Kadant Inc (KAI) 2009 Q3 法說會逐字稿

Good morning. My name is Latanje and I will be your conference operator today. At this time, I would like to welcome everyone to Kadant's third quarter earnings updates 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 session. (Operator instructions)

Thank you. I would now like to turn the conference over to Mr. Thomas [Wayne,] Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. This is Thomas O'Brien. And good morning everyone and welcome to Kadant's third-quarter 2009 earnings call. With me on the call today is Bill Rainville, our Chairman and Chief Executive Officer and John Painter, our President and Chief Operating 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 period ended July 4, 2009, 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 Investor 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?

Thanks, Tom. Good morning everyone. Thank you for joining us today as we review Kadant's 2009 third-quarter results and comment on our outlook for the rest of the year. While '09 has been a challenging year, we are encouraged by the increasing number of positive reports suggesting industrial activity is beginning to rebound and our customers are becoming healthier with respect to their balance sheets and cash flow.

Likewise, we are seeing early indications of positive trends, particularly on a sequential basis with respect to our bookings and revenues. However, our outlook remains tempered as paper and board demand recovery trends remain flat and the general consensus among our key customers suggests no material recovery in the near term.

Following a review of our third-quarter financial performance, I will provide an update on industry developments, our business activities around the globe and our outlook for the remainder of '09. I'll start with a review of our financial performance.

Revenues for the third quarter of '09 were $54 million, or 36% lower than the same period in '08. This drop in revenue was found across all of our major product lines. However, revenues were up sequentially from Q2 to Q3 by 7%.

Our bookings for the quarter were $62 million compared to $64 million in Q3 '08. Encouragingly, Q3 bookings in all of our product lines experienced sequential increases from Q2 of this year. This was particularly evident with our stock preparation product line where we booked several large system orders in Q3.

Gross margins in Q3 remained strong at 41%. While still weak relative to previous years, operating income from our papermaking system segment was $3.9 million in Q3, representing the best quarterly performance to date in '09. Our SG&A expenses were 20% lower than Q3 last year, showing the impact of our restructuring efforts. And when markets do recover, we expect to see improved profitability of our businesses as a result of the actions we have taken to align the Company's cost structure with current market conditions.

EPS for Q3 was a loss of $0.01 compared to our GAAP EPS guidance of a loss of $0.28 to $0.30. The EPS performance was boosted by higher than anticipated revenue and gross margin contributions, primarily from our stock prep product line. Despite the challenging economic environment, we had another solid quarter of cash flows from operations and generated $13 million in the third quarter. This performance resulted in strengthening our net cash position at the end of the third quarter to $11 million.

Taking a closer look at our regional markets, I'll begin in North America. The anticipated capacity closure announcement by International Paper and a more recent announcement by West Fraser will permanently remove approximately two million tons of containerboard capacity from the market. While these permanent closures are expected to bring supply in better balance with demand and help to support an increase in operating rates to levels above 90%, the closing of these mills does negatively affect our North American business.

In most grades, pricing is holding up. Inventories are at near record lows and demand declines are moderating. North American operating rates are hovering close to 90%, yet the increase in operating rates over the past few months has provided only a modest uptick in our consumables business as mills continue to manage cash tightly and limit spending. That said, we do expect higher operating rates and production levels will lead to increased consumables and spare parts business once the recovery takes hold.

In our North American capital business, we are seeing mills continue to restrict spending. We have, however, received a number of smaller capital system projects that were reflected in our Q3 bookings and some more recent orders booked in Q4.

For example, a specialty packaging producer in the US placed an order for the rebuild of its steam joints and syphon equipment for its dryer section while a Canadian pliant paper producer signed a two-year doctor blade contract with us in September. In addition, we booked several capital orders in Q3 for stock preparation equipment used in tissue production and are seeing increased requests for upgrading recycling systems as US mills look to improve their cost competitiveness using newer stock prep technology.

Turning to Europe, paper and board demand in '09 has been weakened by both the depressed economy and the strong euro which has had a negative impact on Europe's export market. The capacity closures in Europe, however, have been small compared to the large drop in demand in both domestic and export markets. This in turn has led to European operating rates dropping into the low 70s earlier this year. But unlike North America, European rates have yet to return to higher levels. European operating rates across all grades are expected to remain low during the second half of '09 and into the first half of 2010. As a result, we see Europe lagging the rest of the world in the recovery.

Despite the low operating rates and less than favorable market conditions, we are seeing some capital projects moving forward. For example, last week we booked an order for a Petax fine filtration system from a major printing and writing producer in France. The patented Petax filtration system allows for the recycling of white water used in the papermaking process resulting in reduced fresh water consumption and lower water treatment costs. This system is expected to ship in the first half of next year.

In addition, we are actively negotiating fluid handling system orders with papermakers in Russia, Finland and Turkey and expect to conclude these negotiations in the near term. And just a few weeks ago, we booked an order in the UK for fluid handling equipment for an application that converts solid waste into an organic fiber that can be used as fuel. Applications of this type of closed-loop system are becoming more and more relevant as communities and waste management companies look for environmentally friendly ways to reduce landfill waste through economically viable recycling methods of household and commercial waste.

In Latin America, an improvement in containerboard demand was seen in both August and September with Brazil's containerboard demand increasing 5% in September compared to the previous month. This increase in demand, along with higher pricing for recovered paper, has driven up pricing for containerboard. And the tissue sector recently reported that Chile-based CMPC will invest $80 million to build a new tissue machine and converting lines at plant near Santiago, Chile.

Kadant's recent business activity in Latin America has been encouraging with several dryer section rebuild projects and a major system order from a leading tissue producer in Q3 for a stock prep system valued at approximately $8 million. This system referred to in our previous earnings call and in a press release issued yesterday was expected to be installed by August, 2010.

And finally, in Asia we continue to be encouraged by the increased activity in China as producers ramp up plans to rebuild or expand existing operations. While the current recovery has been driven primarily by stimulus-related investments in exports, China's DDP grew nearly 9% in the third quarter of '09 and is expected to grow nearly 11% in Q4.

We recently returned from visiting our major operations around the globe and during our visits to our plants in China, we were encouraged to see the improvements taking place and the signs of increasing economic activity. Our business leaders in China are optimistic about the growing activity in capital projects and are actively pursuing opportunities in all of our product lines. We believe that the longer-term fundamentals of China's economy are still in place and the country's economic recovery will stimulate increased demand for Kadant products and services.

For example, we received two major orders worth approximately $6 million for stock prep systems for linerboard producers in Q3 and booked three more system orders worth approximately $3 million early in Q4. In addition, we received a contract from a Taiwan-based OEM for fluid handling equipment and steam system for a recycled packaging producer in Indonesia. And we are in the final negotiation stage to secure two orders for fluid handling systems from a paper producer in China.

As these examples demonstrate, we are seeing some bright spots developing around the globe. However, we remain cautious about the timing and strength of a market recovery. Our booking rates have improved due to some larger system orders from Latin America and China, but we have yet to see a material increase in global bookings for spare parts and consumables.

Encouragingly, revenues for spare parts and consumables did see a sequential increase of approximately 6% from Q2 to Q3. The increase in operating rates in some sectors, coupled with the restrained consumable spending during the first three quarters of '09, lead us to believe that spending will improve in the coming months. That said, we also believe that overall the recovery of our booking rates will be somewhat choppy and uneven from quarter to quarter.

We will continue to focus on managing our business to reflect the economic uncertainty and believe that we are well positioned for growth when global capital equipment markets recover. In the meantime, Kadant enjoys a position of relative strength with respect to a healthy cash flow, large installed base and experienced management team.

As we have outlined in previous earnings calls, our business strategy is particularly appropriate for uncertain times. We are continuing our focus on our after-market and consumables business and on delivering products and technical solutions that provide our customers a compelling return on their investment. Our initiatives to expand our market share of stock prep parts in China, lower our global market share of screen baskets and further penetrate markets with our accessories and water management products are bearing fruit.

In particular, bookings of our accessories and water management product lines in China are up 20% in Q3 compared to the same period last year. We also continue to emphasize the energy saving opportunities available with our fluid handling products marketed to paper and nonpaper industries and are encouraged by the increased business activity being reported by our sales team.

While the activities I mentioned earlier are offering encouraging signals of economic recovery, we do not expect to see a significant increase in business activity in the near term. For the fourth quarter of '09, we expect to report a GAAP diluted earnings per share of $0.02 to $0.04 from continuing operations on revenues of $55 million to $57 million. For the full year, we expect to report a GAAP diluted loss per share of $0.30 to $0.32 from continuing operations on revenues of $224 million to $226 million.

Tom will provide additional details on our financial performance in his review. Tom.

Thank you Bill. I'll begin with our revenue performance. Consolidated revenues were $53.7 million in the third quarter of 2009, 36% lower than last year, including a 3% unfavorable translation effect from foreign exchange. The revenue results exceeded our guidance which was $46 million to $48 million due to higher revenues in our stock prep product line.

Revenues were lower than last year in all our major product lines, ranging from 22% down in accessories to 47% lower in water management. We've added disclosures showing the product line revenue results in the comparisons to last year with and without getting effect to currency changes and you can see this information in the schedule attached to the press release that we issued yesterday. In general, our revenues continue to be negatively impacted by production curtailments, mill closures and paper machine shutdowns with weak results compared to last year in all our major geographic regions, especially in Europe.

Papermaking system segment revenues in Europe were 45% lower in the third quarter of '09 compared to last year's quarter and included a 4% unfavorable effect from foreign exchange. China revenues were down 31% and revenues in North America were 28% lower than last year including a 1% unfavorable effect from foreign exchange.

On a more positive note, however, in the third quarter of 2009 we reported the first sequential increase in quarterly revenues since the second quarter of 2008. In fact, revenues in each of the product lines in the papermaking systems segment were sequentially higher in the third quarter of 2009 compared to the second quarter of 2009, with the exception of water management.

These sequential revenue increases, taken together with our bookings results, where every product line increased sequentially over the second quarter of 2009, suggest that we may have seen the end of quarterly revenue declines brought on by the recession.

Now, before leaving the revenue discussion, I do want to take note of our stock prep business in China. Revenues here were $5.5 million in the third quarter of 2009, down 23% compared to last year. Importantly, however, bookings of $8.7 million more than tripled over last year. As Bill noted in his remarks, China appears to be recovering from the recession more quickly than other regions and this is especially the case in the capital portion of the business.

And finally to end the revenue discussion, revenues in our fiber-based products business were $1.4 million, down 19% from last year largely due to the timing of orders for our [biodeg] products. Nevertheless, revenues for the first nine months of 2009 are up 4% compared to last year as this business, which serves a diverse customer base outside the paper industry, has been less affected by the economic recession.

Now turning to our product gross margins, consolidated product gross margins were 40.8% in the third quarter of 2009, down 10 basis points from last year. In our papermaking systems segment, gross margins of 41.2% were 30 basis points lower than last year largely due to lower margins in our water management product line. Margins in water management were significantly lower than last year and had the effect of decreasing our consolidated gross margins by 150 basis points due to under-absorption of overhead caused by lower sales volumes. Also, water management gross margins were negatively affected by the costs associated with consolidating the US water management manufacturing facility into our US accessories manufacturing facility, a combination which is now been completed. Partly offsetting this decline was a favorable product mix towards higher margin parts and consumable products in the third quarter of 2009 compared to last year, as well as higher margins in our stock prep product line.

Gross margins were significantly higher than last year in our other categories and served to increase our consolidated gross margins by 30 basis points in the third quarter of 2009 compared to what they otherwise would have been, largely due to lower natural gas prices in our fiber-based products business.

Now let's look at our SG&A expenses for a moment. SG&A expenses were $19.6 million in the third quarter of 2009, down $4.9 million or 20% from last year. This decrease includes $700,000 from the favorable effect of foreign exchange as well as reductions from the restructuring initiatives that we began in the fourth quarter of 2008. The impact of those restructuring actions have now taken full effect and we expect SG&A expenses for the full year 2009 to be approximately $82 million, or $18 million lower than last year, including $3 million due to the favorable effect of foreign currency translation.

Now let me turn to our EPS results for the quarter. We reported a GAAP diluted loss per share from continuing operations of $0.01 in the third quarter of 2009 compared to income per diluted share of $0.50 in the third quarter of 2008. The third-quarter 2009 results include an incremental tax provision of $0.03 and a restructuring charge of $0.03. The reported results from the third quarter of 2008 include a net gain of $0.03 associated with the sale of property net of restructuring costs. So excluding these items in both quarters, adjusted EPS was $0.05 per diluted share in the third quarter of 2009 compared to $0.47 in the third quarter of 2008, or a decrease of $0.42. You can see the calculation of adjusted EPS in tabular form in the earnings press release that we issued yesterday.

This decrease of $0.42 in adjusted EPS includes $0.01 from higher net interest expense and $0.01 from the unfavorable effects of foreign currency translation. The remaining decrease of $0.40 was due to lower operating results in the third quarter of 2009 compared to the third quarter of 2008.

Let me also take a moment to compare the actual diluted EPS results in the third quarter to the guidance which we issued during our August, 2009 earnings call. Our GAAP diluted EPS guidance for the third quarter of 2009 was a loss of $0.28 to $0.30 and this included $0.14 of incremental tax expense and $0.04 of restructuring costs. Excluding the tax and restructuring items therefore, the adjusted diluted EPS guidance was a loss of $0.10 to $0.12 and this compares to the actual adjusted EPS income of $0.05 that I just referenced or a favorable variance of $0.15 to $0.17. This favorable variance was entirely due to higher operating income primarily in our stock prep product line.

We reported $800,000 of operating income in the third quarter of 2009 compared to our guidance which was an operating loss of $2 million to $3 million.

Now turning to the balance sheet, we had an impressive quarter for operating cash flows, in fact one of the best we've ever had in the history of the Company. Cash flows from continuing operations were $13.2 million in the third quarter of 2009, up 113% compared to a solid result last year. For the first nine months of 2009, operating cash flows were $31.8 million, an increase of $14.6 million. or 86%, compared to the same period last year. The third quarter of 2009 marked the ninth consecutive quarter we recorded positive operating cash flows. Much of the improvement in operating cash flows in 2009 stems from reductions in working capital and I'll have more to say on that in a moment.

Now with this excellent operating cash performance, we are now in a net cash position for the time since the second quarter of 2008. We ended the quarter with net cash, that is more cash than total debt, of $10.7 million, an improvement of $13 million compared to our net debt position of $2.3 million in the second quarter of 2009. At the end of 2008, we had $15 million more debt than cash so the swing to a net cash position reflects improvement of almost $26 million in the first nine months of 2009.

I should also note that we paid off all our debt in China during the quarter. Our remaining debt of $23 million, all of which is in the US, consists of $15 million under our revolver and $8 million under our real estate loan.

With respect the financial covenants in our $75 million credit facility which runs to 2013, due to the improvement in operating income we were comfortably in compliance with both the fixed charge and the leverage ratio covenants in the third quarter of 2009. If we achieve our operating income guidance, we expect to be in compliance in the fourth quarter of 2009 as well, lessening any short-term need to seek an amendment to the credit agreement.

Now a word or two on working capital -- our working capital, here defined as current assets less current liabilities excluding cash, debt and the discontinued operation, was 13.6% of our last 12-months revenues and this represents our lowest, that is our best, performance since the first quarter of 2007.

A year ago in the third quarter of 2008, this working capital measure was 17.8%. Working capital reductions have contributed over $31 million towards operating cash flows in the first nine months of 2009 and this reflects both the decrease in revenues and improvements in our working capital management over that period. For example, our DSO was 75 days in the third quarter of 2009, down from 82 days a year ago. Moreover, we believe that we still have opportunities to further improve our working capital position and we'll be working on those in the coming quarters.

Before concluding my remarks, I'd like to give you a few additional details on our earnings guidance. As we noted in the press release issued yesterday, in the fourth quarter we expect GAAP diluted EPS of $0.02 to $0.04 including approximately $0.03 of additional net tax expense compared to a more normalized provision and $0.01 due to restructuring costs.

For the year, the expected GAAP diluted loss per share of $0.30 to $0.32 includes approximately $0.28 of additional tax expense and $0.13 of restructuring costs. Remember that the additional GAAP tax expenses have no impact on our operating cash flows, nor do they affect in any way the calculations used to determine compliance with our debt covenants.

Now with respect to operating income, we expect GAAP operating income in the fourth quarter of 2009 to be between $1 million and $2 million, including approximately $200,000 of restructuring costs. GAAP operating income for the full year 2009 is forecasted to be between $0.8 million and $1.8 million, including $2.5 million of restructuring costs.

I do need to caution that this remains an extraordinarily challenging forecasting environment for us due to the market conditions and to a number of factors which are giving rises to higher unpredictability in our effective tax rate. As a result, there may be more variability than usual between our guided and actual results.

That concludes my review of the financials and I will now turn the conference back to the Operator for our Q and A session. Operator?

(Operator instructions) Claudia Hueston; JPMorgan

Thanks very much. Good morning.

Good morning, Claudia.

Hi, Claudia.

You guys did a really nice job on working capital. And, Tom, I was just hoping you could elaborate a little bit on where you see the opportunity to continue to improve that in the next couple quarters.

Well, Claudia, right, I mean, I think our operating people in subsidiaries have done a terrific job so far this year on working capital. We've actually reduced our working capital by about $32 million this year. And I think the remaining challenges that we have, and opportunities, are really in our inventories. So we're refocusing our efforts there and obviously we want to continue to deliver parts and consumables and all our equipment to customers on time. And our on-time deliveries are very important to us, but we still think that we have some opportunities to reduce inventory and I think that's where we'll be concentrating our efforts.

Okay, that's helpful. And then I mean if you just look at the balance sheet and the strength, obviously the cash position at this point, how are you thinking about uses for cash? What are you seeing out there in terms of the M&A environment? And how are you prioritizing sort of M&A versus internal growth versus buybacks?

Well I think certainly, Claudia, we see opportunities in the M&A marketplace. You know it's a question of timing and looking at things. I mean, that's one option for our cash. The other option certainly is we just announced another buyback authorization from our board as well for buy backing -- or buying our stock back. And so we have competing issues, but certainly this could be a good environment as well certainly in the next year or two to look at some nice tuck-in acquisitions for us, perhaps either within the paper industry or some in other industrial markets that would give us a bigger platform in other markets that we're involved in, in a smaller way at this point.

Okay. And then just lastly, it sounds like interest levels are up from some of your customers. How would you characterize their visibilities with the visibility of your customers? How much confidence do you think they have or even just clarity at this point on what their 2010 budgets look like?

That's a good question. And it becomes a mixed bag as well, depending upon the geographic region. I mean, certainly China has different drivers and they have different market conditions than they do in North America and Europe. So I think that we have much -- as commented -- we have much more confidence I think in Asian markets showing strength. And they're starting to show it now and I think that could continue throughout 2010.

North America with the capacity being taken out and the question mark on wondering what's going to happen on the black liquor windfall that they've had, over the next year, depending upon -- will help them (inaudible) upon what their balance sheet's going to look like and their cash position and how healthy they're going to be. But we also see a pent up demand for our products. I mean, they've been -- I think they've over extended some of the life of some of our products in their parts and consumables, both in Europe and North America. So hopefully we'll see some pick-up in the aftermarket business as well. But it's -- there's still a lot of uncertainty out there that I think our customers are facing which makes it more difficult for us on visibility and on markets as well.

We do see, as we commented, some choppiness ahead but we also see I think the overall trend total should be improving for us. But even withstanding that, if you take a look at the expenses we've taken out in this past year, I think you're going to see some nice -- more profit opportunity for us.

Yes. Okay. Thanks a lot.

All right. Thank you Claudia.

Eric Glove; Canaccord Adams.

Hi. Good morning guys.

Good morning Eric.

I was wondering if you could comment on any changes in the competitive landscape in doctor blades and other consumables from the OEM suppliers.

From the OEM suppliers, we really haven't seen -- I think the only change we've seen as far as the blades business goes is the fact that I think we've increased market share in this environment because some of the smaller tier players don't do as well. They don't have the global reach that we have. So I think if anything, we've probably picked up some modest market share. I think that as far as the OEMs go, we don't see -- I think the same -- they have much larger base. But we have -- when it comes to blades, I think we really have, if anything, strengthened throughout this period, throughout this soft period.

Are there any particular regions where you think that that's occurred or is that more global?

No, I think it's more global but we have picked up -- certainly we're picking up market share in areas like Asia, especially in China. I think our thrust there has been very strong and that's a continuing opportunity that we see going forward. We started to penetrate that market two or three years ago in making blades in China and we've seen that starting to bear some fruit. We've seen continuous gains. And just being over there -- I was over there with John Painter and Eric Langevin recently and they seemed very -- they seemed fairly bullish on the ability to continue to penetrate that market.

Okay, great. And then going back to this plant shutdown by International Paper, have you guys quantified at least to yourselves what the impact is going to be on your business? And then are you getting the sense that this is pretty much it in terms of plant shutdowns in North America going forward?

Well, as far as how that quantifies for us we certainly miss out on some parts business there and some of the consumables business because they're a good customer of ours. On the other hand, we see that capacity being replaced and started up in other parts of the world. So in total to Kadant, we still see the growth option, but that does impact our North American business, certainly.

As far as other closures, we certainly -- the newsprint business in Canada continues to be under pressure. And we don't antic- -- we anticipate that perhaps there'll be some more closures of -- in newsprint areas, certainly in North America and in Western Europe. Other than that, we expect if -- with the operating rates running at 90% now in a relatively weak economy, I think that they have their -- in North America, they've got the capacity pretty well in line with -- we don't expect any more major closures.

In Western Europe, there's a different story. There may be some because their operating rates are still at 70% in a depressed market, and we may see some more closures in some of the grades. Tissue and toweling and napkins and so forth, that continuously remain relatively strong globally. But we don't anticipate any major closures in North America. Could be some in Western Europe but, again, there's a lot more capacity being put on in other regions like Eastern Europe and China.

Okay. Thanks very much.

All right. Thank you, Eric. Next question?

(Operator instructions)

No further questions, Operator?

You do have a final question from Walt Liptak with Barrington Research Associates, Inc.

Okay. Good morning, Walt.

Hey. Good morning, guys. Sorry. I thought I was in queue.

No problem.

I don't know. I guess my question is on the pick-up in bookings that you're having. And I wondered if this is just kind of a pent up demand, maybe credit that wasn't released previously that's now getting released causing a one time anomaly, or -- you said there's still a mixed outlook. I wonder if you could comment a little further on that.

Yes, that's a good question. I'm going to have John Painter answer the question.

Sure. As we kind of explained in the news -- in our earnings release and Tom had [bulleted] on the call, there was some large projects that influenced that bookings pick-up, particularly this $8 million order in Mexico. And that I would say is, to some extent, pent up demand. Our spares and consumables business is up a little bit, but much more modestly. And thatI's as encouraging, really, as anything.

And I would also state, particularly in Asia, we are seeing new projects come forward that didn't exist three months ago. So it's not just pent up demand in Asia. It's actually new projects that are being born, if you will.

Okay. Okay. And then I -- one for -- a couple for Tom. I wonder what gross margin you're thinking about for the fourth quarter?

The fourth quarter I think in the -- again, in a range of 40%. It might be -- it's going to be impacted favorably again with that consolidation of the two manufacturing facilities I talked about. It might be -- in terms of the margin percentage impact it a little unfavorably because we'll have that large tissue order and a lot more capital flowing through the fourth quarter. So the mix of that I think would probably either the same or maybe slightly up.

Okay. And on the cost basis, obviously the costs have come down with the work that you've done, but R&D was a little bit lower than we expected. Is that the new run rate now, the $1.1 million?

No, I think it's actually going to be a little bit higher than that going forward. I think in terms of R&D, I think we're looking at about $5.4 million or so on an annual basis. And I would think it would continue like that into next year.

Okay. And overhead costs in the next quarter, can you maintain the percentage of sales at this level, the 30 -- 36.4% roughly?

I think that going forward on the SG&A -- I think I talked about this a little bit last call with you. I think we said we're running around $82 million right now SG&A. That's without R&D obviously.

Right.

And into next year -- the kind of way I look at for next year, Walt, is if I look at our SG&A it'd be around say $82 million maybe and the R&D is in the range of $5 million, so $87 million. Maybe we can do a little bit better than that, so maybe $86 million -- $86 million to $87 million for next year, somewhere in that range.

Okay. Great. Yes. Thanks for the color on that. Okay. Good. Well congratulations on a nice quarter. I hope this pick up's for real.

Thanks Walt

Thanks Walt.

Yes.

At this time there are no —

Any other questions Operator?

At this time there are no further questions. Gentlemen, do you have any closing remarks?

Yes we do. Thank you, Operator. All right. We have outlined in this call there are various sectors and regions that seem to be picking up momentum as market conditions improve. We believe that cost reduction actions that we took earlier this year to reduce operating costs both in manufacturing and SG&A will pay further dividends when markets recover.

We also believe that our large installed-base parts and consumable business and healthy balance sheet will continue to serve us well during these times of economic uncertainty. In the end, we remain cautiously optimistic about the global economy and will continue to deliberately manage our business to reflect the market environment.

On a more personal note, I want to take this opportunity to thank our shareholders for supporting Kadant during my 18-year tenure as CEO. As I look forward to assuming my new role as Executive Chairman in -- next year, I do so with great admiration for the company we have built, our dedicated employees worldwide and the value created around our core values of integrity and innovation.

During the past decade, I've worked closely with the next generation of leaders at Kadant and have full confidence that they will continue to build on our past accomplishments. I look forward to supporting their efforts to deliver increased value to our customers and our shareholders. Thank you for joining us today and for supporting Kadant.

Thank you. This concludes today's conference call. You may now disconnect.