Kadant Inc. (NYSE:KAI)
Q2 2013 Results - Earnings Call Transcript
July 30, 2013 11:00 AM ET
Thomas M. O'Brien - Chief Financial Officer
Jon Painter - President and CEO
Walter Liptak - Global Hunter Securities
Rudy Hokanson - Barrington Research
Good day ladies and gentlemen and welcome to the Second Quarter 2013 Kadant Inc. Earnings Conference Call. My name is Dave, I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.
As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Thomas M. O'Brien, Chief Financial Officer at Kadant. Please proceed, sir.
Thomas M. O'Brien
Thank you, operator. Good morning everyone and welcome to Kadant's second quarter 2013 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer.
Let me begin by encouraging all participants in our business review today to participate via our webcast. You may access the live webcast by going to www.kadant.com, select the investors tab and then select the listen live option for the webcast. To participate in the question and answer session at the end of our prepared remarks, you will need to dial in to the teleconference. The dial in number is available in our press release issued yesterday. It will also be shown at the end of our presentation.
Let me now remind everyone of our Safe Harbor statement. Various remarks that we may make today about Kadent's future expectations, plans, and prospects, our forward-looking statements, the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our report on Form 10-Q for the fiscal quarter ended March 30, 2013. Our Form 10-Q is on file with the SEC and is also available in the investor section of our website at www.kadent.com under the heading SEC filings.
In addition, any forward-looking statements we make during this webcast represents our view only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today.
During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release issued yesterday, which is available in the investor section of our website at www.kadant.com under the heading, Investor News.
And 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, Tom. Hello, everyone, it's my pleasure to brief you on our second quarter results. Overall, we had an excellent quarter with strong cash flows, record gross margins and better than expected earnings per share performance. Let me begin today's business review with the financial highlights of the quarter.
We finished the second quarter with revenues of $82 million, which were down 1% compared to the second quarter of 2012 and down 8% excluding acquisitions. The decline in revenues was due largely to lower capital revenues. Our revenue guidance was $79 million to $82 million and included anticipated revenue from CBTI.
Adjusting for the acquisition revenue from Noss, that was acquired after our Q1 earnings call and thus not included in the guidance, the adjusted guidance was $81 million to $84 million and our revenue of $82 million was within that range. Gross margins in the second quarter was at record 48.6% and beat the previous record by 100 basis points. We have generated GAAP diluted earnings per share of $0.51 in the second quarter.
Our adjusted diluted earnings per share was also $0.51 which excludes $0.12 of acquisition related restructuring charges and the $0.12 gain on the sale of assets. This exceeded our adjusted diluted earnings per share guidance of $0.43 to $0.45 which excluded and estimated gain of $0.10 on the sale of assets.
Cash flows continue to be strong in the second quarter at $11 million. I'm happy to report that we've generated $44 million in cash flows over the last 12 months which I think showed the real strength of our business. The strong cash flow in Q2 allowed us to end the quarter and the net cash position of $48 million, despite having spent $14 million for the Noss and CBTI acquisitions and returning nearly $3 million to shareholders through stock repurchases and dividends.
Our bookings into the second quarter which included $7 million of bookings from recent acquisition increased 13% and $87 million compared to the same period of last year. We ended the quarter with a strong backlog of $106 million including $9 million from our recent acquisitions.
Finally, we completed the acquisition Noss and CBTI in the second quarter and we're working hard to integrate them into our business. As you can see from slide 6, our revenues, which include the impact of acquisition were largely unchanged compared to Q2 of last year. An 11% increase in our parts and consumables record revenue was offset by a 17% decline in capital revenue. The decline in capital revenue was principally due to weaker capital revenues in our more volatile stock-prep line.
Noss and CBTI which were acquired in the second quarter contributed $6 million to our revenue, I should note that the Noss results are reported stock-prep product line and CBTI is reported in all the product lines in our paper making system segments.
Our bookings of $87 million in Q2 were up 13% from last year. The acquisitions contributed $7 million to our bookings, excluding acquisitions, our bookings were up 3% compared to the same period last year. All of our major product lines had increases in bookings with the largest increases found in our Fluid-Handling product line and our Doctoring, Cleaning, & Filtration product lines.
Slide 8, illustrates our bookings and revenue trends with bookings shown by the blue bars and revenues by the solid line. Bookings were down slightly from a strong Q1, our Doctoring, Cleaning and Filtration product line had a strong booking performance in Q2 with bookings up 32% compared to last year. The increase was primarily due to bookings from m-clean products and bookings from CBTI.
As you can see from the slide, after five quarters our book-to-bill ratio below 1, our book-to-bill ratio has been over 1% for the last two quarter and we finished Q2 with a strong backlog of $106 million.
We continue to see upward momentum in our parts and consumables bookings in revenue since the economic recovery began in the second half of 2009. our Q2 parts and consumables bookings were $53 million up 11% compared to Q2 of 2012, this growth in bookings is driven by a stock-prep product line which was up over 30% compared to the same period last year and up 11% sequentially. Our two recent acquisitions contributed $2 million for our parts and consumables bookings. The increase in parts and consumables bookings was led by our stock-prep product line with increases in all geographic regions. The continued success our screening cylinders where bookings are up 60% compared to Q2 of last year is a major factor behind this increase.
Our revenues for parts and consumables were $53 million in the second quarter, up 11% over Q2 of last year and made up 64% of our Q2 revenues. This favorable product mix contributed to our record gross margin this quarter.
I would like to take the next few minutes to provide a brief review of our business activities in each of the major geographic regions of the world. Let me start with North America. The paper industry in North America has remained relatively stable with some grades such as container board showing good performance in Q2, while demand for printing and writing grades continues to weaken year-over-year.
Our revenues in North America were up 4% sequentially to $40 million in Q2 but down 1% compared to the second quarter of 2012. The year-over-year decline in revenues is due in large part to our stock-prep and fluid handling product lines which experienced weaker capital business during the quarter.
In general, we are seeing a healthy market for our parts and consumables but we are in fact seeing some capital projects being delayed. Bookings in North America in Q2 were $36 million, up 1% compared to same period last year but down 17% sequentially from the traditionally stronger first quarter. Overall, I would characterize the North American market as slow but steady. Our customers are doing well and have good cash flow but there are competing demands for capital dollars including spending on environmental projects.
Turning to Europe, the market continues to be weak due to the macro environment and the resulting reduced demand for paper. That said, inventories in container board are low and producers have announced a 50 Euro per ton price increase in certain container board grades schedule to take effect this August. Our Q2 revenues in Europe was 17 million, reflecting the depressed booking levels we had in 2012 and fell 12% compared to last year and 6% sequentially, the decline from the second quarter of last year was due primarily due weaker capital sales and are our stock-prep and doctoring and cleaning and filtration product lines.
Our Q2 bookings of 18 million were down 5% compared to the prior year and were down 3% sequentially following a very strong Q1. As a reminder, our Q1 bookings included two large stock-prep recycling system orders with a combined value of more than 9 million that I noted in our Q1 earnings call in April.
Despite the continuing soft market conditions in Europe, our fluid handling business booked a number of capital orders in Q2 and was up more than 30% compared to same period last year. The capital orders included two steam and condensate systems and related hardware from mills in Germany and Turkey with combined value of approximately 3 million.
Also, after the quarter closed, we received two signed contract for dryer system rebuilt and fabric cleaning systems in Europe with a combined value of approximately 4.4 million. In general, Europe continues to be weak but remains relatively stable. Germany, the UK, Eastern Europe are stronger while the west of Western Europe is somewhat weaker. Russia shows a lot of promise and with several major projects it works and financing continues to be an issue.
Next let's look at China; our business in China continues to see good activity in the second quarter. The increases in both bookings and revenues despite the lumpiness that is often in the case in China, we are seeing an upward trend and bookings in revenues since the global economic recovery begin in 2009.
Our Q2 revenues in China increased 11% compared to the previous year and 10% sequentially, the year-over-year increases in revenue was found largely in our stock-prep and fluid handling product lines. Our bookings in China also increased in Q2 to 15 million up more than 50% compared to Q2 of last year and in fact our second sequential quarterly increase. We booked several OCC recycling systems as well as four system upgrades in Q2 with a combined value of nearly $3 million.
In addition, we booked a number of orders for our new multi-jet cleaning system with a combined value of approximately $2.1 million. And finally, our parts and consumables bookings in China have continued an upward trend in Q2, up 60% compared to Q2 of 2012 and up 8% sequential. This increase was led by our stock-prep product line where Q2 parts and consumables bookings doubled year-over-year.
Although, the economy in China is slowing and there continues to be over capacity in most grades, we are in fact seeing a fairly active market with several capital projects in the pipeline particularly for stock-prep systems.
Turning to South America in slide 14, you can see the impact of our CBTI acquisition which contributed $6 million to bookings and $4 million to revenues in Q2. We have begun the process of moving our fluid handling business which is based in Sao Paulo into the CBTI facility and located just outside the Sao Paulo. The combined density will be called Kadant South America and will supply all of our product lines to customers in Brazil and certain other countries in South America.
Revenues in South America was 7.8 million in Q2, up 37% compared to the same period of last year and up 86% from Q1. Bookings in Q2 are very strong and increased to 11.3 million up 37% compared to the Q2 of 2012. During the quarter, our newly acquired CBTI subsidiary booked several capital orders for stock-prep systems and air drying systems with a combined value of approximately $3 million and our fluid handling business booked a turnkey order for drying the equipment that will replace competitive equipment on our line of board machine.
I should note that CBTI's bookings can be volatile due to large stock-prep and air drying capital projects. The Brazilian economy in general has been fairly weak and demand for commodities has declined due to the global slowdown. GDP growth in Brazil is estimated at 1.9% annual rates.
So far the slowdown of the market has not impacted demand for paper and board, the demand for coated board and corrugated boxes for example up 4% over last year. I would like to close my remarks with a few comments on our guidance for Q3 and the full year of 2013.
We expect to generate $0.47 to $0.49 of GAAP diluted earnings per share and revenues of $88 million to $90 million in the third quarter of 2013 including $0.01 of acquisition related restructuring charges.
For the full year, we are revising our GAAP guidance for diluted earnings per share from $2 to $2.10 on revenues of $336 million to $343 million, to $2.02 to $2.07 on revenues of $340 million to $345 million. On an adjusted basis, we are raising our guidance and now expect to achieve adjusted diluted earnings per share of $2.03 to $2.08 from our previous guidance of a $1.90 to $2.
As you can see from the table on slide 15, our EPS guidance issued in April of 2013, up $2 and $2.10 included an estimated $0.10 gain from the sale of assets. If this gain is excluded, our adjusted earnings per share guidance in April was a $1.90 to $2, this compares our new adjusted guidance of $2.03 to $2.08 which excludes the gain on the sale of the assets as well as $0.13 of restructuring charges.
I will now pass the call over to Tom for additional details on our financial performance in Q2. Tom?
Thank you, Jon. I will begin with an overview of our gross margin performance. Consolidated product gross margins were 48.6% in the second quarter of 2013, a record high quarterly performance and remarkably increased 490 basis points compared to a very solid result in the second quarter of 2012.
Gross margins were higher in all of our product lines in the paper making system segment and were especially strong in stock-prep, where margins were solidly up over last year in three key geographic territories, North America, Europe and China. On a consolidated basis the gross margin improvement from last year's second quarter was largely due to higher margins on both parts and capital products along with a favorable product mix.
Regarding the product mix our higher margin parts and consumable revenues represented 64% of total revenues in the second quarter of 2013 compared to 57% in the second quarter of 2012.
Looking ahead and including the results of the two acquisitions, we now expect that full year 2013 consolidated product gross margins will be approximately 44% to 45%, which if achieved will exceed the record 43.9% annual margins recorded in 2012.
That said, we believe the gross margins in the second half of the year will be lower than in the first half of 2013, partly due to product mix as we expect to shift several larger systems in the second half.
Now let's turn to slide number 18 and our SG&A expenses. SG&A expenses were $29.4 million in the second quarter of 2013, up $4 million or 16% from last year's second quarter and included an unfavorable foreign currency translation effect of $200,000.
Excluding the translation effect, SG&A expenses were up $3.8 million over last year's second quarter. More than three-fourth of this increase is due to the SG&A expenses associated with the two acquisitions which we made in the second quarter of 2013.
SG&A as a percentage of revenues increased to 35.8% in the second quarter of 2013 compared to 30.7% in the second quarter of 2012, largely due to the higher level of expenses on flat revenues. Looking forward, we expect that for the full year SG&A spending as a percentage of revenues will be approximately 33% compared to last year's 31%.
Let me now turn to our EPS results for the quarter and slide number 19. We reported GAAP diluted earnings per share from continuing operations of $0.51 in the second quarter of 2013 compared to $0.56 in the second quarter of 2012. This decrease of $0.05 in diluted EPS consists of the following; decreases of $0.18 resulting from lower revenues excluding the revenues of the acquisitions, $0.12 from restructuring expenses related to the acquisitions, $0.09 due to higher operating expenses, $0.01 from the combined effects of the operating result of the acquisitions and acquisition-related expenses and $0.01 from the slightly higher effective tax rate.
These decreases were partially offset by increases of $0.23 associated with higher gross margins in the second quarter of 2013 compared to the second quarter of 2012, $0.12 from the sale of a building in China and $0.01 from lower weighted average shares outstanding.
Let me also take a moment to compare the actual diluted EPS results in the second quarter through the guidance which we issued during our April 2013 earnings call. On slide number 20, you can see that our GAAP diluted EPS guidance for the second quarter of 2013 was $0.53 to $0.55 and this included an expected gain of $0.10 from the sale of the building in China. Excluding the gain, the adjusted diluted EPS guidance would have been $0.43 to $0.45.
Now let's compare this to the reported results. We reported GAAP diluted EPS of $0.51 in the second quarter of 2013 and this included a gain of $0.12 from the building sale and restructuring expenses of $0.12. Excluding these two items, adjusted diluted EPS was $0.51 in the second quarter of 2013 and this compares to the adjusted diluted EPS guidance of $0.43 to $0.45.
Now let's turn to our cash flows, working capital and debt leverage starting on slide number 21. Operating cash flows from continuing operations were $11.1 million in the second quarter of 2013 compared to $8.6 million in the second quarter of 2012, an increase of $2.5 million or 30%.
Our operating cash flows are off to an excellent start. For the first six months of 2013, we have generated $18.1 million in operating cash flows compared to $4.5 million in the same period last year, an increase of $13.6 million.
We had a few notable non-operating uses of cash during the second quarter of 2013. We spent $14.2 million for the two acquisitions. We've purchased 50,000 shares of our common stock for $1.4 million. We paid a dividend of $0.125 per share or $1.4 million and we spent $1.4 million for CapEx.
Also during the second quarter of 2013, we declared our second quarterly dividend of $0.125 per share totaling approximately $1.4 million, which will be reflected in our cash flows in the third quarter when it is paid.
Let's now look at our key working capital metrics on slide number 22. As you can see the major change here was an increase in our days and inventory from 95 in the first quarter of 2013 to 103 in the second quarter of 2013.
The increase in inventory was largely due to an increase in work-in-process inventories associated with several major projects in our European operations which we expect to shift later in the year.
Looking at our overall working capital management, our cash conversion days calculated by taking days and receivables plus day and inventory and [to tracking] days in accounts payable were 117 at the end of the second quarter of 2013, essentially unchanged from the first quarter of 2013 and were 5 days lower in the second quarter of 2012.
Also working capital as a percentage of the last 12 months revenues was 15.1% in the second quarter of 2013, up from last year's 13.8% again largely due to the increase in work-in-process inventories. Despite the use of cash of $14.2 million on the acquisitions, our net cash position decreased by only $3.3 million in the second quarter of 2013 compared to the first quarter of 2013 and remained at a relatively high level.
Net cash that is cash less debt at the end of the second quarter of 2013 was $48.5 million compared to $51.8 million in the first quarter of 2013. Net cash increased $18.4 million compared to $30.1 million in the second quarter of 2012. We did have borrowings of approximately $9.4 million during the quarter, partly to help fund the acquisition purchases.
As you can see on slide number 25, our leverage ratio calculated as defined in our credit facility increased slightly to 0.27 at the end of the second quarter of 2013. Under the credit facility this ratio must be less than 3.5.
That concludes my review of the financials and I will now turn the call back to the operator for our Q&A session. Dave?
(Operator Instructions). This comes from Walt Liptak at Global Hunter.
Walter Liptak - Global Hunter Securities
Congratulations on a nice quarter, especially the gross margin. And I wonder if we can get a little bit of, you mentioned that the gross margin is going to be down in the next year. Can you give us a little color on in terms of your shipping size, geographic region kind of product that they are going to be shipping?
Well, specifically, Walter a few large stock-prep systems in European operations headquartered in France that will be shipping to Russia and a few other locations, typically those larger systems carry lower gross margins with them, good gross margin dollars but lower margin percentages so that's why we expect somewhat lower margins in the second half, it's still generating very strong margins for the year.
Walter Liptak - Global Hunter Securities
Okay, got it. And just listening to the presentation and hearing about the capital constraints that are going still going on in the U.S. and Europe but sounds like China is starting to act a little bit better and I wonder if you could give us a little bit more detail on the upgrades that are going on in terms of new lower emission or better energy efficient capacity that's going into the region.
Sure. Yeah, it's funny, if you read in the headlines in China you think that it's much slower than it is when you talk to our people in the field. And we are seeing I would say a pretty strong particularly on the stock prep side activity on the capital markets and that's some of the stuff is more in the west, some of the stuff is basically up and down the coast of China and some stuff in fact is in Guangzhou which is a big concentration of the paper industry.
They do continue to close these smaller inefficient mills, I think they're announcing another $6.5 million of closures within the last couple of weeks. When this happens, that's always good for us because those smaller mills that are closing tended not to be our customers and that supply needs to be absorbed by the larger mills. So I would say China has brightened a little bit over the course of this year, we'll see but it's encouraging I would say.
Walter Liptak - Global Hunter Securities
Do we think in the back half of the year the booking trend in China could continue to improve?
The problem with these big system is they're buying or either they come or they don't but we are set up that it could improve. If those orders impact fall and if we in fact win them which we're in a very strong market position. I would comment a little bit on U.S., and North America as well, North America is a primarily not a big capital market. This is a more of a spare parts and consumables market. And that side of the business is doing very well but I would say that, a couple of smaller projects we're seeing out there, in some cases are getting pushed back a little bit. They're competing with other projects that may have an environmental mandate going with them that sort of thing.
Walter Liptak - Global Hunter Securities
Okay, great. And along those lines and parts but just going back to China, the year-over-year and quarter-over-quarter is significant. I wonder if you can just talk about the initiatives, that you have you have going on to get more part sales in that region?
I mean, that is definitely a bright spot of the quarter and the group we have in China is doing an outstanding job on increasing our parts business. And you've been following us a while, you may remember, this is sort of a focus that we put on a couple of years ago to give some stability to a relatively volatile market. And I talked a little bit the last quarter about, we would get in this almost partnership relationships with our customers, where we would say, for example, hey we will do a daily run, or by weekly run into your mills, pick up some of your stuff that's worn and needs to be rebuilt, bring it back to factory conditions if you will, return to you and also do audits and help to give you guidance on operating machines.
And that program, it's so far been quite successful and we hope to expand that to other customers. But that's just an example of some of the things we're doing. The nice thing that's happening in China is as the market does slow a little, down a little bit, the mills are focusing more and more in productivity and as they start to focus on productivity that really is an opportunity for us to one, help them, advice them on operating our equipment in the mills and two, convince them of the benefits of using our spare parts in consumables versus pirate spare parts and consumables.
Walter Liptak - Global Hunter Securities
Okay, got it, okay. Thanks very much.
You're welcome, Walt, as well.
Thank you. Your next question comes from the line of Rudy Hokanson at Barrington Research. Please go ahead.
Rudy Hokanson - Barrington Research
Good morning, nice quarter. I wanted to talk a little bit more about South America and the momentum that you're seeing there even with the outlook for Brazil looking like slow growth, you still seem to be picking up some good numbers right now, and you've also got that acquisition down there. Could you may be give us a little more color on what you are expect out of South America in 2013 and maybe looking forward a little bit to 2014 now that you have your acquisitions?
So I will just give some sort of 50,000 foot comments in South America in general and then focus a little bit more on acquisition. In general and I would say and you have been following us a while at this point, one of our overall theme within Kadant is that the developing world is growing a lot faster than developed world and South America and Brazil in particular is no exception. They have a rising middle class. I think fundamentally over the next 10 years, it is going to be an excellent market as their per capita use of paper goes up.
That said, in the short run Brazil is the market that is highly dependent on the commodity market and as the global world slow down they have certainly its healthy effects. So there I would say there I mentioned the growth rate of little less than 2%, they would I think was even little bit less than last year, so they are certainly going through a slow patch for sure, but I think the longer-term opportunities in Brazil are still fantastic. They have good hardworking workforce and fairly decent infrastructure once you get out of the city.
In terms of our acquisition of CBTI, they had excellent bookings in the quarter. I would just kind of caution that they do occasionally books these large capital systems and in fact they did in the second quarter, so it won't be a steady -- it won't really be a steady rate there, but you know the paper industry seems to be doing somewhat better than the economy which suggests I would say.
I think the key benefit from us in South America from an income point of view is combining our facility with in Sao Paulo with their facilities. So combining those two facilities into one, one strengthens our position in the market, we're a much bigger footprint, we have economies of scale and obviously it's [all of our efficient] to run one facility than two facilities.
Sir, you have no questions at this time. (Operator Instructions).
Is there anyone in the queue there operator?
No further questions for you now sir.
Okay. Thanks. Let me conclude today's call with what I really think are the key takeaway points. First, we had a solid lead of adjusted earnings per share and set a new record for gross margins. Second, we had another strong quarter for cash flows at $11 million and despite spending $40 million on acquisitions and $3 million on repurchases and dividend, we ended the quarter with a strong cash position of $48 million. Third, we completed the Noss and CBTI acquisitions. And finally, we raised our adjusted earnings per share guidance for the full year to $2.03 to $2.08 on revenues of $340 million to $345 million.
I look forward to updating in next quarter on our progress. Thanks very much for listening. Bye, bye.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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