Kadant Inc. (KAI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Kadant Inc. Earnings Conference Call. My name is Adrian and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Thomas O Brien, Chief Financial Officer. Please proceed, sir.

Thank you Adrian good morning everyone and welcome to Kadant’s fourth quarter and fiscal year 2014 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer. Before we begin, let me read our Safe Harbor statement. Various remarks that we may make today about Kadant’s future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our quarterly report on Form 10-Q for the fiscal quarter ended September 27, 2014. Our Form 10-Q is on file with the SEC 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 webcast represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full-year earnings press release issued yesterday which is available in the investor section of our website at www.kadant.com under the heading Investor News. With that, I will turn the call over to Jon Painter who will give you an update on Kadant’s business and future prospects. Following Jon’s remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Hello everyone. It’s my pleasure to brief you on our fourth quarter and full-year 2014 results as well as our outlook for 2015. Overall, we had an excellent quarter with new record set for revenues and adjusted diluted earnings per share. Our full-year 2014 performance resulted in records and just about every financial category including revenue, operating income, adjusted EBITDA, adjusted diluted earnings per share, bookings and cash flow. Let me begin today’s business with review of our Q4 financial highlights. We finished the fourth quarter with record revenues of a $105 million which was up a 11% compared to the fourth quarter of 2013. Internal growth in the fourth quarter excluding acquisitions and foreign currency was up a strong 16%. Gross margins in the fourth quarter remained strong at 45%. Our adjusted diluted earnings per share of $0.81 in the fourth quarter was a new record up 29% compared to Q4 of 2013. Our adjusted earnings per share includes $0.04 of expense related to the acquisition and relocation of the J&L screen cylinder product line into our manufacturing facilities in Alabama. We also had a $0.05 negative impact from FX and a $0.05 negative impact from the higher tax rate compared to Q4 of 2013. Bookings were up 23% from Q4 of last year excluding acquisitions at FX bookings were up 26%. And finally, cash flow from continuing operations was excellent at $19 million which was double the cash generated in Q4 2013. We ended the year with net cash of $20 million. Looking at the full-year, as I noted we set records in revenue, operating income, adjusted EBITDA, adjusted diluted earnings per share, bookings and cash flow. Revenues increased 17% to a record $402 million including $38 million from acquisitions. Excluding acquisitions and unfavorable effects our revenue was up 6%. Our gross margins for the full-year at 44% was the second highest in our history with 2013 being the highest. Operating income set a new record at $42 million, up 26% compared to last year. Our adjusted EBITDA for 2014 was a record $56 million or 14% of revenue up 26% over 2013. Our adjusted diluted earnings per share was also a record up 24% to $2.78. Booking in 2014 were a record $433 million up 26% excluding the impact from acquisitions in FX 2014 bookings were up a very strong 15%. Cash flow from continuing operations was a record $49 million and up more than 22% from 2013 strong performance. Finally, our adjusted return on invested capital was 13% for the year. The higher return on capital compared to 2013 reflects the contributions from our internal gross initiatives as well as the collective results of our acquisitions. I am pleased to report that the acquisitions we made in 2013 and 2014 collectively generated an after-tax return on invested capital of over 10%. Before I get into the additional sales of the quarter and our projections I think it’s helpful to talk about two factors that have a significant impact on both our Q4 and full-year 2014 results and the growth rates. Slide 7, illustrates the impact of these two factors. The first item is the impact the strengthening of the U.S. dollar particularly against the euro. In 2014, 22% of our revenues is denominated in euros. The recent strength of the U.S. dollar has had a significant negative impact on our Q4 results. The impact for the full-year 2014 however, as you can see was less significant. The second factor affecting the results is our recent acquisitions. Acquisitions are an important element of our growth strategy, but we also want to show you our internal growth rate excluding the impact from acquisitions. As a reminder we treat a newly acquired business as an acquisition and how we added for four quarters at which point we have comparable year-over-year results. After that we treat any growth in that business as internal growth. We completed a number of acquisitions in 2013 including the November 2013 acquisition of our Wood Processing business, which was the largest of the group. Consequently, acquisitions have a larger impact in the full-year 2014 and a lesser impact on Q4. Finally, we shown our internal growth rate excluding the impacted FX and acquisition which is the last row in these charts. You can see that our internal growth rate for the full-year 2014 excluding acquisitions FX was 6% for revenue and then even more impressive 16% for bookings. I referred to these results as I go through the presentation, but we wanted you to have this guide to use during today’s call. The booking and revenue trend chart on Slide 8 shows our quarterly revenue which is the red line and our bookings which had a blue bars. Our quarterly revenues continue to see an upward trends since 2013 reflecting the results of our internal growth initiatives as well as acquisitions despite the strength of the dollar which had a negative impact of $4.8 million on our Q4 revenue. Excluding the impact from acquisitions and FX our fourth quarter revenue was $110 million up 16% compared to the same period last year. Bookings were up 23% from Q4 of last year to $103 million and up 3% sequentially. Excluding acquisitions and the impact of FX, Q4 books were up 26% compared to Q4 2013. 215 is also off to a good start, earlier this month we announced orders of over $10 million from paper producers in Taiwan and the U.S. for virgin and recycled fiber processing equipment used. Looking at our parts and consumables, our revenue was up 6% to $62 million in the fourth quarter of 2014 and made up 59% of our fourth quarter 2014 revenue. Excluding the impact of FX, Q4 parts and consumables revenue was up 11%, strong growth on our Wood Processing and Fluid-Handling product lines drove this increase. As you can see from the chart, this represents one of the best parts and consumables quarterly revenue performances in our history, with internal growth contributing nearly 90% if the increase. Our parts and consumables bookings, which is shown in the blue bars, were up 20% or $11 million over Q4 of last year including $1 million from acquisitions. The strong year-over-year was found in all major product lines lead by our Wood Processing and Stock-Prep product lines. Excluding the impact of FX, our Q4 parts and consumables bookings were up 25%. Growing our parts and consumables business has been a major focus of ours and it’s nice to see these efforts are showing good results. We would like to take the next few minutes to provide a brief review of our business activity in each of the major geographic regions of the world. Let me start with North America. Once again, North America was our strongest performing region and this is reflected in both our revenue and bookings in the fourth quarter. Our Q4 revenues in North America was up 35% compared to the fourth quarter of 2013 to $55 million. As you can see on this slide we had a step changing revenues in 2014 primarily due to the addition of our Wood Processing product line which has the bulk of its revenues in North America. Bookings in North America in Q4 was 63 million, up 44% compared to the same period last year and 36% sequentially. All of our product lines were up double digits compared to the same period last year, led by our Stock-Prep product lines which benefited from several large capital orders with a combined value of 11 million as announced in our press release last month. In general, we’ve seen a very favorable investment environment in the pulp and paper industry in North America and all of the product lines benefited from this in 2014. North America container board and tissue producers have continued to do relatively well and are seeing healthy levels of profitability. These producers have a big advantage in both fiber quality and cost and this is led to a positive investment environment particularly for chemical pulp projects. In addition, the macro environment in North America is fairly strong with 2014 GDP growth of 2.4% and an unemployment rate of 5.6%. I’d say the outlook for 2015 is also quite favorable in North America. Turning to Europe, the market continues to be weak but I would say stable. With some mill closures particularly in Scandinavia. Consequently, we’ve initiated restructuring of our operations in Sweden to reflect the changing market conditions. Our Q4 revenues in Europe was $25 million, down 9% from relatively strong Q4 of last year, but up 18% sequentially. Q4 bookings of $19 million were down 3% compared to Q4 of last year and flat sequentially. As I noted earlier the strength of the U.S. dollar versus the Euro had a significant impact on the reported revenue and bookings in Europe. The unfavorable effects impact reduced both bookings and revenues by $2 million in Q4 of 2014. Excluding the currency impact revenue in Q4 was only down 1% and bookings were actually up 5% compared to Q4 of last year. As you can see from these results the growth picture in Europe is quite different depending on revenue you’re using Euros or U.S. dollars in your analysis. As we look ahead to 2015 we expect more the same in Europe. Although I would say the recent drop in the euro should help exports an increased export should in turn demand for packaging growth. Next, let’s take a look at China. The economy in China has been slowing and this is led to a number of projects being pushed out. Slower economic growth and over capacity continues to hamper project activity. We are also seeing extended mill outages around the Chinese New Year as mill seek to reduce some in prior levels. That said, we do continue to see project activity particularly in interior regions of the country. Our Q4 revenues in China was up 4% compared to Q4 of last year to $13 million and up 20% sequentially do in large part to stronger bookings in Q2 and Q3 of 2014. Our bookings in China were up 32% in Q4 to 12 million compared to a weak Q4 of last year. Despite the weak market environment we book several large orders from two container board producers for new stock-prep equipment with the combined value of approximately $2.3 million. We also booked three multi-jet fabric cleaning systems with a combined value of approximately $1.6 million. As you may recall we required this technology for cleaning difficult to clean paper machine clothing in 2011 and we had great success expanding the market position for this product in China. On the other hand, we also had the first phase of a major project with a total value of $14 million that we booked last year, pushed out by the customer due to financing issues. Although we do believe the project will go forward and we kept in our backlog we have not included it in our 2015 forecast. Turning to South America on Slide 14, you can see a general decline in both revenues and bookings in 2014. The macro environment in Brazil continues to be sluggish and the paper industry is reacting in a similar manner as paper production and consumption was essentially flat in 2014. Revenue in South America was $6 million in Q4 down 38% compared to the same period last year, which is the highest revenue recorded post recession. Bookings in Q4 at $5 million were down 30% compared to the same period last year. The decline was primarily due to lower bookings for capital. In general, our parts and consumables business in South America has been relatively stable. In the fourth quarter, we implemented some restructuring of operations in Brazil to better align the organization with the current and expected market conditions. In general, we see similar conditions in South America in 2015 as we’ve had in 2014. I’d like to close my remarks with a few comments on our guidance for 2015 and the first quarter. For the first quarter, we expect to generate $0.57 to $0.59 of GAAP diluted earnings per share on revenues of $94 million to $96 million. For the full-year 2015, we expect to generate $3.05 to $3.15 of GAAP diluted earnings per share on revenues of $413 million to $423 million. We expect this increase in revenues will allow us to leverage our SG&A leading to an increase in our operating margin by up to 200 basis points and making as a fundamentally more profitable company. If we achieve our guidance we will grow our revenue by 3% to 5% and our adjusted earnings per share by 10% to 14% despite a significant unfavorable impact from currency. Excluding the negative currency impact, we expect to grow revenues 7% to 9% and we expect our adjusted EPS to grow 15% to 18% over the record year we have in 2014. And almost all this increase will come from internal growth. I will now pass the call over to Tom for additional details of our financial performance and the outlook for 2015. Tom?

Thank you, Jon. I will start with our gross margin performance. Consolidated product gross margins were 44.7% in the fourth quarter of 2014, up 80 basis points compared to the fourth quarter of 2013. The increase in gross margins from last years fourth quarter was due primarily to higher margins in our parts and consumables business and to a lesser extent in our capital business. These higher margins were partially offset by a small unfavorable product mix effect as our higher margin parts and consumable revenue represented 59% of total revenue in the fourth quarter of 2014 compared to 62% in the fourth quarter of 2013. Product gross margins were higher than last years fourth quarter in all our product lines in both the Paper segment and in the Wood Processing segment. For the full-year 2014 product gross margins of 44.4% was the second highest level achieved in the company’s history and we were 140 basis points lower in the record level of 45.8% achieved in 2013. The margins in both 2014 and 2013 were decreased due to the amortization of acquired profit in inventory by 55 basis points and 44 basis points respectively. Looking ahead we expect that full-year 2015 consolidated product gross margins will be approximately 44% to 45%. Now, let’s turn to Slide 19, in our quarterly SG&A expenses. SG&A expenses were $33.4 million in the fourth quarter of 2014, up 800,000 from last years fourth quarter and included a favorable foreign currency translation effect of $1.3 million. Encouragingly, SG&A expenses as a percentage of revenue were down to 31.7% in the fourth quarter of 2014 compared to 34.4% in last year’s fourth quarter, a decrease of 270 basis points. For the full-year 2014, SG&A expenses were $129.3 million an increase of $11.7 million or 10% compared to 2013 and included a favorable foreign currency translation effect of 700,000. Excluding the translation effect SG&A expenses were up $12.4 million over last year including an $8 million increase associated with the SG&A and transaction expenses of acquisitions. As in the quarter we saw significant leverage in SG&A expenses which as a percentage of revenue were 32.2% in 2014 compared to 34.1% in 2013 or decrease of 190 basis points. Looking forward, we expect this trend to continue and that SG&A spending in 2015 as a percentage of revenue will be approximately 30%% to 31%. Assuming we achieve the gross margins I just mentioned, this improvement in SG&A leverage is expected to lead to an improved operating income margin in 2015. Let me turn to our EPS results for the quarter. We reported GAAP diluted earnings per share from continuing operations of $0.82 in the fourth quarter of 2014 compared to $0.52 in the fourth quarter of 2013 or an increase of $0.30. This increase of $0.30 in diluted EPS consist of the following; $0.30 from higher revenue, $0.07 due to higher gross margin percentages and $0.02 due to lower weighted average shares outstanding. These increases were partially offset by decreases of $0.05 due to higher effective tax rate, $0.03 due to higher operating expenses, and $0.01 due to lower net interest. Collectively included in all the categories I just mentioned was an unfavorable foreign exchange translation effect of $0.05 in the fourth quarter 2014 compared to last year, due to the recent strengthening of the U.S. dollar. Let me also take a moment to compare the actual diluted EPS results in the fourth quarter to the guidance we issued during the October 2014 earnings call. Our GAAP diluted EPS guidance for the fourth quarter of 2014 was $0.72 to $0.74. We reported GAAP diluted earnings per share from continuing operations of $0.82 in the fourth quarter of 2014. This $0.08 increase over the high-end of our guidance included a benefit of $0.12 due to a lower effective tax rate, a decrease of $0.04 related to J&L Screen Cylinder product line, which was acquired during the fourth quarter of 2014 and which was not included in our guidance and a decrease of $0.02 related to the unfavorable foreign exchange translation. The lower tax rate in the quarter was due in part to the reinstatement of the certain expired tax benefits which were enacted for 2014 by Congress at the end of the year. Let’s also take a moment to look at the EPS results for the full-year on Slide 22. We reported GAAP diluted earnings per share from continuing operations of $2.56 in 2014 compared to $2.07 in 2013. This increase of $0.49 in diluted EPS consisted the following; increased of $0.57 due to higher revenue, $0.38 from the combined effects of the operating results of the acquisitions and lower acquisition transaction expenses and $0.03 due to lower shares outstanding. These increases were partially offset by decreases of $0.17 due to higher operating expenses, $0.12 due to a higher effective tax rate, $0.12 due to lower gross margin percentages, $0.05 due to higher restructuring and other costs, $0.02 due to lower net interest expense and $0.01 due to higher minority interest expense. Now let’s turn to our cash flows working capital and debt leverage starting on Slide 23. We had very strong operating cash flows from continuing operations of $18.5 million in the fourth quarter of 2014, the second highest in our history up from $9.2 million in the fourth quarter of 2013. Free cash flow defined as cash flows from continuing operations less CapEx was $14.9 million in the fourth quarter of 2014 up from last years $7.1 million and with the second highest quarterly results have achieved. For the full-year 2014 operating cash flows were a record $48.9 million an increase of $8.9 million or 22% over 2013. We had several notable non-operating uses of cash during the fourth quarter of 2014 the most significant of which was $9 million for the acquisition of J&L screen cylinder product line. We expanded $3.6 million in CapEx purchased $2 million of our common stock and paid a dividend of $1.6 million. Stock repurchases in the quarter represented 50,000 shares at an average price of $39.53 per share. Slide 24 shows our free cash flow for the past several years. As you can see free cash flow in 2014 was $42.1 million, up 25% of 2013 and a new record. On Slide 25, you can see that over the past 12 months we have returned $21.5 million of capital to our shareholders, $15.1 million from share repurchases and $6.4 million from dividends. This represents approximately 75% of our net income during that period. Our working capital performance was outstanding during the fourth quarter of 2014, with significant improvements of both days in inventory and days in receivables. Days in inventory were 87 in the fourth quarter of 2014 compared to 96 in the fourth quarter of 2013 and 97 in the third quarter of 2014. Our days and receivables measure was outstanding for a company that operates in many countries with varying payment practices. 55 days in the fourth quarter of 2014 compared to 70 days in the fourth quarter of 2013 and 66 days in the third quarter of 2014. Looking at the overall working capital position, our cash conversion days measure calculated by taking days and receivables plus days in inventory and subtracting days in accounts payable improved significantly to 100 days at the end of the fourth quarter of 2014 down 17 days and 18 days from the third quarter of 2014 and the fourth quarter of 2013 respectively. Working capital as a percentage of revenue decreased in the fourth quarter of 2014 to 12.8% from 14% in the third quarter of 2014 and 16.6% in the fourth quarter of 2013. With the strong operating cash flows and despite the acquisition of the J&L screen cylinder product line during the quarter, our net cash position increased by $1.2 million in the fourth quarter of 2014 compared to the third quarter of 2014. Net cash that is cash less debt, at the end of the fourth quarter of 2014 was $19.9 million compared to $18.7 million in the third quarter of 2014 and $11.6 million in the fourth quarter of 2013. I should also note that in January 2015, the company entered into an interest rate swap agreement that expires in March of 2020 to hedge $10 million of our debt which in effect fixes the annual rate of interest at 1.5% plus an applicable margin which currently gives us all in rate of 2.5%. As you can see on Slide 29, our leverage ratio calculated as defined in our credit facility was 0.37 at the end of the fourth quarter of 2014, up slightly from the third quarter of 2014. Under the credit facility, this ratio must be less than 3.5. Before concluding my remarks, I would like to give you a few additional details on our earnings guidance. As we noted in the press release issued yesterday, in the first quarter of 2015, we expect GAAP diluted EPS of $0.57 to $0.59. For the full-year the expected GAAP diluted EPS is $3.05 to $3.15. Looking at our quarterly EPS performance in 2015, we expect that due to the variability of order flow and shipments of capital projects. The first quarter will be the weakest quarter of the year in that each of the remaining quarters will be sequentially stronger. As always I should caution here that there could be some choppiness in variability in our quarterly results due to a number of factors including the one I just mentioned. We expected our effective tax rate will be approximately 33% to 34% in 2015, up from 30% in 2014. The increase is due in part to a shift in the geographic distribution of earnings and to the lapsing of certain tax benefits, which I mentioned earlier since Congress did not extend those benefits into 2015. We anticipate CapEx spending in 2015 will be approximately $7 million to $8 million and includes a significant investment in our new ceramic doctor blade line. We had earlier projected that we would incur these expenditures in 2014 but they will now largely fall into 2015. And finally, we expect depreciation and amortization would be approximately $12 million in 2015. That concludes my review of the financials. And I will now turn the call back to the operator for our Q&A session. Operator?

[Operator instructions] Please standby for your first question which comes from the line of Walter Liptak of Global Hunter. Please go ahead.

Hey guys, good morning.

Hey, Wal.

Hey, Wal.

Congratulations on a good year, really was an outstanding year and a good strong end to the year.

Thanks.

I want to ask about the currency headwind and you kind of zero to end on Europe and obviously the euro has been weak, are there other currencies that are in your guidance that you are getting impacted by as well?

Yes, they are definitely are I mean the Canadian dollars also come down quite a bit versus the U.S. dollar, the Brazilian Real has come down quite a bit and the Swedish krona has also come down. The once that are kind of the Chinese renminbi is holding pretty stable, but most of the other currencies in the world are down.

Okay.

In the same kind of ranges as the euro to a large extent.

Okay, that’s rolled into the 2015 guidance for all the currency.

Yes, we talked about the FX impact that’s all the currencies are included in that.

Okay, as you think about currency impact to EPS, is that a translation effect on EPS?

Yes.

Yes.

Okay, is there any negative competitive aspects to the currency as well, you know I guess I'm thinking about Europe or Brazil or whatever where you got to - where may just be a little bit less competitive.

You know our European - our businesses based in Europe when they compete internationally or they sell in U.S. dollars which sometimes they do should be more competitive, but that said a lot of our competitors for our European business are also European.

Okay, great and…

Just as the smaller side in the U.S we also have some European competitors, but in many cases our manufacturing is allover the world.

Okay, good. Okay on the parts sales and that nice growth rate that you had. I wonder what kind of expectation you have got factored into the 2015 modeling, because of your internal efforts to sell more parts, are you expecting a nice growth rate to parts?

I mean yes, you know you might remember a few years back I went through all of these internal growth initiatives including parts. And we kind of said that we hope to have an internal growth rate in that 4% to 6% range on average a five year period. So I think that’s still kind of our kind of goal, some years it will be a little higher, some years it will be a little lower, but that’s kind of what we shoot for.

Okay, okay good and then you know last one and then I’ll go back in queue. It looks like a lot of the growth is coming from North America and you kind of called out the chemical pulp projects. I wonder if you could provide some color on the market opportunities for that and timing for some of those orders.

Sure, I mean I would say it may be a elaborate a little bit on North America in general, so North America is fortunate in a sense that its wood basket as they call it, you know the fiber that it uses from trees grown in North America are probably the most cost effective and some of the strongest fiber in the world, so they just have a real fundamental advantage, the luxury of where they are geographically. The other advantage of course the North American producers have is macro wise the North American economy is probably the strongest economy in the world. So what you have got is I wouldn’t say robust growth in terms of end-user demand, but businesses that are making healthy returns and are making very rational decisions for investments to improve their efficiency, reduce their input cost that kind of stuff, but its probably a little more on the virgin side than the recycle side right now. And I would say the other thing I would say by the way the OCC – the cost of OCC is actually come down in North America, so wouldn’t be surprised to see that shift again the other way. In past years the Chinese have been kind of driving up OCC prices that’s old corrugated containers the feedstock to recycle containerboard, but that’s come down a little bit one from less demand out of China and two from they’re actually getting more fiber from there own sources within China, local Chinese OCC.

Okay good. All right thank you.

All right thanks a lot of Wal.

Your next question comes from the line of Rudy Hokanson of Barrington Research. Please go ahead.

Good morning. I was wondering could you talk a little bit about what you are seeing with your Wood Processing and opportunities from that acquisition in terms of the housing markets right now. I mean your question housing markets have been fairly strong but recent data also talked about the fact that with low interest rates, prices are staying kind of high relative to affordability for some first time buyers, but are you giving any kind of read is to you know expectations in your forecast is to, I am not saying exactly right. But as you are putting out your forecast for 2015 what you are assuming as far as growth rate goes especially for North American housing.

Okay sure. I will just review a little bit you might recall when we bought that Wood Processing business we kind of said we expected the housing market in the U.S. to grow in the 9% to 11% range just coming of the lows that had been post that economic crisis. I think we also said that there is a lot of mothballed OSB mills in North America and we didn’t expect new capacity additions in sub-2017. In fact, the market has come back a little bit stronger than we thought and we know expect that we are actually starting to see some talk about new capacity additions in North America, so could see some new facilities in 2015 and 2016 I don’t think we are talking about waiting till 2017. So it’s doing basically what we expected a little bit better we care mostly about new house construction as a oppose to housing sales in general, but most of the OSB producers that we talk to in North America are fairly optimistic. Another opportunity for us is actually in Europe, the housing market is mostly not wood in Europe, but they are definitely are OSB mills there, and we do have some opportunities I think to increase our market share in Europe which we’re pursuing.

Might that include acquisitions in OSB?

OSB Wood Processing business is done great for us. I’m very bullish on housing as we have talked about. I would love to find kind of a follow-on or acquisitions kind of increase our exposure to that marketplace. We’ve looked at stuff, we just haven’t found things that fit us just right yet, but it is an area we are looking at actively. I think I said when we first made that acquisition, if there was a negative to that acquisition there wasn’t a very logical huge sandbox of acquisition opportunities, and then that is actually proving to be the case.

Okay, and a follow-up, right now what are you seeing in China as far as its macro market goes in terms of closing those facilities and maybe higher utilization of the mills that you sell to?

Yes, so couple of comments on China, they are still closing facilities for sure. I would say that there is I talked about overcapacity that is largely on the coast. And so most of the projects we are seeing are more inline, they are not as big as opportunities in the interior part of the China as the base on the coast. A lot of the activity we are seeing in China on the coast is not so much adding new capacity as helping them become more efficient. So its capital sales in many cases, but its capital sales to existing mills to help them do more.

Could you maybe elaborate a little bit more on your fourth quarter results were it was up I think it was 4%, was that sort of a stalled quarter, or do you think that China in 2015 is likely to be up just a few percent of whatyousee in the market right now?

I mean I would say, two comments on China, one is it’s a volatile place, so things swing up and down. The second one is over the long-run. We are still quite optimistic on China in the sense that they have big advantages in terms of infrastructure, the way their population is moving to cities and so forth. That said they do have to observe this overcapacity and fundamentally that will take a while. The good news is it will happen unless things change dramatically in terms of their overall economy they will reach that. So I think as we look forward to China in 2015 versus 2014 I kind of see more of the same, it’s not super robust, but there are still our projects going on.

Thank you. And I’d might have gotten confused, but could you - was the $14 million order that you are not including in your backlog due to the customer having issues with getting financing was that related to China or where is that related to?

Yes, it is in China, actually I’m glad you asked about that, because maybe it’s worth elaborating a little bit. So this is a big project, three paper machines, it’s buy and established player who has got other mills a hunk of that project was always going to be in 2016, so but it is true that the early shipments that we hope to do in the first part of this year he is saying right now, he has got to arrange financing and to differ that. One of the reasons we’re kind of optimistic that it will eventually happen is there is already a great deal of money sunk into this project. I mean he has got deposits on three paper machines, he has construction at the mill side, it’s pure speculation, but I would guess he has well over a $100 million invested in this project. So from our perspective when we see that and we see that kind of still in the game we kind to say one way or another this project should go forward, but it might not happen in 2015.

The $14 million is still in our backlog.

Absolutely, yes.

It is in the backlog, okay.

I thought I heard you say it was not, but no it actually it is in the backlog still. We expect eventually range of financing, but the reason Jon said is it’s so much sunk into this project and we will eventually be able to ship the order or parts of the order.

We just took it out of the forecast for 2015, but it’s still at the backlog.

But it’s still at the backlog.

I’m sorry didn’t hear that

Okay, thank you. I’m sure I misunderstood. That’s good to know.

Okay.

Those are my questions right now. Thank you.

Okay. Thank you.

Your next question comes from the line of Daniel Jacome of Sidoti & Company. Please go ahead.

Good morning, how are you?

Hi, how are you?

Good morning, Dan.

Not too bad, thanks for the time. Just staying on the subject OSB China did you – already missed it what was the China backlog at the end of the quarter that dollar value?

We don’t give backlog by region.

Okay, I thought the last quarter it was like a $43 million of…

I might have given it for at the end of Q3.

I think its still pretty healthy like it’s in the higher 30s.

Okay. I appreciate that.

Yes, we probably derived it, if we could...

Yes, I know, I gave you booking.

You said bookings of revenue, so we should probably derive it, but I'm pretty sure it’s still a pretty strong number.

I’ll be waiting that…

The comment is we had 14 million of which is this job we are just talking about.

Okay and then I guess staying on China, I mean have you seen any incremental strander business or any project discussions or maybe anything you have a line of sight on for the next few quarters, I'm just curious.

So you know as you might remember in April of last year we got two strander orders in China, you know was up two for last year. It’s a new and emerging market, so at the time I said I didn’t expect much capital in China for the rest of 2014, I actually don’t expect much in the capital in China 2015 either. I think we have to see those jobs startup and those customers introduced this new product, relatively new product to this market, I think its got great opportunity over the long run, but I don’t think you are going to see much in the way of capital in 2015 and I'm not even so sure about 2016, you may see things by 2016.

Okay and then lastly just to clarify, uses of capital and priorities, it sounds like M&A is at the top of pyramid.

We’re spending a lot of time looking at M&A opportunities, I'm pleased that we are seeing a lot of things and I would say things that are more interesting than they have been in the past, we just haven’t quite found stuff interesting and not that a price that’s right, but it is absolutely something we’re actively looking at right now. Noting eminent.

Okay and then I mean as far as valuation criteria, are you trying to benchmark it against maybe what you paid for the Carmanah which I know was a pretty sweetheart deal for you guys or are you using more flexibility as far as evaluation.

Yes, I would say we benchmarked against Carmanah, we could assure we’ll never buy anything, because that was a great deal. Now we understand what the market is, I mean so no that’s not the standard, we’ve got our own internal IRR cost of capital we are trying to get in the 12%, 13% range, we have [indiscernible] requirements that we’re looking for too over lets say a three to five year period. So what we need is an acquisition at a reasonable price or an acquisition where we have a lot of synergies.

Okay, great. Nice job again and thanks a lot.

Thank you.

[Operator Instructions] Your next question comes again from the line of Walter Liptak of Global Hunter. Please go ahead.

Thanks, I want to ask about South America, and it sounds like it’s pretty volatile down there as well. I think I heard that you are going to be doing some restructuring, is that right and if so was there a charge that’s already included in the guidance or it can be a special charge?

The charge that I was referring to in my remarks we actually made in Q3 of last year, and so that restructuring is largely done. Again we are watching it closely, but we’ve actually already put that in place.

Okay, as you are thinking about 2015…

Yes, just I’ll make one comment about South America.

Okay.

We are bombarding everybody with FX changes and we didn’t talk about FX in South America, but it’s substantial that real has also dropped significantly against the U.S. dollar.

Okay. In terms of cost reduction restructuring is that anywhere else where you can get cost out well the some of the markets are slow?

I would say we are doing it right along, so we are doing this little thing in Sweden, we did the thing in South America, that I would say we are relatively comfortable where we are from our cost point of view. The improvements we are having in operating performance or expect to have next year in operating performance that was much derived from having additional revenue I work and not adding as much to our expense structure.

Okay.

In terms of the numbers of what we had about a penny which we noted in the press release that restructuring in the first quarter and there is only about maybe even another penny for the rest of the year, that’s a very, very small amount in the guidance or restructuring.

Okay, got it. Okay, and then just thinking about your geographic mix of business for 2015, is that a margin benefit because of the regional mix obviously the taxes are little bit higher, but is there an offsetting on margins?

Yes, most of this Tom kind of said earlier most of the case we’ve got, if you are referring to FX our costs and our sales are in the same area. So we don’t really have a margin benefit from currency changes. We kind of set our gross margins will kind of stay about the same.

Very good.

Great, okay and then I guess the last one is just we can do the numbers the math on the interest expense, but I wonder if we can get your number for interest expense in 2015.

The net interest expense in 2015 again its not going to be fairly significant it would be in the range of $400,000 to $500,000 net interest. Our all in interest rate right now is somewhere around 2.5% on the…

Okay, it sounds good. Okay thanks guys.

Exactly, it’s around 1%, little over 1%, so I mentioned we fixed a small piece of the debt for five years currently at 2.5% or 1.5% rather, the max that can go to is 2.5%. So it’s a good environment to borrow money and Jon has noted in the past our balance sheet is under levered, so future acquisition opportunities…

Yes, you got to find some reasons to borrow some money and help us all.

We’re working on that yes, yes, but yet not lowering our standards. I think that there inst enough of a reason to do something.

No its right. Okay all right thanks guys.

Okay. Thank you.

Thanks, welcome. End of Q&A

Sir, you have no more questions at this time. So I would like to turn the call over to Jon Painter for closing remarks.

Okay, thank you. Let me conclude today's call with to me one of the key takeaways from the quarter. First we had a record setting year in 2014 with solid growth in both our acquisitions as well as our existing businesses despite these currency headwinds we’ve been talking about. Second, we had excellent cash flow at 49 million. Third, our higher margin parts and consumables business continues to grow with Q4 bookings of 20% and finally despite significant FX impact, we are excepting 2015 to be another good year for growth with revenues up 3% to 5% and adjusted earnings per share up 10% to 14% with significantly improved operating margins. I look forward to updating you on our next quarter on our progress. Thanks very much, bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.