Kadant Inc. (KAI) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Fourth Quarter 2015 Kadant Incorporated Earnings Conference Call. My name is Tuwanda and I will be your coordinator for today. [Operator Instructions]. I would now like to turn the conference over to Mike McKenney, Senior Vice President and CFO, please proceed.

Thank you, operator. Good morning, everyone, and welcome to Kadant's fourth quarter and fiscal year 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 for 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 fourth quarter and full year 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 Mike. Hello everyone. It's my pleasure to brief you on our fourth quarter and full year 2015 results as well as our outlook for 2016. Although while we had a fantastic finish to the year and achieved new quarterly records for revenue and adjusted earnings per share despite the economic headwinds and a strong dollar. Our full year performance resulted in record gross margins, record operating income, record adjusted EBITDA and most importantly record earnings per share. I’ll begin today’s business review with Q4 financial highlights. We finished the fourth quarter with record revenue of $108 million which was up 2% compared to the previous record in the fourth quarter of 2014. Foreign currency translation once again had a large impact on our revenue and when excluding the impact of FX our revenue was up 10%. Gross margins in the fourth quarter remained strong at 43%. Our adjusted diluted earnings per share of $0.95 was also a new record and up 17% compared to Q4 of 2014. Our Q4 bookings of $76 million included new orders of $92 million and a booking reversal of $16 million due to uncertainty regarding financing for a project in China which was originally booked in 2014. Excluding the booking reversal and the impact of FX our Q4 bookings were a solid $99 million, although down 4% compared to a strong Q4 of last year which included several large projects from North America and China. Our adjusted EBITDA increased 16% to a record $17 million and with 16% of revenue. And finally our cash flow was $12 million and we ended the year with net cash of $36 million. During the quarter we repurchased 25,000 shares of our common stock for approximately $1 million at an average price of 39.45. Looking at the full year, as I mentioned, we set new records in gross margin, operating income, adjusted EBITDA and adjusted earnings per share. Revenues decreased 3% to $390 million compared to our record revenue performance in 2014. Excluding the impact of FX, revenue was up 5%. Our gross margin for the full year at 46% was a new record. Operating income at $50 million was also a record, up 19% compared to last year, excluding the impact of FX it was up 31%. Adjusted EBITDA for 2015 increased 9% to a record $62 million or 16% of revenue. Excluding the impact of FX it was up 20%. Our adjusted diluted earnings per share was also a record up 13% to 3.13 excluding the $0.34 negative impact from FX adjusted diluted earnings per share was up 25%. Bookings in 2015 were $376 million down 13% from the record set in 2014. Excluding the impact of FX, bookings were $410 million, down 5% compared to 2014. If we also exclude the booking reversal 2015 bookings would have been $426 million down 2% from 2014. Cash flow from continuing operations was $38 million, down 22% from 2014’s record performance, but still quite strong. During 2015 we repurchased just under 230,000 shares of our common stock for approximately $10 million and an average price of 43.12. Finally, our adjusted return on invested capital was 15% for the year which was excellent. In Slide 7 we present the details of our internal growth excluding the impact of FX as well as acquisitions. As you can see FX continues to have a significant effect on our results both for the fourth quarter and the full year. Our internal growth for Q4 was 10% for revenue and 30% for adjusted earnings per share. Bookings were down 20% due largely to the booking reversal I mentioned earlier. Our internal growth for Q4 and parts of consumables was essentially flat while bookings were down a modest 1%. Taking a look at the full year our internal growth was 3% for revenue and 23% for adjusted earnings per share. Bookings were down 7% due largely to the booking reversal. For the full year 2015, our internal growth for parts and consumables revenue and bookings was 7% and 3% respectively. The booking revenue trend chart on Slide 8 shows our quarterly revenue, which is the red line and our bookings which are the blue bars. Our record revenue in the fourth quarter was largely due to strong capital shipments in China. We achieved this record despite the strengthening of the U.S. dollar which had a negative of $8 million on Q4 revenue. Excluding the impact from FX, our fourth quarter revenue was up 10% compared to the same period last year and 19% sequentially. New orders were $92 million in Q4 down 11% compared to Q4 of 2014 however the booking reversal of $16 million reduced the reported bookings to $76 million in Q4 as shown in the Slide. I’ll mention additional comments in this booking reversal later in my remarks. At the end of 2015 our backlog was a solid $103 million. Looking at parts of consumables, our revenue in Q4 was down 7% to $58 million and made up 54% of our revenue. Excluding the impact of FX, Q4 parts and consumables revenue was essentially flat. For the full year 2015 parts and consumables revenue made up 65% of our revenue. Our parts and consumable bookings were down 9% to $61 million compared to Q4 of last year. Excluding the impact of FX, our Q4 parts and consumable bookings were down 1%. As you can see in this slide the last few quarters have seen a modest decline in revenue which is largely due to the FX and relatively stable bookings. We believe this stability is reinforced by our large installed base that tends to be less volatile than our capital business. Being the end of the year I thought I'd update you on our breakdown of our sales by market. We made a few changes on which categories we put certain industries in, but I think this gives a pretty good representation of our end markets for the full year 2015. We added a new category called Other Paper which we use to classifying revenues from specialty and industrial paper grades which were previously included in the other category. These include grades such as gypsum paper used in wallboard and housing, dissolving pulp used in clothing and electronics and specialty grades such as filter paper, currency and writing paper. As you can see from this slide the troubled grades of printing, writing and newsprint continue to shrink as a percentage of our overall business and collectively represented only 12% of our revenue in 2015. The healthier packaging segment in which production has increased 10% in the U.S. since 2009, represented about 45% of our 2015 revenue. For 2015 24% of our revenue is outside the paper industry. I'd like to show you a longer term perspective of our revenue and adjusted earnings per share performance but before I do so I need to show you the reconciliation for adjusted earnings per share which is on Slide 11. As you can see on Slide 12 despite the significant FX headwinds which slowed top line growth, we continued to make clear progress in growing our adjusted earnings per share over the last few years. I'd like to take the next few minutes to provide a brief review of our investment activities in each of the major geographic regions of the world. I'll begin with North America. North America's our largest and continues to be our most important region. Our two fold revenue in North America was down 3% compared to the fourth quarter of 2014 to 53 million. Revenues were down in all major product lines except for stock prep which was up 9% compared to the same period last year led by strong demand for our stock prep parts. Surprisingly FX had a significant impact in Q4 and in particular was impacted by the weakness of the Canadian dollar versus the U.S. dollar. In total FX had a 2 million or 4% negative impact on our Q4 revenues in North America. Q4 bookings in North America were 51 million, down 19% compared to a very strong fourth quarter of last year. All of our major product lines were down except for our wood processing product lines. The majority of the bookings decline came from our capital business which does tend to be more volatile. That said we did book several large orders in Q4 for combined value of approximately 7 million as was noted in our press release issued in January. One of those orders was recycled fiber processing system for a mill modernization project to convert the production of a newsprint machine to liner board. We've been very active in these types of machine conversion projects over the past few years and we continue to see a strong customer preference for our products and technologies in these projects. As we look to 2016 we continue to see a healthy business environment although we expect less revenue from project activity in face of the record levels we had in 2015. Turning to Europe, we see a fairly stable situation. According to published reports domestic demand and in particular private consumption was relatively strong in 2015 and continues to be the primary factor expected to drive the Eurozone economy in 2016. Our Q4 revenue in Europe was 21 million, down 16% from a strong Q4 last year, but up 13% sequentially and the third consecutive quarterly increase. Q4 bookings was 18 million were down 3% compared to Q4 of 2014 and down 20% sequentially as a result of fewer large capital projects. As a reminder Q3 of 2015 included a $70 million recycled liner board project in Southern Europe. As I noted earlier the strength of the US dollar had a significant impact on the reported revenues and bookings from Europe. The unfavorable FX impact reduced both bookings and revenue by $3 million in Q4. Excluding the U.S. currency impact revenue in Q4 was down 5% and bookings were up 11%. During the quarter we booked several smaller capital orders for stock prep systems and a dryer section rebuild for a machine conversion from magazine paper to food packaging with a combined value of 2 million. As we look ahead to 2016 we expect measured but stable growth in Europe with the weaker Europe helping to stimulate exports which could result in increased demand for packaging. Next let's take a look at Asia. The economy in China has decelerated for most of 2015, large capital investments in prior years has led to a capacity surplus in paper and other process industries in China. November and December continued to see declines in industrial production growth relative to prior years with December up only 5.9% compared to the previous year and this was evident in our new order intake of $10 million in Q4. In addition as I mentioned earlier during the fourth quarter of 2015 we removed an order from our backlog from a customer in China with a value of $16 million based on our concerns that the necessary financing would not be secured. Including the $16 million reversal we have negative net bookings of $6 million in Asia. I should mention that our team in China did a good job managing progress payments and matching those payments with our investments in inventory. In addition, we’ve not recorded any revenue associated with this project. Our Q4 revenue in Asia was up nearly 60% compared to Q4 of last year to a record $27 million due primarily to shipments from a large backlog of capital projects we built up over the last several quarters. Although we had a significant drop in our backlog in China during the fourth quarter, it was still a healthy $24 million at the end of 2015. The performance of our stock prep business in China was a strong contributor to our earnings fees in Q4. On the other hand lead capital bookings in Q4 as well as the booking reversal reflects a weaker marketplace. As we look ahead to 2016 containerboard growth in China is forecasted to be around 2% which suggest new capital activity will remain at reduced levels this year. Correspondingly we assume reduced project activity on all of our product lines. In this environment we’re focusing on offering our customers solutions to help them increase productivity and reduce input costs. This includes both smaller capital investments and cadence OEM parts and consumables. Finally, I’d like to make a few comments on our rest of the world results. Our rest of the world revenue was $7 million in Q4, down 23% compared to the same period last year and up 2% sequentially. Nearly all the year-over-year decline was due to the weakness of the real. Excluding the impact of FX revenue was down 1% compared to Q4 of 2014. As you can see in the chart in Slide 17, Q4 bookings nearly doubled to $12 million. This increase is primarily due to capital orders for turnkey fiber processing system from a tissue producer in Peru and a fabric cleaning system to one of the largest pulp and paper produces in Brazil. Combined these two orders represented nearly one third of Q4 bookings in this region. Although the region and in particular Brazil is relatively weak, our healthy backlog and stable parts and consumable business should position us well to weather this soft patch. I’d like to close my remarks with a few comments on our guidance for 2016 and the first quarter. We expect another strong year in 2016 although our performance in 2015 will make for some tough comparisons. We also expect 2016 will be more challenging than 2015 due to a softer market for capital in North America and China and continued FX headwinds. Assuming exchange rates remain stable, FX will reduce our expected revenue and earnings per share in 2016 by $10 million and $0.11 respectively. For the full year 2016, we expect to generate 280 to 290 of GAAP diluted earnings per share on revenues of $370 million to $380 million. Similar to 2015, we expect Q1 to be our weakest quarter and each of the remaining quarters to strengthen as the year progresses. For the first quarter we expect to generate $0.55 to $0.58 of GAAP diluted earnings per share on revenue of $89 million to $91 million. I’ll now pass the call over to Mike for additional details on both our financial requirements in 2015 and the outlook for 2016. Mike?

Thank you, John. I’ll start with our gross margin performance. Consolidated product gross margins were 43.1% in the fourth quarter of 2015, down 160 basis points compared to the fourth quarter of 2014. The decrease in gross margins from last year’s fourth quarter was primarily due to an unfavorable product mix and to a lesser extent lower margin in our capital business, which included a high level of large stock prep systems in China this quarter. Our higher margin parts and consumables revenue represented 54% of total revenue in the fourth quarter of 2015 compared to 59% in the fourth quarter of 2014. For the full year 2015 product gross margins of 46.2% were the highest level achieved in the Company’s history and 180 basis points higher than the gross margins achieved in 2014. I should note that the margins in 2014 were decreased 55 basis points due to the amortization of acquired profit inventory. Looking ahead we expect that full year 2016 consolidated product gross margins will be approximately equal to 2015. As is normally the case, there is likely to be some variability by quarter due in part to product mix as well as the timing and profitability of large system orders. Now let’s turn to Slide 22 and our quarterly SG&A expenses. SG&A expenses were $30.3 million in the fourth quarter of 2015 down $3.1 million from last year’s fourth quarter and included a favorable foreign currency translation effect of 2.2 million. Excluding the translation effect SG&A expenses were down 900,000 or 2.8% compared to the fourth quarter of 2014. SG&A expense as a percentage of revenue was 28.2% in the fourth quarter of 2015 compared to 31.7% in last year's fourth quarter, a decrease of 350 basis points. For the full year 2015 SG&A expenses were a 122.8 million a decrease of 6.5 million or 5% compared to 2014 and included a favorable foreign currency translation effect of 9.4 million. Excluding the translation effect SG&A expenses were up 2.9 million over the last year. 1.6 million of this increase is associated with the SG&A of the JNL screen cylinder product line acquired during the fourth quarter of 2014. As a percentage of revenue SG&A expenses were 31.5% in 2015 compared to 32.2% in 2014 or a decrease of 70 basis points. Looking forward we expect that SG&A spending in 2016 as a percentage of revenue will be approximately 31.5 to 32.5% due to lower expected revenue. Now let's turn to Slide 24, adjusted operating income. Our adjusted operating income which excludes restructuring costs and expenses related to acquired inventory and backlog, was 14.6 million or 13.6% of revenue for the fourth quarter of 2015 compared to 12.2 million or 11.6% of revenue in the fourth quarter of 2014. Adjusted operating income was up 2.4 million or 20% due to a decrease in SG&A expenses, offset in part by a decrease in gross margins as mentioned earlier. For the full year 2015, our adjusted operating income which excludes restructuring cost and expenses related to acquired inventory and backlog was 50.8 million or 13% of revenue compared to 45.5 million or 11.3% of revenue in 2014. Adjusted operating income was up 5.3 million or 12% due to a 6.2 million decrease in SG&A expense. Now let's turn to our EPS results for the quarter. We reported GAAP diluted earnings per share of continuing operations of $0.94 in the fourth quarter of 2015 compared to $0.82 in the fourth quarter of 2014. Results in 2015 included a $0.01 restructuring charge while the fourth quarter of 2014 included a $0.01 benefit from restructuring activities. Excluding these items for both periods adjusted diluted EPS was $0.95 in the fourth quarter of 2015 compared to $0.81 in the fourth quarter of 2014, an increase of $0.14. This increase of $0.14 in adjusted diluted EPS consists of the following, $0.20 due to lower operating expenses, $0.07 due to the increased revenue and $0.01 due to lower shares outstanding. These increases were partially offset by $0.11 due to lower gross margin percentages and $0.03 due to a higher effective tax rate. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.10 in the fourth quarter of 2015 compared to last year's quarter due to the strengthening of the U.S. dollar. Let me also take a moment to compare the actual diluted EPS result in the fourth quarter to the guidance we issued during our May, excuse me, our November 2015 earnings call. Our GAAP diluted EPS guidance for the fourth quarter of 2015 was $0.79 to $0.82. We reported GAAP diluted earnings per share from continuing operations of $0.94 in the fourth quarter of 2015. This $0.12 increase over the high end of our guidance range, included a benefit of $0.07 due to a lower effective tax rate and a $0.04 benefit related to improved gross margins as a percentage, excuse me, as our performance on capital equipment particularly in China was better than anticipated. A lower tax rate in the quarter was due in part to the geographic distribution of our earnings and the reinstatement of certain expired tax benefits which were enacted for 2015 and future periods 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 27. We reported GAAP diluted earnings per share from continuing operations of $3.09 in 2015 compared to $2.56 in 2014. The results in 2015 included a $0.03 charge from restructuring activities and a $0.01 charge for the amortization of acquired profit inventory and backlog. The results for 2014 included a $0.17 charge for the amortization of acquired profit in inventory and backlog and $0.05 charge associated with restructuring activities. Excluding these items from both periods, adjusted diluted EPS was $3.13 in 2015 compared to $2.78 in 2014, or an increase of $0.35. This increase of $0.35 in adjusted diluted EPS consist of the following; increases of $0.43 due to lower operating expenses; $0.18 due to higher gross margin percentages; $0.06 due to the combined effects of incremental operating results on a 2014 acquisition and lower acquisition transaction expenses and $0.03 due to lower shares outstanding. These increases were partially offset by decreases of $0.34 due to lower revenue and $0.01 due to lower interest income. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.34 [ph] in 2015 compared to 2014 due to the strengthening of the U.S. dollar. Now let’s turn to our cash flows and working capital metrics starting on Slide 28. Cash flows from continuing operations were $12.3 million in the fourth quarter of 2015, down $6.2 million from an exceptionally strong fourth quarter of 2014. Free cash flow defined as cash flows from continuing operations less CapEx was $10.9 million in the fourth quarter of 2015 down from last year’s very strong $14.9 million. For the full year of 2015, operating cash flows were $37.9 million a decrease of $11 million from a record performance in 2014. A contributor to the decrease in 2015 was the strong revenue performance in the fourth quarter which drove receivables and ongoing costs up $7.5 million from the third quarter level. We anticipate these receivables will be collected early in 2016. We had several notable non-operating uses of cash during the fourth quarter of 2015. We paid a dividend of $1.8 million, expended $1.4 million in CapEx and purchased $1 million of our commons stock. The stock repurchases in the quarter represented 25,000 shares at an average price of $39.45. Slide 29 shows our free cash flow for the past eight years. As you can see free cash flow in 2015 was $32.4 million. Slide 30 shows stock repurchases and dividends over the last five years. Over the past 12 months, we have returned $17.1 million of capital to our shareholders, $9.9 million from share repurchases and $7.2 million from dividends. This presents approximately 50% of our net income during that period. Let’s now look at our key working capital metrics on Slide 31. Days in inventory were 91 in the fourth quarter of 2015 compared to 87 in the fourth quarter of 2014 and 123 in the third quarter of 2015. As we anticipated on our last call we had several large capital orders shipped in the fourth quarter of 2015 and as a result the days in inventory have returned to historical levels. Our days and receivable measure was 59 days in the fourth quarter of 2015 and comparison to 55 days in the fourth quarter of 2014 and 63 days in the third quarter of 2015. Our AP days were 36 in the fourth quarter of 2015 compared to 42 in the fourth quarter of 2014, and 51 in the third quarter of 2015. Looking at our 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 was 114 at the end of the fourth quarter of 2015 down 21 days from the third quarter of 2015 and up 15 days from the fourth quarter of 2014. Working capital as a percentage of revenue was 12% in the fourth quarter of 2015 compared to 12.8% in the fourth quarter of 2014 and 14.7% in the third quarter of 2015. Our net cash position increased $8.2 million compared to the third quarter of 2015. Net cash, that is cash less debt at the end of the fourth quarter of 2015 was $35.7 million compared to $27.5 million in the third quarter of 2015 and $19.9 million in the fourth quarter of 2014. Before concluding my remarks, I’d like to give you a few additional details on our earnings guidance. As we noted in the press release issued yesterday in the fourth quarter of 2016 we expect GAAP diluted EPS of $0.55 to $0.58. For the full year we expect GAAP diluted EPS of $2.80 to $2.90. Looking at our quarterly EPS performance in 2016 we expect that the first quarter will be the weakest quarter of the year and each of the remaining quarters will be sequentially stronger. As always I should caution here that there could be some choppiness and variability in our quarterly results due to a number of factors including the variability of our order flow and shipment of capital projects. We expect our effective rate will be approximately 31% to 32% in 2016, up from 30% in 2015. The increase is due in part to a shift in the geographic distribution of earnings. We anticipate CapEx spending in 2016 will be approximately 7 million to 8 million. Finally we expect depreciation and amortization will be approximately 10 million in 2016. That concludes my review of the financials, I'll now turn the call back to the operator for our Q&A session. Operator.

Thank you. [Operator Instructions] Your first question comes from the line of Rudy Hokanson with Barrington, please proceed.

Could you tell us a little bit about what you're seeing in terms of the OSV market right now?

It’s been quite strong, continues to be strong, the pricing is holding up just fine you know for OSV itself and we're actually seeing some project activity in -- also in Europe and Asia, which is encouraging. So I would say, generally speaking good news for OSV in the world and I am particularly encouraged that it’s certainly heavy North America but the fact that we're seeing pretty healthy activity in Europe and Asia is encouraging.

Okay thank you and then on the markets in China right now and your activity in China can you maybe flush that out a little bit more, do you see there being -- you know with the slowing of the overall economy, a lot of that as I understood it had to do with the industrial side and export markets, but that the focus was going to be on your consumer markets which I would think could help your sales, to the higher end paper companies in terms of their utilization rates. But it sounds like it's hitting everything as far your end markets go. I don’t know if I said that right, but if you could maybe talk about a little bit more?

Sure, I'll give a -- I guess a couple of general comments about China. As you know they worked -- they built up over capacity over the last four or five years. That's mitigated a little bit by these governments mandated closures. On the encouraging side I would say that they have decent amount -- I'm talking particularly about liner boards here, they have a decent amount of market concentration, of some big players with a reasonable market shares and not unlike the U.S. you've got them taking I would say some leadership and cutting back production to keep operating rates pretty good. So the pricing environment and the operating rates for liner board are actually pretty good I would say and they're making decent money, that’s all quite encouraging. Printing and writing is of course relatively weak, newsprint is relatively weak and they're adding tissue at a rapid rate, but also have good demand. I think going forward you're right Rudy, in the sense that as they shift from a more of an investment based manufacturing type economic to a more consumer driven economy things will change a little bit and they're also increasing their service aspects of their economy. So the immediate effect is there is less -- for every percent of GDP there is less liner board as it shifts to more services, but as the consumer economy grows their per capita use of paper will definitely increase. The other thing I think to watch in China is exports of paper products. You might see them exporting to other parts of Asia or even North America or Europe, there their products.

And then I think you were talking about this but I was having a hard time seeing some of the slides, could you talk a little bit more about your expectations on the consumable and parts business and what you expect for that in 2016 compared to '15? And you know again given your gross margin assumptions what the mix is going to be in order to derive those gross margins?

You’re talking in general or about China in specifics?

No, in general.

So in general we don’t typically give guidance, that this is what we think the mix will be next year. But I think you can glean a few things, I mean, what we are saying is that we’re going to hold -- we expect to hold both our gross -- those gross margins, and the mix is a big part of that. So, I think the fact that we’re projecting that we’ll company to have strong gross margins indicates that we’ll continue to have a pretty high percentage of parts and consumables and I think it indicates that some of the performance levels on a gross margin basis that we’re seeing in China, we expect to have a lot of that hold up next year.

Your next question comes from the line of Dan Jacome with Sidoti & Company. Please proceed.

Just wanted to say on the topic of Europe tissue and I appreciate the new end customer breakdown that you provided this quarter. I am just wondering bigger picture why is tissue becoming a smaller part of your business especially with the comments you just made on Europe. I think a couple of years ago it was like 13% and now it looks like you’re down to 10%. Maybe if you can give us some flavor there?

The comments that I was making about tissue are largely in China and our two strongest product lines in China in terms of market share our stock prep product line which is heavy recycle and also our fluid handling product line. So in China those are by far the ones with large market shares from China. The nature of tissue, there isn’t a lot of fluid handling products on the tissue machine and the nature of tissue in China, they don’t by law recycle tissues, so we don’t play very much in that in the growth of tissue in China. So, that’s one factor. The other factor is it's not so much a tissue -- a big part of it is that our packaging business, particularly liner board, stock prep business both in North America and China which was very strong in 2015 really moved to the packaging percentage up a lot. So it took a little away from everybody if you will.

That make some sense. And Jon on the new significant breakdown, I guess other non-papers, is that where the dissolving pulp, is that where you said where you’re going to place it?

Dissolving pulp is another non-paper [ph].

I am glad you asked about other non-paper because it’s kind of worth talking about and I don’t -- one of the things, as you look at other non-paper, I think it's important to look at it, that is this different than paper. You can imagine that if you’re making gypsum board for wall -- making a drywall board that’s not the typical growth driver that you think about for paper, that’s housing, 100% housing. So think about that growth rate, when you think about growth rate for dissolving pulp, a big hunk of that goes into those quick-drying Nike, Under Armour shirts that kind of stuff. That particular piece of apparel is growing quite rapidly. So, I think it's a mistake to lump that in with paper.

Yes I agree. Do you know, I could do my homework on this, but do you what sort of capacity growth is for that dissolving pulp that you just mentioned that wasn’t athletics?

I should tell you what I’ve heard about it and I am really not an expert. So, over the years the market for those Under Armour type shirts has been growing double digit rates. They are very popular particularly in Asia. There has been a big growth and by the way we play -- we have a very high market share in the dissolving pulp projects, but there has been a big burst of growth, I would say. So, a lot of capacity for that has recently come on.

For dissolving pulp.

So they may have a situation where they have to work up a bit of capacity, but that market is quite encouraging. I think the end drivers in that market are really strong.

Okay, so if I got you correct, capacity might be coming online at a double-digit --.

There is a lot of capacity that has recently come online.

Yes definitely.

Okay, I’ll look more into that, I think it's interesting. And last, staying on your Asia base business, can you breakdown how much of that business is consumables versus capital equipment, did I missed that?

We don’t as a general rule break that down I think --.

Is it near [ph] your corporate average of like mid-60s?

It tends to be heavier, it tends to be heavier capital of course. I will say the China is moving as it matures and as we look to 2016 we see less capital and we’re mitigating the effects of less capital by paying much more attention to spare parts and helping our customers there improve the assets that they have, lower their input costs.

If you did that, wouldn’t that lower the risk of having more booking reversals? Isn't that kind of the plan?

I'm sorry, what was that again?

If you move more of that business to spare parts and consumables, you would have less, kind of a risk of like a booking reversal having such a major impact on your numbers, right?

Yes I mean, as most people follow us, we love parts. I mean we love them because they're stable and we love them because they're generally higher margin than capital. So, you know absolutely. You might remember on the last earnings call we said about 58% of our sales in China was consumables for the prior quarter '15.

Okay great, appreciate it. I admit that, thanks. And then lastly how much is left on your buyback again? Your authorization as of now?

12 million.

12 million?

Yes.

Okay is there any --.

As per the general rule, when we started to run low the buyback we just re-up it, if you follow us there's really -- it's never the case we don’t have a buyback in place. Whether we exercise or not is a different story but we're -- if we need more we just get more.

Okay. But again your guidance it doesn’t assume any level of incremental repurchases, right?

No our guidance does not assume any -- it assumes we're sort of, no buybacks.

Alright Jon, really appreciate it. Thank you guys.

Alright thanks, Dan.

[Operator Instructions] And at this time there are no further questions in the queue. I would now like to hand the conference over to Jon Painter for closing remarks.

Thanks operator. In closing, I want to thank our 1,800 employees around the world for making 2015 an outstanding year with record gross margins, operating income, adjusted EBITDA and adjusted diluted earnings per share. I have every confident that this timely group of individuals will deliver another solid performance in 2016. And I look forward to updating you next quarter on our progress. Thanks very much.

Thank you joining today's conference. That concludes the presentation, you may now disconnect. Have a great day.