Kadant Inc (KAI) 2007 Q1 法說會逐字稿

Good morning. My name is Cheryl and I will be conference operator today. At this time I would like to welcome everyone to the Kadant First Quarter 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).

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Thomas O'Brien, Chief Financial Officer.

Sir, you may begin your conference.

Thank you, operator, and good morning, everyone and welcome to Kadant's First Quarter, 2007, 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 the fiscal year ended December 30, 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 our most directly comparable GAAP measures is contained in our First Quarter Earnings press release issued yesterday, which is available in the Investor section of our website at www.kadant.com under the heading "News Releases."

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, Thomas. Good morning, everyone, and thank you for joining us today as we recap our first quarter, 2007, results. I'm pleased to say that we're off to a great start to the year.

Let's begin with a review of the financial highlights of our continuing operations as compared to Q1, 2006.

Our revenues for Q1 grew 17% over Q1, '06, to $88.2 million, with each of our paper making product lines showing increases over the prior year, including a 29% increase in stock prep revenue and a 23% increase in water management revenue.

Our operating income grew 53% to $7.4 million as compared to the '06 quarter thanks to strong performances by many of our businesses.

Our EBITDA was up 36% from Q1,'06, to $9.1 million.

Diluted EPS was $0.33, exceeding the high end of our guidance by $0.09.

Due to continued strong demand for our stock prep products in China, we experienced our second highest bookings quarter to date, with orders totaling $100 million.

Cash flow was up almost 300% from the first quarter of '06 to $6.5 million.

We ended the quarter with $11 million in net debt and repurchased over $5 million of our stock during the quarter.

Yesterday our Board increased our authorization to repurchase our securities to $20 million over the next 12 months.

Finally, we ended the quarter with our second highest backlog ever, $85 million, which positions us well for the year ahead.

With a sound first quarter under our belts we look forward to yet another successful year.

Let's discuss the outlook for '07.

Many, but certainly not all, of our markets throughout the world are showing some signs of improvement.

The North American market, which had seen significant consolidation, continues to be challenging. But, in spite of these challenges, our orders in North America have grown modestly.

We believe this is a result of our cusThomasers' recognition of the value our energy-related equipment and services provide.

Another encouraging sign we have seen over the past year is the increasing investment being made at the mills that have been recently purchased by private equity firms.

It appears that these firms are willing to invest in projects that yield a good return on their investment.

While we do not anticipate any significant capacity additions in the region, we are hopeful that the level of order activity in the first quarter will continue.

While the Western market is undergoing consolidation in Europe, we continue to benefit from solid demand from OEMs despite ongoing shutdowns and mill closures.

The story is different in Eastern Europe, such as in Russia and Poland, where we see increased activity in our food handling business, with several energy-related projects underway and others under serious evaluation.

The Chinese market remains the strongest in the paper industry, with significant capacity additions expected to continue this year.

In the first quarter we received our largest booking from a single cusThomaser when a leading (minor) board producer in China placed orders for three stock prep systems with a combined value of approximately $18 million.

Overall, we booked over $24 million in stock prep orders in China in Q1, one of our strongest quarters ever.

Since the end of the quarter we have received two stock prep orders with a combined value of more than $7 million from Lee and Man, one of the largest paper and board producers in Asia for recycled linerboard mills in China and Vietnam.

One of these orders was part of the $10 million of pending orders awaiting deposits we previously announced.

In addition, our food handling business in China also experienced one of their best booking quarters ever. Although the order sizes are smaller than those of our stock prep business, they provide enhanced values because of the after markets for these products.

In addition to improved market conditions, we believe we have several opportunities to grow our business and improve our margins.

The biggest opportunity to improve our operating margins is through increased sourcing from lower cost regions such as China and Mexico.

Our Mexican manufacturing operation also now supplies capital equipment to all our North American accessories and water management businesses, providing significant cost advantages. Similarly, our food handling manufacturing facility in China supplies components and equipment to our other food handling operations throughout the world.

With the addition Huayi Jining last year, we are following the same business model to increase sourcing of our stock prep equipment in China.

Presently we are taking steps to improve the efficiency of our stock prep manufacturing in China by training our Chinese workforce to build our products efficiently and implement our production and quality control procedures.

This is a large undertaking and we are making considerable progress, but we still have room for improvement.

We are working to increase market share of our accessories and water management products in Asia by manufacturing accessories and water management parts in that region we stand to gain market share with local resource products.

Our program to establish manufacturing of doctoring in one of our existing facilities in China is on track and we expect it will be operational by mid-year.

Our efforts in this area are beginning to pay dividends already received for blades, folders, and showers, including an order of $125,000 for showers for a tissue producer in China received last week.

We are also working to increase our spare parts business for stock prep in China by mining our install base, we can create a profitable revenue stream in replacement parts and service.

As I noted during our year-end earnings call we have begun to manufacture screen baskets at a dedicated facility in China. We are now beginning to use this facility to supply baskets for our cusThomasers in China and around the world.

Since screen baskets need replacing every nine to 12 months, this is a cornerstone of our spare parts program for stock prep.

Although we have made significant progress in enhancing productivity, we have more work to do in order to reach our projected goals.

Our cusThomasers continue to look to our products to reduce their energy costs.

Building on the success of our food handling business, whose energy-efficient drying systems are integral to our cusThomasers' cost reduction goals, we will work to market our energy-saving products to cusThomasers with high energy costs, particularly those located in Europe and North America.

We also continue to pursue growth opportunities outside of the paper industry. We were quite pleased to see an increase in demand for our food handling products from the steel industry in China with our recent sale of over $400,000 for rotary joints.

Kadant Johnson China was recently named a preferred supplier for rotary joints by China's Design Institute for the steel industry.

Now, let's review our guidance.

For the second quarter, we expect to report Diluted EPS of $0.36 to $0.38 per share on revenues of $84 million to $86 million.

For all of 2007 we expect Diluted EPS of $1.49 to $1.59 per share from continuing operations on revenues of $360 million to $379 million.

This guidance includes and estimated $0.01 per diluted share charge related to the sale of the Kadant Johnson casting business in the second quarter. This was a non-core business for us, and its sale allows us to focus on our main business.

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

Thomas?

Thank you, Bill. I'll start with our revenues.

Consolidated revenues were $88.2 million in the first quarter of 2007, and increase of 17% over last year's $75.6 million. The 17% increase was due mainly to the following, 10% of internal growth; 12% from Kadant Jining, which was acquired in June, 2006; and 3% from the favorable effects of foreign exchange.

We exceeded our revenue guidance for the quarter, which was $77 million to $79 million, primarily due to higher revenues in our stock prep product line.

For the third consecutive quarter every product line in the paper making system segment reported increases in revenues over the prior year quarter. 29% in stock prep, 23% in water management, 10% in accessories, and 6% in fluid handling.

Now, let's look at each of those product lines in more detail.

Stock prep revenues were $39.9 million, 29% higher than last year, including a 9% increase from Kadant Jining and a 3% favorable effect from foreign exchange.

Internal growth in this product line was 17% over last year's first quarter.

Stock prep revenues in our North American-based operations increased 28% over the first quarter of 2006, with notable performances in both capital and aftermarket products.

The North American capital business continues to benefit from higher percentage of completion revenues derived from several large system orders which were booked in the latter half of 2006.

Encouragingly, the North American aftermarket revenues were up 23% over last year.

Stock prep revenues in China, including Kadant Jining, were $13.8 million, up 53% over last year.

As in the past few quarters, these revenues were well distributed across 11 major percentage of completion projects in the first quarter of 2007 as compared to only four such projects last year.

Stock prep revenues in Europe were 8% higher than the first quarter of '06, but included a 9% increase from foreign exchange.

Revenues in our water management product line were $7.9 million in the first quarter of 2007, up 23% compared to the first quarter of 2006, including a favorable effect of 3% from foreign exchange.

Here the internal growth of 20% was mainly generated in Europe, where revenues doubled compared to last year.

This solid performance in Europe was due largely to higher sales to OEMs, particularly for tissue-related projects and, to a lesser extent, to continuing investments by paper companies in Eastern Europe and Russia.

Turning to accessories, revenues from this product line were $15.5 million in the first quarter of 2007, which exceeded last year's first quarter by 10%, including an increase of 4% from foreign exchange.

Our performance here was somewhat mixed as we look across the major territories.

In North America revenues were up 14% compared to last year, with significant contributions in the U.S. and Canada.

We were especially pleased with these increases given the headwinds of mill shutdowns and capacity rationalizations in the North American paper industry.

In Europe, accessories revenues were up 2%, including a 13% favorable effect from foreign exchange. The decrease in Europe, including exchange, reflects both the impact of mill closures and an increased emphasis by cusThomasers to reduce operating costs.

Revenues in the food handling product line of Kadant Johnson were $20.1 million in the first quarter of 2007, up 6% over last year, including a 4% favorable effect from foreign exchange.

This product line had solid double-digit revenue increases in China, Europe and Latin America, offset somewhat by a slight decline in the U.S. and more substantial decrease in Canada.

In our fiber-based products business, whose revenues are included in the "Other" category on the chart attached to the press release, revenues were $3 million, down 16% from last year.

This decrease was entirely attributable to lower sales and buyback, which, in turn, was due to increase competition.

As we noted last quarter, we expect lower revenues and profitability from this business in 2007 as compared to last year.

Turning to our product gross margins, consolidated product gross margins were 36.9% in the first quarter of 2007, down 100 basis points from last year.

Overall, gross margins in our papermaking systems segment were 140 basis points lower than last year, offset partly by margin improvements in our "Other" category.

Gross margins in our papermaking systems segment were 37% in the first quarter of 2007, compared to 38.4% last year. The decline is largely due to an unfavorable product mix and lower margins in our stock prep capital products, especially for large systems in China.

Product gross margins in the "Other" category were 34.3% in the first quarter of 2007, up from 28.8% last year, due to higher margins in both our fiber-based products business and Kadant Johnson's casting products business.

The Fiber-based products margins benefited from lower cost in natural gas, which, unlike our papermaking systems business, is a major component of our manufacturing costs.

I'll look at our SG&A expense for a moment. SG&A expenses were $23.5 million in the first quarter of 2007, up $1.4 million, or 6% from last year. The increase includes 3% from the unfavorable effect of foreign exchange and 2% from the inclusion of Kadant Jining.

Excluding these increases, SG&A was up 1% compared to the first quarter of 2006. As a percentage of revenues, reported SG&A was 26.6% in the first quarter of 2007, down 270 basis points from last year, due to better operating leverage associated with a higher level of revenues in the 2007 period.

On EPS we reported GAAP Diluted Earnings Per Share, including the discontinued operation, of $0.30 in the first quarter of 2007, compared to last year's reported EPS of $0.19.

The discontinued operation incurred losses of $0.03 per diluted share in the 2007 quarter and $0.01 in the 2006 quarter.

Excluding the discontinued results in both periods, EPS from continuing operations increased 65% to $0.33 per diluted share in the first quarter of 2007, from $0.20 last year, or an improvement of $0.13 per diluted share.

This improvement of $0.13 per diluted share includes the following. And increase of $0.01 due to a reduction in the effective tax rate, and increase of $0.01 due to the net favorable effects of foreign currency translation, and a decrease of $0.01 associated with a higher number of diluted shares outstanding in the 2007 quarter compared to a year ago.

As these factors explained a net increase of $0.01, the remaining increase of $0.12 was generated from better operating results in the first quarter of 2007 versus the first quarter last year.

Now, before concluding my remarks, let me spend a few moments on the Balance Sheet and our cash flows.

We ended the first quarter with $41.2 million in cash and $52.1 million in debt, leaving us with a net debt position -- that is debt less cash -- of $10.9 million. Our net debt declined by $3.4 million as compared to the balance at the end of 2006.

Net debt, as a percentage of our total capital, was 4.4% at the end of the first quarter of 2007, down from 5.4% a year ago.

The ratio of our net debt to our last 12 months' EBITDA was slightly less than .3.

Although the first quarter is historically our weakest quarter for cash flows, we have a very encouraging start to the year, nonetheless.

We generated operating cash of $6.5 in the first quarter of 2007, up almost 300% from last year's $1.7 million.

In addition, our flow-through cash in the first quarter came from the proceeds and related tax benefits associated with the exercise of employee stock options in the amount of $1.2 million.

Looking at the uses of cash for a moment, during the quarter we paid down $1.9 in debt and repurchased $800,000 of property, plant, and equipment. Also we purchased $5.2 million of our common stock, of which $3.8 million was paid during the quarter. This represented 205,700 shares at an average price of $25.21 per share.

As we announced yesterday, our Board of Directors has authorized the repurchase of up to $20 million of our stock in open market or negotiated transactions effective May 2nd, 2007, through May 2nd, 2008.

At the moment the limit under our credit facility is approximately $6 million, although I should add that we have a preliminary understanding with our bank group, subject to final approvals, to significantly relax the restrictions on our stock repurchases in the future.

And with that I will conclude my review of the financials and turn the conference back to the operator for our Q&A session.

Operator?

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Hutchison of Barrington Research.

Good morning.

Good morning, Mike.

Hi, Mike.

What region in stock prep outperformed your expectations that allowed you to have such a strong quarter? I mean you really outperformed what even your guidance was by quite a bit.

Yes, Mike. It was primarily out of China, with the percent completion recognition. And that really exceeded our expectations for the quarter.

Okay, and is that why you're expecting revenues to be down in the second quarter, sort of the first quarter borrowing?

Well, yes. And that and part of the product mix, yes. That's part of it, but also the product mix in the second quarter is really more favorable towards, like our food handling and accessory business and water management, which tend to be more of a -- a lot of parts, a lot more consumables in that mix.

Okay, so you're not going to have as many of the big orders in the second quarter?

We won't -- yeah, we don't expect to recognize much in percent completion rate.

With the OCC prices rising recently and the OCC inventories at relatively low levels, are you expecting your operations that serve that market to perform pretty well this -- in the near-term here.

Yes, we do. In fact, that puts more pressure on optimizing the recycling system, to get more yield out of the waste stream.

And, again, we believe we have the best technology in the marketplace and, fortunately, so do our Chinese cusThomasers, on being able to go deeper into the waste stream so they can yield more fiber from lower cost sources.

So you think you'll see some benefit from North America with that, too?

Yeah, we haven't seen it yet, but there's certainly -- that's a possibility, yes.

Okay. All right, thank you.

All right, Mike, thank you.

Thank you, your next question comes from Claudia Shank of JP Morgan.

Thanks, very much. Good morning.

Good morning, Claudia.

Hi, Claudia.

How are you?

Very good. Thank you.

Good. I was intrigued by your comments on North America and some of the sort of pick up you're seeing in terms of some of the capital projects here. And I just wondered if you might put some color on that in terms of sort of which grades, maybe, and sort of how the outlook looks for the remainder of this year?

Yeah, we've seen pickup, Claudia, on a number of the grades. Probably less so on the linerboard side, but on the presheet uncoated, on some of the lightweight coated grades, and a lot of them are related to energy. Some of them are projects that really needed to be upgraded on -- minor upgrades on a lot of their equipment, whether it be in the doctoring and accessories side or in the water management side.

But we were very pleased, which indicated to us that there's probably a -- some more opportunity for us throughout the year.

And also I think some of the major corporations that have been bought out by private equity are also starting to release some capital to optimize their investment.

Okay, and then sort of thinking about your guidance and as we look to the second half of 2007, what are your expectations? Because it seems like given sort of the strength of this quarter I was surprised that you didn't sort of raise some expectations as you move towards the back half of the year.

Yes, that's a good question, Claudia. Well, one of the things we'd like to do is to get a little more visibility into the year, And that's because, as some of the -- like some of the business that could add to us would be large orders coming out of China, which are very difficult. Sometimes the timing of those are very difficult to predict.

We know that over the next couple of years we're going to certainly get a benefit, and as we get more into the year we'll have a better sense of what sort of capital orders may drop throughout the year. So we're going to keep an eye on it, but right now the best outlook that we have for the year is sticking to the guidance we have 'til we get further into it.

Okay. And then just maybe a comment on sort of uses of cash beyond the share buyback. What are you seeing in terms of acquisition opportunities and how are you thinking about acquisitions?

Yes, we are continuing to look at acquisitions, especially based upon the huge success that we had in acquiring and adding Johnson to our family, which also provides us other possibilities, even outside the paper industry, that we continue to look at and explore. But within the paper industry itself we continue to look at potential add-on, complimentary acquisitions.

And again, the profile would be one that they'd have a very good high technology, a great reputation, and that they would have complimentary products that would also offer us aftermarket opportunity.

But we are -- we continually -- continually look at acquisitions as well.

Okay. Thanks very much.

Thank you, Claudia.

Thank you. (OPERATOR INSTRUCTIONS).

Are there any further calls?

There appear to be no more questions at this time. I will turn the floor back to your manager for any closing remarks.

All right, thanks, operator.

In closing, I'd like to say that building on a successful first quarter we believe that Kadant is well-positioned for continued growth this year. Market conditions are generally improving around the world and we believe we have several opportunities to improve and top and botThomas lines.

Thanks, again, for joining us today and for supporting Kadant. I look forward to reporting on our progress next quarter.

Thank you, this concludes today's Kadant First Quarter Conference Call. You may now disconnect.