Kadant Inc. (NYSE:KAI)
Annual Shareholder Meeting Conference Call
May 22, 2013 2:30 pm ET
William A. Rainville – Chairman
Sandra L. Lambert – Vice President, General Counsel, and Secretary
Jonathan W. Painter – President and Chief Executive Officer
Welcome to Kadant’s 2013 Annual Stockholders Meeting. I will now turn the call over to Bill Rainville, Chairman of the Board. Please proceed.
William A. Rainville
Thank you. Good afternoon everyone and thank you for joining us today. I now call the order for 2013 Annual Meeting of the stockholders of Kadant Inc.
First, I would like to introduce our directors who are here with us today; Jack Albertine, Scott Brown, Tom Leonard, Jon Painter and Bill Tully.
Next, I would like to introduce the other members of our management team who are present or participating in today’s meeting and webcast: Tom O'Brien, Executive Vice President, CFO; Eric Langevin, Executive Vice President, Chief Operating Officer; Jeff Powell, Executive Vice President; Sandra Lambert, Vice President, General Counsel, and Secretary; Mike McKenney, Vice President – Finance, Chief Accounting Officer; Wesley Martz – VP, Marketing; and Dan Walsh, Treasurer.
Also here with us today is Mike (inaudible) representing KPMG, our independent registered accounting firm. Mike is available to answer any questions you may have regarding our audited financial statements. After I conduct the formal portion of the annual meeting, Jon Painter will update you on our business and then take your questions. Sandy Lambert has been appointed Inspector of Election for the Annual Meeting and we will now report on the meeting procedures and present the voting results. Sandy?
Sandra L. Lambert
Thank you, Bill. Okay, thank you. Before we begin, I’d like to remind everyone of the following 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 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 this presentation and those discussed under the heading Risk Factors in our quarterly report on Form 10-Q for the period ended March 30, 2013. Our 10-Q is on file with the Securities and Exchange Commission, and is also available in the investor section of our website at www.kadant.com under the heading SEC filings.
In addition, any forward-looking statements we make during this meeting 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 meeting, we may 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 2013 earnings press release issued April 29, 2013 and our 2012 fourth quarter and full year earnings press release issued February 26, 2013 which are both available our website at www.kadant.com in Investors Section under the heading Investor News.
Finally, our presentation today and the associated slides address certain current goals and targets pertaining over the next five years. There can be no assurance that these goals and targets will be achieved and in additional to the general risks and uncertainties of our business, they are based on a number of assumptions that may or may not prove accurate or achievable. These assumptions include our ability to identify and complete acquisitions, at the acquisition characteristics we desire and achieve the intended financial metrics. Our ability and willingness to continue to pay dividends consistent with our recent practice, our ability to effect open market stock repurchases, and our ability to implement our internal growth initiatives, successfully and achieve the goals of such initiatives. Additionally, these goals and targets may change at anytime and we undertake no obligation to update them.
Now turning to the annual meeting, Mr. Chairman a quorum is present for the transaction of business of today's annual meeting. In addition, voting of today’s meeting will be by proxy, however, if anyone holds their shares directly in record name and has not voted their shares and would like to do so now, please raise your hand and we’ll provide you with the proxy card. Seeing no hands, I now declare that the polls for voting are closed.
These three items of business have been presented for the consideration of stockholders at this meeting. The first proposal was the election of two directors constituting the entire class of directors to be elected for three-year term expiring at 2016 Annual Meeting of Stockholders. The two directors nominated for re-election are Mr. Jonathan W. Painter and Mr. William A. Rainville. Mr. Chairman, the tally of the proxy shows the priority of the shares cast by the shareholders entitled to vote at this meeting were in favor of the election of each of the nominees.
The second proposal was to approve by a non-binding advisory vote, the following resolution also known as say on pay evolved that the compensation paid to our company’s named executive officers as disclosed pursuant to the compensation discloser rules of the Securities and Exchange Commission. Including the compensation discussion and analysis, the compensation tables and any related material disclosed in our proxy statement is hereby approved. Mr. Chairman, to tell you the proxy shows, the majority of the votes cast by the stockholders entitled to vote at this meeting when favor of the approval of the adoption of the (inaudible).
Our third and final item of business is the ratification of the selection of KPMG LLP as our independent registered accounting firm for the 2013 fiscal year. Mr. Chairman, to tell you the proxy shows that majority of the votes cast by the shareholders entitled to vote at this meeting were in favor of the ratification of the selection of our auditor. And Mr. Chairman, that completes by building report and the business portion of the Annual Meeting. I would like to introduce now Jon Painter.
Jonathan W. Painter
Thanks, Sandy. So I was kind of the fun part of the meeting. I'm going to basically spent a little time reviewing how we did last year, but spend the majority of our time and share with you something of the management team we’ve set some goals for ourselves for where we would like to be in five years. I'm going to spend a little time on those two items.
This is sort of basics statistics on Kadant, I can tell you it's been a pleasure to – we’ve had to update this chart over the last couple of weeks almost every day, so it's nice to see the stock I think recognizing some of the hard work that our team has done over the last several years.
And this is a chart of our revenues and adjusted earnings per share over the last six years, and obviously you can see recession in 2009, and we actually 2008 and we actually came from a revenue point of view relatively Qickly. Quick 2011 point of view relatively quickly after 2011 and you can see the revenue kind of leveled off in 2012 the world essentially leveled off late 2011 and 2012.
What I’m pleased about this is our earnings per share on the other hand continue to accelerate and we ended up last year with a record adjusted earnings per share performance leading frankly the record over the prior year. So the last two years actually have the two from an earnings per share point of view our adjusted earnings per share with two best figures on our history with something we are very pleased with that.
This is something we required to show the reconciliation from the GAAP earnings per share down to adjusted earnings per share. We think adjusted earnings per share was more helpful. The one thing I’ll point out over the last several years, we’re actually – the gap numbers are higher than the adjusted numbers. So we’re actually diminishing, mostly the adjustments are taking good things out if you will.
Taking a closer look at 2012, as you can see our revenues were flat may be down 1%, and that really reflects the slowdown that we saw in Europe and really the world. As I mentioned earlier, the most pleasing thing is our adjusted earnings per share was up about 9%, and we still continue to have quite good cash flows, I’ll talk about it little more later. If we had a disappointment for the year, so our bookings were down significantly, $300 million and again that’s really reflecting the situation in Europe and to some extent China, as the world comes slow down a bit. And the other thing I pleased about is our adjusted return on invested capital continues to be very storng over 13%.
Taking a look at the first quarter, we did see revenues down about 9% again that really reflects the slower booking rates we had in largely last year. We did have – we continue to have very strong margins if I guess this is one of the strongest gross margin periods we’ve had rather really. And our earnings per share were $0.47 that was down from the $0.61 mainly due to revenue, but it did be the guidance which was $0.32 to $0.34, so actually a pretty good quarter.
The best thing about the quarter was really this number right here, which is the booking. Bookings of $90 million it was actually our second sequential increase, it’s a very nice way to start the year. So this is a pretty positive sign and one of the things we saw in the earnings calls, we’re fairly encouraged about project activities. And there is another positive element in Q1, it’s the cash, Q1 is typically a relatively each quarter for cash flow and we actually had pretty mix.
William A. Rainville
The bottom, Jon. Yeah.
Jonathan W. Painter
We had pretty strong cash flows in Q1, so that’s the most – that’s a very good way to start the year. The balance sheet which has always been, I would say quite strong continues to be so $51 million of net cash.
I wanted to kind of end the financial part with this chart. What this is – is a rolling 12-month chart of our cash flow from operations. So you can see that we have a very strong and fairly stable, even through the economic cycle, cash flow engine. And this is what really is going drive a lot of the discussion going forward is putting this cash flow to work, this is the real heart of the business and the engine if you will with what we’re planning to do.
So I am going to go through some slides kind of a picture where we are going to be in five years. And a couple of caveats may be where the whole program, but a couple of more going out five years partly is the sort of get away from thoughts about the economic cycle, we have some businesses affected by the cycle, either – who knows what the cycle would be in 2018. But these incremental growths should get us there, the cycle may take it up a little more, or take it down a little more.
But I think we will make steady progress on that. So we really have, I would say four drivers that we can create shareholder value. The first and most important and actually when I intend to spend the most time with this just good old fashion internal growth. And I wish I could come and tell you, we’ve got some great program that’s going to, it's easy to articulate and it's going to generate 20% earnings per share growth for the next five years where that's not our nature of our business.
We actually have several numerous growth initiatives that I put them in the base hit department, individually they make a modest or small contribution, but collectively I think we could reasonably expect that we could grow in the 4% to 6% rate internally that's a revenue growth rate.
The other engine of course, which is using that cash flow that I talked about is acquisitions, and this could supplement our growth, I would not call us – acquirers of company, but we do steadily acquire businesses and I think we've had a fairly successful track record of that. And you could imagine we might have another 4% to 6% top line growth from acquisitions.
And frankly depending what assumptions you make we're still going to have plenty of cash, so stock of purchases and dividend basically giving back stock to shareholders is definitely important part of the formula for returning value to shareholders.
Over the last couple of years, in fact we've done 50% of our net income has been with stock repurchases as many of you know we do have a dividend but we now have in place that we paid in May $0.125 per share.
So if all those things came to we were successful in those things, what’s bit of a picture, what the business might look like. So you could say, if we had 4% to 6% growth the acquisition internally, our sales could be in the $500 million to $550 million and the EBITDA falling out about $6 million to $8 million and assuming that we've bought some shares back, it's not a reasonable thing that we could be putting off $4 to $5 a share and earnings.
Now, I’m going to spend a little time on the internal growth side. And the first piece is, I think is often a misperception about Kadant and that we have this massive headwind, because we are in the paper industry. And there are ways that are troubled the regions that are slower growth, but in the world the projections for growth for the paper industry is 2.3%, because the developing world is growing faster than the developed world. And in fact, more relevant to us is lets the world growing not counting a newsprint which we have very low exposure to and printing and writing. So for our business that's only about 15% of our sales. The container board and tissue groups growing much stronger so that’s – those two grades are actually expected grow in 3.6%. So we do have some lift in our markets.
I mentioned we have numerous initiatives, I’m not going to go through all of them, I'm just going to give you maybe kind of the sampling of the few. I would say generally they can fit into these fixed buckets if you will of overall category, so now I’m just going to hit a couple of highlights on some of them.
Really the first and most important is increasing our presence in the emerging markets. Growth rate in U.S. and Europe is in the 1.5% to 2% range for printing – for say containerboard and tissue, and negative growth for some of the white grades and newsprint. On the other hand, in the developing world they’re growing 4% to 6%, 6% to 8% depending on the area. So it’s quite important for us to increase our position in that faster growing market. We’re now about 40%, how we’re going to do it, I would put this in sort of the blocking and tackling department. It seems like opening an office in Russia, opening an office in Indonesia.
We’re using, where we had a strong position with the product line like our fluid-handling product line, and trying to sell some of our other products that aren’t strong in that market like, in China for our doctoring and water management products. It’s utilizing some of the communication technologies that’s now available. A lot of the developing world it’s hard to get to its remote. A key part of our value proposition to our customers, is our technical advice. And to the extent that we can use communication technology to more easily get us to the mill if you will, but always having to fly there, that helps that.
And finally, acquisitions and I’ll talk about one later also and contribute to this call. Another one and this kind of falls into the second sort of bucket of growing our parts and consumables business. Those of you who follow us, you know, we are a very part centric company. We focus very hard on parts. Every quarter I update you on how our parts business is doing. One area that we’re very much trying to touch businesses is in China.
And I think it’s very important to get a nice stable parts business in China with supplement with relatively volatile capital businesses in China. One of things that’s really moved us along is two years ago, I mean just this year we entered into a two year agreement with the major linerboard producer whereby we're partnering with them, we are rebuilding all of this key equipment and supplying it. So what does he get? He gets our technical advice; he gets the equipment built back to factory specifications. What we get, nice parts business, partner and our equipment is running it platform.
One of the things about China, we've been growing so fast over the last – if you go back five years ago most of their energy was focused on building the next plant, and growing, growing, growing. We’ve shifted a little bit, their economy slowdown and they are now focused on productivity, productivity, productivity, and that is good for us, and good for our parts businesses. So by using our parts and by using our advice we can help them become more productive. This is the great business; you can see our parts business in China has done very well going 27% a year since 2009.
It's also falls into the overall bucket of parts and consumables that’s our screen cylinder business. The screen cylinder is the key piece of equipment, the key spare part in a stock prep line, which is our largest product line. Those things cost probably $17,000 last nine months two year, so a very important consumable. Frankly if you few go back many years and we’ve had – we did not have a strong position in this and – despite the fact that we had a large installed base.
So three years ago, we brought I would say we did technology acquisitions buying a company called [FiberWall] had a terrific very robust, very accurate slot – and with established manufacturing China in fact we've added another [label] and doubled it, that business is growing about 18% from 2009 to 2012 and it's really doing very well and the mills customers love it and its taken us throughout the world. So that's a nice growth in our parts business, it’s particularly strong in China at this point I would say we’re one of the leading, if not the leading provider of screen baskets in China. Our market is roughly about $150 million, that's – customers are estimates difficult but that's what we estimate in that.
This is another one using nanotechnology and this is really saying what I’m talking here about focusing on the higher growth grades. We have a big difference in growth rate between newsprint and printing and writing, we’re showing decline really in the world. And containerboard they have widely in decline, they have structural threats and things like the iPad and electronic media that's our thing.
Contrast that with tissue and containerboard which have no structural threats and as growing reasonably in the U.S. and Europe and much more significantly in the developing world as standards of living (inaudible). So we put it upon our self to try to focus our products on those higher growth grades. All of our product lines the one with the most exposure of printing and writing has been doctor blade line. Whey because the printability they need the more expensive composite blades, so several years ago, Eric and his team.
So let's work on containerboard, let's make ourselves more important to containerboard. The containerboard producers what their sticky’s these things called sticky, that are mainly in the cycle furnished and as they try to get thinner weight linerboard those sticky and so fourth (inaudible) get down and so forth. So we have developed a blade using nanotechnology, which makes it much more homogenous in terms of the wear rate. It used to be the resin section we’re faster than the fiber – the fabric if you will. This greatly extends the life two to three times and causes not to be laminate. So these are very much focused on the linerboard mill, we really just introduce somewhat last three months or so. So we’ll see how they go, but I think it’s going to be a very positive thing. And the trials have been really fantastic so far, so that’s another thing we’re quite pleased with.
Another thing we find and this is really to taking our technology to other markets. The paper industry has been around a long time, the paper industry machine is very sophisticated, runs a very high volume, very high-speed. We often find that we’ll go to our similar process industry and the paper industry is frankly years and years ahead of where that industry is.
Most recently, we started to look at the carbon fiber market and the way you make carbon fiber is to exclude these little fibers and then much of the process it’s kind of a stretching and twisting process on these threads really and they are threads, and that is what makes them strong and well we do, those are going on rolls and those rolls need to be kept clean. So we’ve said, and now these are – they are not paper machines the length might be a four people or not 400 meters. But we’ve actually got around 200 of these running now in carbon fiber installations very, this includes three – three different mills, but the results are quite promising.
And the carbon fiber of course is growing very quickly this is the dreamliner, aerospace, cellphones, medical devices a lot of stuff is going in the direction of carbon fiber because it’s light and strong automotive. So this is very interesting brand-new market for us. We – our rough estimate of the total market, not the annual market but the total market is around $15 million. And there’s probably a $2 million to $5 million blade business associated with that. So it’s still early days, but it’s quite interesting to us. So anyway, that’s just an example of four or five of the local initiatives that I talked about.
Now I’m going to talk a little bit about acquisitions. Again one of the other of the four engines that you will of our growth. And I’m going to talk a little bit on what do we like in an acquisition, what are we looking for.
The first is, we need a great product, we start by saying this is a product that we would like to have as part of our group, is the product that is well regarded with customers, and usually that kind of product has reasonable gross margin, so we’ll look at something like that. We also, as I mentioned early, we are aftermarket guys, we kind of look to see, doesn’t have a good aftermarket business, it gives us some stability and margin boost and that’s a real plus.
Is it in market, is it in the paper industry, that’s a plus, it is in the adjacent market like the wood yard or converting, or virgin pulp, or similar industry, another process industry like carbon fiber equipment. Those are all kind of areas that we would look at. And of course is it something we can add value to, we can typically add value either through the sales and synergies, selling it to our sales force or manufacturing, manufacturing our low-cost manufacturing facilities in places like China and Mexico. And our target is around after three, five years it’s around 20%.
When I talk about two acquisitions, we did two happens early in the last couple of months, both I think fit this very well. But first is our acquisition of CBTI, which is our licensee in Brazil and we’ve known these guys about a range of probably known at group for 30 years, they are excellent managers. I tell you an issue, when you’re dealing and developing roll that’s finding a good management team and these guys are really know their market well are very professional. So that the huge plus for us, there also increasing our presence in South America we are very strong in China,
We are very strong in parts of Mexico but it relatively stronger in Brazil and this is going to ability increase our footprint there self, it’s a positive in that way. We also have an operation in Brazil, certainly some operational synergies that can help out as well. When we look at them, we also can say, here we can see some sale synergies related to CBTI thinks like selling our m-clean product line in Brazil. And in fact, we just took $500,000 order last month for that m-clean product line also could sell our screen cylinders and emerging fiber virgin pulp business to the big pulp business excellent so.
An another acquisition also excellent acquisition my opinion is the acquisition of Noss Group. Noss is one of the premier suppliers of Hydro cycle and clean equipment this is piece of equipment use and stock credit. But I really like about them is they have well established company, they were suddenly started in the 50th may of the began stalled base if you look at this, these cleaners each of these little yellow dots there is a cleaner count. Those things get replaced about every 10 years; they have 500,000 of them out there. So 10% of those are turning over every year, they actually keep about 85% of that spares business so that leads to a very €6 million, €7 million spare parts businesses, its very stable and a real asset for that business. We also have the opportunity to help that with manufacturing and using our sales force.
Finally, they’re strong in approach flow, which is an area lagging from the paper machine, but we’re not as strong, they are stronger in the virgin pulping area, we’re not a strong. So they can help us in that area. And they are also quite strong in that kind of areas we do some in, but not a ton, which is dissolving pulp. That’s actually the manufacturer of the fiber used and things like under armor shirts and that kind of stuff. That’s actually made from wood believe it or not.
Okay, so those are the two ones that are going to affect our top line. Now I’m really going to talk about one that are going to be more impactful on the bottom line. The first is stock repurchases. This is a chart of the cumulative stock purchases, repurchases we’ve done since we started the program in 2004. So you can see we brought back nearly $120 million of stock since 2004. I think the average price is little over $21 a share. And we’ve really stepped it up as you can see over the last several years.
The next one is dividend. We just started this really the first dividend was issued in the second quarter. At the time we did it, and we announced, we want to have a meaningful dividend, we started it, it’s about 2% yield if conditions are right and we have the cash flow which not convert, I think we will. We would expect to increase those conditions permit but we do want to have a real dividend, it’s a very meaningful part of the value proposition that we’re going to make to our shareholders.
So where does this kind of add us on and how do we look and kind of circling back to the first slide here. As I mentioned we would be around $500 million to $550 million business with earnings per share in the $4 to $5 range with obviously a fewer shares outstanding because of buybacks.
One thing of note, we wouldn’t – this isn’t some highly leveraged business. If you kind of make assumptions about reasonable acquisition prices and reasonable prices for buying back stock and so forth, you don’t you can end up with either no debt or minimal debt but this isn’t the highly leveraged company by any means, if it goes according to plan.
And as I mentioned, I would expect that we would continue to have a very meaningful dividend and that would be part of the value that our shareholders will get from only Kadant.
So with that, happy to answer any questions that anybody might have while we have.
Jonathan W. Painter
Jonathan W. Painter
Jonathan W. Painter
Okay, that's a good question. So I think as you know remember in many shareholder meetings we had a long time water is a natural expansion of our business, absolutely. We are involved with separation technology and the paper industry uses lot of water, much of the stock prep is going on, its 99% water, 1% fiber. So, I can tell you for many years we were looking at acquisitions in the water space trying to increase our presence there and frankly they were expensive. So we really never did that, I think we have did discipline on acquisitions in that regard.
That said, we still have opportunities in water. Customers in China were the water is becoming an increasingly important issue as said you guys know the process, we need to help with keeping our process water clean, because we need to take less than a river and so forth. We need some on who have some technology, but most importantly who understands our process. So we do have a small offering filtration equipment associated with the process, but when looking to work with the customers particularly in China to maybe increase that offering. So that is very much an area of focus.
Okay. Thank you very much for coming. I don't know do we have the core meeting (inaudible), okay, I take my guidance. Anyway thanks for coming. The meeting is adjourned. We look forward to updating you as we move forward through the year. Thanks very much.
Sandra L. Lambert
Operator, you can now announce that the meeting is concluded.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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