Kadant Inc (KAI) 2008 Q3 法說會逐字稿

Good morning. My name is Elsa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kadant, Incorporated Earnings Business Update Conference Call. (Operator Instructions.)

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

Thank you, Operator. And good morning, everyone. And welcome to Kadant's third quarter 2008 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 10Q for the fiscal period ended June 28, 2008, 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 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 Recent News.

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?

Thank you, Tom. Good morning, everyone. And welcome to our call as we review Kadant's 2008 third quarter results and comment on the outlook for the rest of the year.

Before I review Kadant's performance in the third quarter and the challenges facing us, I want to take a moment to congratulate all of our employees around the globe for helping make Kadant one of America's 200 best small companies as ranked by Forbes Magazine. This is the second year in a row that we've received this recognition and been named to the Forbes list. I am proud of this accomplishment and the ability of our talented workforce to consistently deliver value to our shareholders and our customers, especially during these tough economic times.

I'd like to begin my formal comments with the financial highlights of our continuing operations for our third quarter. Our diluted EPS was $0.50, a slight increase compared to the same period last year, excluding the results of our discontinued operations. This compares to our guidance of $0.36 to $0.38 and represents one of the highest levels of performance in the history of the company. Our revenues for Q3 were $83.7 million, or 10% lower than Q3 '07.

Although we saw good performance in our food handling and water management businesses, growth in these product lines was offset by weak revenues in our stock prep business in Asia and North America.

Product gross margins were 41% in the third quarter, an increase of nearly 300 basis points over the same period last year. This was due to improved product mix as aftermarket business constituted a higher percentage of our revenues, as well as results from our efforts to shift manufacturing to lower-cost regions.

Our bookings for the quarter were $64 million, a 39% decline from our record-setting performance in Q3 of '07. The decline in total bookings is mainly the result of lower stock prep bookings from Asia and North America, as our customers reduced capital spending in response to concerns about the global economy.

Backlog at the end of Q3 stood at $86 million, a 16% decrease from the same period last year. We did, however, have another solid quarter of cash flow from operations, which generated $6.2 million in Q3, 58% more than the same period last year. Our cash flow from continuing operations for the last 12 months was $43 million.

And finally, as announced in our earnings release yesterday, we repurchased $22.2 million of our common stock in the third quarter and received authorization from our board to repurchase up to an additional $30 million of our stock through October 22, '09. We firmly believe that repurchasing our stock is an excellent use of our cash and will benefit shareholders in the future.

Now let's look ahead to the rest of 2008. Without a doubt, uncertainty and prospects of a global recession have adversely affected our customers' short-term outlook. This is especially true in China, which is experiencing an oversupply of liner board as demand has dropped due to reduced exports. In addition, many of our customers require credit to finance larger projects, and the turmoil in credit markets has affected their ability to obtain financing. These conditions lead us to temper outlook for the remainder of '08 and 2009.

That said, our business fundamentals are strong, our balance sheet is healthy and we believe we are well positioned to weather the economic downturn during the coming months.

As I mentioned in previous earnings calls, there are four major factors that benefit us in slower times. The first is our substantial consumables and parts business that is generated from our large installed base. Consumables and parts make up about one-half of our sales and are fairly stable, even during slowdowns. They also generate higher gross margins than capital projects.

Second, many of our products offer energy and fiber-saving benefits, resulting in compelling returns on investment opportunities. Even during difficult times, these products offer attractive solutions to reduce operating costs and improve energy utilization.

Third, our global manufacturing and servicing capabilities provide increased flexibility to manage our costs as currencies and other factors change the relative manufacturing costs from region to region.

Fourth, we have consistently maintained a healthy balance sheet and currently have a small amount of net debt. In addition, we have access to capital through our established credit facilities that allow us to take advantage of opportunities such as stock repurchases and complementary acquisitions. We will continue to seek out opportunities that add value to our portfolio and believe that patience is a valued attribute in the current environment.

The point that I want to emphasize here is that we believe our business model is very robust. For more than 100 years we have been serving our customers, and our businesses have been through tough times before. Difficult times can also provide opportunities, and we will take advantage of the situation in the marketplace to build for the future.

Overall, our strategy for maximizing our business remains the same -- to deliver products and technical solutions that provide our customers a good return on their investment through energy savings and fiber yield improvements, to increase our aftermarket and consumables business, to further penetrate existing markets where market share is low and to focus on emerging markets with opportunities such as Asia, Russia, Eastern Europe and Latin America. Also to leverage our global manufacturing and sourcing capabilities and continue to ensure our cost structure is in line with expected business levels.

Although our business strategy has remained consistent, the market environment has not. I'd like to take the next few minutes to highlight some of the recent developments in the regions we serve and the potential impacts on our business. Taking a closer look at the regional economies, I'll begin in North America.

According to [REC] Economists, domestic demand for most grades of printing and writing paper as well as newsprint in North America has trended down in 2008. North American producers will be adjusting supply-side capacity or looking for new growth opportunities outside the US. In fact, we are already seeing supply management in effect with the removal of 3.25 million tons, representing approximately 3% of the annual capacity in the US and Canada so far this year.

However, increases in capacity with the startup of new tissue machines, investments in upgrading existing machines and the increased utilization rates of operating machines mitigate the negative effect that could result from these curtailments.

Despite the softening demand for paper in mature markets, we continue to see the value of the Kadant brand in launching new products and generating orders for energy-saving products. For example, two tissue manufacturers in Canada recently installed Kadant's patented dryer bars developed at our research center in Three Rivers, Michigan, and launched earlier this year to improve heat transfer in the tissue drying process. Gains in heat transfer provide the opportunity to reduce steam consumption and, in some cases, apply the excess steam capacity to generate low-cost electricity.

In another example, a liner board mill in the US recently purchased a rapid-clean filtration system to improve the quality of its well water applied to the wet end of the paper machine. This new filter system will reduce the maintenance frequency and associated costs with the mill's vacuum pumps used after the filtration system.

Now turning to Europe -- there's also a softening in paper demand. And paper capacity during the first half of 2008 was reduced in all grades except tissue compared to the first half of '07. According to RCE, further supply-side cuts may develop in Scandinavia as the Russian wood export tariffs are making the supply of Russian logs, which make up 90% of Scandinavia's wood source, uneconomical.

While the market conditions in Western Europe are similar to those in the US, Eastern Europe and Russia continue to experience relatively healthy project activity, although we are mindful of the potential impacts of restricted credit on this region.

In Latin America, where paper consumption is relatively low per capita, we see a slight improvement in paper demand. Kadant's business activity in Latin America has been encouraging with several recent dryer section rebuild projects in Brazil and Chile and a stock preparation system designated for El Salvador. The 100-ton-per-day stock prep system will be installed at a tissue mill and is valued at $2 million.

At the end of the quarter, we received an order valued at approximately $4.2 million from a Colombian tissue producer for a 130-ton-per-day deinking line.

Finally, I'd like to comment on the market conditions in China and how Chinese paper makers are responding to current economic developments. For the last several years, paper producers in China have been aggressively adding capacity to feed China's booming export business. The global slowdowns and the resulting reduction of exports from China have caught China's paper industry by surprise, leading to an oversupply of liner board.

During the last earnings call, I indicated that China's paper producers were building inventory as demand waned and planned capacity increases were brought on line. To address the oversupply, market-related downtime was reportedly taken in September, and it was noted that many producers were taking downtime during the Chinese national holiday from September 29th through October 5th.

Recently, China's two largest container board producers, Nine Dragons and Lee & Man, announced delays or cancellations of several new machines. We see these moves as prudent, and would expect that supply-side control reflects market demand. We also expect it will take some time to absorb the excess capacity that is currently in the market or slated to come on line.

It's important to acknowledge that the longer-term fundamentals of China's economy are still in place. China's GDP grew 9% in the third quarter of '08. And the low per capita paper usage is expected to continue to grow from its current levels.

We continue to focus on building our aftermarket business in China and around the globe, leveraging our large installed base and emphasizing a return on investment found with our energy and fiber-saving products. Bookings for our water management and accessory product lines in China doubled during the first nine months of '08 compared to the first nine months of '07. And our stock prep aftermarket revenue in China increased twofold during the same period.

Although we don't know when the global economy will rebound, we do know that our business fundamentals are solid. And we are in a strong position to seek opportunities as they arise.

Prior to passing the call over to Tom, I'd like to comment on our guidance for '08. Despite the current economic environment, we believe Kadant is well positioned to withstand a global slowdown. Our spare parts business and consumable sales, which make up approximately 50% of our total revenue, are relatively stable even during sluggish economic periods. The decline in stock prep bookings, however, will have a near-term impact.

As we discussed in our July earnings call, we had included approximately $15 million in revenue and $0.09 of diluted earnings per share associated with the large systems order for a new customer in Vietnam in our full-year guidance. We had noted that the customer had been unable to open a Confirmed Letter of Credit, which we required in this transaction before making any shipments.

The customer has made significant progress in arranging financing for this project, including a 30% down-payment and a Letter of Credit for a portion of the remaining amounts. However, partly due to the worldwide credit crisis, we do not expect the customer will complete all the steps necessary for us to recognize revenue and income on the order in the fourth quarter. We now expect to recognize revenue and income from this project in early 2009.

Based on this development and the general market conditions I have discussed, we now expect to achieve GAAP-diluted EPS of $0.18 to $0.20 from continuing operations in the fourth quarter of '08 on revenues of $75 to $77 million. For the year, we now expect GAAP-diluted EPS of $1.54 to $1.56 on revenues of $337 to $339 million. Had we included the income from the large systems order from Vietnam, we would have been at or near the low end of our previous full-year guidance.

I will now turn the call over to Tom for a more detailed review of the financials. Tom?

Thank you, Bill. I'll start with our revenue performance. Consolidated revenues were $83.7 million in the third quarter of 2008, 10% lower than last year including a 4% favorable effect from foreign exchange. Revenues were slightly below our guidance for the quarter of $86 million to $88 million, primarily due to lower-than-anticipated sales in our stock prep and fluid handling product lines.

In general, we had solid revenue performances in our water management and fluid handling product lines, offset by weakness in our accessories and especially in our stock prep product lines.

Let's now look more closely at the revenue performances in each of our major product lines. Stock prep revenues were $30.3 million in the third quarter of 2008, down 27% from last year including a 5% favorable effect from foreign exchange.

As was the case last quarter, the major contributor to the decline was our business in China with stock prep revenues of $7.1 million were down 62% from last year including a 3% favorable effect from currency. Our capital business in China continues to be very weak, with few large system projects underway and few on the immediate horizon.

The same was true of our stock prep business in North America, which was down 29% compared to the third quarter of 2007, in part due to a large [system] project in last year's results. In contrast, our European-based stock prep business had a strong revenue performance. Stock prep revenues here were up 55% compared to last year, including 16% from the favorable effects of currency, with some of the larger projects originating in Russia, Greece, Portugal and Colombia.

Revenues in our water management product line increased 22% from last year, including a 1% favorable effect from foreign exchange. In North America, revenues increased 23% compared to the third quarter of 2007, including a 1% favorable impact from currency, largely due to higher sales in our formation and infiltration product lines, especially in the US. European-based revenues were up 12% over last year including a 5% favorable currency effect.

Turning to our accessories product line, revenues were $15.2 million in the third quarter of 2008, down 9% from last year and included a 1% favorable effect from currency. Revenues declined in both North America and Europe due in part to lower sales to fine paper and coated paper producers, who have in turn seen reduced demand for their products due to the weaker global economy. We also believe that some mills are running longer intervals between maintenance and, in some cases, are only replacing critical parts that directly affect machine up-time.

And finally, to round off my discussion of revenues, our fluid handling product line posted another solid revenue performance in the third quarter of 2008. Revenues here were $27.3 million, up 9% over last year including a 7% favorable effect from foreign exchange.

As was the case in the second quarter of 2008, the major contributor to the revenue growth in this product line came from our European business, where revenues increased 30% over the third quarter of 2007, including 9% from foreign exchange. Here we continue to see project activity in mills, especially in Eastern Europe and Russia, particularly for machine rebuilds. Revenues were also strong in Latin America and in our Southeast Asia business. Partly offsetting these revenue gains were decreases of 16% in the US and 6% in China, the latter of which included an 18% favorable effect from currency.

The US market remains relatively weak, despite excellent ROIs on energy-saving projects as some customers continue to defer projects due to spending restraints and the increased uncertainty in the economic outlook.

Now turning to our product gross margins. For the second quarter in a row now we've seen excellent results in the gross margin line. Consolidated product gross margins were 40.9% in the third quarter of 2008, up 280 basis points over last year. This improvement occurred entirely in our paper making system segment, where gross margins of 41.5% were 310 basis points higher than third quarter of 2007. The increase in our paper making systems segment was primarily due to a better product mix -- that is, a larger proportion of higher-margin aftermarket revenues and fluid handling revenues, as well as higher margins in our water management product line.

Gross margins were lower than last year in our other categories, although this only adversely affected our consolidated gross margins by 30 basis points, largely due to higher prices for natural gas, which is a major component of the manufacturing costs in our fiber-based products business. As you may know, gas prices have dropped significantly, and we expect improved results for this business next year.

Now let's look at our SG&A expenses for a moment. SG&A expenses were $24.4 million in the third quarter of 2008, up $400,000 or 2% from last year. This increase includes $1 million from the unfavorable effect of foreign exchange, as well as a decrease of $1 million associated with lower employee incentives compensation expense. Due to lower revenues in the 2008 period, SG&A as a percentage of revenues increased from 25.9% in the third quarter of 2007 to 29.2% in the third quarter of 2008.

Now on to our EPS results. We reported GAAP-diluted earnings per share including the discontinued operations of $0.50 in the third quarter of 2008, compared to $0.40 in the third quarter of 2007. The discontinued operations reported break-even results in the 2008 period, compared to a loss of $0.09 in the 2007 period. So excluding the discontinued results, income from continuing operations was $0.50 in the third quarter of 2008, compared to $0.49 in the third quarter of 2007, an increase of $0.01 per diluted share.

This improvement of $0.01 per diluted share, which compares to a very strong quarter last year, includes increases of $0.09 from the following; $0.03 due to a gain on the sale of property, net of restructuring costs; $0.02 due to a lower effective tax rate, which in turn was largely the result of several discrete, nonrecurring tax benefits; $0.02 due to lower shares outstanding, for which I will give more details in a moment; $0.01 from the net favorable effects of foreign currency translations; and $0.01 due to lower net interest expense.

Now let's turn to the balance sheet and our cash flows for a moment. We ended the third quarter with $59.8 million in cash and $61.1 million in debt, leaving us with a net debt position that is debt less cash of $1.3 million. This compares to a net debt position of $7.2 million in the third quarter of 2007, or a reduction in our net debt of $5.9 million compared to last year. In the second quarter of 2008, we were in a net cash position of $10.9 million, and the change from the second quarter to the third quarter of 2008 was largely the result of significant repurchases of common stock in the third quarter of 2008.

Encouragingly, cash flows from operations were a solid $6.2 million in the third quarter of 2008, an increase of $2.3 million or 58% over last year. For the first nine months of 2008, cash flows from operations of $17.1 million have more than doubled over the same period last year.

Now with respect to our stock repurchase program, during the quarter we repurchased 945,600 shares of our common stock in open market transactions for a total purchase price of $22.2 million. Through the first nine months of 2008, we have purchased over $1.6 million shares of our common stock at a cost of $41 million. The effect of these purchases will be to lower our fourth quarter 2008 weighted average diluted shares outstanding to approximately 13 million shares, compared to 14.4 million shares in the fourth quarter of 2007.

Partly to fund these repurchases, we borrowed an additional $16 million under our fully revolving credit facility at an average interest rate of 3.2%. I should add that we still have approximately $27 million of committed lines available under this facility as of the end of the third quarter, and an additional $175 million in uncommitted credit lines available from our bank group and from our [proved] shelf facility, both of which we entered into earlier this year.

And that concludes my review of the financials. And I will now turn the conference back to the operator for our Q&A session. Operator? Elsa?

Thank you. The floor is now open for questions. (Operator Instructions) One moment while we hold for questions.

Our first question is coming from Claudia Hueston with JPMorgan. Please go ahead.

Thanks very much. Good morning, guys.

Good morning, Claudia.

Just a couple of questions here. First, this is on Asia. I was wondering -- you know, obviously we've heard about Lee & Man and Nine Dragons. I wondered what you're hearing from some of the smaller manufacturers in Asia. And then, just sort of beyond the soft prep business -- you know, how are the parts in consumables and sort of the growth in the accessories? Have you noticed any shift in trends there in the last month or so as things have really slowed down?

Concerning some -- that's a good question, Claudia. Concerning some of the smaller customers that we have in China, we're actually still quoting and still see some active projects. And on some varying grades of paper as well. So I mean, China -- although it's not going to have that big, robust contribution on major capital orders that we've seen in the last couple of years -- we still expect to get some orders out of China.

And concerning our parts, consumables and the blade business, on the water management accessory side of the business we continue to make gains there. We had good increases over the previous year. We also see our parts business in the stock prep area -- you know, doubled over the previous year.

So we continue to see -- and I think one of the advantages that we have in this marketplace now is we've established a large installed base in China over the past few years in stock preparation. And I think -- you know, we're going to continue to see opportunities to mine that installed base for parts. And we're also seeing a nice pickup and gain in our basket business as well. And that basket business, not only for Asia, but that's also all manufactured in China, is going to help us throughout the world.

Okay. That's helpful. And sort of -- you know, picking up a little bit on that -- you know, your margins in the core business were quite good in the quarter. And I didn't know if maybe you could talk a little bit about what's sort of driven just by mix and a little less stock prep in there. But what also might be a result of some of the productivity and sort of global sourcing that you've done over the last couple of quarters?

Well, I think that the mix obviously helped, as we had more percentage of the parts and consumables. But on the other hand, we also had a fair amount of pickup because of the global sourcing that is now taking place out of our lower-cost facilities in Asia and in Mexico, for example.

And where would you say--?

So it's really a combination of the two.

Thanks. Where would you say you are in that sort of -- in that ramp-up of sourcing more from some of your other-- your Mexican operations or your Asian operations? Is there still more to come?

Yes. I think that -- in Mexico, I think we're really pretty well-situated at this point in terms of capacity and ability to produce capital equipment on water management accessories, and certainly for North America.

In China, we've made major improvements on those lines as well. Because we're now -- that's helping us establish a good, strong base for our accessories and water management business, along with our fluid handling business.

Concerning stock prep, we see there now we have the ability within China to manufacture just about our entire line of stock preparation equipment. So not only for the Asian markets, but we're also going to benefit on a margin opportunity by sending components whether they be for parts or systems to feed Europe and North America and the rest of the world as well.

So we're far better off today than we were a year ago. We accomplished a great deal in the past year. And on the basket business as well, we had added capacity over this past year. And we've trained a workforce. And consequently we reduced our delivery times dramatically on baskets, which are going to really help us penetrate markets in North America and Europe.

Thanks. That's helpful. And then, maybe just two for Tom. Any comment on the tax rate? How we should think about it for the fourth quarter? And any early guidance for '09? And then similarly, I don't know if you have any thoughts on capital spending yet for 2009.

Well, it's actually for the fourth quarter. I think I can answer that one. That -- the recurring rate will be 30%. In fact, that was actually the recurring rate in the third quarter as well. We had some discrete items that lowered it in the third quarter. So I would use 30% in the fourth quarter. And I would think the next year, it's a little early to say that on the tax rate. But you know, we should be in the same general range for next year.

Okay.

CapEx I can tell you for this year will be somewhere-- you know, I think we've only spent about $4 million or a little bit more than that so far through the first three quarters. We're still expecting somewhere -- you know, $7 to $8 million for the year in CapEx. And next year I think it will probably return to more traditional levels that we've had, which is -- you know, somewhere around 1.5% of revenues.

Okay. Perfect. Thank you guys very much.

Thank you.

Thank you, Claudia.

Thank you. Our next question is coming from Paul Mammola with Sidoti & Company. Please go ahead.

Hi. Good afternoon, guys.

Good morning, Paul.

Good morning.

Just a quick question on cash. Obviously, you had a good quarter in terms of operating cash generation. I guess what are the primary uses? Are acquisitions in the picture here? Or would buybacks be the primary use?

Well, Paul, I guess we continue to look at both as an opportunity. Certainly stock buybacks, as we commented on, were very active in the third quarter. And we still see opportunities in stock buybacks. This is why we had obtained this additional authorization.

On the other hand, we've also very successfully in past down cycles have looked carefully and accomplished some good acquisitions. And in down cycles and in economic cycles like this, there could be some great opportunities for us to add complementary acquisitions to our product line, whether it be within the paper industry or in other industrial markets outside paper. So both of them we continue to look at and try to optimize shareholder value.

Okay. And I guess building off that, you mentioned previous acquisitions. Obviously Kadant Johnson is a big part of holding EPS steady here. You know, do you think it's fair to assume if fluid handling holds up in the fourth quarter that -- you know 10 to -- or $0.18 to $0.20 might be very conservative? Considering again that fluid handling holds up?

Well, yeah. Just -- well, fluid handling certainly is a big contribution to that. It's just very difficult. I mean, based on what we have now and the shifting of this order that we had out of Vietnam from the fourth quarter into first quarter certainly has influenced our guidance for the fourth quarter.

You know, as I commented if that would've remained in there, if we would've received all the assurances of payment through Letters of Credit, we would've been at or very near our low guidance for the quarter.

So some of it I guess is just sitting back and taking a look and watching all the economic events taking place throughout the globe. And I guess, I'd rather err on taking a look at what we really are fairly confident of achieving at this point.

Okay. And I guess that's helpful. Would you classify -- you had some good color on what your customers are doing. But would you classify financing for all customers in Asia as difficult right now? Or is it more selective to -- you know, I guess single customers in Vietnam and such?

Yeah. I guess it's somewhat selective, Paul. I mean, there are some customers, obviously, that are still looking at proposals. And not necessarily the big giants, but some of the other ones. Because for example, within China they're developing their own consumer base, primarily on white grades of paper. And you know, we certainly have opportunities to get involved in them.

And then in other parts of the world, it depends upon the customer and their availability of capital, whether they have their own cash or funds to fund projects, or on the other hand if they have credit and access to going to the markets for capital. So it does vary.

Okay. Thanks for your time.

All right. Thank you, Paul.

Thank you. Our next question is coming from Walt Liptak with Barrington Research. Please go ahead.

Thanks. And good morning, everyone.

Hi, Walt.

Good morning, Walt.

I wonder if I could just drill down a little bit on the situation in China? And I wonder if you can tell me what the capacity utilization is running at some of the customers like Nine Dragons or Lee & Man? Do you have that detail?

Yeah. I think sometimes we don't get as accurate information as currently as we do in other parts of the world. But our sense right now is that they've shut down and they've -- you know, some of the machines right now. And they have fairly high inventories. So I think on liner board, they're probably on the machines that are running are probably running more like the 90% to 95% range. Because they've shut some of the capacity down.

And then on some of the other grades of paper, they are running it fairly close, , continuing to run it to around the 90% to 95% range. This is why they're still looking at adding some capacity on paper outside of liner board. I think liner board itself in general, especially on the major ones, I don't think we're going to see any major thrust in projects like that for the next year or

For a year or two?

But there are certainly other opportunities for us within China. And I think the good thing that we have is that installed base now. Now is the opportunity for us to really go in and mine that. And for us, that's going to be a great opportunity over the next couple of years.

Okay. Do you know what the breakdown is between the white paper and the liner board in terms of their capacity?

The liner board right now is making up the bulk of it. It's probably making up somewhere around three quarters to 80% of their capacity. It's by far the largest one. Because that had related primarily to feed their manufacturing base. And I think that on the other hand, I don't see much growth in that over the next year or two. I do see more growth coming out of the white grades.

And on the white grades of paper, by the way, we certainly get involved with stock prep. But there we even get more of a benefit out of our accessories and water management product line as well. And on projects, I should also mention that we continue to talk about stock prep there. But there're also on smaller scales, we do get involved in projects on our water management systems and our accessory systems as well as on the fluid handling projects there.

Okay.

So you know, China's still -- you know, we still look at it as a very viable market for us. But we just see that growth certainly is going to slow down for us for the next year or two.

Right. On the liner board side?

On the big liner board projects.

What -- over the last couple of years, what percentage of China has been those two big customers?

What would you say, Tom, on that? I'd say that -- yeah. I'd say probably around about half of our big projects, our major stock prep hard projects came out of those two. They were really leading the pack.

Okay. Okay. And do you have an idea of the value of the business that's getting pushed out? I guess I could back into it based on the way you answered these questions. But you know, as you talk to your customers do you know? Are there known projects where you could say X millions of dollars have been mothballed or pushed out for a year or two?

We have -- I guess we have seen some of that where we had anticipated perhaps some activity in '09 that is now pushed back and probably may occur in '10. But you know, some of that is so hinged right now and so difficult, Walt. Because what we really look at is -- and a lot of that depends upon how quickly economies pick up and what happens in Western Europe and what happens in North America. Because you know, they feed so many products into these markets. So a lot of that is hinged right now. So we're trying to grasp a handle on that as well.

Okay. Yeah. Thanks for trying to answer that. The aftermarket opportunity and I think I've heard numbers thrown around before but what percentage of sales in China have been OEM equipment versus aftermarket parts and sales? I guess I'm trying to get to a number of what kind of opportunity do you have there now that you've got the nice installed base?

Well, I think on the stock prep business because a lot of our consumables in our water management goes into the parts area. But if I go into the -- you know, where we have the huge install base in stock prep. I mean, we're at a level right now because a lot of these systems were just started up in the last year or two. And so we're just in the very early stages of where they'd really require the parts. But this year we're going to be at a level of around -- just to give you a sense of around $7 million.

And having said that, I would think that over the next few years, it's going to get up closer into the level of around $25 to $30 million. Especially if we start feeding baskets into that. And it's -- and over the next five or six years, it's going to get probably about the same level as we have in the US. And in the US we've been operating primarily on aftermarket business for the installed base that we have over the last couple of years. So there's a great opportunity for us.

Okay. Good. And then, Tom, when you were going through the different product categories; water management, I didn't catch the revenue number that was up 22%.

Oh. Water management?

Yeah.

Okay. Hold on a second. It was up 22%. And that--

Okay. Do you have the dollar amount of revenue?

Oh. The dollar amount of revenues for water management?

Yeah.

Do I have that number? It's around $8.5 million. It might be off a little. All right?

Okay. Thanks, guys.

Yes.

Thank you, Walt.

Thank you. (Operator Instructions.)

No further questions, Operator?

No. There appear to be no further questions. I'll turn the floor back over to you.

Thank you, Operator. In closing, I'd just like to say that we believe Kadant is well positioned to capitalize on opportunities, even during times of economic uncertainty. Importantly, a robust parts and consumable business, energy-saving products and healthy balance sheet provide stability during challenging times and flexibility to achieve our goals. I look forward to reporting on our progress as we work toward implementing our strategies and meeting our operational and financial goals for the remainder of 2008.

Thank you for joining us today and for supporting Kadant.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.