Q2 2021 Kadant Inc Earnings Call
[music].
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Good day, and thank you for standing by walk on to the Q2.2021 Kt, Inc earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you on each of press star 1 on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Michael Mckenney Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you Mr. <unk>, good morning, everyone and welcome to cadence second quarter 2021 earnings call with me on the call today is Jeff Powell, our President and Chief Executive Officer for.
We begin let me read our safe Harbor statement.
Remarks that we may make today about cadence future plans and expectations financial and operating results and prospects are forward looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1090 products.
These forward looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward looking statements as a result.
On 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 <unk> 2021, and subsequent filings with the Securities and Exchange Commission.
In addition, any forward looking statements we make during this webcast represent our views on estimates 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 views or estimates change.
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 non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release, and the slides presented on the webcast and discussed in the conference call, which are available in the investors section of our website at www dot cadence dot com.
Finally, I wanted to note that.
When we refer to GAAP earnings per share or EPS and adjusted EPS on this call. We are referring to each of these measures as calculated on a diluted basis.
With that I'll turn the call over to Jeff Powell, who will give you an update on cadence business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and we will then have a Q&A session. Jeff. Thanks, Mike Hello, everyone and thank you for joining US This morning to review our second quarter results.
And discuss our business outlook for the second half of 'twenty 'twenty 1.
I'll begin by reviewing our operational highlights for the second quarter.
Pleased to report that we had our best quarter ever with strong demand and excellent execution across all of our operating segments.
Widespread business reopening and pent up demand led to a high level of economic activity and a record financial performance for the second quarter.
Our aftermarket parts and consumables business was exceptional in the second quarter and capital project activity was also moving at a record setting pace.
Our new order activity was driven by strong demand for our stock preparation and wood processing product lines. Both of which are included in our industrial processing segment and this led to another great quarterly performance for the segment.
I'll provide more details on that as I review, our operating segments.
I'd like to thank our operations teams around the globe for doing a fantastic job on managing the flow of our materials and ensuring our products get to our customers when needed despite the supply chain challenges.
They've done a superb job.
Before moving on to review, our second quarter financial performance I wanted to update you on the progress of our recent acquisition of clues that was announced in June.
I am pleased to tell you that last week, we completed the acquisition of clues and most of this related companies and are moving forward with integrating this business indicators.
First class management team has built a solid reputation in its core markets and they are quality products complement and extend our doctor blade offerings I'm delighted to welcome <unk> employees to the <unk> family.
I look forward to the contributions they will make the cadence.
Yeah.
Turning now to slide 6 and our Q2 financial performance you can see we had significant increases across all of these financial metrics compared to Q2 of last year.
Bookings were up 60% compared to Q2, 2020 and were a new record for the third consecutive quarter.
Q2 revenue was up 28% compared to the second quarter of 2020, and up 14% sequentially to a record $196 million.
Our aftermarket parts and consumables revenue was also up 28% compared to the same period last year and up 6% sequentially to a record $125 million in Q2.
The consistently high operating rates of our customers combined with lower store room inventory of parts contributed to this record aftermarket performance.
Solid execution contributed to boosting our adjusted EBITDA margin to 21%, which led to record operating cash flows of $44 million in Q2.
We continued to benefit from strengthening industrial activity in Q2, especially in North America and Europe.
Our business is executed well and our global workforce continue to safely meet our customers' needs despite challenging circumstances in many areas of the world.
All 3 of our operating segments experienced an improved adjusted EBITDA margin performance, despite the growing inflationary pressures for materials and supply chain constraints.
Next I'd like to discuss our 3 operating segments, beginning with our flow control segment.
Our flow control segment had record revenue and strong bookings the second quarter with a solid revenue contributions for capital projects bookings and revenue were up 45% and 38% respectively compared to the same period last year and for parts made up 65% of total revenue in the second quarter.
Operating leverage debt to a record adjusted EBITDA and adjusted EBITDA margin of nearly 30%.
Our flow control segment strong start to the first half of the year is expected to moderate somewhat in the second half however, with a record backlog and strong bookings heading into Q3, we still expect a strong second half of the year.
Our recent acquisition of <unk> will further add to our overall performance and will be included in this segment going forward.
Our industrial processing segment continued to experience strong demand with bookings in this segment up 92% to a record $102 million.
New orders for our fiber processing systems in China and that this increase in bookings in the second quarter.
Strong end market demand for wood products continued throughout the quarter as U S housing starts increased 23% in June 2021, compared to June 2020.
Although housing starts were down 5% for May to June of this year overall demand for housing in wood products is high and is expected to remain strong throughout the second half of 2021.
Revenue in this segment increased 26% to $83 million with parts and consumables, leading the growth up 32% compared to the same period last year and 11% sequentially.
A favorable product mix and good execution led to a 340 basis point improvement on our adjusted EBITDA margin.
We ended the quarter with another record backlog and this positions us well for the remainder of the year.
And our material handling segment.
We had strong demand for aftermarket parts and saw a strong uptick in orders for our high performance Balers that prepare materials for secondary processing to transport.
European markets led the way to a record revenue performance in Q2.
Revenue in the second quarter was up 18% to $42 million and parts and consumables revenue was strong making up 60% of total revenue.
Capital bookings in our material handling segment were up compared to the same period last year and are back to pre pandemic levels, although not a record total bookings were up 29% at the top end of our historical bookings.
Solid execution by our businesses in this segment helped boost our EBITDA by 30% on adjusted EBITDA margin by 180 basis points to its highest level since Q4.2019.
Capital project activity remains at a good level and we expect capital projects in the second half of 2021 to be similar to the strong profit.
Performance in the first half of the year.
As we look ahead to the second half of 2021, we continue to see signs of healthy project activity and an optimism in our customers as the economic recovery takes hold as more regions of the world begin to experience an improved economic outlook, we would expect to see strong demand for our products and technologies.
With the extent of the spread of COVID-19 to other very it's still a big unknown a record backlog has as well positioned as we look ahead to the second half of the year.
I'd like to pass the call now over to Mike to review, our Q2 performance.
Thank you Jeff.
I'll start with some key financial metrics from our second quarter.
Consolidated gross margins were 43, 6% in the second quarter of 2021 compared to 43, 5% in the second quarter of 2020.
Our parts and consumables revenue represented 64% of revenue in both periods.
SG&A expenses were $49.3 million and 25, 2% of revenue in the second quarter of 2021 compared to $45.1 million and 29, 5% of revenue in the second quarter 2020.
The $4.2 million increase in SG&A expenses, Inc.
Moving to $2.6 million unfavorable foreign currency translation effect and.
And increases in incentive compensation outside labor and travel related costs due to improved business conditions.
We received $1 million from the government assistance programs in the second quarter of 2021 compared to <unk> 8 million in the second quarter of 2020.
I would like to note for guidance purposes that we do not expect to receive any meaningful government assistance payments going forward.
Our GAAP diluted EPS was a record $1.96 in the second quarter up 96% compared to $1 in the second quarter of 2020.
Adjusted EBITDA increased 56% to $41.3 million or 21, 1% of revenue compared to $26.6 million or 17, 4% of revenue in the second quarter of 2020 due to strong performance in our flow.
And industrial processing segments.
I would like to note that both adjusted EBITDA of $41.3 million and 21, 1% of revenue were records.
Adjusted EBITDA is an important metric for us as we assess the returns achieved on our business initiatives.
Operating cash flow increased 101% to a record $44.4 million in the second quarter 2021, compared to $22 million in the second quarter 2020.
Free cash flow was also a record at $42.3 million in the second quarter of 2021 compared to $21.1 million in the second quarter of 2020.
During the quarter, we were able to utilize our strong cash flows to pay down our existing debt by $27 million.
We had several other notable non operating sources and uses of cash in the second quarter of 2021.
Borrowed $78.7 million at the end of the second quarter to fund the third quarter acquisition of crude.
We also paid $2.1 million for capital expenditures and paid a $2.9 million dividend on our common stock.
Let me turn to our EPS results for the quarter.
In the second quarter of 2021, our GAAP diluted EPS was $1.96, and after adding back acquisition cost or <unk> or.
Our adjusted diluted EPS was 201.
In the second quarter of 2020.
Our GAAP diluted EPS was $1 and our adjusted diluted EPS was $1.6 the <unk> difference includes restructuring costs for <unk> and acquisition costs of <unk> III.
As shown on the chart the increase of <unk> 95.
And adjusted diluted EPS in the second quarter for 2021 compared to the second quarter of 2020 consists of the following.
$1.15 due to higher revenue.
<unk> due to higher gross margin percent percentage.
And <unk> <unk> due to lower interest expense.
These increases were partially offset by 27 due to higher operating expenses for <unk> due to a decrease in the amounts received from government assistance programs and <unk> due to higher weighted average shares outstanding.
Collectively included in all other categories I, just mentioned was a favorable foreign currency translation effect of <unk> 16 in the second quarter of 2021 compared to the second quarter of last year due to the weakening of the U S dollar.
Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable decreased to 109 at the end of the second quarter of 2021 compared to 128 at the end of the second quarter 2000.
<unk> 'twenty.
The decrease was primarily driven by a lower number of days in inventory.
Working capital as a percentage of revenue was 12, 7% in the second quarter 2021, compared to 14, 8% in the second quarter 2020.
Our net debt that is debt less cash decreased $40 million or 26% sequentially to $116 million at the end of the second quarter 2021.
We paid down $27 million of our debt in the quarter and as previously mentioned, we also borrowed $79 million of debt at the end of the second quarter to fund our acquisition of <unk>, which was largely completed in mid July the <unk>.
Closing in mid July relates to the majority of the <unk> entities that we are acquiring.
We borrowed an additional $4 million at the end of July associated with the acquisition of the remaining legal entity.
Which we expect will be completed in mid August.
Our leverage ratio calculated in accordance with our credit agreement increased to 1.
7.1 at the end of the second quarter of 2021 compared to 1.5% at the end of the first quarter of 2000.
Our net interest expense decreased $9 million or 47% to $1 million in the second quarter of 2021 compared to $1.9 million in the second quarter of 2020.
At the end of the second quarter 2021, we had $141 million of borrowing capacity available on our revolving credit facility, which matures in December of 2023.
Our record bookings activity in the second quarter 2021 has resulted.
And an increase in our revenue expectations for the year.
While we have had record bookings results over the last 3 quarters, we remain cautious about future for the future potential impact on our business of increasing COVID-19 cases in certain regions of the world and supply chain disruptions, which could impact the timing of delivery.
On projects.
Travel and visitation restrictions have continued to impact our ability to timely execute some projects and certain parts of the world, especially where COVID-19 travel restrictions are still in place.
In addition to an increase in our revenue expectation due to continued strength in the market and the record bookings in the second quarter.
Our 2021 estimates now include the acquisition of <unk>.
As a result, we are updating our revenue range for the year to an increase over 2020 of approximately 23% to 25% or 783 million to $793 million.
Up from our previous estimated range of $710 million to $730 million.
The majority of this increase is organic.
With approximately 1 third of the revenue range increase related to the addition of <unk>.
We anticipate that revenue in the fourth quarter will be the strongest for the year due to both strong capital project activity and our recent acquisition.
For the third quarter, we anticipate revenue between $195 million to $200 million for the fourth quarter revenue of $220 million to $225 million.
For the third quarter, if we exclude the additional revenue from crude we anticipate revenue will be down compared to the second quarter of 2021 due to the projected timing of revenue recognition on capital projects.
As mentioned earlier this guidance is of course predicated on the pandemic and supply chain issues, having little impact on our customers' activities or the delivery of shipments to them.
We now anticipate gross margins for the year will come in at approximately 42, 5% down from our.
From our prior estimate of 43% principally as a result of including the amortization of the acquired profit and inventory related to our <unk> acquisition.
As I've noted on the last 2 calls the mix will be more weighted towards capital in the second half of the year, especially in the fourth quarter.
As a result, we anticipate gross margins will be 42% in the second half of the year, which includes the impact of amortization.
The acquired profit and inventory.
Our current estimate for the inventory write up is approximately $3.5 million with $1.4 million or 9 turning in the third quarter and the remaining $2.1 million or 12, turning in the fourth quarter.
We anticipate SG&A expenses will be a little over $54 million per quarter in the third and fourth quarter.
We now anticipate that SG&A expenses as a percentage of revenue will be lower than we projected at the beginning of the year and will be approximately 26% on revenue for the full year 2021.
This includes backlog amortization expense of approximately 400000 or 3 in the third quarter.
Our interest expense will be approximately $1.3 million per quarter in the second half of 2021 due to the incremental borrowings related to our recent acquisition.
We anticipate the tax rate for the year will be approximately 28% in the third and fourth quarter of 'twenty, 1 approximately 28, 5% to 29%.
We anticipate that our adjusted EPS will be lower in the third quarter compared to the second quarter of 2021 due to several factors, including a lower anticipated gross margin percentage versus the second quarter and the lack of payments received from government programs that contributed 10 to the second quarter results.
I hope these directional comments will help provide insight into how we see our current business environment.
Before concluding my remarks, I wanted to comment on our first quarter 2021 results.
We have recast our first quarter 2021, non-GAAP financial metrics to reflect that our SG&A expense included $1.3 million of acquisition costs related to our acquisition of crude which was announced in June.
We reported diluted EPS of $1.43 in the first quarter of 2021.
With these acquisition costs added back to our adjusted diluted EPS, our adjusted diluted EPS was $1.53 in the first quarter of 2021.
Also we reported adjusted EBITDA of $31.1 million or 18% of revenue in the first quarter of 2021 with.
With the addition of these acquisition costs, our adjusted EBITDA was $32.4 million or 18, 8% of revenue.
This recast information is shown in the appendix to this presentation and is included in the information presented for the 6 months of 2021 and our earnings release.
That concludes my review of the financials and I will now turn the call back over to our operator for our Q&A session operator.
At this time, if you would like to ask a question press star 1 on your telephone keypad again that is star on the number 1.
Our first question comes from the line of Chris Howe with Barrington Research.
Good morning, Jeff Good morning, Mike Thanks for taking my question on script.
Good morning.
As we think about the common topic seems across all conference calls.
Related to the supply chain constraints.
Can you provide some context.
Around the pressures are challenges in the environment as it pertains to the quarter, how that may have impacted the end of the quarter.
And kind of how you see yourself navigating this environment.
Well I would say Chris.
Sure.
I think our decentralized structure, it really becomes a strength for us here.
On our business leaders are able to see what's coming and react quickly and stay in front of.
Material price increases.
In addition, I would note the fact that over 60% of our business is parts and consumables that also helps us it's easier to adjust for inflationary pressures on parts and consumables since there.
Sure So short cycle.
Theres no doubt theres going to be some impact.
I would say most notably of course on capital orders that were taken prior.
To the inflationary pressures rising.
Overall I don't think.
There is really going to be a big impact for us on our gross margins as you know.
As I just said.
If I exclude the inventory.
Write up associated with <unk>, we're still going to come in near that debt, 43% and I have been saying that from the get go from the beginning of the year. So.
But.
I would say tailing on to that debt. In addition to the inflationary issue.
We.
We are concerned about supply chain issues in particular shipping.
Both in regards to cost increases and the timing of wind when shipped items are delivered and I noted that also in the call. So youre hearing a lot about that also I'm sure for many others.
Okay, and then just following up on that we know.
<unk> strong market position across each of the segments.
As we take that market position in consideration of this current environment.
Along with the price increases to help offset.
Some of this environment is there an opportunity here for cadence too.
Work its way up on price.
I would assume that customers know cadence value proposition and a growth piece that they provide to their equipment and that a small incremental raising price may be permanent.
Yes, Chris so.
We're always working hard to create more value for our customers and we focus very hard on the <unk>.
Total cost of ownership extending the life on the performance of our products. While we also have as you know several internal initiatives to lower our costs theres always tremendous pressure to to lower pricing or to keep pricing levels. The same and so our guidance get up every day and focus hard on how to deliver more value to our customers.
And so.
There are certainly instances where costs have gone up and you don't have any option other than to pass those costs onto our clients just like our clients are doing that with our customers our customers have announced price increases as their cost have gone up but we worked very hard to to increase the overall value we deliver to our customers.
So that they get a better return on that investment and that's that's the case on these these kind of uncertain times.
More traditional times. So that's always a focus of ours, we work hard to to help contain costs for our customers to the day.
Prosper and do better in and.
And reward us accordingly with it.
Work.
Okay and on 1 last question, if I may about the material handling segment.
You did very well.
On a geographic based or specifically as it pertains to the demand you saw in Europe, leading to that record revenue.
How about other geographic regions as it pertains to material handling we've mentioned briefly in the past it's hard to size, what the infrastructure impact that could happen with material handling.
And as we look at the second half outlook.
Kind of what are your thoughts on a geographic basis versus the first half.
Yes, so I would say that our material handling business.
It is predominantly focused on North America and.
In Europe and as you as you just indicated we have had some strong demand in Europe, particularly for our for our billing side of the business.
Our aggregate side of the business bulk handling material side of the business has been it was hit harder by the pandemic than any of our other businesses. We actually had customers that were forced to shut down they rely on customers that were that were force down during the pandemic and they've been slower to come back up so I would say that's probably been 1 of the.
1 of the business has been fairly flat over the last over the last many quarters up a little bit.
Certainly in Europe, but flat in North America.
We expect this.
Infrastructure package.
We received final approval to to help some obviously theres going to be talking about spending more money in roads bridges infrastructure, which which our customers supply directly to and so that will translate into over time, it should transfer and translate into more demand for for our technology and products as they up their ramp up there.
Production for supply.
But it has it has been probably the day slower 1 to recover.
And.
We're expecting and hoping that the <unk>.
Growth we've seen in Europe.
We will continue but also that we'll see some some increase in demand in America.
America and the U S in particular.
This infrastructure Bill hopefully gets rolled out.
It Hasnt hasnt been hit severe.
Severely but it's been I would say flatter than than our other segments for some time.
Okay. Thank you.
<unk>.
Your next question is from John <unk> with <unk>.
For the <unk> company.
Good morning, guys. Thanks for taking my questions.
Morning.
I want to discuss the backlog how long has it been extended compared to historic norms and is any particular segment seeing backlog extended.
Well beyond into next year that normally wouldn't be the case.
Okay.
Well of course, we are mid year now back on backlogs a little over $240 million. So there is no question that there is a chunk of it that's going to be delivered in 2022 at this point.
On.
I would say that in terms of looking at debt by the segments, it's probably most notably and industrial processing, where we have.
Capital projects that are really going to be 2021 revenue.
Okay great.
Sorry 2022.
Okay.
Do you expect that to be filled in the first half for 2022.
Year loan.
I think the majority of it will be in the first half of 2022, but we do have.
Some orders that will go to the second half, but the majority will be in the first half.
Okay and then.
And then since we're satisfying pent up demand that was pushed.
To the right during the pandemic.
Whats your sense from the from the customer base.
How long it would take to satisfy that demand is this a 2 year process.
To reach equilibrium.
Or are they trying to get the orders in that for us so they can get.
And bear in get their equipment when they want it.
Yes.
So I think there is clearly some pent up demand, particularly I think they ran down there their stores their inventory levels on parts and consumables and they'll start to build those up.
But if you look at if you look at the.
The biggest strongest market, we had which was on the industrial processing side.
Stock prep and wood processing, those are really being driven by by market growth.
Ah.
Shifting if you look at packaging and of course, there's been a shift that was that.
That was occurring but really was accelerated by the pandemic.
At home deliveries, which as you know requires more packaging and then there has been a growing demand GAAP.
Versus the supply of new housing and that's really being driven by by many things.
Again accelerated by the pandemic and people working at home, but also.
Since the <unk> 9 crash the demand is growing faster than supply so that debt supply deficit has continued to widen and.
And then you've got the.
You have the millennials that are really now starting to enter the house buying.
On.
Market in a big way and so that's when you look at the industry forecast for those that are expected to be strong for the next several years housing is always goes up and down relative to the economy, but overall they are projecting that this housing demand on this if you will net supply capital.
We will be there for many years and so on.
There will probably be some moderating as as the pent up demand as is alleviated.
Underlying fundamentals in our on our 2 biggest core markets.
Inc.
Our.
Are going to continue to.
To support our business for the years ahead.
Great Great news and just just on crude.
It sounds like that you expect them to do better in the fourth quarter than the third or just.
I didnt hear that properly or was that the case on that yet.
Yes, John on what I was trying to convey there it was just simply.
Didn't close the transaction until July.
July so we don't have on we're not going to have a full quarter of revenue.
Okay Alright.
Seasonal as you'd be aware, okay. Thanks for taking my questions guys.
Excellent. Thank you.
The next question is from Kurt Yinger with D. A davidson.
Great. Thanks, and good morning, Kevin Mike.
Thank you for.
Good morning, just wanted to start on the capital equipment side I'm, just curious whether you have any thoughts or.
Indications from your customers around how sustainable these elevated levels of bookings can be.
Or whether perhaps we should expect kind of a bit of a normalization here on the back half for early 2022 as you work through some of this.
Essentially pent up demand after.
On the software last year.
Well the capital on the capital buying cycles.
I've always been there so.
There is some <unk>.
Volatility in that over the years, if you followed us over the years.
And I think we are seeing a little bit of pent up demand. There no question for things that were kind of hit the pause button last year.
There is a little bit of that.
As I just mentioned.
We're talking to John though there is clearly.
Increased demand in some areas, which also our customers are going to have to address by by adding an additional supply. So I don't know exactly how long.
This buying cycle will last what we typically see is when the customers are doing really well, they're having strong free cash flow.
After a period of time, they start to invest in new technology to increase their competitive position and increase their their supply capabilities.
We have customers that are making.
Near record profit and some of our markets and so we would expect them to reinvest some of that back into further strengthen their businesses.
So, but it's a little difficult.
Unfortunately, Curt to know exactly how long that May go on because you know this is somewhat unprecedented.
That we have.
Still somewhat experiencing here.
So I don't know that we know for share other than we know our customers are doing very well and they turn to reinvest in their businesses are doing very well.
Right right, Okay, no I appreciate that and just on the gross margin guidance.
It didn't really change versus the prior outlook, obviously, the revenue outlook smoothed higher curious.
How we should be thinking about.
Potential mixed impact from capital equipment, and any cost inflation impact here in the back half and as you look at the.
For capital equipment bookings.
Youre kind of taking in right now do you feel like you're appropriately pricing those.
To offset the higher level of cost that youre seeing on the business.
So I would say current to your last question on current pricing, Yes, I think.
Our pricing now reflects.
The state of the market in terms of the material cost increases.
It really kind of the things that we are orders we booked prior to these inflationary pressures arising, but those will work their way through.
On the backlog and on a go forward basis as I indicated I really don't I'm not anticipating.
Much of an issue.
As it relates to the margins in the second half.
From the GAAP <unk> been saying second half of the year is going to be stronger on the capital side.
That will impact the margins so.
The guidance I gave was for 42% margins in the second half of the year.
That's really relatively consistent with where we've been all along.
And that 42% includes the.
<unk>.
Inventory write up associated with the <unk> transaction, but still.
Still even when you back that off you'll be able to calculate note debt. Okay margins in the second half are lower and the reason theyre lower because of the mix of capital Alright.
Right right. Okay. That's helpful and just lastly.
It seems like over the last couple of quarters, you've had some real nice momentum in terms of fiber processing systems for customers in China.
Just curious whether you think thats indicative of kind of a sustainable pick up as customers finalized strategies in response to fiber restrictions or any other thoughts you had on that topic.
Well, China traditionally goes to these buying cycles. We've seen these for for we've been there for nearly 30 years and we've seen these were though they'll have a 2 or 3 year buying cycle and then they will take time to absorb that new capacity.
<unk> and they go on to the next 1 and I had mentioned before that we were constantly amazed at the ability to continue to.
Growth to grow the business and to bring on new capacity and for demand to be therefore, it and so.
It's always difficult to predict exactly how long these things will last but there is a.
A fair amount of I would say project discussions that have been taken place this year in China and as we mentioned, we had a very strong quarter bookings quarter.
So we're pleased with that and we're pleased with the level of discussions.
Activity.
Occurring now no guarantee those will convert to orders, but I would say that.
There is a good good activity level discussions going on right now for projects there.
And they continue to growth I mean their economy. If you look at their current or even though it's down there is still growing whatever 6.5% something like that so I mean, there's still good growth there.
Right right, Okay, well I appreciate all the color and good luck here on the back half guidance.
Thanks Kurt.
Next question is from Walt Liptak with Seaport research.
Hi, Thanks, Good morning, guys.
Cornwall.
I wanted to ask.
I guess a follow on.
About the new.
The adjustments or the <unk>.
Third quarter gross margin.
But when.
When you when you put out your results for the third quarter will you do adjusted numbers adjusted EPS for you back out debt.
<unk> inventory step up were.
Adjusted EPS for gross margin.
Yes.
We standard Lee adjust those out there onetime non recurring.
Items so.
Far and away the <unk> and.
Now that $3.5 million split 1 for $2.1 between the third and the fourth that's on.
Marker that we have and it's not finalized but I wanted to get it out there. So that people were aware of it and then yes, we will adjust that out we also have the <unk>.
Backlog right up if you will add new.
Not anywhere near the level of the inventory write up but I mentioned that is about 400000 again, that's our marker for currently and.
And that will be roughly <unk>, but both of those items will be called out and then excluded from our adjusted EPS in the quarter.
Okay, great, Okay, and just to clarify so.
So the 42% gross margin that's going to be the GAAP number.
On the non-GAAP or the adjusted number is going to be closer to <unk> 43.
Yes.
However, you are doing your model you now have a number to go from net 42, you can take the $1.4 million out of it to get to the kind of recurring.
Okay got it Okay and then your comments.
Thanks.
When you were talking about the fourth quarter.
I apologize you were clear I just didn't hear it.
I think you said that the on.
On a core basis.
Our revenue was going to be down.
Did I hear that correct I wonder if you can provide some more detail.
So just to clarify for you since you brought on fourth quarter for the fourth quarter, where we're guiding to revenue of $220 million to $225 million, but debt question, you're asking what you heard while it was for the third quarter, we're guiding to 195 to 200 million and net.
Includes the clues.
Our revenue now it wasn't a full quarter, but includes partial quarter for crude and if you back that off.
That would be down in comparison to the second quarter and then I noted really the reason for that is just the timing on capital shipment deliveries, which are heavy to the fourth quarter.
Okay got it alright, that's clear.
Thank you very much and then the last 1 for me is.
I'm just wondering about your 80.20 programs that you've talked about in the past.
Obviously, it's helping a lot as it seems like it's helping a lot in the.
The leverage in the profit.
Are you in now how many operations are working on 80.20.
Yes, so as you know I like to talk about and earnings I guess baseball is a game I played gone up sales.
And as it turns out it worked out well for us but.
I would say so we have kind of 6 companies that are in various stages of implementing some of them are I would say a 280.20 companies others are on their way there.
So and we have kind of for more teed up debt and we'll start some of those are on the back half of the year. So I would say right now that we're kind of in the third inning.
Yes.
Trying to rush hard to get to the fourth inning, but that's in the number of companies. If you look at it from revenue standpoint, it's a little further along because we are focusing on on.
Some of our bigger operations.
As it turns out.
You might think that 80.20, you would use on your companies that are underperforming or let's say on the bottom half of your performance, but in fact, you can get a better return out of going after your biggest and most profitable companies. So that's what we're doing.
So we are right now doing.
Some of our bigger companies and have plans for the next group to be some of our top performers so and Youre right. We are seeing some good results from that.
We expect to see.
Significantly more as we as we get the entire organization 80.20, new over the next couple of years.
Okay great.
And just to.
To get the number so when you look on your business you've got 6 that are are implementing 80.20, how whats your total number of companies.
We kind of talk about the business being somewhere in the neighborhood of 20%.
Depending on how you can it.
It could be 19 for 'twenty, 1 depending on how you look at it but approximately 20 companies I think.
Okay, Alright, great and then last 1 for me.
Congratulations on the crude deal.
Wondering if you could talk about the pipeline.
And your appetite for more deals do you have the capacity to.
To get more deals done and do the integration given <unk> already kind of in the bag.
Yes so.
Had mentioned most of the share the prior call that activity level is very robust.
And I would say our deal team.
As seen as many opportunities as we have in a very long time, we've continued to be very active we did slow down during the pandemic, although certainly that things slowed down because of the inability to travel. So we're continuing to full speed ahead.
And discussions on looking at opportunities thinking strategically about what makes sense for us.
And it's a good strong market out there from a capacity standpoint, we've got plenty of capacity.
With our existing line with our accordion with our other debt instruments that are out there. So I don't think debt financing is going to be an issue and from an integration standpoint, and a resource standpoint again, our decentralized structure really helps us and so that's not really a constraint either so if we find a good strategic opportunity.
We've got the financing and we have the.
On the organizational capability to bring that on and we will.
Okay, great. Okay. Thank you.
The next question is from Bill <unk> with W. T H capital.
And Neil Your line is open please make sure it's not muted.
Hello can you hear me okay.
Hi, Bill.
I appreciate the call on good morning.
A quick follow up on the Asia question.
Which sounds like ages on that is recovering I know between 2018, and 2020 year Asian revenues had been on a steady decline.
But when you look at Asia now are you starting to see revenues outside China, because I know there's been expansion pulp expansion.
In countries like Vietnam, Indonesia.
Maybe a little color on where the revenues in Asia could be coming from over the next year or 2.
Sure. So obviously you mentioned kind of what occurred from $18 million to $20 million. There were 2 events that occurred there 1 was the.
The China government decided to stop importing.
Waste paper and that really just create a complete chaos in the market for a while and then of course it was.
Compounded by.
By the Covid pandemic. So it has been a very chaotic time over there, but they are starting to come out of it obviously, they kind of open the although the last week or so obviously the COVID-19 cases now are really starting to increase their again, which is a little scary, but.
They were coming out of other countries recovering and they also we're kind of sorting out the fiber supply issues that was created by the by the ban the import ban, but we've always been active outside of China, China just of course kind of.
As the dominant player but over the last couple of years, we've secured several orders for system work in Southeast Asia, and then, particularly in India, which we report as part of our Asian business and we've been very strong in India, India is actually the fastest growing market for right now for pay for its actually growing faster than China, just a very small base that you are starting.
From that we have.
We are heavily invested in India had been for a long time, and we think it's going to continue to be 1 on the faster faster growing. So we are busy outside of China, but again China's share size mix.
It makes it even went there quite quite noticeable.
But as I mentioned.
A few minutes ago on on <unk>.
<unk> activity level, our discussions over there have been quite strong this year.
Oh, Great I guess on just 1 follow up question on maybe the Big picture out there that you guys are seeing in <unk>.
OCC containerboard.
It's.
<unk> been a big beneficiary of the expansion in these markets, particularly OCC I assume recycling.
On the past 5.6 years I mean any color on where are you.
I think we may be what inning, I mean, you still see a fairly.
Optimistic outlook for the next fleet for 5 years.
So.
There is a fair amount of new capacity coming on line.
But the demand is strong if you look at OCC prices are up close to $100 a ton.
We're back up the demand is strong for it and I think.
What's really going to drive this market over the longer run as this migration away from plastics and kind of high carbon footprint in materials and so thats just going to continue that.
It's just going to continue for for for a long time. So you've got this kind of I would say.
Tailwind.
Is going to continue to drive this market as people ban on plastics and other non renewable non biodegradable materials and you're just seeing it everywhere.
We have announced.
I mean every week do you see an announcement, where theyre trying a new cellulose based products to replace plastic being beverage containers and things like that so I think this is going to it's not going on it's not going to grow at 10% a year for the next 10 years, we're not saying that but I think that youre going to see.
A slow steady increase in the demand.
As more and more packaging and more and more materials migrate to to cellulose because its renewable biodegradable.
And so that's why we were in the business and that's why we're excited about the business because we think that is the perfect raw material of the future.
And so it goes of course, it becomes somewhat goes up and down.
As economic cycles, do but over the long run we think we have a tailwind there that's going to continue for the foreseeable future.
And you mentioned plastic recycling.
I mean, it's not your traditional pulp paper what area, but is there potential opportunities to use your.
Any of your businesses and getting a bigger foothold in plastic recycling and which seems to be also.
Growing dramatically in the next few years.
So we play in that business, a little bit in that our balers.
On the manufacturer they build up the plastic for recycling the.
The challenge for for plastic of course has always been what do you do with it.
I mean, you've got the PBT, which of course is for.
<unk> grade.
Strong and that gets there is a market for that is commodity market for that and it gets back on the fibers and things for carpets and things like that but there's always been a challenge on finding.
<unk>.
End market products for recycled plastic in China was taking a very large share of that and stopped of course over the last couple of years, which created some challenges for that.
We've not look too much at debt at that business I mean.
Net.
It's a market debt.
And we traditionally have not played in it isn't really a renewable biodegradable and.
So it's not 1 that is a big focus of ours, I think theres going to be.
Continual pressure on challenges in that market has as countries around the world continue to ban the use of it.
Products and so it is not 1 that we've that we're heavily on invested in.
Okay.
I'll tell you I am good I appreciate the insights great quarter. Thanks.
Thank you. Thank you okay.
Okay.
Again, if you would like to ask a question press star 1 on your telephone keypad at a star and the number 1.
There are no further questions I will turn the call back over to the speakers for closing remarks.
Thanks for Mystic.
Before wrapping up the call I just wanted to leave you with a few takeaways.
Our customer centric focus to deliver maximum value has always been and remains a key differentiator for us the cadence.
As we look ahead beyond the immediate health crisis, and the broader economic recovery, we will continue to focus on meeting our customers' needs as we seek to accelerate revenue growth in our core markets.
Our financial health is excellent and our ability to generate strong free cash flow remains a cornerstone of our business model.
We do expect continuing improvements in the economy around the world and we look forward to a strong half of 2021. Thank.
Thank you for joining the call today and please stay safe.
This concludes today's conference call you may now disconnect.
[music].
Yes.
Hum.
Yes.
Yes.
Yes.
Yes.
[music].
Moving on.
Yes.
Net.
Yes.
Yes.
[music].
Yes.
[music].
[music].
[music].
[music].