Kadant Inc (KAI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Kadant Inc. Earnings Conference Call. My name is Katine, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Mike McKenney, Chief Financial Officer. Please proceed.

Thank you, operator. Good morning, everyone, and welcome to Kadant's First Quarter 2016 Earnings Call. With me on the call today is Jon Painter, our President and Chief Executive Officer.

Before we begin, let me read 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 annual report on Form 10-K for the fiscal year ended January 2, 2016. Our Form 10-K is on file with the SEC and is also available on 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 first 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.

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, Mike. Hello, everyone. It's my pleasure to brief you on our first quarter results and provide some information on our recent acquisition of the PAALGROUP.

Overall, we had a solid quarter with better than expected revenue and earnings per share performance. I'll begin today's business review with the financial highlights for the quarter.

We finished the first quarter with revenues of $97 million, which was up 5% compared to the first quarter of 2015. Foreign currency translation once again had a significant impact on revenue, and excluding the effect of FX, we were up 9% compared to Q1 of 2015.

Gross margin in the first quarter was excellent at 46%. Our adjusted EBITDA was $14 million or 14% of sales, up 2% compared to Q1 of last year.

Our adjusted diluted earnings per share of $0.72 in the first quarter was up 14% compared to Q1 of 2015. Our adjusted earnings per share result exclude an expense of $0.12 related to the PAAL acquisition and a gain of $0.02 on the sale of a building in Sweden related to our reorganization there.

Our GAAP diluted earnings per share of $0.62 was the same as reported in Q1 of 2015 and beat the top end of our guidance by $0.04. Our bookings of $97 million were quite good but down 10% compared to Q1 of last year, which was the third highest in our history.

And finally, after the close of the quarter, we completed the acquisition of the PAALGROUP, the leading European supplier of baling equipment used in recycling and waste management industries. I will provide some detail on this business and the potential synergies with Kadant later in my remarks.

The relatively strong dollar and corresponding FX translation continued to have a significant effect on our results. As you can see on Slide 6, our internal growth, excluding FX for Q1, was 9% for revenue and 24% for adjusted earnings per share, while bookings on the other hand, were down 7% from a very strong Q1 of 2015. Our internal growth, excluding FX for parts and consumables revenue, was up slightly while bookings were down 5%.

Turning to Slide 7. Despite the headwinds from the strong dollar, we saw a slight revenue -- sorry, we saw solid revenue performance in the first quarter of 2016. Our first quarter revenue of $97 million was up 5% year-over-year and beat the top end of our guidance of $89 million to $91 million. This growth was led by our Stock-Prep product line in all regions of the world.

Our bookings of $97 million in Q1 were down 10% from a strong first quarter of last year, which as I noted was the third highest in our history. Strong bookings in our Doctoring, Cleaning, & Filtration and Wood Processing product lines, which were up 15% and 30% respectively, were more than offset by reduced bookings in our Stock-Prep and fluid handling product lines compared to a strong Q1 of 2015.

Our revenue for parts and consumables in the first quarter decreased 3% to $63 million from a record Q1 of 2015. Parts and consumables revenue represented 65% of our total Q1 revenue. Excluding the impact of FX, parts and consumables revenues was up modestly, driven by our Stock-Prep product line, primarily in Europe and North America.

Parts and consumables bookings were down 9% compared to the record bookings of Q1 of last year to $62 million. All regions experienced reduced parts bookings compared to the record results we had in Q1 of 2015.

Before I begin our regional review, I'd like to take a few moments to talk about our recent acquisition of the PAALGROUP for approximately $58 million, which we completed at the beginning of the second quarter.

PAAL is Europe's largest producer of balers. In 2015, they reported revenue of EUR 48 million and adjusted EBITDA of EUR 7.3 million. Like most of our existing businesses, PAAL, which was founded in 1854, is a well-established supplier with a large installed base. This contributes to a healthy aftermarket business, representing about 30% of their sales.

While PAAL's aftermarket business is not as high as other Kadant businesses, it's still quite high for an equipment supplier.

One of the things we like about PAAL's aftermarket business is the high level of service contracts they have with the customers. This is something they do well and my hope is that we will learn something from them in this area.

PAAL is one of the few suppliers in the world which offers a full line of balers from large horizontal balers used by regional recycling centers to smaller vertical balers which you might see behind big-box stores. They also -- they offer different options for time to bale, such as steel wire used for OCC and polypropylene twine used for waste that will be burned for power generation.

The majority of PAAL's customer are using their products to bale paper and plastic. In this way, you can think of it as an upstream product line extension as the bales produced by PAAL balers often end up in our pulpers for the production of recycled paper. In addition to balers, PAAL also supplies conveyors, contactors and bale wrapping machines.

There are four main drivers of demand for balers, rising standard of living and population growth, storage -- shortage and cost of landfilling, increasing recycling rates, and environmental regulations. As you would expect, there's relatively slower demand growth in developed regions where living standards and recycling rates are already high and higher growth rates in the developing world.

Those of you who follow us closely will see some familiar characteristics in what we like about PAAL. First and foremost, PAAL is a great product. They are the technology leader in the marketplace and have an excellent reputation for rugged and reliable equipment that performs well in harsh environments.

Like their other equipment, PAAL balers need to be reliable. If they break down, the entire waste collection center can come to a stop yet the trucks of waste keep coming in. If the baler cannot get back online quickly, the trucks need to be diverted to a landfill and when this happens, the revenue source for the customer is transformed into an enormous cost. As a result, customers demand a rugged and reliable baler.

Other things we like about PAAL are their high market share which is around 45% in Europe, their large install base, their history of relatively stable revenue and their strong aftermarket business.

Also, and most important to us, since it's not our core market, PAAL has a first-class management team, which has done an excellent job growing this business over 5% per year for the last few years. We would not have been able to do this acquisition if PAAL didn't have a strong team in place.

Before moving on to our regional review, I wanted to highlight a few of the potential synergies we believe -- which if achieved, could increase the return on this acquisition from pretty good to very good.

Geographic expansion is one of the biggest but it's also one of the hardest to accomplish. Although PAAL is the largest bale supplier in Europe and one of the largest in the world, it does not participate in the largest market, which is the U.S., or the fastest growing, which is China. Although we do not have an existing sales force within Kadant that can sell PAAL products, we do have a global platform and can help get them get established in other markets, as we did with Carmanah.

In addition, we hope to be able to provide some lower-cost sourcing and manufacturing opportunities for PAAL, particularly for those parts currently outsourced. And lastly, since the market is quite fragmented, it does appear there are potential follow-on acquisitions in this space.

Next, I'd like to take a few minutes to provide an overview of our business activities and performance in each of the geographic regions of the world.

I'll begin with North America. Our revenue in North America was down 4% compared to the near-record first quarter of 2015, $55 million. Our Stock-Prep and Wood Processing product lines were up, while our other product lines saw revenue declines in Q1 compared to a relatively strong Q1 of 2015. Excluding the impact of FX, revenues were down 2%.

Bookings in North America were $54 million, down 5% compared to Q1 of last year. Increases in bookings for our Doctoring, Cleaning, & Filtration product line as well as our Wood Processing product line, were more than offset by reductions in our Stock-Prep product line. Although as expected, we have some difficult comparisons with 2015, we did have a reasonable level of activity in the first quarter of 2016, including a large order for two pulper systems and another for a forming system for paper machine wet end rebuild project for a combined value of $5 million.

Our expertise in forming technology and the ability to retrofit existing machines position as well for projects such as this, where cost-effective technical solutions are required to maximize productivity and uptime of an existing asset.

Turning to Europe. Our Q1 revenue was $21 million, up 29% from a very weak Q1 of last year. Excluding the impact of FX, our revenue was up a solid 33%; while Q1 bookings of $19 million were essentially flat compared to Q1 of last year, but were up 6% sequentially. Excluding the impact of FX, our Q1 bookings were up 3% year-over-year.

Despite overall market conditions being constrained, we did book capital orders for continuous detrashing equipment from containerboard mills in Italy and France and another for our Wood Processing product equipment to replace competitor screening equipment at a plant in France with a combined value of approximately $4 million.

Our market-leading stranding equipment has become the preferred choice of our customers due to its unique feature that provides gains in productivity, strand quality and safety.

Next, let's take a look at Asia. As China makes it the largest single country in Asia, my comments will be primarily focused in China. As many of you know, China continues to work through its slowdown in the industrial sector and capacity surplus as it transitions to a more consumer-driven economy.

Our Q1 bookings in Asia were down 23% compared to the strong first quarter of 2015, when we booked several large cap orders from customers in Taiwan and China. While we did book several large capital orders for recycled fiber systems as well as our M-clean fabric cleaning system, capital activity was somewhat subdued in Q1 and we see weaker market conditions in China for the rest of 2016.

That said, we do see healthy activity in other parts of Asia. For example, we booked a large capital order for our Wood Processing equipment from an OSB plant in Malaysia during the first quarter and are actively working on other projects in the region.

Our Q1 revenues in Asia were $13 million and essentially flat compared to Q1 of last year. Our revenue performance in Q1 was led by our Doctoring, Cleaning, & Conditioning product line, which achieved 59% increase in revenue due to the shipment of several large orders for doctoring and cleaning equipment. We also saw a solid performance of our Stock-Prep product line, which was up 11% compared to the same period last year.

Finally, I'd like to make a few comments about our rest of the world results. Our revenue in the rest of the world was $8 million in Q1, up 34% compared to the same period last year and 13% sequentially. While this quarterly performance was the best since 2014, the market in South America, in particular Brazil, continues to suffer from political uncertainty, high inflation and an increasing unemployment, all of which create a drag on economic recovery in the near term.

That said, over the last few years, we've made a number of restructurings to our business in Brazil and at this point, we have a nicely profitable operation even at the reduced revenue levels we are seeing in the current environment.

Rest of the world bookings were down 31% to $6 million in Q1 of 2016, due in large part to a $2.5 million Stock-Prep order received in Q1 of 2015 from a paper producer in South Africa. Similar to other regions, FX has impacted these results. Excluding FX, revenue was up 55% and bookings were down 16%.

I'd like to close my remarks for the few comments or guidance for Q2 and the full year 2016.

The inclusion of PAAL will increase our 2016 revenues and adjusted earnings per share, although the acquisition-related costs will have a negative impact on our GAAP diluted earnings per share.

For 2016, we expect to achieve GAAP diluted earnings per share of $2.75 to $2.85 on revenues of $412 million to $422 million. Our revised GAAP guidance includes $0.14 of acquisition costs, $0.10 of expense related to acquire inventory and backlog and a $0.02 gain on the sale of assets.

Excluding the acquisition-related costs and gain, our adjusted diluted earnings per share guidance for 2016 is $2.97 to $3.07. For the second quarter of 2016, we expect to achieve GAAP diluted earnings per share of $0.50 to $0.53 on revenue of $103 million to $105 million. Our second quarter 2016 GAAP diluted earnings per share includes $0.02 of acquisition costs and $0.10 of expense related to acquired inventory and backlog.

I'll now pass the call over to Mike for some additional details on our financial performance. Mike?

Thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 45.6% in the first quarter of 2016, down 250 basis points compared to 48.1% in the first quarter of 2015, which was the second highest in the company's history.

The decrease in gross margins from last year's first quarter was equally split between an unfavorable product mix and lower margins, principally in our parts and consumables business.

Our higher-margin parts and consumables revenue represented 65% of total revenue in the first quarter of 2016 compared to an exceptionally strong 71% in the first quarter of 2015.

Looking ahead, with the inclusion of PAAL, we now expect full year 2016 consolidated product gross margins to be approximately 45%. As is normally the case, there's likely to be some variability by quarter due in part to product mix as well as the timing of larger capital orders.

Now let's turn to Slide 23 and our quarterly SG&A expenses.

SG&A expenses were $32.5 million in the first quarter of 2016, up $0.3 million from last year's first quarter and included a favorable foreign currency translation effect of $1 million.

Excluding the translation effect, SG&A expenses were up $1.3 million or 4% compared to the first quarter of 2015. The increase in SG&A is due to $1.4 million of acquisition cost incurred in the first quarter of 2016 related to our recent acquisition of the PAALGROUP.

SG&A expense as a percentage of revenue was 33.7% in the first quarter of 2016 compared to 34.9% in last year's first quarter, a decrease of 120 basis points.

Looking forward, with the inclusion of PAAL, we expect that SG&A spending in 2016 as a percentage of revenue will be approximately 31.5% to 32.5%. I would note that this includes the transaction cost and backlog amortization related to the PAAL transaction.

Let me turn to our EPS results for the quarter.

In the first quarter of 2016, adjusted diluted earnings per share was $0.72 compared to our reported GAAP diluted EPS of $0.62. The adjusted diluted EPS excludes a $0.12 charge for acquisition costs related to the acquisition of the PAALGROUP and a $0.02 gain from the sale of a facility in Sweden.

In the first quarter of 2015, adjusted diluted EPS was $0.63 compared to our reported GAAP diluted EPS of $0.62. The adjusted diluted EPS excludes a $0.01 charge from restructuring activities. The increase of $0.09 in adjusted diluted EPS consists of the following $0.13 due to increased revenues, $0.06 due to lower operating expenses, and $0.05 due to a lower effective tax rate. These increases were, partially offset by $0.15 due to lower gross margin percentages.

Collectively, included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.06 in the first quarter of 2016 compared to last year's quarter due to the strengthening of the U.S. dollar.

Let me also take a moment to compare the actual diluted EPS results in the first quarter to the guidance we issued during our February 2016 earnings call.

Our GAAP diluted EPS guidance for the first quarter of 2016 was $0.55 to $0.58. We reported GAAP diluted earnings per share from continuing operations of $0.62 in the first quarter of 2016, which included $0.12 of acquisition-related cost and a $0.02 gain from the sale of a facility.

Excluding these items, our adjusted diluted EPS was $0.72. This $0.14 increase over the high end of our guidance range was principally the result of higher-than-anticipated revenues, primarily due to the shipment of several capital projects originally projected to ship in the second quarter of 2016 and to a lesser extent, a lower effective tax rate. These increases were offset in part with lower gross margins than forecasted.

Now let's turn to our cash flows and working capital metrics, starting on Slide 25.

Cash flows from continuing operations were $5.5 million in the first quarter of 2016, up $7.7 million from a use of $2.2 million in the first quarter of 2015.

I would also note that historically, the first quarter has been a weak quarter for operating cash flows due in part to the payment of performance incentive compensation.

We had several notable non-operating uses of cash during the first quarter of 2016. We paid $2 million for tax withholding payments related to the vesting of stock awards, paid a dividend of $1.8 million and contingent consideration of $1.1 million related to a prior period acquisition. We also expended $0.5 million in CapEx. There were no share repurchases during the first quarter of 2016.

Over the past 12 months, we have returned $17.3 million of capital to our shareholders: $9.9 million from share repurchases and $7.4 million from dividends. This represents approximately 50% of our net income during that period.

Let's now look at our key working capital metrics on Slide 26.

We had a sequential increase in days in inventory from 91 days to 99 days and there were also modest sequential increases to our days in receivables and AP days.

Looking at our overall working capital position, our cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 118 at the end of the first quarter of 2016, up four days from the fourth quarter of 2015 and down four days from the first quarter of 2015.

Working capital as a percentage of revenue was 15.1% in the first quarter of 2016 compared to 12% in the fourth quarter of 2015 and 15.4% in the first quarter of 2015.

Our net cash position decreased $1.8 million compared to the fourth quarter of 2015. Net cash, that is cash less debt at the end of the first quarter of 2016, was $33.9 million compared to $35.7 million in the fourth quarter of 2015 and $12.5 million in the first quarter of 2015.

The increase in cash and debt on our balance sheet in the first quarter of 2016 reflects $41 million in borrowings made at the end of the quarter, primarily to fund the PAAL acquisition.

On April 4, we acquired PAAL for approximately $58 million. Approximately $28 million of the purchase price was funded with our overseas cash and $30 million was funded from our revolving credit facility in Europe. The interest rate on this euro-denominated floating rate debt is currently less than 1%.

As you can see on Slide 29, our leverage ratio, calculated as defined in our credit agreement, was slightly below one at the end of the first quarter of 2016, up from 0.45 in the fourth quarter of 2015. The increase is principally due to the additional debt taken on just before quarter end to fund the PAAL acquisition. Under the credit facility, this ratio must be less than 3.5.

Before concluding my remarks, I'd like to make a few comments on our earnings guidance.

Looking at our quarterly EPS performance in 2016, we expect that the second quarter will be the weakest quarter of the year and that each of the remaining quarters will be sequentially stronger. As always, I should caution here that there could be some choppiness in variability in our quarterly results due to a number of factors, including the variability of order flow and shipments of capital projects.

We expect our effective tax rate will be approximately 30% to 31% in 2016. And finally, due to the acquisition, we expect that depreciation and amortization, excluding the backlog amortization costs, will increase to approximately $13 million in 2016.

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) Your first question comes from the line of Walter Liptak representing Seaport Global. Please proceed.

Hi. Good morning, guys. Well for our first question, let me ask about the second quarter guidance. And you mentioned a couple of things. I think the timing of some capital orders and some other impacts on gross margin. I wonder if you could just review that with us so we have an idea of what the gross margins may be looking like during the quarter.

Sure. I mean, as a -- I'll give kind of a big-picture comment and then let Mike give a little more detailed comment. As you recall in our guidance in February, we kind of had said we expected each quarter to be sequentially better. And essentially, what happens is Q2 and Q1 flipped. And the reason for that is largely these capital orders that we expected in Q2 really fell into Q1. So that broadly. Mike, maybe you want to comment with a little more detail.

Okay. Well, Walt, you see -- you saw the change in our revenue guidance, right? We basically had an uptick of $42 million from our past revenue guidance. And that's principally due to the PAAL transaction. And that's kind of spread relatively evenly by quarter through the remainder of the year. So we gave revenue guidance in the quarter of $103 million to $105 million. And you can assume PAAL's in there for approximately $14 million. So that would give you a Kadant-without-PAAL revenue guidance of approximately $89 million to $91 million, which is pretty much in line with what happened in the first quarter in terms of our guidance. And if we were to give guidance just on that, we would have guided $0.57 to $0.60 per share. And when we layer in PAAL, that is dilutive about $0.07 a share, so we get down to the $0.50 to $0.53 guidance that we gave. Okay?

Yes, it sounds good. What are the transaction costs looking? And can you quantify that for us in millions of dollars that will hit in 2016?

Yes, it was actually a pretty expensive acquisition, because it's in Europe. They really have operations in Germany, U.K., France and England -- I mean, France and Spain. And so -- and we did it on a relatively condensed time frame, which was kind of required from the seller. So we had what we had. We incurred a $1.4 million in the first quarter. We're projecting pretax of $0.3 million in the second. So $1.7 million for the total acquisition costs.

Okay, got it. And then I guess just thinking about PAAL. You mentioned that the growth rate was 5%, which sounds really impressive considering that a lot of those countries have been in little, slow-growth environment or recession.

Exactly.

I wonder, have you seen improvement over the last year or two to get to that 5% CAGR? And what kind of growth rate are you thinking about over the next 12 months?

So you're right, it was quite impressive that they grew 5% over the last couple of years in a market that's much slower growth than 5%, particularly for balers. So the market in Europe probably is growing about 1.5% for the sort of EU type, EU-28 or whatever they call it. When we did our modeling, we didn't have it growing at quite that high. I think that they'll -- much of their growth is really going to be through geographic expansion, in South -- Latin America, Mexico in particular, where they've already got some good progress; and then hopefully, with some assistance from us, in the U.S. and China.

I would say China will be a longer -- a little bit of a longer-term play because at this point, China, I don't know that, that market would be willing to pay the prices for these kind of high-cost, premium products. But knowing China and how they work, this is a country that does everything in big economies of scale. So they -- at some point, I think they will be moving towards large efficient waste management centers. And when they do, I think that will be a good opportunity for us.

Okay. Well it sounds like there's enough work to do in bringing products into the U.S. How long do you think that process will take? And will you be exporting out of Europe into the U.S.?

One thing I'll tell you as well, Walt, and I think I've mentioned this to you before, sales synergies are the hardest of all to get. So I expect it to take many years. We would be manufacturing out of Europe for the foreseeable future, let's say. One of the things in the U.S. market that's kind of opportune for us is the largest baler manufacturer in the U.S. bought, like the second and third -- or third and fourth biggest baler manufacturer. And the second biggest baler manufacturer actually has withdrawn from the market and left the U.S. more or less. So customers who had kind of four, five choices of baler manufacturers are largely down to one, and they don't like that. And I think they'd like to see some additional suppliers in the market.

Okay, great. And I'll just switch over to just the bookings in North America, if you don't mind. I wanted to ask about -- the bookings in North America didn't look bad. And I wonder about if you could talk a little bit about the pipeline of larger systems orders and the -- it seems like some of the general industrial's starting to pick up, and if you think that might flow through to a little bit better order trends in North America this year.

I kind of think of North America is more of the same. We have some stuff we're chasing. I don't expect it to be at the level we had in 2015. So that's really -- we don't see much on the -- on the Wood Processing side.

Okay. And your comments about Asia, where that you're expecting it still to be weak. Is there anything that you can point to? Is it financing issues like we'd seen in the past? Or just the slow industrial economy there?

I think it's more the slow industrial economy. We had financing issues with the [Gotai] project that we reversed, but that's really it. Financing is not the major issue right now. It's really just to have some overcapacity in certain areas and people are a little bit cautious.

Okay. Got it. Okay. Thank you.

Thanks.

(Operator Instructions) The next question comes from the line of Dan Jacome representing Sidoti.

Hey, good morning. Thanks for your time. Apologies if I missed this. I was on another call so I was hopping back and forth. But the capital equipment that got pulled forward this quarter, what was the geography and the product line for that?

There was a fair bit in China.

Some in Europe, some in America.

Yes. They're really all three, maybe a little more in China though.

And was that Stock-Prep? Because it looks like you had a good quarter for Stock-Prep all-in.

A lot of it was Stock-Prep.

Yes, it was Stock-Prep. Yes.

Okay, great. And then I know you got a lot of questions about PAALGROUP, so interesting transaction. Just looking at, in May, you said the revenue synergies are going to be harder to capture, but just in terms of cost synergies, longer term, is there any room for that? Because it sounds like you're going to keep most of the manufacturing in Europe, is that correct? So --

Yes. I should say it's European manufacturing, mainly in Germany, and also a little bit in the U.K. But they have a sort of heavily outsourced model. So our intent is to keep that. And they make a very precise high-quality product, so our intent is very much to maintain the -- those operations there, but we will look to see if there's opportunity on some of the outsourced components as to whether we can make those in China.

Okay, good. And then my last question, kind of a random one. But just remind us again, for the tissue business that you do, what's your exposure to at home versus away from home? Because I was looking at some of these at-home tissue numbers from some of the guys that already reported and they've excellent numbers. So can you -- what's your exposure there?

Yes. I'll tell you, we do globally track what grade our orders are going into, and we did -- we instituted that a little while ago, more or less for you, but we don't break out at home versus away from home for tissue. So I can't really give you a good answer on that.

But in terms of geography though, it's mostly U.S. customers, right?

Our tissue business?

Yes.

No, no. I wouldn't say it's mostly U.S.

Okay. Does it track the geography mix?

Yes. I mean over the longer run, don't forget that our Stock-Prep exposure to tissue, okay, which is one of the bigger pieces, that's recycle tissue, and that is Europe and South America. It's really not the U.S., hardly at all. The U.S. just for preferences doesn't use recycle tissue particularly. But our other businesses are doctoring, water management business, those kind of businesses, they of course would sell to the virgin tissue mills.

Okay. Thanks a lot for clarifying that. Thanks.

With no further questions at this time, I would now like to turn the call back to Mr. Jon Painter for any closing remarks.

Thanks, operator. I want to conclude today's call with what I think are several key takeaway points. First, we had another good quarter with excellent internal revenue growth of 9%, excluding FX. Second, we're moving quickly with the integration of the PAALGROUP into the Kadant organization to capitalize --

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-- per share guidance to $2.97 to $3.07 on revenues of $412 million to $422 million, largely due to the PAAL acquisition. I look forward to updating you next quarter. Thank you very much.

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