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Edited Transcript of KAI earnings conference call or presentation 30-Oct-19 3:00pm GMT

Q3 2019 Kadant Inc Earnings Call

WESTFORD Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Kadant Inc earnings conference call or presentation Wednesday, October 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey L. Powell

Kadant Inc. - President, CEO & Director

* Michael J. McKenney

Kadant Inc. - Executive VP & CFO

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Conference Call Participants

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* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Kadant Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [2]

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Thank you, Liz. Good morning, everyone, and welcome to Kadant's Third Quarter 2019 Earnings Call. With me on the call today is Jeff Powell, 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 plans and expectations, financial and operating results 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 29, 2018, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates 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 views or estimates change.

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 third 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'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [3]

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Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and to discuss our outlook for the remainder of the year.

Overall, we performed well and achieved a solid EPS beat and are on our way to another record year of financial performance. I'll begin with our financial highlights for the quarter.

Our Q3 bookings increased 4% to $171 million and revenue was up 5% to $174 million, led by our Material Handling business. Our gross margins were 43% and adjusted EBITDA was $32 million or 18.6% of revenue. Adjusted EBITDA was down 4% from a record third quarter of last year. Adjusted EPS was $1.41, well above the top end of our guidance of $1.20 to $1.26. Cash flow from operations was strong at $26 million, up 51% compared to the third quarter of last year. And finally, we finished the quarter with net debt of $267 million and a leverage ratio of 2.07.

As you can see on Slide 6, the stronger dollar had a significant impact on our foreign currency translation. Also of note was the strong contribution from our Material Handling acquisition completed earlier this year. Excluding FX and acquisitions, both our internal revenue growth and internal growth in bookings were down 5%. For Parts & Consumables, our internal revenue growth decreased 1% while bookings decreased 3%.

On Slide 7, you can see our Q3 bookings were up 4% and revenue was up 5% compared to the third quarter of last year and down slightly sequentially from last quarter's record revenue. We benefited from solid bookings in our Stock-Prep and Fluid-Handling product lines in North America, Europe and South America. However, these were more than offset by declines in China and in our Wood Processing segment, which I will discuss in more detail when I review our regional performance. As many of you know, our geographic diversity, combined with our strong Parts & Consumables business, helps buffer against global economic volatility. This diversification is a key strategic attribute of our business.

Parts & Consumables were 61% of revenue for the quarter, up 14% compared to the same period last year. Our Material Handing acquisition led this growth as Parts & Consumables revenue was relatively stable in all of our markets with the exception of our Wood Processing business, which saw a decline due to softness in lumber pricing and demand. Parts & Consumables bookings were up 11% to $101 million. As was the case for revenue, the largest growth contributor was our Material Handling acquisition. Excluding this acquisition and the impact from FX, bookings were off 3% for the quarter. That said, our year-to-date Parts & Consumables organic bookings, excluding FX, are up from last year.

Next, I'd like to review our performance in the major geographic regions where we operate. I will begin with North America where Q3 revenue increased 24% to $92 million. This growth was led by our Material Handling product line. Excluding the impact of FX and the acquisition, revenue was down 1%. Bookings in North America were $89 million, up 15% compared to Q3 of last year. Our acquisition made a significant contribution to this increase. Excluding the impact of FX and the acquisition, bookings were down 7%. We saw solid growth in our Stock-Prep and Fluid-Handling product lines and decreased bookings in our Wood Processing equipment in North America, which primarily serves the housing market. Capital project activity in the wood processing sector has softened, as we stated during our last earnings call, and we are seeing less demand for our capital products in 2019 compared to the historic demand that we experienced last year.

Before I leave North America, I want to comment on a recent and positive development within our Material Handling segment. During the third quarter, we entered into an agreement with a customer for a mining project that could represent up to $18 million in new business for us. We have booked orders under this agreement valued at $4 million already and another $7 million after the third quarter close. The market outlook for mining aggregate and food sectors looks promising for 2020 and we are encouraged by the forecasted growth.

Next, let's turn to Europe. Slide 10 shows our revenue and bookings performance in Europe. Even with the weak export markets in Europe, we are performing well in this region as our customers continue to pursue new projects and demand replacement of parts. Third quarter revenue was up 9% to a record $49 million. Excluding the negative impact of FX, revenue was up 14%. All of our product lines, except for Fluid-Handling, were up in Q3. Booking in Europe was up 4% compared to third quarter of last year and up 9% excluding FX. Strong demand for our high-performance balers and our Fluid-Handling product lines led this bookings growth.

Next, Asia. The market in Asia, which is dominated by China, continued at a similar pace at the beginning of 2019. A general slowdown in both bookings and revenue since mid-2018 can be seen on the chart on Slide 11. Our revenue in Asia was down 36% from last year's record $33 million and Q3 bookings were down 17%. This is a challenging comparison due to the record strength of Q3 of last year. As we discussed last quarter, project activity in containerboard in China has slowed and our bookings reflect the slower pace of investment in new capacity. On a more positive note, investment in tissue production in several industries where we provide DCF and Fluid-Handling products have been growing. These products, although smaller than containerboard, are providing nice orders for our high-value doctoring and fluid handling product lines.

I returned from China a few weeks ago and I was pleased with the discussion with our customers and our business leaders there. Many of those I spoke with have the expectation that additional investments are needed and strategies are finalize to relieve the fiber shortages resulting from the China waste paper ban. As discussed on prior earnings calls, these new processing facilities are being built outside of China. As of the end of Q3, we have now supplied or received orders to supply 18 such systems and expect most of them to come online over the next 12 months.

Turning now to the rest of the world results. Our bookings in the rest of the world were strong in Q3, second only to the record-setting bookings in third quarter of 2018. During the quarter, we booked a number of smaller capital orders and one large Stock-Prep system order, which helped drive our near-record bookings performance in Q3. While Q3 revenue was down 18%, we did see solid revenue growth at our DCF and Fluid-Handling product lines.

I would like to conclude my remarks with a few comments on our guidance for Q4 and the full year. Our performance to date has positioned us well for another record year of financial results. Our Material Handling acquisition provided a nice lift to our financial performance and all of our businesses continue to have solid operating metrics. While we are performing well, 3 factors continue to be a challenge. The first is the stronger U.S. dollar, which negatively affects our results when we translate foreign currencies into U.S. dollars. The second is the tariffs associated with U.S.-China trade dispute. And the third is the global economic slowdown, which we believe is tempering investment in capital projects.

We expect the full year EPS impact of FX and tariffs to be $0.50, the effect of which, I believe, obscures the underlying performance of our business this year.

So finally, I wanted to briefly comment on our plan to terminate our defined benefit pension plan, which we expect will be completed in the fourth quarter. We estimate the cost will be approximately $7 million or $0.64 per share to terminate the plan. This is expected to save us approximately $1.6 million annually and eliminate the risk and uncertainty associated with these plans. Mike will provide more details in his remarks.

For the full year, we are lowering our revenue guidance to $694 million to $698 million from our previous guidance of $700 million to $710 million due largely to the impact of FX translation. We expect to achieve GAAP diluted EPS of $4.38 to $4.46, revised from our previous guidance of $4.97 to $5.09. This revised EPS guidance includes $0.64 for the above-mentioned pension termination cost. We expect adjusted diluted EPS, which excludes the pension termination cost, among other things, to be $5.30 to $5.38 for 2019, revised from our previous guidance of $5.26 to $5.38.

For the fourth quarter of 2019, we expect to achieve GAAP diluted EPS of $0.59 to $0.67 on revenue of $172 million to $176 million. Excluding the pension termination cost I just mentioned, we expect adjusted diluted EPS of $1.23 to $1.31 for the fourth quarter.

I will now pass the call over to Mike for some additional details on our financial performance in Q3.

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [4]

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Thank you, Jeff. I'll start with our gross margin performance. Consolidated gross margins were 42.8% in the third quarter of 2019, down 130 basis points compared to 44.1% in the third quarter of 2018 due to the inclusion of the lower gross margin profile of our Material Handling business acquired in the first quarter of 2019. Our Parts & Consumables revenue represented 61% of total revenue in the third quarter of '19 compared to 56% in the third quarter of '18.

Now let's turn to Slide 16 in our quarterly SG&A expenses. SG&A expenses were $47.1 million in the third quarter of 2019, up $4.2 million from the third quarter of '18. This included an increase of $4.7 million from our acquisition and a decrease of $0.8 million from a favorable foreign currency translation effect. SG&A expense as a percentage of revenue increased to 27.1% in the third quarter of '19 compared to 25.9% in the third quarter of '18.

Let me next turn to our EPS results for the quarter. In the third quarter of 2019, GAAP and adjusted diluted EPS were both $1.41. In the third quarter of '18, GAAP diluted EPS was $1.64 and our adjusted diluted EPS was $1.53. The $0.11 difference relates to $0.03 of restructuring costs and a $0.14 discrete tax benefit that related to the reversal of tax reserves associated with uncertain tax position covering multiple tax years. A decrease of $0.12 in adjusted diluted EPS in the third quarter of '19 compared to adjusted diluted EPS in the third quarter of '18 consists of the following: $0.13 due to a lower effective tax rate; $0.03 from lower interest expense after allocating a portion of interest expense to the acquisition; $0.03 due to lower operating expenses; $0.01 due to higher gross margins; and $0.01 due to lower noncontrolling interest expense. These increases, totaling $0.21, were offset by $0.33 due to lower revenue.

Collectively, including all the categories I've just mentioned, was an unfavorable foreign currency transition effect of $0.05 in the third quarter of '19 compared to the third quarter of last year due to the strengthening of the U.S. dollar. Let me also take a moment to compare our adjusted diluted EPS results in the third quarter to the guidance we issued during our July 2019 earnings call. Our adjusted diluted EPS guidance for the third quarter of '19 was $1.20 to $1.26. We reported adjusted diluted EPS of $1.41. The $0.15 increase over the high end of our guidance range was the result of a $0.09 tax benefit primarily related to the reversal of tax reserves associated with the current year's expiration of uncertain tax positions and, to a lesser extent, the exercise of employee stock options.

In addition, lower SG&A, interest expense and a modest improvement in gross margins also contributed to the guidance beat. As I mentioned on the last call, there could be additional tax benefits over the next 3 to 4 years associated with the exercise of previously awarded employee stock options as unexercised options reach their 10-year expiration dates.

Slide 18 presents our quarterly adjusted EBITDA performance. Quarterly adjusted EBITDA was $32.3 million or 18.6% of revenue compared to $33.5 million or 20.2% of revenue in the third quarter of '18. Adjusted EBITDA for the first 9 months of '19 was $95 million or 18.2% of revenue, up from -- up $11.8 million or 14% compared to $83.2 million or 17.7% of revenue for the first 9 months of '18. The increase in adjusted EBITDA over '18 is the result of contributions from the Material Handling acquisition.

Now let's turn to our cash flows and working capital metrics, starting on Slide 19. Cash flow from operations was $25.7 million in the third quarter of '19 compared to $17 million in the third quarter of '18. Free cash flow increased to $23.6 million compared to $14.4 million for the third quarter of '18. For the first 9 months of '19, free cash flow increased 31% to $51.9 million compared to $39.7 million in the first 9 months of '18. We had several notable nonoperating uses of cash from the third quarter of '19. We paid down bank debt by $27.2 million, paid a $2.6 million dividend on our common stock, and paid $2.1 million for capital expenditures.

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 payables, was 122 at the end of the third quarter of '19. Working capital as a percentage of revenue was 14.6% in the third quarter of '19 compared to 15.4% in the second quarter of '19 and 11.1% in the third quarter of '18. Net debt, that is debt less cash, at the end of the third quarter '19 was $266.9 million, up from net debt of $135.6 million at the end of the third quarter of '18 but down sequentially from $288.7 million at the end of the second quarter of '19.

As I mentioned on the last call, during the third quarter, we repatriated $71 million of cash from our European operations. $56 million of this was through euro-denominated borrowings under our credit facility with the remainder coming from cash on hand. These funds were used to pay down U.S. debt that was outstanding under our credit facility. As a result of this, we have paid down $15 million of debt, which is included in the $27.2 million that we paid down this quarter and exchanged higher interest rates associated with the U.S. debt for the lower interest rates on euro-denominated debt. As a result of lower interest rates on the euro-denominated debt, we estimate annual savings of approximately $1.1 million at current market interest rates. In addition, we expect it will be easier for us to utilize the cash flows from our European operations to pay down debt.

As you can see on Slide 22, our leverage ratio, calculated in accordance with our credit facility, decreased to 2.07 at the end of the third quarter of '19 from 2.19 at the end of the second quarter '19. Under our credit facility, this ratio must be less than 4 for 3 quarters following the material acquisition as defined in our credit agreement and then the ratio requirement steps down to less than 3.75.

A few comments on our guidance for 2019. In 2018, we froze and began the process of terminating a defined benefit pension plan and a supplemental benefit plan at one of our U.S. operations. Participants in the pension plan were given the option to receive either a lump sum payment or an annuity. On past calls, we mentioned related settlement charge would likely be incurred late in 2019, part of which will be cash and part noncash. We have now included in our 2019 U.S. GAAP guidance an estimated settlement loss of $0.64 in the fourth quarter associated with the expected settlement of this pension plan. This charge consists of an estimated pretax settlement loss of $7.2 million, which includes additional cash funding of $5.1 million for the purchase of annuities and associated net tax provision -- and an associated net tax provision of $0.1 million.

The associated net tax provision includes 0.9 -- a $0.9 million tax benefit from the additional cash funding offset by $1 million of tax expense primarily related to the settlement of amounts in other comprehensive income. The $0.64 charge has been excluded from our adjusted diluted EPS guidance for the fourth quarter of $1.23 to $1.31 and for the full year of $5.30 to $5.38. Both the settlement loss and additional cash required to fund the pension plan termination are higher than anticipated due to: one, the very significant fall in long-term interest rates from the fourth quarter of '18 to today; and two, significantly more planned participants than expected chose to receive annuities rather than cash lump sums in connection with the termination.

We anticipate a supplemental benefit plan will be cash settled in early 2020. The liability for this is already reflected on the balance sheet at $2.4 million, and we do not expect any material P&L impact associated with this settlement.

With the progress we've made on paying down debt of nearly $40 million so far this year and lower interest rates, in part resulting from having exchanged U.S. debt for euro-denominated debt, we now estimate our net interest expense for the year will be approximately $12.8 million to $13 million. Our tax rate for the third quarter of '19 was 24%, which included a tax benefit of $0.02 associated with the exercise of employee stock option awards and a $0.07 benefit related to the reversal of tax reserves associated with the current year's expiration of uncertain tax positions. We expect our tax rate for the fourth quarter of '19 to be approximately 28% to 29% after excluding the impact of the pension plan settlement. This does not include any potential tax benefit associated with the exercise of employee stock option awards.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chris Howe with Barrington Research.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [2]

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Just going over some of the comments that you've mentioned. Just as we think about Parts & Consumables, you mentioned on an organic basis, it was down but your expectations are, for the year, for it still to be up. On a geographic basis, can you comment on the performance of Parts & Consumables and -- in the quarter and what you're seeing there as far as we look forward?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [3]

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Yes. I would say that our Parts & Consumables actually are holding up quite well, general speaking, which is an indication of the operating rates that our customers are currently experiencing. The one area where our Parts & Consumables is down is in China and that's because, of course, there's been a reduction in the run rates there. And there's been a reduction in the amount of recycled material that they're processing. And we're in the process of building these new processing facilities over there in Southeast Asia but most of them, the vast majority, have not come online yet, so they're not generating parts yet. So we definitely have seen a reduction in our parts in China associated with this transfer of the initial fiber processing from Mainland China to Southeast Asia as well as U.S. I would say parts in Europe actually have been quite good for us. Some areas, surprisingly strong. And then the U.S. is holding its own, I'd say, with the exception of the Wood Processing, which was down a little bit because the operating rates are down some on the Wood Processing side. But generally speaking, I would say the Parts & Consumables globally are holding up quite well. We're kind of flat with last year, up slightly from last year when you kind of take out FX and everything else. So we're actually pleased with that and we think that indicates that our customers are still operating at a healthy rate from an operations -- from a run rate standpoint.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [4]

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Okay. That's great. And that leads me to my next question. Just about Asia, more specifically, China, the success that you're having in capital equipment orders outside of China. Can you give an update where are we as far as the time line? And where are we in regard to offsetting the current fiber shortage with the 18 coming online? And what are some key inflections or bookmarks that we should pay attention to as we monitor the environment there?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [5]

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So let me give you a couple of data points. In 2016, before the waste import ban was implemented and the cleanliness standard was implemented, China imported about 30.4 million tons of wastepaper. In 2017, that was down to 25.7 million tons as the cleanliness standard started to be applied. In 2018, that dropped down to 18.7 million tons, and in 2019, through October, there's 11 million tons that have been permitted. So that gives you a sense that this year, we're looking at possibly 1/3 as much imported waste as they had in 2016. Now I was over in China a few weeks ago and actually had dinner with the head of the China Paper Association. And he tells us that, in fact, this ban will go forward. They'll continue to reduce the import permits next year and they'll be completely eliminated in 2021. So if you look at the 30 million tons that they were importing in 2016, you can say, okay, they've got to somehow replace 30 million tons of fiber. To date, the 18 systems that we've received orders for, which I think is the vast majority of all the orders that have been placed, only represents about 4 million tons of replacement. So you can see that if, in fact, they've got to replace 25 to 30 million tons, we're in the early stages. I think in the last call, I said we were kind of in the second inning -- first to second inning of this and I would say that's still the case.

What they're doing is they're starting up these systems and they're making sure that this works because they have to ship this processed fiber into China and get it into the machine before it starts to have biological activity start to occur. So they've got a very short time line between processing the fiber and shipping that to Mainland China to get it in. And I think they wanted to make sure that, in fact, that conceptually this work, they could do that. And I think they are having success in doing that. And so we're starting to see more investments and more project activity associated with that. So I think over the next couple of years, assuming they stick with this particular strategy of putting these processing plants in the Southeast Asia countries, there's going to have to be a fair amount activity to replace the shortfall.

Now they're also buying some idle mills in the U.S., and in this case, they're going to dry the pulp and send it over in a dry form. You have to do that because of the length of time it takes to get it from here to China. And so we're seeing that come online, too. But in reality, it still isn't anywhere near replacing the amount of fiber they're going to need. Now their fiber requirements have decreased a little bit. Their business is off a few percent and so, of course, their overall production rate is down accordingly. But still, there's quite a bit of tonnage that still has to be replaced over the next, I would say, 24 months to 36 months.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [6]

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Great. That's helpful. And my last question is for Mike. Your SG&A came in ahead of my expectations. You're at $47.1 million, I was around $48 million. Can you talk about the different expense line items as we look forward to the fourth quarter? And more specifically for the route, what type of leverage opportunities that you see here?

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [7]

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So Chris, you had modeled it at $48 million and we came in at $47.1 million?

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [8]

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For SG&A, yes.

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [9]

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Yes, yes. I think for the fourth quarter, we'll probably be around that level. So I think that's a pretty good marker for the fourth quarter activity. In terms of operating leverage, it's -- at this point, it's very much contingent on sales volumes.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [11]

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I wanted to ask a follow-on about the Southeast Asia processing plants. So -- and just to clarify, so these 18 systems they called out, you've already booked those orders? Or are those orders that are...

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [12]

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And I would say, Walt, roughly half of those have been delivered already.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [13]

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Okay. Okay. Great. And the other half, I guess, finished up over the next 12 months? That was what you were getting there.

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [14]

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Yes, yes.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [15]

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Okay. But it sounds like there is potentially significant more orders behind those 18 to get enough wet fiber into China over the next couple of years. Is that -- so that's what you guys are talking about?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [16]

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Yes. I mean, like I said, they've seen little bit of a slowdown in their economy and -- as well as their exports. So their demand probably isn't where it was in 2016 when they brought in 30 million tons. And of course, they continue to try to increase their recovery rate within China, although they're kind of, I think, starting to bounce up against the top limit of that. But there's still substantial fiber requirements that they're going to have to replace. And so we expect that they'll have to get that somewhere. Bringing in pulp doesn't really work for them in the long run. So we expect that it's going to be, as I said earlier, fairly significant investment requirements somewhere to offset this loss of imported fiber.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [17]

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Okay. Great. What was the value of the 18 systems that you've already booked orders on?

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [18]

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It's roughly $14 million-ish.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [19]

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Okay. Great. And how many tons do you think that, that helped bring back online into China?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [20]

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Somewhere between 3 million and 4 million tons.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [21]

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Oh, I see what you're saying. So there's a long way to go to fill the 30 million.

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [22]

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Yes.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [23]

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Okay. Great. Okay. And any visibility on the next slug of orders that might start coming in from China? I heard the concern about the economic issues. But is there something where we can start seeing orders next quarter? Or is it an unknown kind of event for the next round of orders?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [24]

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Obviously, we're constantly engaging our customers over there, discussing projects. I don't know that we're ready to forecast exactly when and if they may occur. But there's ongoing discussions and activity.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [25]

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Okay. All right. Fair enough. I wanted to ask...

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [26]

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Walt, I wanted to action now because I was looking at the schedule here. That $14 million that I referenced, that's actually what's left to be delivered. You were asking what the aggregate value was. I would say it's roughly twice that.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [27]

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Wow, okay. All right. Great. So $28 million for 18 systems. Okay. I wanted to ask on the Material Handling order. Congratulations on that, those orders starting to come in. How is the margin coming through for these? Are these going to be, I guess, normal profitability? Or because of where we are in the market, is there a pricing pressure?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [28]

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Well, they have quite a mix of products. And as is the case with many of our other businesses, the margins vary a fair amount from product to product. But I think it's fair to say on the -- you might imagine, on really large projects like these multimillion-dollar projects, there's always more competition, more price pressure. So I would say, generally speaking, the really big systems are lower margin. And of course, the parts and the smaller systems are higher margin.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [29]

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Okay. Great. And then I just wanted to ask about Europe. The bookings, excluding foreign currency, up 9%, looked pretty good. But everything we hear about Europe is bad, that it's slowing down. We see ISM is going down. I wonder if you'd comment about like the sustainability of the bookings or the visibility on other projects in the EU.

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [30]

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Yes. So I think I mentioned this a little bit in the last call, that the activity level that we're seeing tends to be in the developing parts of Europe: Eastern Europe; Russia, Belarus, Romania. Kind of the developing world is as the standard of living increases there, they have more and more demand for our products. And so I would say kind of the historical Western Europe definitely is a little slower right now. The export market clearly has slowed down in Germany. But we're very active in all of Europe. And in Eastern Europe, Turkey, places like that, there's still decent activity. So I would say that our project activity level has been quite high this year in kind of what we would call the developing portions of Europe.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [31]

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Okay. Okay. Great. And then last one for me, for Mike, thinking about the pension. Is there going to be a lower expense level in 2020 as a result of the change in the pension? Or is this -- okay. Can you give me an idea of what that will be?

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [32]

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Yes. We had -- it had been running at about $1.6 million a year, roughly, I'd say, $0.10 or $0.11 cost.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [33]

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Okay. Great. So that goes away in 2020?

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Michael J. McKenney, Kadant Inc. - Executive VP & CFO [34]

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Right. That will go away in 2020, yes.

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Operator [35]

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(Operator Instructions) We have a follow-up question from the line of Chris Howe with Barrington Research.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [36]

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It's me again. Just following up on Walt's question about the Material Handling order. Can you comment on the size of this deal? How does this compare to other customers that are in the market? And at the time of the acquisition, you had mentioned about potential synergistic acquisition opportunities related to Kadant Syntron. How does that environmental look? And what are you seeing as far as the overall pricing environment for M&A?

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [37]

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Yes. So on the order, again, it's a larger -- it's on the larger side of orders. Certainly, there are projects out there that we're aware of that could be larger than this. But this would be considered a large project, a large order. As far as the acquisitions, our business development group actually has been spending a fair amount of time with the company just developing a strategic plan for that. And as you mentioned, when we bought the company, we had indicated that one of the things we really liked was the size and the diversity of their markets and the opportunities that, that would present. And I think we're still excited about that. We still see that is the case. And so we are -- obviously, we've known these guys now for 10 months, so we're still early in the planning process but we're working closely with them to develop a plan to grow that business and expand it. Valuations are -- have been high for the last few years and they continue to be high, which makes it more challenging for us because we have a very specific discipline that we adhere to and that we try not to deviate from. So it's always a challenge for us because of that. But we have been -- if you look at us over the years, we've been successful in identifying opportunities and being able to buy companies that what we think are a reasonable return. And I expect that, that will be the case going forward, although clearly, it's more difficult now because prices are quite high.

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Operator [38]

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I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Powell for closing remarks.

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Jeffrey L. Powell, Kadant Inc. - President, CEO & Director [39]

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Thank you, operator. Before I let you go, I would like to summarize what I think are the key takeaways from the quarter. First, we had good operating performance in Q3 with a strong EPS beat and excellent cash flow. Second, China's economic headwinds and the slowdown in our Wood Processing segment are impacting our business activity. And finally, we are maintaining the high end of our full year adjusted EPS guidance range and expect to achieve record revenue and adjusted EBITDA in 2019.

We want to thank you for joining us today, and we look forward to updating you next quarter.

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Operator [40]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.