Kadant Inc. (KAI) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 Kadant Inc. Earnings Conference Call. My name is Sheila, and I will be your operator for today. [Operator instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the conference over to Michael McKenney, Chief Financial Officer. Please proceed sir.

Thank you, operator. Good morning, everyone, and welcome to Kadant's second quarter 2015 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 Annual Report on Form 10-K for the fiscal year ended January 3, 2015 and subsequent filings with the Securities and Exchange Commission. Our Form 10-K is on file with the SEC and is also available in the Investors section of our website at www.kadant.com under the heading “SEC Filings”. In addition, any forward-looking statements we make during this webcast represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today. During this webcast, we 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 second quarter earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading “Investor News”. With that, I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Hello, everyone. It's my pleasure to brief you on our second quarter results as well as our outlook for the second half of the year. Overall, we had another solid quarter with better than expected earnings revenue and adjusted earnings per share performance and while we have some tough comparisons against Q2 of last year which was one of the best ever. I'll begin today's business review with the financial highlights of the quarter. We finished the second quarter with revenue of $98 million, down 6% compared with the second quarter of 2014, which was the second highest revenue in our history. Foreign currency translation had a large impact on Q2 revenue, and excluding the effect of FX our revenue in Q2 was up 2%. Gross margin in the second quarter continue to be very strong at 47%. Our adjusted EBITDA was a record $16 million or 16% of sales, up 1% compared to Q2 of last year. Our GAAP diluted earnings per share of $0.76 in the second quarter exceeded the top-end of our guidance by $0.05 and was up 9% compared to Q2 of 2014. Our adjusted earnings per share was up 5% to $0.78. Excluding the impact of FX translation, our adjusted earnings per share increased 18% over Q2 of last year. Our bookings of $94 million were down 19% compared to the record set in Q2 of 2014. Excluding FX, our bookings were down 11%. That said, our backlog at the end of Q2 remains healthy at $132 million. Cash flow for the second quarter was excellent at $14 million and we ended the quarter with net cash of $20 million. During the second quarter, we repurchased just over 86,000 shares of our stock for $4 million. Turning to the next slide, you can see from slide 6 FX continues to have a significant impact on our results when compared to Q2 of last year. Our internal growth for Q2 which excludes acquisitions and FX was down for bookings against a record Q2 of 2014 and essentially flat for revenue. Our internal growth for Q2 and parts of consumables revenue on the other hand was up 9% while bookings were down 1%. Excluding acquisitions FX translation our internal growth for the first six months of the year was up 2% for revenues and down 7% for bookings. Despite the headwinds from the strong dollar, we saw a solid revenue and bookings performance in the second quarter. Our second quarter revenue of $98 million was down 6% year-over-year entirely due to FX translation. Excluding the impact of FX, our growth was 2% compared to the near record Q2 of last year. Strong performance in our Stock-Prep business in North America is largely responsible for this growth. This strong revenue performance is expected to gain momentum in the second half of 2015 with the fourth quarter expected to be the strongest of the year and in our history. Our bookings of $94 million in Q2 were down 19% from our record second quarter last year. Excluding the impact from FX, our Q2 bookings were down 11%. A large stock of bookings in our Stock-Prep product line in China compared to a very strong Q2 of last year accounted for most of the decline. Turning now to our parts and consumables business, our revenue for parts and consumables in the second quarter increased 4% from Q2 of 2014 and was the second highest in our history with Q1 of 2015 being the highest. Parts and consumables revenue represented 66% of our total Q2 revenue which is at the higher end of our typical percentage we’ve had over the last few years. Excluding the impact of FX and acquisitions, our internal growth was nearly 9%. Our near record revenue performance in Q2 was driven by a stock-prep product line in North America and our doctoring, cleaning and filtration product line in China. Drawing our parts and consumables business continues to be a strategic focus for us and we’re seeing solid results from both our internal initiatives as well as from acquisitions. Parts and consumables bookings were down 6% compared to a very strong Q2 of last year to $62 million. The decline was due to FX and when excluding the impact of FX Q2 bookings were up 2%. Also contributing to the decline was our wood processing product line which had unusually strong bookings in Q2 of 2014. Before I finish with parts and consumables, I will kind of note that, to me this is one of the takeaways from this call s that the benefit that parts and consumables business in its growth is having one on our gross margins and really two on our overall profitability, I think you can see that this quarter. Next, let me take a few minutes to provide an overview of our business activities and performance in each of the major geographic regions of the world starting with North America. The North America market is our largest and continues to be the strongest in the world for us. Our revenue in North America was up 11% compared to the second quarter of 2014 to a record $59 million. Our Stock-Prep product lines led the growth in this region, up 80%, compared to Q2 of last year driven by strong demand for our virgin fiber processing equipment and Stock-Prep parts. Our Fluid-Handling product line was also up while other product lines our modest revenue declines compared to a relatively strong Q2 of 2014. Despite the sequential decline in Q2 bookings, I would say overall market conditions are still quite good. Bookings in North America were $51 million down 2% compared to Q2 of last year. During the quarter we booked several large orders for our wood processing equipment and our base business in that sector remained strong. In addition, we expect to receive an order this quarter for the rebuild of a drier sections for two large container board machines and this project is expected to be shipped before year end. The market conditions for spare parts and consumables in North America also continues to be strong particularly for Stock-Prep and Fluid-Handling product lines while at doctoring, cleaning and filtration product line is experiencing somewhat softer demand primarily due to M&A activity in the printing and writing grades. The growth in our parts and consumables business in North America was led by our Stock-Prep product lines which increased 35%. In Europe, we have seen improved performance relative to the first quarter of this year with increased business activity in all of our product lines. Our Q2 revenue in Europe was $18 million down 35% from a relatively strong Q2 of last year primarily due to reduced capital sales. FX also played a role in this decline and when excluding impact of FX our revenue was down 21%. Q2 bookings of $21 million were down 2% compared to Q2 of last year, but were up 9% sequentially. Excluding the impact of FX, our bookings we had a healthy increase of 20% in our Q2 bookings compared to the second quarter of last year. As I mentioned last quarter, we are seeing some encouraging sign of increased project activity including several Stock-Prep projects we hope to book this year. In general, we hope – we expect the weaker euro will continue to have a positive impact on the European economy overall. Next lets look at Asia. Our Q2 revenue in Asia was $14 million down 13% compared to Q2 of last year. The decrease was primarily due to lower capital revenues in our Stock-Prep and doctoring, cleaning and filtration product line. This decrease was moderated by a strong increase in parts and consumables in our doctoring, cleaning and filtration product line. Over the past several years in China, we’ve seen the benefit of our model of combining high value critical parts with world class service. The increasing focus on efficiency by our customers in China has also allowed us to make good headway fielding our after market business. This is of particular importance in China where this base of more stable parts and consumables adds some stability to this capital heavy region. Our Q2 bookings in Asia were $15 million down 57% in the second quarter of last year, which was one of the best of our history. While project activity was somewhat subdued in Q2, we did book three small OCC systems rebuild orders with combined value of approximately $1.6 million. In addition, after the quarter closed we booked two more orders for Stock-Prep equipment with a combined value of approximately $1 million. Despite general over capacity conditions we continue to see capital project activity in Central and Western China. In addition, as I mentioned earlier this year we’ve also seen some shipment delays in China in particular we believe the shipments of two large capital projects will likely be delayed into 2016. One, which I discussed earlier this year, is due to difficulty with our customer’s ability to obtain financing and the other is due to routine plant construction delays. At the end of Q2, our backlog in China was $56 million of which $31 million is expected to ship in 2016. I should say that the majority of the $31 million was always scheduled to ship in 2016 and thus is not delayed; only about a third of the $31 million in the 2016 backlog is due to delays that we’ve seen in 2015. Finally, I’d like to make a few comments on our rest of the world results and activities. As a reminder, this region includes South America, Africa, Australia and the Middle-East. Our revenue in the rest of the world was $7 million in Q2 down 8% compared with the same period last year due entirely to FX. Excluding the impact of FX, revenue was up 16%. Rest of the world bookings were down 12% to $7 million in Q2 of 2015 also due to the negative impact of FX. Excluding FX, rest of the world bookings were actually up 13% compared to the same period of last year. Improved performance in South America particularly for doctoring, cleaning and filtration product lines was the main driver for the increase. Let me close my remarks with a few comments on our guidance for Q3 and the full year 2015. The first half of 2015 has positioned us well for another great year. That said, the capital shipment delays in China I discussed earlier have led us to lower our full year revenue guidance to $395 million to $400 million. And while we expect improved operating margins we will diminish the impacts of these late capital shipments they will have a negative impact on our earnings per share for the full year. As a result, we are narrowing our full year guidance for GAAP diluted earnings per share to $3.05 to $3.11. As I had mentioned in the past, FX has had a significant impact on our expected growth rate versus 2014 reducing revenue and adjusted earnings per share by 7% and 10% respectively. Excluding the negative currency impact we expect our revenues to grow 5% to 6% and our earnings per share to grow 21% to 23% over 2014. For the third quarter of 2015, we expect to achieve GAAP diluted earnings per share of $0.70 to $0.72 on revenue of $95 million to $97 million. We expect the fourth quarter will be the strongest of the year and the best adjusted earnings before share performance in our history leading to another record year of 2015. I’ll now pass the call over to Mike for some additional details on our financial performance in Q2. Mike.

Thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 46.5% in the second quarter of 2015, up 350 basis points compared to the second quarter of 2014. The increase in gross margins from last year's second quarter was due to higher margins in our capital business as well as a favorable product mix and lower amortization associated with acquired profit and inventory. Our higher parts and consumable revenue represented 66% of total revenue in the second quarter of 2015 compared to 60% in the second quarter of 2014. Looking ahead, we expect full year 2015 consolidated product gross margins will be approximately 45% to 46% or 50 basis points higher than we had guided to during our previous earnings call in May. Now, let's turn to Slide 17 in our quarterly SG&A expenses. SG&A expenses were $31.1 million in the second quarter of 2015, down $500,000 from last year's second quarter and included a favorable foreign currency translation effect of $2.4 million. Excluding the translation effect of $2.4 million and the SG&A from acquisitions, as well as the transaction expenses of acquisitions, SG&A expenses were up $1.4 million or 4% compared to the second quarter of 2014 SG&A expense as a percentage of revenue was 31.6% in the second quarter of 2015 compared to 30.1% in last year's second quarter. For the full year, we expect SG&A expense as a percentage of revenue to be approximately 30% to 31% or a 120 basis point to 220 basis point improvement over 20104. Let me turn to our EPS results for the quarter. We reported GAAP diluted earnings per share from continuing operations of $0.76 in the second quarter of 2015 compared to $0.70 in the second quarter of 2014 or an increase of $0.06. This increase of $0.06 in diluted EPS consists of the following: $0.23 due to higher gross margin percentages; $0.03 due to lower operating expenses; $0.02 associated with acquisition operating results and acquisition costs; and $0.01 due to a lower effective tax rate. These increases were partially offset by a decrease of $0.23 from lower revenue. Collectively, included in all the categories, I just mentioned, was an unfavorable foreign exchange translation effect of $0.09 in the second quarter of 2015 compared to last year’s quarter, due to the strengthening of the U.S. dollar. In regards to our tax rate, we now expect our effective tax rate to be approximately 31.5% to 32.5% in 2015. Now, let's turn to our cash flows, working capital, and debt leverage starting on Slide 19. We had strong operating cash flows from continuing operations of $14.2 million in the second quarter of 2015 up $5.2 million compared to the second quarter of 2014. Free cash flow defined as cash flows from continuing operations less CapEx was $12.7 million in the second quarter of 2015, up from last year’s $8.1 million. We had several notable non-operating uses of cash during the second quarter of 2015. We purchased $4 million of our common stock, paid down debt $2.3million, paid a dividend of $1.9 million and expanded $1.4 million in CapEx. Stock repurchases in the quarter represented 86,518 shares at average prices of $46.70 per share. Over the past 12 months we have returned $14.7 million of capital to our shareholders, $7.9 million from share repurchases and $6.8 million from dividends. This represents approximately 47% of our net income during that period. Now let’s look at our key working capital metrics on slide 20. Days and inventory were 107 in the second quarter of 2015 compared to 92 in the second quarter of 2014 and 109 in the first quarter of 2015. Our days and receivables measure improved to 57 days in the second quarter of 2015, one of our best performances ever in comparison to 61 days in the second quarter of 2014 and 63 days in the first quarter of 2015. I should note here that a measure of 57 in receivables from multinational company with operations in many countries with different payment practises is outstanding. In addition, our AP days were 49 in the second quarter of 2015 compared to 44 in the second quarter of 2014 and 50 in the first quarter of 2015. Looking at the overall working capital position, our cash conversion days measure calculated by taking days in receivables, plus days in inventory and subtracting days in accounts payable was 115 at the end of the second quarter of 2015, down 7 days in the first quarter of 2015, by up 6 days from the second quarter of 2014. Working capital as a percentage of revenue was 15.8% in the second quarter of 2015, compared to 15.7% in the second quarter of 2014 and 15.4% in the first quarter of 2015. Our Strong cash flows led to an increase in our net cash position of $7.6 million in the second quarter of 2015 compared to the first quarter of 2015. Net cash that is cash less debt at the end of the second quarter of 2015 was $20.1 million compared to $12.5 million in the first quarter of 2015, and $9.5 million in the second quarter of 2014. And as you can see on Slide 23, our leverage ratio calculated as defined in our credit facility was 0.37 at the end of the second quarter of 2015, down slightly from 0.43 in the first quarter of 2015. 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 over to the operator for our Q&A session. Operator?

[Operator Instructions] Your first question comes from the line of Walter Liptak of Global Hunter. Please proceed.

Thanks, good morning guys.

Hey, Wal.

Hey, Wal.

I want to start by asking and see if we can get a little bit more detail about the China project delays. I wonder if you can just give us some color, the kind of customers. These are the chances – that these could get cancelled, my understanding is a lot of times, China will place orders but they don't give you timing on when they're going to ship. And so, wondering about that and then if there other customers that could delay, you know, given the slowdown that has gone on with the financing there?

Good question, Walt, I kind of mentioned in my remarks there’s two kind of larger ones, the first one is the one that we talked about earlier in the year where we said it was a project of over $14 million that we – the first part has been delayed into 2016, that project is looking for financing. I guess now getting some equity contribution. We believe those projects -- that projects is going to go forward because they’ve already put around $200 million into the project, I mean building are built that sort of thing. So, our experience in the past is when you see that kind of money already invested those projects go forward. So, we feel pretty good about that one. The other larger one is really I would say routine construction delays, it’s actually in Taiwan well established player, nothing special, I mean, that kind of stuff happens. They have site preparation work that kind of thing. So I don’t see – I view that as a little bit defer. We also have a few smaller projects in China that have seen some push back, hard to call it a trend. There is no doubt that the market in China is slowing in general, but by sense from a financing point of view is that the government is trying to be more accommodative on lending than less in their own efforts just kind of spark that economy.

Okay. Are there -- I guess, what's the quote activity looking like in China, is this something we think where there might be a pipeline building or is it—how is that looking?

It’s a pretty subdued. It’s mainly essentially in Western China. I would add – you want a little more color on region in general. I think I mentioned on one of the calls that in the Dongguan in Guangdong area they've actually closed a lot of these smaller mills, so the mills in those regions are doing quite well, have good profitability. They’re benefiting from somewhat restrictive supply. So that’s good. I would say, the mills up the coast doing medium to a little worse so as you move north. So I think we still need to see the economy grow and work off that surplus before we really have a strong quote activity.

Okay. Okay, sounds good. And then switching over to North America, the parts business and consumables continues to do great. And so, I wonder if you can talk a little bit about market demand versus your own internal initiatives are to the marketplace and what the visibility looks like, pricing, et cetera, for North American parts and consumables.

So, one of the – you may remember Walt, in Q4 we did acquisition of a screen basket business. They ran around $10 million. That’s heavy in North America. It’s doing extremely well, I would say better than we expected. So that’s definitely adding a boost to our business in North America. But I would say across the board with bit of an exception of our doctoring business we’ve seen customers responding to our initiatives on parts and consumables very well. And with regards to doctoring business probably has a little more exposure than some of our units to printing and writing grades and some of those grades are tied up with the certain new page verso any even a little bit – even though printing and writing and the WestRock stuff has been delaying a little bit of there purchases.

Okay. Okay, thanks guys, I will get back in queue.

Okay. Thanks, Walt.

Thank you. And your next question comes from the line of Dan Jacome of Sidoti. Please go ahead Dan.

Good morning. How are you?

Hey, Dan, how are you?

Not too bad. Appreciate, taking the time. Just to stay on the doctoring blades, just want you on the ceramic blades. I know that's been kind of like a newer product ramp for you guys, just wondering if you're seeing any incremental customer adoption or any news to share with us?

Okay.

Sure. So as you might remember we did a small kind of technology acquisition last year and we’re in process of kind of getting established here in North America with a facility. That will probably take us through the end of this year I would say, its actually quite difficult to do which is good news and bad news. It’s good news, because it’s bad news, because it takes us a long time. But it’s good news because it’s hard. So, we’ve sense some blades out for customer trials which I would say have gone very, very well. But obviously we want to get establish and there should we have sort of manufacturing where we wanted to be before we accept orders for that stuff of any size. But I would say, the results of trials which basically using the blades that we make in Europe have been very, has been really terrific.

Okay. Good. I mean once this is integrated into your ecosystem do you think the barriers to entry will be higher here?

Well, I would say we have a couple of significant advantages in the ceramic doctor blade market. And as I know you know but maybe other people on the call don’t know ceramic doctor – ceramic creping blades, this is for making tissue. It’s sort of a longest lasting blades for tissue and they’re most expensive ones. So, we’re I think uniquely positioned is we’re very, very strong in the creping blade holders. The thing that holds that creping blade on the – against the roll, we’ve got a high degree of service. I would say perceived as world expert in this. So I would say we’re nature to be able to sell this high end blade. And our customer is very much want us to sell this high-end blade to them.

Okay. And then, well, I guess staying on tissue. Everything I'm reading is a lot of incremental like TAD, Tissue Machine Capacity coming online for the at home segment. Are you guys seeing this like in your business or do you have any thoughts here?

Yep. I mean, definitely North America seems like when they are adding Tissue its on these TAD machines, incidentally those TAD machines are naturals for these ceramic blades. They tend to use those. So, that’s great. It’s not so good for our recycle business which I mean our stock-prep business which is kind of heavier on the recycle side with TAD machines is tend to be virgin. But yes, we definitely see that on the doctoring side of business.

Got you. And then last one, you mentioned the WestRock integration -- I guess giving pause to your business; what side is that? Is that sort of like on the stock-prep or the blades, where is that?

It’s more like – it was odd to us. As you can see, we had a excellent quarters for parts and consumables in North America and I would say, our doctoring business has been a bit of an outlier in the sense that they’re not seeing the same kind of strong demand that some of the others are. When we kind of look in to it, we see occasionally when there is merger activity often projects are slowdown, things kind of get put on hold a little. And a couple of key mills in North America, I think that was the case.

Okay. I appreciate all the color. Thank you.

All right. Thank you.

Thank you. We have no questions at this time. [Operator Instructions] And the next question comes from the line of Walter Liptak of Global Hunter. Please proceed.

Hi. I would just follow-up with the acquisition question. You know, how have things gone there in the quarter as you talk with companies and what are you hoping for through the end of the year?

Okay. I’m glad you ask that question because it’s a good chance to talk about acquisition I would say in general. So we are very pleased with how our acquisitions that we’ve done had gone. We go back and look at those and do kind of postmortems, one year or three years out and so forth, but they’re all tracking very well. So I would love to do more acquisitions. As you know Walt, but I think most people know, acquisitions are definitely part of our growth strategy if you will. That said, we’re kind of finding when you get acquisitions kind of in the above $50 million range, which exercise we would love to do frankly because they’re really needle movers as they said. The valuations are getting pretty high and even though whole process is getting pretty crazy I think. So, there is some larger ones that if we like a more stretch a little bit on that, but I’m little bit – I’m a little bit more pessimistic that we’re going to be able to buy something at valuations we like. I hope we do but I’m a little concern about that. So we’re seeing more reasonable valuations and spending more time I would say is smaller acquisitions sub $30 million, sub even sometime $20 million family-owned business that maybe aren’t so much attractive by private equity and that sort of thing. And there’s stuff out there. I would say there’s a lot of money chasing, a lot of properties. So it’s a pretty, I would say pretty active market. So I hope we something announce, if you know, I would really love to do something a little bit larger on the $50 million, $60 million, $70 million range, but would have to be a pretty great company and in somewhat reasonable price.

Okay. Thank you.

Thank you. There are no questions at this time. [Operator Instructions] And the next question comes from the line of Kevin Sonnett of RK Capital. Please go ahead.

Thanks. Hi, gentlemen.

Hi, Kevin.

Hi. Just staying with discussion on acquisitions, so who you seeing emerge as the incremental buyer participant in the process. Can you try to somewhat quantify the valuations that you’re seeing out there?

Whom I think emerging is buyers?

Correct. It sounds there is, you know, I’m sure there is a kind of a traditional contingent of strategic buyers and perhaps broadly just financial buyers I suppose, but it sounds a little bit throughout the year. The normal and I guess I’m just wondering who, you know, you said the process itself is maybe getting even a little bit crazy, I just hoping you can discuss that in a little more detail?

So on the -- financial buyers kind of spread across. We’re talking now about acquisitions that are – let’s say $40 million and above. They tend not to be on the super small stuff. So the financial guys I would say are across the board, across all industries as everybody’s knows, they can pay higher prices with leverage, and as long as interest rates are low they’re going to be able to do that. The strategic, specifically their ace on the hole is synergies. In the paper industry it hasn’t been terribly active. And one of the things I’ve talked about in the past on acquisitions is that I wish there was more stuff going on the paper industry but there’s not a well of companies of size. I would say, in the paper industry that we would find attractive. We definitely see some of these smaller ones and there I would say less competitive processes. When you take to other process industries than and I’d said in the past we’re – the type of acquisition that we like would be sort of an adjacent space, maybe not in the paper industry but some other process industries in which we kind of have a small, the target has a smaller piece of equipment that has a high impact on the overall process as good margins technology, love to see good aftermarket and some stability of earnings. And of course in that space we’re really looking for very strong management. The acquisition that we did in wood processing business in 2013 is a good example of that. There it depends sometimes the strategies have the kind of stuff that we have in the paper, they can add value on distribution. They can close facilities and that sort of stuff. And I would say for us that’s a disadvantage because – let’s say we’re going to some particular industry where our – typically our only real synergy when you’re outside of the pulp and paper industry is one our low cost manufacturing in China and Mexico. And two our infrastructure for supporting global sales, but we don’t have the sales. And that in the terms of the process, the part that just gives me heartburn on the process is normally you give an indication of interest and the seller picks one potential bidder and they sign exclusivity and you spend 60 days or so doing due-diligence in negotiating the transaction and then you close. What we’re seeing more now which I think not helpful trend is they’ll actually run a parallel processes. So you might – you may not get exclusivity and you maybe negotiating purchase itself, doing due-diligence at the same time one or two other people are doing the same thing, so you’re spending all that time and effort and you may have only 25% chance to close. By the time we spend serious time and energy on the transaction we want to be the sole person who is pursuing that.

That’s helpful color. Thanks. One quick follow-up on that and then a separate question. And so, what do we’re seeing roughly in terms evaluation and understanding there’s different degrees of synergies for you or other buyers maybe more in terms X synergy valuation. And then separately could you just characterize today you’ve done so on the past, but maybe just currently give your view of the different end markets and perhaps by geography or maybe just overall as far as kind of the publication paper relative to packaging tissue, et cetera?

Okay. So, what was the first part of the question, again, it was valuation.

Valuations.

If you’ve been kind of following us, I would say we’ve been very unfortunate value -- we've been getting stuff, five times earnings, five and a half times earnings that wood processing business we paid maybe six and a half times earnings. I think it would be – we’re not seeing that. Those kind of valuations we’re not seeing in the market. So, I would say that’s unlikely. We’re seeing valuations, eight and nine times and even higher for growth businesses. We probably wouldn’t go nine, 10 times earnings.

Okay. Thank you.

That’s kind of where we are. And a lot of that I would say, tax synergies. A little color on the sort of end markets, as a general rule of the measure grades, container board and tissue are the strongest, there is not structural threats to container board and tissue. Container board, and I would say, as a general overlay for all grades the developing markets growing faster than the developed market. So North America and Europe container board is kind of trading, I would say, typical demands I the 1.5%, 2% range for container board both in the U.S. and Europe. Conditions in Europe for container board are much improved. Inventories are good. I would say, its somewhat rosier picture on the container board side in Europe. And U.S. has been good for while. Both markets now have enough consolidation of industry players that you the Top Three players were kind of running 70% of the volume and they are being very rationale in terms managing capacity to meet demand. Tissue tends to be smaller mills. Your use of tissue is very stable. It’s not too economically cyclical. It kind of grows with population, let’s call 1.5% U.S. and Europe, and I would say for both of those products over the long run should grow 5%, 6% those kind of numbers in the developing world where they’re not using packaging for food and what have you or using a tissue products. And there’s a standard of livings rise they’ll do that. Another little factor I would say on, container board is typically about 50% of its is tied to food, so its kind of more stable than I think people realize. The trouble grades are the printing and writing grades. Those have suffered from electronic media, Albany International on our call today. Yesterday they talked a lot of about having a significant drop in their printing and writing business and publication grades in North America. Typically most analysts say, those are going decline probably 3% to 5% in North America and Europe. And be up a little bit in places in India whereas they developed a service economy and again urbanize, they’ll have some growth, but it’s relatively bleak particularly in the developing markets. Not a free fall, but I would a steady decline. Newsprint is probably the worst grade. Again most – there are places like China may not go through a lot of newspapers, they might go right to electronic media, certainly in North America and Europe electronic media is having a significant impact on newsprint. Some really poor countries like India newsprints – there is a good newspaper business and newsprint market, because people don’t have the tablets and smartphones and that kind of thing.

Okay. That was a helpful review. Thank you.

You’re welcome.

Thank you. I would now like to turn the call over to Jon Painter for closing remarks.

Okay. Thanks, operator. Let me conclude today's call with what I think are the key takeaway points. First, despite the strong FX headwinds, we had another solid quarter in revenue operating income, earnings per share and cash flow. Second, our parts and consumables business is going strong which is increasing our gross margins and overall profitability. And finally, we continue to expect 2015 to be an excellent year with record earnings per share performance. I look forward to updating you on our progress on future calls. Thanks very much for listening.

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