Kadant Inc (KAI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 Kadant Inc. earnings conference call. My name is Dave; I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the call over to Mr. Thomas M. O'Brien, Chief Financial Officer at Kadant. Please proceed, sir.

Thank you, Operator. Good morning, everyone, and welcome to Kadant's second-quarter 2013 earnings call. With me on the call today is Jon Painter, our President and Chief financial -- Chief Executive Officer.

Let me begin by encouraging all participants in our business review today to participate via our webcast. You may access the live webcast by going to www.Kadant.com, select the investors tab, and then select the listen live option for the webcast. To participate in the question-and-answer session at the end of our prepared remarks, you will need to dial into the teleconference. The dial-in number is available in our press release issued yesterday and will also be shown at the end of our presentation.

Let me now remind everyone of our 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 outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our report on Form 10-Q for the fiscal quarter ended March 30, 2013. Our Form 10-Q 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 during this webcast 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 webcast, 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 second-quarter earnings press release issued yesterday, which is available in the investors section of our website at www.Kadant.com under the heading investor news.

And with that, I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Hello, everyone. It's my pleasure to brief you on our second-quarter results.

Overall, we had an excellent quarter with strong cash flows, record gross margins, and better-than-expected earnings per share performance. Let me begin today's business review with the financial highlights of the quarter.

We finished the second quarter with revenues of $82 million, which were down 1% compared to the second quarter of 2012 and down 8% excluding acquisitions. The decline in revenues was due largely to lower capital revenues.

Our revenue guidance was $79 million to $82 million and included anticipated revenue from CBTI. Adjusting for the acquisition revenue from Noss that was acquired after our Q1 earnings call and thus not included in the guidance, the adjusted guidance was $81 million to $84 million and our revenue of $82 million was within that range.

Gross margins in the second quarter was a record at 80 -- I'm sorry, at 48.6% and beat the previous record by 100 basis points.

We generated GAAP diluted earnings per share of $0.51 in the second quarter. Our adjusted diluted earnings per share was also $0.51, which excludes $0.12 of acquisition-related restructuring charges and a $0.12 gain on the sale of assets. This exceeded our adjusted diluted earnings per share guidance of $0.43 to $0.45, which excluded an estimated gain of $0.10 on the sale of assets.

Cash flows continued to be strong in the second quarter at $11 million. I'm happy to report that we have generated $44 million in cash flows over the last 12 months, which I think shows the real strength of our business. The strong cash flow in Q2 allowed us to end the quarter in a net cash position of $48 million, despite having spent $14 million for the Noss and CBTI acquisitions and returning nearly $3 million to shareholders through stock repurchases and dividends.

Our bookings in the second quarter, which included $7 million of bookings from recent acquisitions, increased 13% to $87 million compared to the same period last year. We ended the quarter with a strong backlog of $106 million, including $9 million from our recent acquisitions.

Finally, we completed the acquisition of Noss and CBTI in the second quarter and we're working hard to integrate them into our business.

As you can see from slide six, our revenues, which includes the impact of acquisition, were largely unchanged compared to Q2 of last year. An 11% increase in our parts and consumables revenue was offset by a 17% decline in capital revenue. The decline in capital revenue was principally due to weaker capital revenues in our more volatile stock prep line.

Noss and CBTI, which were acquired in the second quarter, contributed $6 million to our revenue. I should note that the Noss results are reported in our stock prep product line and CBTI is reported in all the product lines in our Papermaking Systems segments.

Our bookings of $87 million in Q2 were up 13% from last year. The acquisitions contributed $7 million to our bookings. Excluding acquisitions, our bookings were up 3% compared to the same period last year.

All of our major product lines had increases in bookings, with the largest increases found in our fluid handling product line and our doctoring, cleaning & filtration product line.

Slide eight illustrates our bookings and revenue trends, with bookings shown by the blue bars and revenues by the solid line. Bookings were down slightly from a strong Q1. Our doctoring, cleaning & filtration product line had a strong booking performance in Q2 with bookings up 32% compared to last year. The increase was primarily due to bookings from m-clean products and bookings from CBTI.

As you can see from the slide, after five quarters of a book-to-bill ratio below 1, our book-to-bill ratio has been over 1 for the last two quarters, and we finished Q2 with a strong backlog of $106 million.

We continue to see upward momentum in our parts and consumables bookings and revenue since the economic recovery began in the second half of 2009. Our Q2 parts and consumables bookings were $53 million, up 11% compared to Q2 of 2012. This growth in bookings was driven by our stock prep product line, which was up over 30% compared to the same period last year and up 11% sequentially.

Our two recent acquisitions contributed $2 million to our parts and consumables bookings. The increase in parts and consumables bookings was led by our stock prep product line, with increases in all geographic regions. The continued success of our screen cylinders, where bookings are up 60% compared to Q2 of last year, is a major factor behind this increase.

Our revenues for parts and consumables were $53 million in the second quarter, up 11% over Q2 of last year, and made up 64% of our Q2 revenues. This favorable product mix contributed to our record gross margins this quarter.

I'd like to take the next few minutes to provide a brief review of our business activities in each of the major geographic regions of the world. Let me start with North America.

The paper industry in North America has remained relatively stable, with some grades, such as containerboard, showing good performance in Q2, while demand for printing and writing grades continues to weaken year over year.

Our revenues in North America were up 4% sequentially to $40 million in Q2, but down 1% compared to the second quarter of 2012. The year-over-year decline in revenues was due in large part to our stock prep and fluid handling product lines, which experienced weaker capital business during the quarter.

In general, we are seeing a healthy market for our parts and consumables, but we are, in fact, seeing some capital projects being delayed. Bookings in North America in Q2 were $36 million, up 1% compared to the same period last year, but down 17% sequentially from the traditionally strong first quarter.

Overall, I would characterize the North American market as slow but steady. Our customers are doing well and have good cash flow, but there are competing demands for capital dollars, including spending on environmental projects.

Turning to Europe, the market continues to be weak due to the macro environment and the resulting reduced demand for paper. That said, inventories in containerboard are low and producers have announced a EUR50 per tonne price increase in certain containerboard grades scheduled to take effect this August.

Our Q2 revenues in Europe were $17 million, reflecting the depressed booking levels we had in 2012, and fell 12% compared to last year and 6% sequentially. The decline from the second quarter of last year was due primarily to weaker capital sales in our stock prep and doctoring, cleaning & filtration product lines.

Our Q2 bookings of $18 million were down 5% compared to the prior year and were down 32% sequentially, following a very strong Q1. As a reminder, our Q1 bookings included two large stock prep recycling system orders with a combined value of more than $9 million that I noted in our Q1 earnings call in April.

Despite the continuing soft market conditions in Europe, our fluid handling business booked a number of capital orders in Q2 and was up more than 30% compared to the same period last year. The capital orders included two steam and condensate systems and related hardware from mills in Germany and Turkey with a combined value of approximately $3 million. Also, after the quarter closed we received two signed contracts for dryer system rebuilds and fabric cleaning systems in Europe with a combined value of approximately $4.4 million.

In general, Europe continues to be weak, but remains relatively stable. Germany, the UK, Eastern Europe are stronger, while the rest of Western Europe is somewhat weaker. Russia shows a lot of promise and with several major projects in the works, but financing continues to be an issue.

Next, let's look at China. Our business in China continued to see good activity in the second quarter with increases in both bookings and revenues. Despite the lumpiness that is often the case with China, we are seeing an upward trend in bookings and revenues since the global economic recovery began in 2009.

Our Q2 revenues in China increased 11% compared to the previous year and 10% sequentially. The year-over-year increases in revenue was found largely in our stock prep and fluid handling product lines.

Our bookings in China also increased in Q2 to $15 million, up more than 50% compared to Q2 of last year and, in fact, our second sequential quarterly increase. We have booked several OCC recycling systems, as well as four system upgrades in Q2, with a combined value of nearly $3 million.

In addition, we booked a number of orders for our new MultiJet cleaning system with a combined value of approximately $2.1 million.

And finally, our parts and consumables bookings in China have continued an upward trend in Q2, up 60% compared to Q2 of 2012 and up 8% sequentially. This increase was led by our stock prep product line where Q2 parts and consumables bookings doubled year over year. Although the economy in China is slowing and there continues to be overcapacity in most grades, we are in fact seeing a fairly active market with several capital projects in the pipeline, particularly for stock prep systems.

Turning to South America on slide 14, you can see the impact of our CBTI acquisition, which contributed $6 million to bookings and $4 million to revenues in Q2. We've begun the process of moving our fluid handling business, which is based in Sao Paulo, into the CBTI facility located just outside of Sao Paulo. The combined entity will be called Kadant South America and will supply all of our product lines to customers in Brazil and certain other countries in South America.

Revenues in South America were $7.8 million in Q2, up 37% compared to the same period last year and up 86% from Q1.

Bookings in Q2 were very strong and increased to $11.3 million, up 37% compared to Q2 of 2012. During the quarter, our newly acquired CBTI subsidiary booked several capital orders for stock prep systems and an air drying system with a combined value of approximately $3 million, and our fluid handling business booked a turnkey order for drying equipment that will replace competitive equipment on a linerboard machine.

I should note that CBTI's bookings [can evolve to], due to large stock prep and air drying capital projects.

The Brazilian economy in general has been fairly weak and demand -- as demand for commodities has declined due to the global slowdown. GDP growth in Brazil is estimated at a 1.9% annual rate. So far, the slowdown in the market has not impacted demand for paper and board, but demand for coated board and corrugated boxes, for example, up 4% over last year.

I'd like to close my remarks with a few comments on our guidance for Q3 and the full year of 2013. We expect to generate $0.47 to $0.49 of GAAP diluted earnings per share on revenues of $88 million to $90 million in the third quarter of 2013, including $0.01 of acquisition-related restructuring charges.

For the full year, we are revising our GAAP guidance for diluted earnings per share from $2.00 to $2.10 on revenues of $336 million to $343 million to $2.02 to $2.07 on revenues of $340 million to $345 million.

On an adjusted basis, we are raising our guidance and now expect to achieve an adjusted diluted earnings per share of $2.03 to $2.08 from our previous guidance of $1.90 to $2.00. As you can see from the table on slide 15, our EPS guidance issued in April of 2013 of $2.00 and $2.10 included an estimated $0.10 gain from the sale of assets. If this gain is excluded, our adjusted earnings-per-share guidance in April was $1.90 to $2.00. This compares to our new adjusted guidance of $2.03 to $2.08, which excludes the gain on the sale of the assets, as well as $0.13 of restructuring charges.

I'll now pass the call over to Tom for additional details on our financial performance in Q2. Tom?

Thank you, Jon. I'll begin with an overview of our gross margin performance.

Consolidated product gross margins were 48.6% in the second quarter of 2013, a record high quarterly performance and, remarkably, increased 490 basis points compared to a very solid result in the second quarter of 2012.

Gross margins were higher in all our product lines in the Papermaking Systems segment and were especially strong in stock prep, where margins were solidly up over last year in three key geographic territories -- North America, Europe, and China. On a consolidated basis, the gross margin improvement from last year's second quarter was largely due to higher margins on both parts and capital products, along with a favorable product mix.

Regarding the product mix, our higher-margin parts and consumable revenues represented 64% of total revenues in the second quarter of 2013, compared to 57% in the second quarter of 2012.

Looking ahead and including the results of the two acquisitions, we now expect that full-year 2013 consolidated product gross margins will be approximately 44% to 45%, which, if achieved, will exceed the record 43.9% annual margins recorded in 2012. That said, we believe that gross margins in the second half of the year will be lower than in the first half of 2013, partly due to product mix, as we expect to ship several larger systems in the second half.

Now let's turn to slide number 18 and our SG&A expenses. SG&A expenses were $29.4 million in the second quarter of 2013, up $4 million, or 16%, from last year's second quarter, and included an unfavorable foreign currency translation effect of $200,000. Excluding the translation effect, SG&A expenses were up $3.8 million over last year's second quarter. More than three-fourths of this increase is due to the SG&A expenses associated with the two acquisitions which we made in the second quarter of 2013.

SG&A as a percentage of revenues increased to 35.8% in the second quarter of 2013, compared to 30.7% in the second quarter of 2012, largely due to the higher level of expenses on flat revenues.

Looking forward, we expect that for the full year, SG&A spending as a percentage of revenues will be approximately 33% compared to last year's 31%.

Let me now turn to our EPS results for the quarter and slide number 19. We reported GAAP diluted earnings per share from continuing operations of $0.51 in the second quarter of 2013, compared to $0.56 in the second quarter of 2012. This decrease of $0.05 in diluted EPS consists of the following -- decreases of $0.18 resulting from lower revenues, excluding the revenues of the acquisitions; $0.12 from restructuring expenses related to the acquisitions; $0.09 due to higher operating expenses; $0.01 from the combined effects of the operating results of the acquisitions and acquisition-related expenses; and $0.01 from a slightly higher effective tax rate.

These decreases were partially offset by increases of $0.23 associated with higher gross margins in the second quarter of 2013, compared to the second quarter of 2012; $0.12 from the sale of a building in China; and $0.01 from lower weighted average shares outstanding.

Let me also take a moment to compare the actual diluted EPS results in the second quarter to the guidance, which we issued during our April 2013 earnings call. On slide number 20, you can see that our GAAP diluted EPS guidance for the second quarter of 2013 was $0.53 to $0.55, and this included an expected gain of $0.10 from the sale of the building in China. Excluding the gain, the adjusted diluted EPS guidance would have been $0.43 to $0.45.

Now let's compare this to the reported results. We recorded GAAP diluted EPS of $0.51 in the second quarter of 2013, and this included a gain of $0.12 from the building sale and restructuring expenses of $0.12. Excluding these two items, adjusted diluted EPS was $0.51 in the second quarter of 2013, and this compares to the adjusted diluted EPS guidance of $0.43 to $0.45.

Now let's turn to our cash flows, working capital, and debt leverage starting on slide number 21. Operating cash flows from continuing operations were $11.1 million in the second quarter of 2013, compared to $8.6 million in the second quarter of 2012, an increase of $2.5 million, or 30%. Our operating cash flows are off to an excellent start. For the first six months of 2013, we've generated $18.1 million in operating cash flows, compared to $4.5 million in the same period last year, an increase of $13.6 million.

We had a few notable nonoperating uses of cash during the second quarter of 2013. We expended $14.2 million for the two acquisitions. We purchased 50,000 shares of our common stock for $1.4 million. We paid a dividend of $0.125 per share, or $1.4 million, and we spent $1.4 million for CapEx.

Also during the second quarter of 2013, we declared our second quarterly dividend of $0.125 per share, totaling approximately $1.4 million, which will be reflected in our cash flows in the third quarter when it is paid.

Let's now look at our key working capital metrics on slide number 22. As you can see, the major change here was an increase in our days in inventory from 95 in the first quarter of 2013 to 103 in the second quarter of 2013. The increase in inventory was largely due to an increase in work-in-process inventories associated with several major projects in our European operations, which we expect to ship later in the year.

Looking at our overall working capital management, our cash conversion days -- calculated by taking days in receivables, plus days in inventory, and subtracting days in accounts payable -- were 117 at the end of the second quarter of 2013, essentially unchanged from the first quarter of 2013 and were five days lower than the second quarter of 2012.

Also, working capital as a percentage of the last 12 months' revenues was 15.1% in the second quarter of 2013, up from last year's 13.8%, again largely due to the increase in work-in-process inventories.

Despite a use of cash of $14.2 million on the acquisitions, our net cash position decreased by only $3.3 million in the second quarter of 2013 compared to the first quarter of 2013 and remained at a relatively high level. Net cash -- that is, cash less debt -- at the end of the second quarter of 2013 was $48.5 million, compared to $51.8 million in the first quarter of 2013. Net cash increased $18.4 million, compared to $30.1 million in the second quarter of 2012.

We did have borrowings of approximately $9.4 million during the quarter, partly to help fund the acquisition purchases. As you can see on slide number 25, our leverage ratio, calculated as defined in our credit facility, increased slightly to 0.27 at the end of the second quarter of 2013. Under the credit facility, this ratio must be less than 3.5.

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

(Operator Instructions). Walter Liptak, Global Hunter.

Congratulations on a nice quarter, especially the gross margin. And wondering if we can get a little bit of -- you mentioned that the gross margin is going to be down in the next (technical difficulty) year. Can you give us a little color on the systems that are shipping, size, geographic region, kind of product that they --- is going to be shipping?

Specifically, Walter, a few large stock prep systems in our European operations, headquartered in France, that will be shipping to Russia and a few other locations. Typically, those larger systems carry lower gross margins with them. Good gross margin dollars, but lower margin percentages. So that's why we expect somewhat lower margins in the second half. You know, it's still generating very, very strong margins for the year.

Okay, got it. And just listening to the presentation and hearing about the capital constraints that are still going on in the US and Europe, but it sounds like China is starting to act a little bit better, and I wonder if you can give us a little bit more detail on the upgrades that are going on in terms of new lower emission or better energy-efficient capacity that's going into the region?

Sure. It's funny. What you read in the headlines in China, you'd think that it's much slower than it is when you talk to our people in the field.

And we are seeing, I would say, pretty strong, particularly on the stock prep side, activity on the capital markets. And that's -- some of this stuff is more in the West, some of this stuff is basically up and down the coast of China, and some stuff, in fact, is in Guangzhou, which is where a big concentration of the paper industry.

There is --- they do continue to close these smaller, inefficient mills. I think they announced another $6.5 million of closures within the last couple of weeks. When this happens, that's always good for us because those smaller mills that are closing tended not to be our customers and that supply needs to be absorbed by the larger mills.

So, yes, I would say China has brightened a little bit over the course of this year. We'll see, but it's kind of encouraging, I would say.

Okay, are --- do we think in the back half of the year the booking trend in China could continue to improve?

Well, I mean, you know, the problem with these big systems is they are binary. Either they come or they don't, but we are set up that it could improve if those orders, in fact, fall and if we, in fact, win them, which we are in very strong market position.

I would comment a little bit -- you asked about North America as well. You know, North America is primarily not a big capital market. This is more of a spare parts and consumables market, and on that side of the business, it's doing very well. But I would say that a couple of the smaller projects we're seeing out there, in some cases, are getting pushed back a little bit. They are competing with other projects that may have an environmental mandate going with them, that sort of thing.

Okay, great. And kind of along the lines of parts, but just going back to China, the year-over-year and quarter-over-quarter growth is significant. I wonder if you could just talk about the initiatives that you have going on to get more parts sales in that region.

Yes, I mean, that is definitely a bright spot of the quarter and has --- the group we have in China is doing an outstanding job on increasing our parts business.

And you have been following us a while, Walt. You may remember this is sort of a focus that we put on a couple of years ago to give some stability to a relatively volatile market. And I talked a little bit the last quarter about we would get into almost partnership relationship with our customers where we would say, for example, hey, we will do a daily run or a biweekly run into your mills; pick up some of your stuff that is worn and needs to be rebuilt; bring it back to factory conditions, if you will; return it to you; and also do audits and help give you guidance on operating your machines.

And that program, it's so far been quite successful, and we hope to expand that to other customers. But that's just an example of some of the things we're doing.

The nice thing that's happening in China is as the market does slow down a little bit, the mills are focusing more and more on productivity, and as they start to focus on productivity, that really is an opportunity for us to, one, help them, advise them on operating our equipment in the mills and, two, convince them of the benefits of using our spare parts and consumables versus sort of pirate spare parts and consumables.

Okay, got it. Okay, thanks very much.

You're welcome, Walt, as well.

Rudy Hokanson, Barrington Research.

Nice quarter. I wanted to talk a little bit more about South America and the momentum that you are seeing there. Even with the outlook for Brazil looking like slow growth, you still seem to be picking up some good numbers right now and you've also got that acquisition down there. Could you maybe give us a little more color on what you expect out of South America in 2013 and maybe looking forward a little bit to 2014, now that you have your acquisitions?

Sure. So I'll just give some sort of 50,000-foot comments on South America in general, and then focus a little bit more on our acquisition.

You know, in general, and I would say -- and you've been following us for a while at this point, Rudy, one of our overall themes within Kadant is that the developing world is growing a lot faster than the developed world, and South America and Brazil, in particular, is no exception. They have a rising middle class. I think fundamentally over the next 10 years, it's going to be an excellent market as their per capita use of paper goes up.

That said, in the short run Brazil is a market that is highly dependent on the commodity market, and as the global world has slowed down, they have certainly felt the effects. So their --- I mentioned their growth rate of a little less than 2%. I think it was even a little bit less than that last year.

So they are sort of going through a slow patch, for sure, but I think the longer-term opportunities in Brazil are still fantastic. They have a good, hard-working workforce and a decent -- fairly decent infrastructure once you get out of the cities.

In terms of our acquisition of CBTI, they had excellent bookings in the quarter. I would just kind of caution that they do occasionally book these large capital systems, and in fact, they did in the second quarter. So it won't be a steady -- it won't really be a steady rate there. But the paper industry seems to be doing somewhat better than the economy would suggest, I would say.

I think the key benefit from us in South America, from an income point of view, is combining our facility with -- in Sao Paulo with their facility. So that, combining those two facilities into one, one strengthens our position in the market. We're a much bigger footprint. We have economies of scale, and obviously it's a lot more efficient to run one facility than two facilities.

Okay, thank you.

Sir, you have no questions at this time. (Operator Instructions).

Is there anyone in the queue there, Operator?

No further questions for you, no, sir.

Okay, thanks. Let me conclude today's call with what I really think are the key takeaway points. First, we had a solid [lead] of adjusted earnings per share and set a new record for gross margins. Second, we had another strong quarter for cash flows at $11 million, and despite spending $14 million on acquisitions and $3 million on repurchases and dividends, we ended the quarter with a strong cash position of $48 million.

Third, we completed the Noss and CBTI acquisitions. And finally, we raised our adjusted earnings-per-share guidance for the full year to $2.03 to $2.08 on revenues of $340 million to $345 million.

I look forward to updating you next quarter on our progress. Thanks very much for listening. Bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.