America and 85% in Europe, the latter including a favorable impact of 8% from currency. As we expected in North America, we recognized $1.9 million in revenue from the large forming system order we announced earlier in the year. The 85% revenue increase in Europe was largely due to higher sales of filtration capital products, both notably a Petax filtration system and its related spare parts.

Accessories revenues of $15.3 million increased sequentially for the third quarter in a row, exceeding last year's third quarter by 6% including an increase of 3% from foreign currency. North American revenues were up 4% compared to third quarter '05, including a 1% favorable effect from foreign exchange led by a particularly strong performance in our subsidiary based in Mexico. We were quite encouraged as well with higher sales of Curl and moisture control systems in North America.

In general, we believe that both our accessories and water management businesses in North America are starting to see the benefits of the sales force integration which we undertook late last year, giving us better coverage and presence in the paper mills. European revenues were up 11% including a 6% favorable impact from exchange, largely due to higher sales of capital products to our OEMs.

Revenues in the fluid handling product line of Kadant Johnson increased for the fifth consecutive quarter since the acquisition of this business in May 2005. Note that the third quarter of 2006 is the first quarter we can now compare to a full quarter's results in the prior year for Kadant Johnson. Revenues in this product line were $21.9 million in the third quarter of '06, up 31% over the third quarter of last year, including a 4% favorable effect from foreign currency.

We continue to see strong customer interest in Kadant Johnson's products, many of which are directly tied to reducing energy consumption, especially in the areas of steam usage and drying rates. Revenues were higher in every major geographic market including the U.S., Europe, Latin America, and China.

And finally in our GranTek business, whose revenues are included in the other category on the chart attached to the press release, we reported revenues of $1.5 million in 3Q '06, an increase of 64% over last year. This increase was largely due to higher volumes and improved pricing in our family of Biodac granular products.

Now turning to our product gross margins, consolidated product gross margins were 35.6% in the third quarter of 2006, down 490 basis points from last year's 40.5%. This decline was entirely due to lower margins in our paper-making systems segment where product gross margins were 35.8% in 3Q '06, down 570 basis points from last year.

As we have noted before, several of the larger system orders we booked and recorded as revenues this year were at lower than normal margin levels. And this was especially the case in our stock prep product line, particularly in China. We do expect to benefit in the future from sales of higher margin, after-market products which typically originate from these system sales, in some cases for many years after installation.

To a lesser extent, the decrease in product gross margins also resulted from higher labor and indirect manufacturing costs we incurred as we processed a record level of orders while at the same time consolidating our stock prep manufacturing facilities in North America.

Although this consolidation is largely behind us, we expect some continuing negative impact in the fourth quarter of 2006. We do expect that the spending levels in these facilities will return to normal levels in the first quarter of 2007.

And finally I should add that with the high level of capital sales in 3Q '06. We experienced an unfavorable product mix which also contributed to the lower product gross margins.

Product gross margins in the other category were 26.8% in 3Q '06, up from 7.2% last year, primarily due to significant improvements at GranTek as the result of volume and price increases.

Now let's look at our SG&A expenses for a moment. SG&A expenses were $21.5 million in the third quarter of 2006, up $1.3 million or 6% from last year. This increase includes approximately $400,000 or 2% of incremental SG&A from Kadant Jining and another $400,000 or 2% from the unfavorable impact of foreign currency. Excluding the effects from Kadant Jining and foreign currency, SG&A expenses were up 2% in the third quarter of 2006 compared to the third quarter of 2005. As a percentage of sales, SG&A was 23.8% in 3Q '06, down 750 basis points from last year due to significantly higher operating leverage associated with the higher level of sales.

Now looking at EPS, we reported GAAP diluted earnings per share including the discontinued operation of $0.40 in the third quarter of 2006 compared to last year's reported EPS of $0.03. The discontinued operation incurred losses of $0.01 in 3Q '06 and $0.16 in 3Q '05. Excluding the discontinued results in both periods, income from continuing operations more than doubled to $0.41 per diluted share in 3Q '06 compared to $0.19 in 3Q '05 or an increase of $0.22.

Included in the increase of $0.22 per diluted share was the $0.03 improvement due to a reduction in the effective tax rate and $0.01 due to the favorable effects of foreign currency translation. Improved operating results accounted for the remaining $0.18 improvement in the third quarter of 2006 compared to last year.

During our February 2006 earnings call, we noted that our target for accretion from Kadant Johnson for the full year 2006 was approximately $0.25. And I can report that we have already comfortably exceeded that goal through just the first three quarters of 2006. Also exceeding our expectations was Kadant Jining's performance, which was slightly accretive to the consolidated EPS results in its first full quarter as a Kadant company.

Looking at EBITDA, consolidated EBITDA was $11.1 million in the third quarter of 2006, up $4.2 million or 61% over last year. Our paper-making system segment had EBITDA of $13.4 million in 3Q '06, up $5 million or 60% over last year and included $800,000 from Kadant Jining. Kadant Johnson's fluid handling business once again posted an impressive EBITDA to sales performance 22%. As a percentage of sales, paper-making systems EBITDA was 15.2% in the third quarter of 2006, up 190 basis points over last year. Impressively in the second and third quarters of 2006 combined, EBITDA has exceeded $26 million in this reporting segment.

In the corporate and other category, which includes the results of the casting products business, GranTek, and our corporate expenses, we reported an EBITDA loss of $2.3 million compared to last year's loss of $1.5 million due to higher expenses reported in the corporate category.

Now let me conclude my remarks with a few comments on the balance sheet and our cash flows. We ended the third quarter with $39.1 million in cash and $55.9 million in debt, leaving us with a net debt position that is debt less cash of $16.8 million. Net debt as a percentage of our total capital was 6.8% at the end of 3Q '06, virtually unchanged from last year's 6.6%. This percentage is well below our targeted capital structure, which given the right opportunities, would allow for a net debt to total capital percentage in the range of 20%.

Looking at uses of cash for a moment, during the quarter we spent $6.3 million, net of acquired cash, in connection with the acquisition of Kadant Jining. We paid down $2.4 million in debt and we purchased $1.4 million of property, plant and equipment. Also we purchased $3.1 million of our common stock, representing 135,300 shares at an average price of $23.00 per share. We currently have over $11 million of stock repurchases available under the limits contained in our board authorization and credit facility.

With regards to the major sources of cash, we generated operating cash flows from continuing operations of $4.1 million in the third quarter of 2006. And we received proceeds and related tax benefits of $4.1 million associated with the exercises of employee stock options.

The operating cash flows are $4.1 million in the third quarter of 2006. We're $2.2 million lower than last year's quarter. Given the record levels of revenues in the last two quarters, we incurred an additional investment of $3.1 million in a category on our balance sheet called unbilled contract costs and fees, which essentially represents the receivables on revenues recognized out of the percentage of completion method.

We do expect our cash flows to improve considerably in the fourth quarter as many of these larger amounts become due and are collected.

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, we're turning it back to you for our Q&A.

[OPERATOR INSTRUCTIONS] Our first call comes from Michael Hutchison from Barrington Research.

Morning.

Morning Mike.

I had a couple questions. Overall what is your goal for operating margins in 2007? And then the other question I had was could you talk about your progress and plans for the non-paper businesses of Johnson?

Yes, Mike I think in terms of the 2007 operating margins, you might recall that in our May 2006 shareholders' meeting we put up some general, broad goals that we were trying to reach over the next two or three years. And I think we were trying to get to a point in 2008 where our operating margin percentages was 11+ percentage range. So we're obviously making good progress in getting there. We just-- we're not saying that we'll get to those numbers in a straight line, but that was a goal that we were reaching for over the next few years.

Sure right now we've got modeled in 10% for '07 and I just look at some of the moves that you've made in France, the Chinese operation that should contribute and would you say that 10% is realistic for '07?

You know that's difficult to answer. We certainly look at improvements from what we had in '06. And in some of it Mike depends upon how quickly we can get the operation in Jining and our operation that we just acquired up to speed and up to the same qualities so we can use them as a supply for our stock prep. I think there's a real margin opportunity for us. It's just a question of timing I think at this point.

But we do see some opportunities out there to improve margins. And as Tom commented, we certainly set those goals for 2007 and we're working hard right now and are making progress to get up to that level. And so certainly if you take a look at where we are now and what our goals are in 2007, I would say you're certainly in the range at this point.

I mean France for one thing France you had some negative impact earlier in the year. Certainly you're going to see something better there in '07, right?

Yes, absolutely. And again they're going to be able to take advantage Mike of operation in China for low cost sourcing. So yes we expect to get improvement, in fact, in our entire stock prep line we should start to see some improvement as a gain from that acquisition we just completed.

Okay and then could you talk about the progress and plans for the non-paper businesses?

Well that seems to be going along fairly well yet. That still represents about a third of Johnson's business. And as I commented I think on our last earnings call, we received a number of holders for the steel industry, which is an accessory product. And so and we have marketing and sales people from all the groups talking about how we can assess that.

And also even if you take a look at the, just recently even the Chemi-Washers that we sold out of stock prep part of the business. That's really going into a line where they're making fiber produced in textile manufacturing. So we are really start-- we look at that as a real opportunity for us. And now as again we have the resources which is the understanding the markets and the processes through this acquisition at Johnson which we have started slowly but expect it to increase the opportunities for other product lines and capitalize on that.

Okay, well thanks.

Thank you Mike.

Our next question comes from Claudia Shank from J.P. Morgan.

Good morning Claudia.

Good morning. Thanks for taking my question. Just a couple of things. One, I just, I know it's early but I wondered if you had any sense to sort of the pipeline of activity for 2007 both in China and your other markets.

It's a good question. We haven't really put everything together yet for 2007 as you can understand. But concerning the pipeline in China, we still see some good, some good potential orders coming through. I guess it's always difficult for us to determine when the timing of these orders are going to come and when we're going to benefit from them, but there's certainly a lot of potential projects yet to be had coming out of China and hopefully some of them will be coming in and benefit in 2007.

On the other markets, we continue to see certainly you know if we take a look just quickly in North America the Canadian newsprint industry continues to be depressed and I would expect as I commented in the past that continue to drop on us. And so that does not make a big play for us as we look at our opportunities. And in the U.S., we continue to see softness in some grades as IP just announced they were having, they still have softness in the corrugated market and which certainly impacts us to some extent.

But I think the big opportunities we see are more globally. And again, whether it's in South Africa or any and not only China but other parts of Asia, which are now showing some life, we see some great opportunity there. Now that we've-- we have a strong base within China to serve Asia, I look at that as an opportunity for both because we're going to have Johnson product line. We're going to be really introducing with a real forceful marketing program as well as manufacturing capability in China for our water management and accessories. So that's a real market opportunity for us to expand in that growing market, capitalizing on the presence that we have there now with Kadant Black Clawson and Kadant Johnson we have great brand recognition.

And then in Europe, I mean we've seen some improvements coming out of Europe as we certainly look that in the water management side of the business and in the stock prep side of the business. And we expect that to continue as well.

So we see some opportunities out there and but there's less and less emphasis on us within North America as growth opportunities. But again North America's very valuable in terms of-- I still think they need to retool. That's still waiting on the horizon and we've seen certainly a pickup in North America based on energy and especially with Johnson I think and we expect that to continue on as well for that opportunity to continue on as well for the next couple years.

Yes, so you still see that interest in fluid handling even though energy prices have pulled back a little bit, the interest seems to still be there?

Yes I do Claudia, because it's still such a large portion of their-- of the cost of producing paper as you know. And again it comes down to cost per ton and they're looking for any advantage that they can have in tough market conditions. And we see that not only in North America the focus on energy but we see that globally at this point. And I think it will stay yes.

Okay and then just with regard to sort of your movement towards China and Mexico in trying to produce more parts there. Are there any implications for capital spending or are those for your capital spending or are those systems pretty much in place?

Those systems are pretty much in place. We don't see any major capital requirements for us to satisfy those needs. In fact, with that acquisition we just recently made in China we have a tremendous amount of what I would call underutilized capacity at this point to serve, to start feeding everything into North America and Europe.

Okay and then just finally could you just comment a little bit more on the French business and how it's doing?

Well the French business has certainly been making progress this year. It's not where we want it to be. And I think that that's one of the opportunities we look at for next year. I think the good news on the French business out of the bookings that they had, which really reflects their continued strength in the marketplace. And now we still have opportunities, we're making progress. And certainly this year they're contributing to our profitability. But I expect them to contribute much more to profitability in 2007. And that I look at as a real opportunity as well as just lining the stock prep lines with, as Tom commented on, moves we made in consolidating in North America. And we made those moves to take advantage of the outsourcing capability we're going to have out of China. And I think that there's another big piece that I look at as a very nice margin opportunity for us in 2007.

Thanks so much guys.

Thank you Claudia.

Claudia.

Any other questions operator?

Our next question comes from Anthony Lisa from Crown Advisors.

Good morning.

Hey guys. How are you?

Very good thank you. We should be.

Yes, absolutely. Tom, you gave a lot of numbers and I apologize if I might have confused this. But I just kind of wanted to talk about your revenue guidance for the year and as that relates to the fourth quarter. You beat by $2 million and then I guess you raised your range or the high end of your range, $338 to $340. But the high end of your earnings range really didn't change. And so consensus estimates sort of end up staying where they are. And I was just wondering if you could comment on that?

Well I think one thing is, first of all we did bring up obviously the lower end of the range by $0.05.

Right.

And I would say, you know you can always, when you give guidance in the third quarter and you give guidance for the year, you can always infer obviously a fourth quarter number.

Right.

I would say what has changed in our thinking then is the fact that as I mentioned, Kadant Jining was slightly accretive to us in the third quarter, which came as a pleasant development for us. We had guidance at the fact in our last earnings call that we thought that there would be somewhat diluted for us for the year. So I would say that one thing that's changing our thinking is the fact that Kadant Jining was positive for us in the third quarter, but we're being prudent with that, given the fact it's only the second quarter that we've owned them in terms of our expectation for the fourth quarter. So I think that's part of the answer.

So if I infer that correctly, not only are you not giving yourself credit for that in the fourth quarter, but you're sort of leaving it at what you had expected before.

We think it will be either moderately accretive or kind of neutral for us for the year. So that would suggest perhaps slight dilution in the fourth. And obviously we're working-- we're working hard to make it accretive in the fourth but we, you have a lot of experience with acquisitions and you can't just base one quarter's results and kind of extrapolate from there. So we are being, I would say a little prudent with that going forward.

Yes, we just haven't had it long enough yet to have that, the confidence. And which we will gain as we go along with it, with the acquisition.

Right. So there's nothing from a margin perspective in any of your businesses that removed from your expectations that Q4 is a softer quarter in general and you telegraph that very well for a long period of time, which is good. But there's nothing going on margin wise or even maybe foreign currency that you might expect to be against you. I mean in general we're just exercising some prudence here not only on the acquisition but in the, in the number in general?

I think you said it very well.

Okay, okay.

Thanks Anthony.

Thanks very much guys.

[OPERATOR INSTRUCTIONS] Our next question comes from Mark [McGrath] from [Kenmore].

Hi, good morning. A few questions. The first for Tom. You mentioned there was an incremental $3.1 million of the receivables in the quarter. Can you give us a receivables and an inventory balance?

Yes I can. Let's see, okay the-- okay so what I was talking about was this category called unbilled, which is equivalent to receivables for percent complete. And when we filed our Q, that number will be in the range of $31 million. Okay, but that's not our total receivables that's just the category that I was talking about. That's the one that's kind of built up here over the last couple of quarters because a lot of these large system orders that we've been talking about have been on percent completion.

Yes.

So we'll be, we'll be collecting a lot of that in the fourth quarter. In fact, I should have said our October cash receipts in North America were very strong since the end of the quarter. So--

Okay.

I'm pleased with that. And then on the inventory side, our inventories will be in the range of $41 million for the third quarter.

Okay, can you give us an order of magnitude of the cash liquidation you expect from working capital in Q4?

Well I can give you a kind of, like a cash forecast for Q4 but I would say that the cash flows will be-- you know we expect they will be very good in the fourth quarter.

Okay, so should we expect I guess long term kind of DSO and days inventory to be similar to what you've had in the past rather than what you've--?

In fact we've looked at that and DSO in the third quarter is about 79 days. It's almost equal to where it was a year ago at this time. So there's no, there's no build up in that. By the way that includes and incorporates the unbilled category in there as well, so that's the way we do the calculation, which is the correct way to do it. So there's no build up in DSO. Our over 90 percentages are treated like that all the time are very good and our inventory turns were also good. So there's no, there's no-- there's nothing that would suggest that anything is askew other than the fact that we're building the absolute amounts by virtual of the fact that we've got all this volume passing through the system here.

Okay. And have there been a few questions on stock prep in Europe. And I think you said that in Q1 of this year that Kadant Lamort was finally breakeven or slightly in the black. Can you give like a little more numerical clarity to what margins are right now in stock prep in Europe?

We don't really break that out. I mean I think for competitive purposes we'd rather not say that. But I think as Bill mentioned, I'd say the operating margins in Europe today are in the positive range but they're not where we'd like them to be and we still think that we have opportunities there in 2007.

I think you said in the--

In the range of multiple hundreds of basis points here.

Yes, but I guess you'd said in the past that you thought you could get operating margins in Europe to where they are in the U.S., right?

Right. But we didn't, we didn’t think we'd do that in 2006.

Right. I guess what I'm wondering very loosely is how far along that path are you so far?

I think we're making good progress but we're not where we want to be.

I would add that I think within probably in the next year or two we should be where we, where we expect to be. And we're going to be continuing to make progress throughout 2007. And again I think what would really help us here as well Mark will be the-- that acquisition that we made in China because we really sized the Lamort operation to do more outsourcing. A lot of those components are going to come from our own operation out of Jining in China.

Okay. And the sales in China, is there any percentage you know maybe less than 10% that are already after-market sales or is it entirely capital?

The majority of that right now is just about entirely capital. Our after-market sales there are relatively small at this point. However, with our, with the base we have now again in Jining, one of the-- that's another purpose for having it there is that we're going to be supplying a lot of, a lot of our after-market components. Because again a lot of the install base is relatively new. But over the last few years now we've built up some aging of that base which we intend on capitalizing in the after-market business.

Okay and I guess kind of last question is it still your belief that you can get the sales capital to after-market 50-50 in China as you are elsewhere? And how long very roughly does that take?

Yes I would think that this is certainly our target. And what's going to help us there as we introduce our accessories and water management in business. And our accessory business is almost entirely what I would call consumable business. And so with the addition of those as well as what Johnson and the after-market base that we've developed in China, I expect to have the same profile, yes.

Okay but is that a five-year program or is that more like a two or three year?

Well it's, you know we're just going to be really introducing the accessories and water management. But I would certainly say within five years and hopefully much shorter than that.

Okay. Well thanks a lot.

Thanks Mark. Operator, any other questions?

Sir, there appears to be no further questions at this time.

All right, then I just in closing I'd just like to say I'm very glad to report this morning that all of our employees' hard work over the past few years is producing dividends this year. We have successfully shifted more of our resources to Asia and we've been able to capitalize on growth in that market.

Looking ahead, I believe we are well positioned to take advantage of further growth opportunities, both geographically and industries beyond paper.

Thank you for your interest in Kadant.

This concludes today's Kadant Inc. Third Quarter Earnings Conference Call. You may now disconnect.