Kadant Inc (KAI) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2013 Kadant, Inc. Earnings Conference Call. My name is Jasmine and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Thomas O'Brien, Chief Financial Officer, Kadant. Please proceed.

Thank you operator, and good morning everyone and welcome to Kadant's third quarter 2013 earnings call. With me on the call today is John Painter, our President and 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 of the webcast.

To participate in the question and answer question at the end of our remarks you will need to dial into the teleconference. The dial in number is available in our press release issued yesterday, it will also be shown at the end of our presentation.

Let me now remind everyone of our Safe Harbor progress statement. Various remarks that we may make today about Kadant's future expectations, plans and prospects are forwarding-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially form these forward-looking statements as a result of various important factors. Including those outlined at the beginning of our slide presentation and these discussed under the heading Risk Factors in our report 10-Q for the fiscal quarter ended June 29, 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 the third 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 John Painter, who will give you an update of Kadant's business and future prospects. Following John's remarks I will give an overview of our financial results for the quarter and we will then have a Q&A session. John?

Thanks Tom. Hello everyone, it is my pleasure to brief you on our third quarter results. Overall we had a solid quarter with strong cash flows, gross margin, and better than expected earnings per share performance. I will begin today's review of the financial highlights of the quarter.

We finished the third quarter with revenues of $91 million which were up 5% compared to the third quarter of 2012 and 11% sequentially.

Gross margins in the third quarter remain strong at 44%. We generated GAAP diluted earnings per share at $0.67, down 14% compared to the same period last year due to a higher tax rate. This exceeded our guidance of $0.47 to $0.49 which included $0.01 of restructuring cost. Our Q3 2013 earnings per share also included $0.05 of acquisition expenses.

Operating income was $10 million in both the third quarter of 2012 and 2013. Our bookings in the third quarter increased 18% to $82 million compared to the same period last year. Cash flows continued to be strong at $13 million and allowed us to end the quarter in a net cash position of $59 million. We have generated over $30 million of operating cash flow over the last nine months.

And finally, I am happy to announced that after the quarter closed we signed an agreement to acquire Carmanah Design and Manufacturing a leading supplier of process equipment for the production of oriented strand board or OSB. I will be talking more about this company later in my remarks.

You can see from slide six, our revenues that include $7 million from acquisitions were up 5% compared to Q3 of last year. Our books of $82 million were up 18% compared to a relatively weak Q3 of last year. Our recent acquisition contributed $5.2 million to our bookings. Excluding acquisitions our bookings were up 10% compared to the same period last year.

Although we reported bookings of $82 million we actually booked $86 million in new business during the quarter. The difference was due to a reversal in Q3 of an order we originally booked from Russia in 2012 for $3.8 million. Due to an extended delay in the customers' ability to get financing, we thought it prudent to remove the booking from our backlog, although we are still hopeful that the project will go forward once the financing is in place.

Slide eight illustrates our bookings and revenue trends with bookings shown by the blue bars and revenues shown by the solid line. Revenue in 2013 continues to trend up nicely reflecting the improved bookings this year and the additional revenue from acquisitions.

Bookings were down 6% in Q2 but were essentially flat if you exclude the booking reversal I mentioned earlier.

We are seeing some good activity on a number of capital projects, so I expect we will have a meaningful sequential increase in bookings in Q4.

Our Q3 parts and consumable bookings were $54 million, up more than 20% compared to Q3 of 2012. Our businesses in all geographic regions had double digit growth and parts bookings led by strong performance in our stock prep product line.

Our revenues in parts and consumables of $52 million in the third quarter were also up 20% with solid performance in all regions. As many of you know increasing our parts and consumables business has been a focus of ours and I am very pleased with the progress we have made.

Before I talk to you about our performance of each of our major markets I would like to brief you on Carmanah Design and Manufacturing, which as I noted earlier we signed an agreement to acquire last Friday for approximately CAD54 million or $52 million.

Carmanah is based outside Vancouver British Columbia. For fiscal year, ended March 31 2013, Carmanah had sales of CAD29 million and EBITDA of $7 million which included $1 million non-recurring expenses. This acquisition is significant in that it expands our presence in the forest product industry outside of pulp and paper.

Carmanah's principal product line is stranding equipment, which is used to break down trees into thin strands of wood that are used in the production of oriented strand board or OSB. For those of you, who don't know OSB is an engineered environmentally friendly product that performs a function similar to plywood but it will lower costs.

Carmanah's equipment and systems are used to debark the trees and strand the logs in the OSB manufacturing process that is shown here in the photos. Although Carmanah has different end markets it is similar to Kadant in many ways. Similar to our products, Carmanah's products are critical high impact components that are used in a large process mill, which in Carmanah's case is an OSB mill.

Similar to a paper mill an OSB mill is a significant capital investment with a cost of over $300 million. Customers Carmanah's stranders for the same reason that they buy our equipment, reliability, fiber and energy savings, and safety. If the strander goes down the entire OSB mill goes down.

Just as we are impacted by the overall health of the pulp and paper industry, Carmanah is impacted by the overall health of the OSB industry and indirectly the housing market as 70% of OSB is used in new home construction or remodeling.

Needless to say, the US housing was severally impacted by the housing crisis on you can see on slide 12. While the housing market is recovering it is now where near pre-crisis levels. We have taken a close look at the housing market and there is reason to be optimistic about the growth in housing over the next several years.

The dotted line on slide 13 shows the average annual household information from 1980 to 2007 at just under 1.3 million households per year. The bars show the change in occupied housing. What is notable in the chart is not the overbuilding in the years building up to the crisis but the dramatic under building under the crisis.

Industry analysts expect it will take several years of growth before new home construction meets current demand, never mind pent up demand from five years of under building. End the end I would say we could expect more volatility in the OSB market than we have in paper but it does not have the structural headwinds we see in certain grades of paper. In fact, industry analysts expect annual growth of just under 10% per year for the next five years in North America.

Another thing we like about Carmanah, which is also similar to us is the leading market position it has particularly in the large North American market. Carmanah's stranders are installed in more than 80% of the OSB's mills in North America and 70% globally.

We also love Carmanah's strong parts and consumables business. As you can appreciate, breaking down trees into the thin stands of wood used to produce OSB is extremely abrasive and the equipment suffers a lot of wear. The cutting knives, in particular, need to be replaced one to two times a day and a a ring strander can have up to 44 sets of knives on a machine.

On average each ring strander in operation can generate $150,000 to $200,000 in parts and consumables per year. As you can imagine this large and stable parts and consumables business was highly attractive to us.

Finally, and perhaps most importantly, Carmanah has a great management team and they are staying on to operate the business. They have been together a long time and they have managed to grow the business while increasing the profitability over the last several years.

As I mentioned earlier, Carmanah's has seen good growth in OSB production and we expect the business will have revenues of $35 million to $40 million in 2014 and adjusted EBITDA margins of 25% to 27% depending on mix.

I should point out that Carmanah is a low acid intensive business with over 70% of its manufacturing outsourced. In general, we like low acid intense businesses, but it does mean that we will have significant annual non-cash amortization of tangible assets.

In addition, we will have a number of purchased accounting adjustments in Q4 and the first part of 2014 which will negatively impact earnings. So the earnings per share accretion for Carmanah in 2014 will likely be in the ball part of $020.

In summary, Carmanah will benefit Kadant by expanding our pretense into a faster growing part of the forest products industry and advancing our strategy to increase our parts and consumables business.

In addition, with over 70% of their manufacturing outsourced, we will expect that we will have opportunities to manufacture some of their products at our facilities in China.

Getting back to our third quarter performance, I would 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.

Our reviews in North America were up 5% compared to the third quarter of 2012 to $37 million, down 8% sequentially. Bookings in North America for Q3 were $38 million up 17% compared to the same period last year and 4% sequentially.

Overall, I would characterize the North American market as slow but steady. We see a lot of activity in the market but our customers still have some uncertainty regarding the global economy.

Turning to Europe, the market continues to be weak, but shows some sign of improvement. Our Q3 revenues in Europe were relatively strong at $26 million, up 43% over Q3 last year and 56% sequentially. The strong revenue performance in Europe was driven primarily by the timing of capital sales through our stock prep product line.

Q3 bookings of $19 million were up over 30% compared to a Q3 of last year and 4% sequentially. Our fluid handling, doctoring, cleaning, and filtration business took a number of capital orders in Q3, including a dryer system rebuild and a fabric cleaning system. With a combined value of approximately $4.4 million.

Despite a general weakness in Europe, upgrades in paper making equipment are continuing albeit at a moderate pace. Germany, the UK and Eastern Europe are stronger while the rest of Western Europe is somewhat weaker.

Financing continues to be a serious issue in Russia and we have seen several pending orders get pushed out due to customer difficulties in obtaining financing. Additionally, we removed a booking from our backlog as I discussed earlier which we had hoped to ship in Q4.

Next lets take a look at China, although the economy in China has seen a slight increase in Q3 to 7.9% annualized growth, there continues to be an overcapacity situation that creates a drag on investments in new capacity. Even though the relatively strong tissue sector, over capacity continues to threaten mill profitability and we are seeing a shift in customer focus to machine optimization projects rather than capacity issues.

Although we like capacity addition, the new found focus on optimization has proved an excellent opportunity for us to demonstrate to our customers how we can help them maximize the performance of our equipment. Our consultative approach has lead to significant increase in our aftermarket sales in China, particularly in our stock product line.

Our Q3 revenues in China declined 17% from a fairly strong Q3 of last year, and increased 19% sequentially. Our bookings in China of $14 million were up 12% compared to Q3 of last year. Despite the soft capital activity we booked several OCC recycling system orders as well as five system upgrades in Q3 with a combined value of more than $5 million. In addition, we booked several orders for our new multi-jet cleaning system with a combined value of just under $1 million.

While China is working through its capacity issues and general economic slow down we continue to introduce new products to our customers in China. This is creating new products to grow do to our relatively low market share with these newly introduced products, such as our forming equipment and filtration systems.

Turning to South America in slide 20 you can see the impact of our CBTI acquisition which contributed $3 million to bookings $2 million to revenues in Q3. We've completed the move of our fluid handling business, which is based in Sao Paulo to CBTI's existing facility located near Companhia and integrated the two businesses into a single operating entity that we are calling Kadant South America.

Revenues in South America were $8 million in Q3, up 37% compared to the same period last year and up 3% from Q2. Bookings in Q3 more than doubled to $6.9 million, although they were down almost 40% sequentially due to a large stock prep system that was booked in Q2 of this year.

The Brazilian economy has slowed in recent quarters as demand for commodities has declined due to the global slow down. Recent economic forecast predict Brazil's annual growth rate in 2013 will be a relative modest 2.5%. So far the slow down of the market has not had a significant impact on paper and packaging. Tissue and container-board demand, for example, is expected to grow at a rate of 4% to 6% per year for the next five years.

I would like to close my remarks with a few comments on our guidance for Q4 and the full year for 2013. The third quarter was stronger than we expected and the fourth quarter will be weaker than we thought last quarter, due in part of the removal of a Russian project from our fourth quarter forecast I mentioned earlier.

That said we expect to generate $0.47 to $0.49 of GAAP diluted earnings per share on revenues of $86 million to $88 million in the fourth quarter of 2013, including $0.01 of acquisition related restructuring charges.

For the full year we expect to achieve GAAP diluted earnings per share of $2.02 to $2.04 on revenues of $336 million to $338 million. I should mention that our guidance dues not include any results from the pending acquisition of Carmanah. Although we expect Carmanah to maintain its historical EBITDA margins the purchase accounting adjustments, I mentioned earlier, will cause the acquisition to be diluted fourth quarter.

I will now pass the call over to Tom for additional details on our financial performance. Tom?

Thank you John, I will begin with a overview of our gross margin performance. Consolidated products gross margins were 43.9% in the third quarter of 2013, up slightly 50 basis points from 43.4% in the third quarter of 2012. This increase in gross margins from last years third quarter was due to a favorable product mix of approximately 170 basis points offset partly by lower margins in our capital markets, especially our stock prep.

Regarding the product mix, our higher margin parts and revenues represented 57% of total revenues in the third quarter of 2013 compared to 50% in the third quarter of 2012.

As we expected gross margins in the third quarter of 2013 were notably lower than the margins recorded in the first half of 2013. In this case, largely due to an unfavorable product mix, as the third quarter margins include relatively lower margins on several larger system orders shipped in the quarter.

Looking ahead and excluding the effect of the Carmanah acquisition. We now expect the full year 2013 consolidated produce gross margins to be over 45%, which if achieved will exceed the record 43.9% margins in 2012.

Now let's turn to slide 24 and our SG&A expenses. SG&A expenses were $28.6 million in the third quarter of 2013, up $2.4 million or 9% from last years third quarter., and included an unfavorable foreign currency translation effect of $400,000.

Excluding the translation effect SG&A expenses were up $2 million over last years third quarter included a $3.2 million increase associated with the operating, due diligence, and other expenses of acquisitions.

SG&A expenses is a percentage of revenues with 31.3% in the third quarter of 2013 compared to 30.2% in last years quarter. The sequential decline you see on the chart reflects improved operating leverage with higher revenues with slightly lower expenses in the third quarter of 2013. Compared to the second quarter of 2013.

Looking forward and again excluding the effect of Carmanah, we expect that SG&A spending as a percentage of revenues for the full year will be approximately 33% to 34% compared to last year's 31%.

Let me turn to our EPS results of the quarter, slide 25. We reported GAAP diluted earnings per share from continuing operations of $0.57 in the third quarter of 2013. Compared to $0.66 in the third quarter of 2012. This decrease of $0.09 in diluted EPS consists of the following.

Decreases of $0.10 resulting from a higher effected tax rate in the third quarter of 2013 compared to the third quarter of 2012. $0.07 associated with lower revenues excluding the revenues of the acquisitions. And $0.02 from the combined effects of the operating results of the acquisitions and acquisition related expenses.

These decreases were partially offset by increases of the $0.05 due to lower operating expenses, $0.03 from higher gross margin percentages, $0.01 from lower net interest expenses, and $0.01 from lower weighted average shares outstanding.

Collectively included in all the categories I just mentioned was a favorable foreign exchange translation effect of $0.01 in the third quarter of 2013 compared to last year.

Now let's turn to our cash flows, working capital, and debt leverage. Starting on slide 26. Operating cash flows form continuing operations were d$12.6 million in the third quarter of 2013 only slightly lower and a very strong performance of $13.2 million in the third quarter of 2012.

As we have noted in previous earnings calls we are having an excellent year in operating cash. For the first nine months in 2013 we have generated $30.7 million in operating cash flows compared to $17.7 million in the same period last year -- an increase in $13 million or 73%.

We had several relatively small non-operating uses of cash during the third quarter of 2013. We expended $1.6 million in CapEx, we repaid debt of $1.5 million, we paid a dividend of $0.12 and-[one-half] per share or $1.4 million, and we purchased 25,000 shares of our common stock or $766,000 or approximately $30.63 per share.

Let us know look at our key working capital metrics on slide 27. As you can see we had an excellent performance on our working capital management in the third quarter of 2013. Days in inventory declined from 103 days in the second quarter of 2013 to 92 days in the third quarter of 2013 and DSO declined 6 days in the same period.

There was an unfavorable sequential decline of 10 days in our accounts payable measure although this had a relatively minor effect on our overall working capital position.

Looking at that overall working capital postilion, our cash conversion days calculated by taking days in receivables and days in inventory and subtracting days in accounts payable, were 110 at the end of the third quarter 2013. Down 7 days from the second quarter of 2013 and improved 3 days compared to the third quarter of 2012.

Also working capital as a percentage of the last 12 months revenues was 14.4% in the third quarter of 2013 down slightly from 15.1% in the second quarter of 2013 and up slightly from last years 13.4%.

Impressively, our net cash position increased by $10.2 million in the third quarter of 2013. Compared to the second quarter of 2013 and attained its highest level since the first quarter of 2005.

Net cash, that is cash less debt, at the end of the third quarter of 2013 was $58.7 million compared to $48.5 million in the second quarter of 2013 and $41.5 million in the third quarter of 2012.

Looking forward, our net cash position will decline significantly in the fourth quarter of 2013, of course, with the Carmanah transaction, which is expected to close in the fourth quarter of 2013.

We currently plan to finance the purchase with approximately $19 million, sourced from our existing cash balances and the remainder from borrowings under our revolving credit facility.

As you can see on slide 30 our leverage ratio calculated as defined in our credit facility was 0.22 at the end of the third quarter at the end of 2013. Under the credit facility this ratio must be less than 3.5.

With respect to our credit facility in conjunction with the acquisition of Carmanah we amended the facility on November 1, 2013. The amendment extends the maturity date of the revolving credit facility to November 1, 2018, eliminates the financial covenant, limiting our capital expenditures and provides for borrowings in Canadian dollars indexed to the Canadian dollars acceptance rate.

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

(Operator Instructions). And your first call comes from the line of Walt Liptak. Please proceed.

Hello Walt.

Mr. Liptak will you please check the mute feature on your phone?

Thanks, good morning guys.

Morning.

Morning. Congratulations on the acquisition and the nice quarter. I wanted to ask first about the booking that was pushed out and see if we can get a little bit more color on it. Was this a new customer? What dates are you getting on the financing, etcetera?

It is a customer in Russia who we have done business with before. We booked it, was it the third or fourth...towards the end of 2012. He has got a deposit in but it has been long delays in getting the interim payments. He is having trouble getting a letter of credit from the banks in Russia.

And as I said in my remarks we have seen this with a number of customers in Russia where financing is an issue. He has got enough skin in the game. He has got other expenditures besides expenditures on us that I suspect that they will try to find a way to get it done. But, we really can't say for certain when that will happen. So we thought the prudent thing to do was to take it out of our backlog.

Yes, we have seen this kind of thing before in other parts of the world and talked about them on these calls, but is there anything different about this one because typically it is just a one quarter or two quarter push out.

I would say that you are right and over the years we have talked about financing in various regions being an issue but this seems a little bit more wide spread, this issue in Russia. I am not saying it is permanent or anything like that but it does seem like it is more pervasive.

Okay, does that mean that we may see other orders that come out of Russia that come up with the same problem?

No, I wouldn't say that, I mean, you know not every customer needs financing and so forth. But it is not immediately solvable.

Just to throw my two cents in on that Walt. I don't think there are any other orders on the backlog to be concerned about with that respect. When John says there are other orders being delayed for financing those are pending orders. We haven't actually booked those, so.

Okay.

It is fairly unusual for us to take an order out of the backlog. I think we did it this time because of the extended delays associated with this one but there are no other booked orders in the backlog of any significance that we are aware of that are in this situation.

But there are pending orders throughout, some of our operations, especially in Europe where we do business with Russia that we are awaiting financing on, but we haven't actually booked those orders yet.

We might have a signed contract but we don't book it until we get a deposit and we can make (inaudible) the financing.

Okay good. I was wondering could we switch over to the Carmanah acquisition. Congratulations, it looks like a very good acquisition. I just want to clarify a couple of things. One, your 2014 accretion number, I think you said it was $0.25 is that right.

I would say the operative word being, in the ballpark. Because there is a lot of purchase accounting and that kind of thing. Valuations, so we really don't have a good handle on exactly what it is going to be but I did want to give people some kind of a sense. I don't know if you have anything to add, Tom?

No, I think that is exactly right, I think we are trying to give a sense to 2014. The EBITDA here is very high so it implies good cash flows in this acquisition. But the first full year 2014 we will have a lot of purchase accounting adjustments going through the P&L.

Now having said that, in 2015 a lot of that will go away, not all of it. We will still have some significant amortization intangibles. A lot of this will go away and I think you will see, all things being equal, much more accretion in 2015 than 2014 from this acquisition.

I think that is a good point about the cash flow. I think it is going to be the case even for ten years where the cash flow is going to be much more impactful even after we flush through the purchase accounting because of this intangible amortization. The impact on earnings per share will be less than the cash impact.

Okay. I wonder if I could just ask? This gets you, like you mentioned, it gets you out of traditional markets. Is there something we should imply by that? In that maybe there aren't as many acquisitions in core markets of paper and packaging or are you just being opportunistic here?

Walt, as we said in the past, we love doing acquisitions in pulp and paper if we can find the right company. Because frankly, we have better opportunities for synergies. But it is the case that there isn't a tremendous wealth of companies like us, particularly when you say, hey you want to have a nice parts business, we wanted to have technology.

And as you remember, you have been following us a while, we often describe if we were going to get out of pulp and paper, what would the acquisition look like? And we would say it would probably be in a adjacent space. I would say Carmanah fits that. Have very good management, because know, we don't know that market very well. Carmanah has excellent management. And a nice parts business, something to give it some stability and Carmanah has that for sure.

So it really met all the characteristics we were looking for in a move out side of our core markets and I would say a business that is the market that is growing close to 10% is a real plus too.

Yes, great. I will just ask one more and then get back in queue, on Carmanah. Are there margin improvement opportunities, if you look out over the next couple of years? And I wonder if you could talk about the competition in OSB?

So the principle margin opportunities are really related to our doing some manufacturing for them in China. And as I said in my remarks, 70% of the work that they do is outsourced primarily in the Vancouver area. So I think we are going to take a hard look at whether we can increase their margins by manufacturing something for them in China.

From a competitive point of view, there is not a lot of players. There is another German player that competes with them throughout the globe. Carmanah does extremely well in North America, in particular. I would say the competitor does a little bit better in Europe and the North American market is a bigger part of the market. Carmanah's market share is probably in that 70% world market share range.

The other thing I would say is that one of the things that Carmanah is doing in terms of internationally is that a lot of times a customer, particularly abroad or in a developing company will work with a suppler of the whole OSB mill. So we will actually have a marketing business relationship with the largest producer of the press, which is the center of that OSB system, and they have a preference for using Carmanah stranders and vice versa.

So we are hoping that that relationship is going to bear some good fruit going forward. Walt, does that answer your question.

Yes, it does thank you.

All right.

(Operator Instructions). I do see where Mr. Liptak has queued up for another follow up question. From Global Hunter, please proceed.

Hello Walt, long time.

(technical difficulty)

Walt, we are having trouble, move toward the window or something we can't hear you.

(technical difficulty)

Walt, I am sorry to say we have no clue what you are talking about. We can't hear you at all.

(technical difficulty)

Okay, there was something about off line. Operator, any other questions?

Yes, your next question comes from the line of Lawrence Stavitski from Sidoti & Company, please proceed.

Hello good morning guys, thanks for taking my question. You gave your growth margin guidance for 2013, as you mentioned, is has fluctuated a little bit in the last couple of quarters. What do you think are sustainable margins looking past 2013?

That is a very interesting question. John and I sometimes debate this back and forth. I think this year we once again exceed what we thought we could do. We will be over 45%, as I mentioned, which is quite remarkable.

I think going forward we have to factor into our calculus the fact that we will probably have better parts and consumables percentages as a part of the total revenue. Particularly, with the Carmanah acquisition where 70% of their business is in spares and we also added the Noss acquisition a few months ago and they are heavily dominated spares as well.

So we are continually exceeding what we thought we could do on the margin side and I would say we are somewhere in the 45% range, quite frankly. The mix of business that we have right now. That will fluctuate from quarter to quarter because, as you know, we will get a large systems order or several of them and they go out at lower percentages, still good margin dollars but lower percentages. It will fluctuate but we seem to have been settling in in this 44% to 45% plus range and I think as you look forward most of the factors I see would be favorable on that front.

Now the unfavorable factors would be competitors coming in or something of that nature.

Or big capital orders.

Or a big capital order, but we seem to be in and around that 45% range. That is what I would say the sustainable level is at the moment.

Okay, thank you. I guess building on Walt's question in terms of the Russian project. Is that basically the sole reason for lowering the fourth quarter EPS guidance?

No, it's not the sole reason, it is one of the factors. In every quarter there are puts and takes, but it was certainly one of the largest reasons.

Can you amplify on any other reasons. I guess the question is, is it mainly orders, fluctuation of orders, or is there another component?

I don't know if you can quite put your finger on any specific thing. But forecasts change all the time. Particularly the timing of where revenues fall between forecasts. It happens irregularly. I would say the Russian order is a little unusual in the sense that we expected to ship that entire order, more or less, in Q4.

But you always have a little move, a customer wanting to delay this or you didn't get that order or you got something you didn't get that order or you didn't get something you didn't expect. It is quite common.

Okay, got you. I guess shifting gears to the Carmanah acquisition. Can you actually breakdown the revenues by geography? Give us a ballpark estimate of North America versus the rest of the world.

I guess what I would say the North American market is by far the bulk of their revenue. OSB is tied to housing made of wood. Europe is not a big market. They don't typically have wood houses. In an international point of view going forward, there is a lot of talk about Russia, even though we may have issues with financing, they have a lot of trees and the government has announced some sort of impetus to build new housing made of wood, obviously, and using OSB.

China is another market, even though they don't have wood houses, they do things like the floor bedding for shipping containers. Something like that. They would have need for panels. Another one of the nice things about OSB, unlike plywood, you can use the smaller trees.

The other big market which is not a big market for Carmanah, for wood housing is Japan. And that is primarily a plywood market, not an OSB market. I can't predict if that would change over to OSB or not. Where are North America, OSB is probably 70% to 80% of the panel market versus plywood.

Okay, I was doing a little of reading up on the debate between plywood and OSB. You alluded a little bit to the other uses for OSB. What is the remaining 30% of some of the uses for it. I guess outside of home building.

It is home building and then remodeling, which is different than home building and it doesn't have the cycles that home building has. But other uses are, they are doing a very interesting new project using it for furniture. Making it a very, very thin strand for a European furniture maker and that would be used in furniture. Other uses are I would say industrial uses, things like that.

Okay, great. Is there a way to quantify the synergies or what would be the synergies with the acquisition between you guys.

Well we haven't really quantified it. I would say the synergies I mentioned, the biggest one is probably our manufacturing some of the products that they outsource in China. Another area, which is a little softer is much of the future growth of new OSB mills is probably going to be outside of North America, because in North America there is actually quite a number of idle mills just from the pre-crisis days.

So you can expect that those mills will start up in the next several years, but they won't necessarily be building new mills -- at least until 2017 or 2018.

Okay.

But off shore, internationally. Although we are not going to have salesmen calling on OSB customers or anything like that. We can offer some infrastructure, Carmanah is physically located in North America and we can maybe help them be a little bit more European or a little bit more South American or a little bit more Chinese. Just really with infrastructure as opposed to salesmen calling on the place.

Okay, got you. I guess the last one for a return. On the horizon, you guys will close on two or three acquisition in a year. Looking forward, what would be the priorities for capital going forward? Any further acquisitions on the forefront or have you guys kind of cooled off for a while?

I would say our thinking on capital allocations is very much the same. We will always compare buying...we have a dividend, of course, and we will compare buying our stock back to doing an acquisition and what is going to benefit our shareholders in the long run.

It has been a fairly active year. When we complete Carmanah it will certainly be a fairly active year for us in acquisitions. I wouldn't say we are going to signal a big strong push to do more and more acquisitions or anything like that. That said, there are still several in the pipeline and it is not like we are going cold turkey either.

Thanks guys, I appreciate it.

Okay.

Thanks Larry.

There are no remaining questions at this time, I would like to turn the call back over to Mr. John Painter for final remarks. Please proceed.

Thanks operator. Let me conclude today's call with what I think are the three take away points. First, we had a solid EPS performance at $0.57 versus our guidance at $0.47 to $0.49.

Second our cash flows remain strong at $13 million in the third quarter and $31 million in the first nine months of 2013, leaving us a net cash position of $59 million at the Q3.

And finally, the addition of Carmanah to the Kadant family. Once completed is expected to advance our aftermarket revenue strategy while getting us into faster growth markets. I look forward to updating you next quarter on our progress. Thank you very much.

This concludes today's conference. Thank you for your participation, you may now disconnect. You all have a great day.

Thank you.