Kadant Inc (KAI) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Second Quarter Kadant Inc. Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host, Michael McKenney, Executive Vice President and Chief Financial Officer. You may begin, sir.

Thank you, Nicole. Good morning, everyone, and welcome to Kadant's Second Quarter 2018 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. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to 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 December 31, 2017, and subsequent filings with the Securities and Exchange Commission.

Our Form 10-K 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'll 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 and the slides presented on the webcast and discussed in the conference call, which are 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. Thank you for joining us this morning to review our second quarter results and discuss our outlook for the second half of the year.

Overall, we had another terrific quarter with strong growth in bookings and revenue and a solid earnings per share beat. Let me begin with the financial highlights of the quarter.

We had near-record bookings of $176 million, up 47%. The contribution from our recent acquisitions as well as strong capital bookings in all our major markets led to this growth. Q2 revenue was up 41% to a record $155 million. Gross margin came in at 44% due to the inclusion of recent acquisitions and the larger percentage of capital orders we shipped in the second quarter.

Adjusted EBITDA was up 37% to $26 million or 17% of revenue. GAAP diluted earnings per share was up 50% to $1.08, while our adjusted earnings per share was up 3% to $1.07.

Cash flow from operations, which was definitely one of the highlights of the quarter, at $28 million left us in a net debt position of $146 million and a leverage ratio of 1.56 at the end of the quarter.

As you can see, on Slide 6, foreign currency translation had a favorable effect in the second quarter, and the newly acquired businesses also made a significant contribution to our financial performance. Our internal revenue growth, which excludes FX and acquisitions, was 10%, continuing the strength we've seen in the last few quarters. Internal growth in bookings was also very healthy at 11%. And I am pleased to report that our internal revenue growth for Parts & Consumables was 6%, while bookings for Parts was up 7%.

Turning to Slide 7. Following our record bookings level set in Q1 of this year, we had our second best bookings performance in Q2. Second quarter bookings of $176 million benefited from excellent capital bookings in our Stock-Prep product line in Asia as well as our Fluid-Handling product line in North America and Europe. I'll provide more details on this when I discuss our regional performance.

Our book-to-bill ratio for the first half of 2018 was 1.18. Q2 revenue set a new record at $155 million, with growth in all of our product lines in all regions. We had excellent internal growth in our Stock-Prep and fluid product handling lines, up 22% and 20%, respectively, while acquisitions contributed 26% to our revenue growth.

The first half of the year has also been excellent in our Parts & Consumables business with record revenue of -- in Q1 and near-record revenue in Q2. Revenue from Parts & Consumables in the second quarter increased 35% to $95 million and represented 61% of our total Q2 revenue. Parts & Consumables bookings were up 40% to $95 million. North America and Europe led the strong performance of 44% and 42%, respectively.

Bookings for Parts & Consumables, however, were down 7% on a sequential basis from the record Q1, particularly -- due to particularly strong bookings for our Wood Processing parts in Q1. And additional seasonal influences in North America affected the decline as Q1 is historically a stronger quarter for parts as mills prepare for spring maintenance outages.

Next, I'd like to review our performance in the major geographic regions where we operate. Let me start with North America. The packaging market in North America continues to be quite healthy, and the industry conditions are favorable for producers with high containerboard prices and decade-low OCC prices. The low OCC prices are primarily the result of China's restricting imports of waste paper, which I'll discuss later in my remarks.

The packaging industry has always benefited from the stability of food and beverage segment, but it now has an added boost from strong growth in e-commerce shipments. As a result, industry analysts are projecting solid corrugating packaging demand in both the near and medium term. Containerboard machine operating rates during the second quarter reached 99%, and analysts expect operating rates to remain strong in the second half of the year.

While demand for housing remains strong, land and labor shortages are constraining housing starts, which were down 12% in June. As many of you know, monthly statistics can be quite volatile. If we instead compare the residential housing starts with the first 6 months of 2018 to the first 6 months of 2017, we see a 7% increase.

Despite the softer monthly housing statistics, our lumber and OSB customers are doing quite well. Both lumber and OSB prices remain high and producers are running flat out with limited downtime being taken for maintenance. This has resulted in continued strong demand for our products from our Wood Processing customers.

As you can see, on Slide 9, revenue was up 46% in the second quarter to $75 million, second only to our record-setting performance last quarter. Contributions from our recent acquisitions as well as strong performance by our Fluid-Handling product line drove this growth.

Bookings in North America were up 67% to $80 million, with strong contributions from our acquisitions and growth in our Fluid-Handling product line, which more than doubled compared to last year.

Several Fluid-Handling capital orders from paperboard and box producers with a combined value of $5 million were booked in Q2.

We're having good success penetrating the corrugating packaging industry, where we had extended our papermaking expertise and steam systems to the converting segment where corrugated boxes are produced.

Our R&D efforts in this segment began over 5 years ago, and we're now seeing strong demand for this segment as box plants are reaching their operating limits in production and they need our products to increase output from their equipments.

Before leaving North America, I want to comment on the tariff situation and the general increases we're seeing in input costs. As most of you know, the trade tariffs went into effect July 6 and include pulp and paper equipment. Last quarter, I noted that the trade tariffs -- that had the trade tariffs been in place in 2017, the impact on Kadant would have been about $2 million, assuming we do not pass on the cost through price increases. Due to the exceptionally strong second half in 2018 in North America, we expect to have a $1.4 million margin impact due to the tariffs.

Since nearly all of our second half capital shipments relate to orders booked before the tariffs were announced, we're not able to adjust prices for the vast majority of capital orders to be shipped in 2018.

We are in the process of adjusting prices, which will start to impact Parts & Consumables margins in the fourth quarter and capital margins as we move into 2019.

I should note that while we're working to mitigate the impact of the tariffs through pricing and sourcing strategies, we can't be certain of how our customers and competitors will react to the actions we take.

Finally, the strong economy in North America has led to upward pressure on input cost, particularly material costs. However, over time, we expect to offset most of these higher cost through price adjustments and sourcing strategies.

Turning to Europe. As in North America, European packaging producers are facing a favorable environment with low fiber costs coupled with solid demand and stable prices.

Slide 10 shows our revenue and bookings performance in Europe. Second quarter revenue was up 33% to $45 million, led by our Forest Products acquisition and double-digit revenue growth from our existing businesses.

Bookings in Europe were up 22% to $48 million. The capital project activity consisted of many smaller orders for our fiber processing systems, balers, paper drawing systems and debarking equipment. Bookings from all of our major product lines were up compared to last year, except for our Doctoring, Cleaning & Filtration product line, which had a tough comparison against record bookings in Q2 of last year. As has been the case for the last several quarters, the Russian market has been particularly strong.

Turning now to Asia. You can see the bookings and revenues chart on Slide 11. Our second quarter bookings were up 40% and revenue was up 54% from last year led by a high volume of capital shipments during the quarter and solid growth in Parts & Consumables revenue. The market in Asia has been extremely strong. It's also going -- undergoing major changes, stemming from China's decision to severely restrict the import of recovered paper.

So far in 2018, recovered paper imports to China are half of what they were last year. The resulting fiber shortage is causing big disruptions in China with up to 40 mills announcing downtime related to the lack of available fiber. China has also announced its intention to ban all imports of recovered paper by 2020.

These actions are creating havoc in the global fiber balance, which is driving Chinese producers to make huge investments to rapidly increase pulping capacity outside China.

Once they are in place, these facilities are expected to process imported waste paper outside of China and then ship the pulp to mills in China.

The capacity build-out presents a big opportunity for us, and we're capturing the bulk of these new systems and we're encouraged by our customers' demand for our products.

During the second quarter, we booked 8 pulping system orders in Asia with a combined value of approximately $14 million, of which nearly half was for mills outside of China. We also expect Q3 will be a strong bookings quarter. So far in the third quarter, we've secured approximately $3 million orders for pulping system to be located outside of China. We're also putting plans in place to expand our service capability in Southeast Asia to support this new wave of capacity.

In addition to Stock-Prep, our Wood Processing product line also contributed to our strong bookings performance in Q2. During the quarter, we booked 2 OSB processing equipment orders with a combined value of approximately $4 million. One project is destined for China, while the other is for a new mill in Thailand. The outlook for Q3 bookings for our OSB equipment is also promising, but we do expect bookings level to pause and moderate after Q3 as the market absorbs this new capacity.

Finally, a few comments on the rest of the world results. As you can tell from my remarks, we're seeing healthy market conditions in most regions of the world. As has been the case in the past, the exception is South America and, in particular Brazil, which has shown some sign of improvement, but that has reversed in the second quarter with labor actions, such as the truckers' strike. Our revenue in the rest of the world, which is largely South America, was $9 million in Q2, up 10% compared to the same period last year. However, on a sequential basis, revenue was down nearly 10%. Bookings in Q2 were $11 million, up 76% from the same period last year, but down sequentially after a strong performance in the 3 preceding quarters.

Despite this decline, we have several notable capital bookings during the quarter, including one from a tissue producer for an upgrade to an existing Stock-Prep system in Chile and the capital order for a rotary debarker for a plant in Brazil.

We believe the increasing uncertainty resulting from the upcoming presidential election has been a large driver of the general slowdown in Brazil that began in April.

The high-level of optimism that we saw at the start of the year has all but fizzled and has led to a rather weak economic outlook until after the elections in the fall. Despite this, there are several capital projects under consideration that may move forward in the coming months.

I'd like to conclude my remarks with a few comments on our guidance for Q3 and the full year 2018. The strong start to the first half of 2018 has positioned us well for another record year of financial performance. The strong economy in North America, the capital build-outs in Asia and our acquisitions have all contributed to our record bookings in the first half of the year. While our markets in general are doing well, there are 2 negatives impacting our guidance: The first is the impact of the stronger U.S. dollar, which negatively affects our foreign earnings when translated into U.S. dollar; and the second is the impact of the trade tariffs that I mentioned earlier.

For 2018, we're increasing our revenue guidance to $630 million to $638 million. However, due to the expected negative impact of FX, and the trade tariffs, we're lowering our GAAP diluted earnings per share guidance to $4.89 to $4.99. Our earnings per share guidance includes a negative impact of $0.19 from the strengthening of the U.S. dollar since our last call and $0.09 from tariffs. We expect our adjusted diluted earnings per share, which excludes restructuring costs and other items, to be $5 to $5.10. I think it's important to understand that our business in the grounds are doing quite well and in fact have strengthened since our last call.

If we did not have the FX and tariff headwinds, we would have been raising our earnings per share guidance, which makes sense, given our earnings per share beat in the second quarter and our strong bookings performance.

For the third quarter of 2018, we expect to achieve GAAP diluted earnings per share of $1.35 to $1.40 on revenue of $1.62 to -- I'm sorry, on revenue of $162 million to $166 million.

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

Thank you, Jon, I'll start with our gross margin performance. Consolidated gross margins were 44% in the second quarter of 2018, down 390 basis points compared to 47.9% in the second quarter of 2017.

Our second quarter 2017 gross margins were one of the best quarterly performances ever, and were influenced by a high percentage of parts and consumables in our overall product mix.

Our Parts & Consumables revenue represented 61% of total revenue in the second quarter of 2018 compared to 64% in the second quarter of 2017. In addition to the lower percentage of parts and consumables in 2018, the most significant factor reducing gross margins in the second quarter is the inclusion of the lower margins from businesses we acquired last year, which include some product lines that have lower margins than our legacy business. I should also note that they have lower SG&A costs as well. The remainder of the change is due to lower gross margins achieved on capital equipment sales. Margins on capital equipment sales are very order-specific, and as a result can fluctuate between periods. The gross margins on our legacy Parts & Consumables were essentially the same in both periods.

Now let's turn to Slide 16 and our quarterly SG&A expenses. SG&A expenses were $45.1 million in the second quarter of 2018, up $6.2 million from the second quarter of 2017. This included an increase of $6.9 million from our acquisitions and $1.1 million from an unfavorable foreign currency translation effect.

SG&A expenses in the second quarter of 2017 included $4.1 million of acquisition costs. SG&A expenses, as a percentage of revenue, decreased to 29.1% in the second quarter of 2018 compared to 31.6% in the second quarter of 2017 when acquisition-related costs are excluded in the prior year period. We expect continued improvement in this metric in the second half of 2018.

Let me turn next to our EPS results for the quarter. In the second quarter of 2018, GAAP diluted EPS was $1.08 and our adjusted diluted EPS was $1.07. The $0.01 difference relates to $0.04 of restructuring costs and a $0.05 discrete tax benefit. In the second quarter of 2017, GAAP diluted EPS was $0.72, and our adjusted diluted EPS was $1.04. The $0.32 difference relates to acquisition costs. The increase of $0.03 in adjusted diluted EPS in the second quarter of 2018 compared to the second quarter of 2017 consists of the following: $0.49 due to higher revenue and $0.19 from the operating results of our acquisitions. These increases were partially offset by $0.21 due to higher operating costs; $0.17 due to lower gross margin percentages; $0.15 due to a higher recurring tax rate; and $0.11 due to higher net interest expense, almost entirely related to our prior year acquisitions and $0.01 due to higher weighted average shares outstanding.

The increase in our recurring tax rate can largely be attributed to 2 items. The primary cause of the increase is our tax rate -- in our tax rate, how the new U.S. law taxes foreign earnings. This accounts for more than half of the rate increase. As I mentioned last quarter, we believe there is a flaw in how the law was written related to the utilization of foreign tax credits, and we hope it will be corrected. If it is corrected, as we believe it should be, the impact would reduce our tax rate by roughly 200 basis points.

The second item is that we are now providing for repatriated earnings from certain locations as we move cash to pay down debt. This accounts for approximately 1/3 of the rate increase. Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.05 in the second quarter of 2018 compared to the second quarter of last year due to a weaker U.S. dollar.

Let me also take a moment to compare our adjusted diluted EPS results in the second quarter to the guidance we issued during our May 2018 earnings call.

Our adjusted diluted EPS guidance for the second quarter of 2018 was $0.95 to $1, which excludes $0.06 of restructuring costs. We reported adjusted diluted earnings per share of $1.07, which excludes a $0.05 discrete tax benefit and $0.04 of restructuring costs in the second quarter of 2018. This $0.07 increase over the high-end of our guidance range is principally the result of better-than-expected results primarily from our Stock-Prep product line in China. Our adjusted EBITDA was $26.1 million or 16.9% of revenue in the second quarter of 2018. Compared to last year's quarter, adjusted EBITDA increased $7.1 million or 37%. We are anticipating stronger adjusted EBITDA margins for the remainder of 2018.

Now let's turn to our cash flows and working capital metrics starting on Slide 19.

Cash flow from operations was $28.4 million in the second quarter of 2018 compared to $23.7 million in the second quarter of 2017. On a year-to-date basis, cash from operations was $35.6 million in 2018 compared to $25.4 million in 2017, an increase of $10.2 million or 40%.

We had several notable nonoperating uses of cash in the second quarter of 2018. We paid down debt, $29.5 million; paid $5.1 million for capital expenditures, which includes $2.1 million for the facility project; and paid a $2.4 million dividend on our common stock.

We anticipate spending approximately $700,000 on the facility project in the third quarter, which will compete the capital expenditure for this project.

Let's now take a look at our key working capital metrics on Slide 20.

Our days in receivables was 52 days and in payables was 36 days, both decreasing from the first quarter of 2018. Days in inventory increased to 100 days from 98 days in the first quarter of 2018 as we increased inventory related to projects, which will ship in the second half of 2018.

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 116 days at the end of the second quarter of 2018. Working capital, as a percentage of revenue, was 10.2% in the second quarter of 2018 compared to 13% in the first quarter of 2018 and 11.6% in the second quarter of 2017.

Net debt, that is debt less cash, at the end of the second quarter of 2018 was $105 -- $145.7 million, down $21.5 million from the first quarter of 2018 as a result of strong cash flows in the second quarter.

As you can see, on Slide 23, our leverage ratio, calculated in accordance with our credit facility, was 1.56 at the end of the second quarter of 2018, down from 1.93 at the end of the first quarter of 2018. Under the credit facility, this ratio must be less than 3.5.

Before concluding my remarks, I'd like to update some guidance numbers that we gave in our last call. As Jon mentioned, we have increased our revenue guidance to $630 million to $638 million from $625 million to $635 million, despite a significant FX headwind of $15 million due to U.S. dollar strengthening from our April forecast to our July forecast.

We were able to increase revenues -- our revenue guidance as a result of our strong bookings performance in the first half of 2018. Our first half book-to-bill rate was 1.18. However, regarding our EPS guidance, we have lowered our adjusted diluted EPS guidance by $0.15 to $5 to $5.10, from $5.15 to $5.25. The strength of the U.S. dollar reduced our forecasted EPS by $0.19. In addition, we have included a $0.09 impact related to recently implemented tariffs in the guidance we are providing today. Although these 2 items have impacted EPS by $0.28, we have only reduced our adjusted diluted EPS by $0.15 as a result of our improved outlook for the second half of 2018.

In addition, we now expect that full year 2018 consolidated product gross margins will be approximately 43.5% to 44.5%, down 50 basis points from our previous guidance.

We also now expect that SG&A spending in 2018, as a percentage of revenue, will be approximately 27.5% to 28.5%, down 50 basis points from our previous guidance. I would also like to add that at the beginning of the third quarter, we closed on a 10-year real estate loan for $21 million at a fixed rate of 4.45. The loan has a provision that allows us to prepay with no penalty after 3 years. This loan frees up $21 million of additional borrowing capacity under our revolver agreement. With this new debt agreement and our outstanding interest rate swaps, we have fixed interest -- we have fixed the interest rate at slightly over 4% based on our current borrowing margin of 1.25%, and $46 million of the $117 million of U.S. denominated debt that was outstanding at quarter-end.

That concludes my review of the financials. And I will now turn the call back over to Nicole for our Q&A session. Nicole?

(Operator Instructions) And our first question comes from Walter Liptak from Seaport Global.

It looks like all the fundamentals are going really well for you. But I want to ask you about the $0.19 FX headwind in the guidance. And I wonder what assumptions did you make about the U.S. dollar for the back half? Did you take the dollar where it is right now and projected forward? Or it was just some other the assumption that you made?

Yes, that's a good question, Walt. We're essentially using the spot rate at the end of the second quarter. So we're really not making an assumption on the dollar weakening or strengthening. We're just looking at the spot rate at the end of the second quarter.

Okay. Are there any -- so it just looks like the $0.19 looks like a big number. Was there -- in the second quarter, was there a headwind from foreign currency? Or is it just in the forward...

Yes. It was about $2.5 million when looking at the guidance we gave back in April.

April to now.

$2.5 million in revenue, how about EPS?

That was about $0.02, just for the second quarter. And so that -- yes. Of course, there was an impact in the second quarter.

Okay. So ramps up because of comps, I guess.

Yes.

Okay. Are there any other assumptions in that 2018 guidance that we should know about that are headwind? You called out the tariffs. Obviously, is there anything else that we should know about?

No. I mean, we're assuming, as I kind of said in my remarks, that our plan is to mitigate the tariffs through sourcing and pricing, but it will be -- have relatively little impact in 2018. And in 2019, we'll start to be continuing stepping it up. I think our goal is eventually to mitigate it 100%, but I don't know that we would do that in 2019, and we're certainly having minimal impact in 2018.

Okay. And the reason you don't take up prices because these are contracts that you've already signed prior to the tariffs.

Exactly. You saw a big backlog building up, much of that was done before the tariffs were really in place.

In the end, it's not that huge of an impact on us. So it's not the kind of thing you can go back and renegotiate a contract if signed.

Okay. Okay, good. If I can switch gears to Asia. I guess that was the nice surprise in the quarter, for, I think, at least, 6 months, you guys have been talking about China orders that are going to slow because of the U.S. waste paper restrictions. But I guess, the pickup in orders outside of China are, obviously, extremely strong. So I wonder about the investment funnel, I guess. So as you look into 2019 and 2020, you kind of alluded to big projects that are out there. Can you give us an idea of what the orders could look like? What the opportunity is for Asia ex China?

That's a great question, Walt. I would say, also, that is the, to me, most important thing that we're talking about on this call, is this a build-out of pulping capacity outside China. We had -- as you know, for a while, we were saying that we expected the Stock-Prep capital orders within China to dissipate in the second half, nothing to do with the waste paper, it was more just the fact that they've done a lot of building. And I think that's still the case, but it is well, well more than offset by this need to build out pulping capacity outside of China. And to put it a little bit in perspective, China right now exports around 20 million tons of fiber every year in the form of boxes to the U.S. and Europe, primarily the U.S., and they've imported about 25 million tons. They've -- just OCC in mixed office waste is cut in half from what it was. They were importing about 7 million tons so far this year. Last year, they had around 14 million tons. So big -- these are huge changes. And of course, if they ban all imported waste paper, they're going to have to figure a way to get fiber into that market to the tune of 20 million tons or 25 million tons. So we are -- the bookings we talked about are less than sort of less than 5 million tons. They're probably in the 3 million, 4 million tons. So I don't know exactly how this is all going to play out, but if China is serious that they're going to ban all waste paper by 2020, that would -- they're going to have to figure some stuff out in terms of how to get pulp in. And of course, if they process -- the restrictions are because the waste paper has these contaminants in it, by pulping it outside of China, you get around that because you essentially are removing the contaminants in Vietnam or Thailand or wherever they do that, and then they send relatively clean pulp into China.

Okay. All right. Great. Well, it sounds like the sector in Asia would be very strong for some time.

Yes. We don't -- we can see Q3 looks pretty good. I can tell you that. And I would say this is kind of uncharted territory for how this is going to go, but they -- if China is serious about this, they will force a lot of investment.

Okay. And if I could just switch gears but stay along the same lines and thinking about the sector. You mentioned North American packaging is healthy for the medium term. And so I wondered if you could just clarify what do you mean by medium term? Is it this year, is it into next year? And I guess, I'm thinking about what do you think about North America packaging in 2019? Are there still projects that are building in the -- in your funnel that you've got a growth in 2019?

Yes. Sure, right. And I -- when I talk about the medium and short term, I'm not saying in any way the long term is worse. As I've talked about before, I absolutely think this structural change with the e-commerce and the Amazon impact and what that drives for boxing is got, that's a long-term structural change. So I'm totally up -- optimistic in the long -- medium, short and long term. I can tell you that the analysts who are forecasting capacity additions in North America are talking 3.5% increases for the next couple of years.

And our next question comes from Chris Howe from Barrington Research.

I just wanted to see if there has been any update as -- in regard to the acquisition environment? Are you still seeing kind of the same things that you've echoed before as far as things being a little bit expensive? Or just kind of what you're seeing there in the quarter and right now, I guess?

Sure. So I'm actually very happy with our -- we have a business development person, who is doing an excellent job, and we're seeing a lot of stuff. That said, it's been a little on the expensive side. So we found a number of things we actually like quite a bit, but we just couldn't get there in price. So we are -- I would say, it's active but a little on the pricy side for our taste at this point.

Okay. And then another thing. Previously you mentioned a 5-year goal, a while back, of 2%, 3% of organic revenue growth. And is there going to be an Investor Day coming up? Or is that something that's a little bit archived right now?

Well. Sounds good -- another good question, Chris. With that, I'm almost a little embarrassed about that forecast for 2021 because we're basically kind of bumping against it in 2018. So yes, we need to redo. We're going to have another Investor Day towards the end of this year or possibly the beginning of next year and we'll probably update that. We had internal revenue growth of 2% to 3%. Last year, we did around 6%. This year, we're probably going to do around 10%. So we're well ahead of that. That said, I don't think this is a 5-year growth rate. So we'll have to come up with something that's maybe not as conservative as we were before, but certainly not as aggressive as we're experiencing right now. And we'll update the acquisition model and so forth, Mike (sic) [Chris]. I wouldn't be surprised if we had a little more on the internal side and a little less on the acquisition side, but we have to work all that through.

And then you've mentioned before the oriented strand board and how that's a growth opportunity moving forward in Asia. How should we think about that? How material could that be within the next 12 months or so?

So -- let's start with -- it's a very big opportunity, right? A lot of furniture's built in China. I've heard and these are not -- I'm going to caution, these are not sort of my estimates, but the people who we work with in that area say that if this thing really takes off over the next sort of 5 to 10 years, you could be looking at another 50, 60 OSB mills. So that would be a lot. my guess is with missionary -- this is a missionary product. It will probably take longer, but to put it in perspective, so we've booked so far 2 OSB mills, and we have some optimism we'll book some more in Q3. Prior to that, there was only really 3 western OSB mills in the whole country. So this is a big influx of a new product line. So we kind of see it pausing, I would say, not stopping, but pausing as they work to introduce this product. And then if it's successful, you should see a sort of pick up, again, at some point.

And our next question comes from Bill Hyler from WDH Capital.

I'd like to delve a little more into this containerboard expansions, first, in North America because it looks like there is another round of significant expansions that have been announced this year. A lot of them are expansions, a lot of them are conversions from paper plants to containerboard. Could you walk us through your relative exposure to a paper plant versus a OCC recycle containerboard plant? And what the relative you think your exposure would be between the 2 type of plants because you probably lose a little bit on the paper side as these other plants are built out.

Right. So a lot -- I would say that let's talk about -- when there is a conversion, right, that's often they're modifying a paper machine, they're often adding new Stock-Prep and significant modifications to the paper machine. So we have -- we do quite well in that kind of setup. The area we probably do a little less well is a greenfield paper mill, where there are actually building the whole thing, including the paper machine, because our competitors in the Stock-Prep side and, frankly, in the paper -- the stuff that goes on the paper machine, they make the whole paper machine and they'll bundle that. So I would say when it comes to expansion, our favorite is conversions. We also like that they do a lot of debottlenecking, that kind of stuff, we like that. And of course, even when there's a greenfield mill, we fight quite hard to get the customer to insist on our stuff.

Right, okay. And I guess to say that's true with virgin plants, too. You don't make as much -- you don't have as much exposure to a virgin...

We don't have much exposure to virgin, right. I mean, one of the things that's happening right -- so adding virgin capacity in North America, they can increase a little bit, but we haven't had a new virgin mill in North America in like 30 years probably. It's a long time. It's very difficult to add -- truly add a plant. That tends to go in South America. But when they do these sort of small capital improvements, we will get some of that. The other thing I would say is with the other side of the paper shortage that's created in China with these restrictions on imports is that OCC prices have plunged here. So there's a lot of favoritism to doing recycle, which we also like.

Right. The economics I think are now favoring that in a big way.

Absolutely.

Let me just -- I also have a question on China. I have been reading some of these expansions they've announced -- pulp plants in Vietnam, I think, is an area they've been targeting. So the way -- so what you're saying is, what they'll do is, they'll process the wastepaper, say, in Vietnam, produce clean pulp, and then ship that back to the OCC plants in China.

That's exactly right.

To reduce the contaminate. Now have the OCC plants in China been idle? Have many been idle or running at lower capacity than they normally would be because of this problem?

Absolutely. Yes, I've been -- I kind of said in my remarks that 40 mills have announced downtime in July and August. So -- and these are big players, Nine Dragons, people like this. So yes, it's a real problem, I would say.

So it should be a double positive effect for you, I guess, long term here. You'll do some business in Vietnam, but also the traditional Chinese plants should start ramping up, again, in the next 5 years.

Yes, I think what -- it's going to shift, right. So we're doing quite well, I would say, capturing market share in this build-out in Southeast Asia, in particular. But a cleaner pulp will be going to China than just the regular wastepaper. So I think, I expect it'll have a slight or maybe some modest negative impact on our parts business in China because they're going to be processing already semi-cleaned pulp, right. So there won't be as much wear and tear. And I don't know -- we don't exactly know how this is all going to fall. They're even talking about doing some build-outs in North America where the wastepaper is. In that case, they have to dry it because you can't ship pretty wet. When it's in Vietnam, they ship, what they call, wet lap. So it's -- they don't spend a lot of energy drying it and they just put it back in the pulper, but if you're shipping it from North America, you really got to fully dry it because it's on a boat for a month.

(Operator Instructions) And our next question comes from Dan Jacome from Sidoti.

Just a quick housekeeping question. I couldn't find it in the K. How -- what are -- of your COGS -- production costs, how much is comprised of just stainless steel and, I guess, aluminum, and what else is under the chairs, maybe ductile iron?

No, you won't really find that.

Just maybe like a high-level thoughts on that, I mean...

I'll give you the broadest comment. It is easily our largest cost. It's hard to say it's this much because sometimes we buy some raw steel and we process it. Sometimes we buy a casting made of steel, your -- the price of steel impacts that casting, but there's a lot of labor into the thing we bought. So it's actually kind of little bit kind of hard to quantify. But it's far away our largest 30%-ish, would you say....

Material.

Okay. There's a number, all right, that's kind of what I was going to 30% to 40%...

Of the material costs.

No, that's fantastic. That's all I had. Just, well, maybe one more on the -- you said the containerboard capacity expansion over the next couple years looks pretty solid. I agree, I've seen similar things in my reading, but what -- all of that's going to be recycled linerboard, you think. Is that what you were saying earlier about the conversions and the lack of virgin...

It depends on what region. When production -- when box usage picks up, you need to add more fiber into the system. So somewhere in the world, virgin capacity has to be added because there's a loss every time you recycle, right. So you've got to add fiber. So that will be somewhere in the world, and my guess is it won't be so much in North America. It'll be Russia -- Russia and Brazil would be my 2 leading candidates for that.

Thank you. I am showing no further questions at this time. I would now like to turn the call back to Jonathan Painter for closing remarks.

Thanks, Nicole. Before I let you go, I'd like to summarize what I think are the key takeaways for the quarter. First, we had a solid performance in Q2 with strong internal growth of 10% and 11% in revenue and bookings, respectively. Second, China's recovered paper import restrictions have created a big opportunity for us, as producers scramble to build pulping capacity in Southeast Asia. Third, cash flow from operations was a healthy $28 million. And finally, despite the negative impact of FX and the tariffs, we're expecting to have a record 2018 with revenue and earnings per share. Thanks for joining us on the call today, and I look forward to updating you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.