Michael McKenney - Executive Vice President and Chief Financial Officer Jon Painter - President and Chief Executive Officer

Walter Liptak - Seaport Global Chris Howe - Barrington Research Bill Hyler - WDH Capital Dan Jacome - Sidoti

Good day ladies and gentlemen and welcome to the Q3 2018 Kadant Inc. Earnings Conference Call. At this time all participants in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Mr. Michael McKenney, Executive Vice President and Chief Financial Officer. Sir you may begin.

Thank you Lisa. Good morning everyone and welcome to Kadant's third quarter 2018 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 cadence future expectations financial and operating results and plans and prospects are forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. 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 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 December 31st 2017 and subsequent filings with the Securities and Exchange Commission. In addition any forward-looking statements we make during this webcast represent our views and statement estimates only as 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 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 third quarter earnings press release and the slides presented on the webcast and discussed in the conference call which are available in the Investor section of our website at www.kadant.com under the heading Investor News. With that, I'll turn the call over to Jon Painter who 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. Thank you for joining us this morning to review our third quarter results and to discuss our outlook for the remainder of the year. Overall, we had another outstanding quarter with record performance and revenue, operating income, adjusted EBITDA and earnings per share. I'll start with the financial highlights of the quarter. Bookings were up 22% nearly all from internal growth. Revenue is a record and up 8%. Gross margin was a solid 44% despite a relatively high level of capital projects. Adjusted operating income was also a record up 13%. Adjusted EBITDA was a record at $34 million or 20% of revenue which was also a record and a milestone we're very proud to achieve. GAAP diluted earnings per share of $1.64 was a record and our adjusted earnings per share was also a record at $1.53. A lot of records. Finally, cash flow from operations was $17 million bringing our net debt at the end of the third quarter to $136 million and our leverage ratio to 1.37. If you take a look at slide six you can see the stronger dollar had a modest negative impact on our foreign currency translation while acquisitions played a really minor role as this quarter represents the one-year anniversary of the two major acquisitions we completed in 2017. Our internal revenue growth which excludes FX and acquisitions was 10% and internal growth and bookings was 24%. Similarly our internal revenue growth for parts and consumables was 12% while bookings were up 13%. Needless to say our internal bookings growth rates of 13% in 2017 and 16% the first nine months of this year are well above our long-term projections for internal growth. Well, I don't expect to sustain this level of internal growth over the long term, I do think the current level is a reflection not only the strength of our markets but also the strength of Kadant's market position. On slide 7, you can see the strong performance in Q3 bookings and revenue compared to the third quarter of last year both of which were records at the time. Revenue and our Stock-Prep and Fluid-Handling product line was up double digits compared to Q3 of last year. A particular note was our revenue performance in Asia which was up 29% sequentially and 30% compared to the third quarter of last year. Although, bookings in the third quarter were lower than the first two quarters of the year that's more a reflection of the unusual strength of the first two quarters than any weakness in Q3. Our third quarter bookings level represents a 660 million annualized run rate which would have been – which would be outstanding. Leading the bookings performance was our stocked product line particularly in Asia and North America up 37% compared to Q3 of last year. The ongoing build-out of pulping and course screening capacity in Southeast Asia in response to China's waste paper import restrictions has been a big driver behind this growth and I'll talk more about this later in my remarks. Parts and consumables revenue in the third quarter benefited from strong demand in all our major geographic regions with revenue up 11% and bookings up 12%. Capital shipments were relatively high in the third quarter and this reduced the portions of parts and consumables revenue to 56%, as was the case with total bookings the modest decline in Q3 parts revenue and bookings compared to the first two quarters of the year is more a reflection of the unusual strength in the first half than any weakness in Q3. Overall, I would say our parts and consumable business remains very healthy. Next I'd like to review our performance in the major geographic regions where we operate and I'll start with North America. Q3 revenues increased 8% to $74 million. This growth was led by our fluid handling of stock product lines up 43% and 32% respectively. Bookings in North America were 78 million up 30% compared to Q3 of last year; all of our product lines were up with strong demand for our wood processing, stock-prep and fluid handling products. The momentum during the first half of 2018 in the pulp and paper market in North America continued into the third quarter. Prices are being sustained or increased across many grades and operating rates for U.S. container board machines are remain in the upper 90s. A lot of container board capacity is expected to come online next year which would ordinarily lead to a slowdown in capital investment as the new capacity is absorbed. The situation may be different this time if China goes through with its plans to ban all imported waste paper which could result in a surge of exports of liner boards of China. The other major sector we serve in North America is housing which remains healthy, although concerns about a potential softening have begun to surface. Industry analysts have noted that constraints in housing are largely related to affordability as house prices have increased due to increased costs for land, material and labor as well as rising interest rates. The good news is there's still plenty of pent-up demand for housing since household formation still lags historic averages. Some analysts project somewhat lower housing prices as supply and demand find equilibrium which should allow for a reasonably healthy housing starts for the next few years of being at lower price points. Some observers believe the strength of the overall economy particularly employment and wage gains will boost the housing markets while others believe the weakness in the housing market will drag down the overall economy. Well, I can't predict the state of the housing market over the next few years I can say with some confidence there will be a time in the future when the housing market goes through a downturn. Some investors have asked what a slowdown in housing starts means for our wood processing group. At the time we expanded into this market segment we did so with the expectation that the housing market was fundamentally more volatile than our other end markets such as packaging and tissue. The turmoil of 2007 through 2009 was still certainly in the forefront of our minds. Consequently we looked hard at the impact of a housing downturn on the wood processing businesses we acquired in 2013 and 2017. What we found are there are several aspects of these businesses that we believe would buffer them from a potential decline in housing starts. The first is that these businesses have very large installed basis which is the basis for stable parts and consumables business. Even in a strong capital year like 2018 the aftermarket is expected to represent around 60% of your wood processing segment revenue. Typically in a slowdown bookings for capital projects are significantly reduced but mills keep producing product albeit at lower levels and generating demand for our replacement parts. In addition, in a slower market mills tend to undertake projects to lower their operating costs. In talking to our North American customers we've been told that there are plans for these type of projects which they believe are necessary to adapt to a lower price environment. A second buffer in our wood processing business is our geographic diversity. It's unusual for all geographic regions to cycle at the same time. Today there is more talk in Europe about capital projects and the end markets for wood products in Europe are more focused on industrial applications versus housing. More recently another buffer has developed which is the new growth markets we're just getting into such as the OSB market in China. Since we entered this market we've sold four strands in China and we have additional projects in the pipeline. Producers in China are using OSB to replace particle board medium density fiberboard and plywood and applications from crates to sub floors to furniture. Building an installed base in China will also add to our aftermarket business, although I should point out that due to the lower labor costs in China Chinese mills typically regrind their own knives rather than use our disposable knives which means the annual aftermarket return for a Chinese mill can be around half of what a North American or European mill might be. Another new market that is emerging is using engineered wood products like cross laminated timber or CLT as a replacement for steel or concrete. This opportunity is further off but it shows promise as CLT can have significant costs and speed advantages over concrete and steel plus it's a greener product with a smaller carbon footprint. We've had exceptionally strong bookings for our wood processing equipment and systems so far this year. So we're feeling pretty good about the rest of ‘18 as well as 2019. However, when a housing slowdown does occur I believe we're well positioned to weather the downturn due to the geographic and market diversity I discussed. Slide 10 shows our revenue and bookings performance in Europe. Although, Europe is not performing at the rate it did in the first half of the year it's still operating at a healthy level. As is the case in North America container board producers in Europe are enjoying low OCC costs due in parts to the China waste paper restrictions and strong liner board prices. In addition, recent e-legislation passed banning certain single-use plastic objects such as straws, [indiscernible] and styrofoam packaging by 2021 should provide opportunities to replace these plastic items with biodegradable cellulose or paper based alternatives. Third quarter revenue was down 3% from the record $46 million in Q3 of 2017. Excluding the negative impact of FX revenue was down 1%. Strong performance in our wood processing product line in Europe was a major contributor to our Q3 results. Bookings in Europe were down 4% compared to the third quarter of last year and down 1% excluding FX. Despite the lower bookings level we had a large number of smaller capital projects including three orders for stock prep systems from customers in Russia for combined value of more than $3 million and we saw a good order activity for our debarking equipment from customers in Sweden, France and Italy. Turning now to Asia. The market in Asia which is of course dominated by China continues to be strong for both capital and parts and consumables. Our revenue in Asia was up 30% from last year to a record $33 million. This performance was driven by our stock prep doctrine cleaning and filtration product lines which were up 42% and 46% respectively. That said the paper industry in China is slowing a bit as mills continue to take downtime due to lack of fiber as well as weaker demand and a lot of new capacity coming online. The high level of capital bookings that we have – that we had in the second quarter continued into the third quarter with our stock prep product line leading this growth as Chinese paper producers continue to execute projects outside of China in response to Chinese restriction on imported waste paper. In the third quarter, we booked orders for 4 OCC recycling systems destined for Southeast Asia with combined value of approximately $3 million. To-date Chinese liner board producers have ordered 11 OCC systems representing four million tons of annual pulping capacity in Southeast Asia and there are additional product projects in the pipeline. This compares to approximately 25 tonnes to 30 million tonnes of waste paper that China imports each year. How long this trend continues will depend on whether China follows through with this plan to ban all waste paper imports by 2020. As our installed base expands in Southeast Asia we're also working to set up infrastructure to be sure to capture the aftermarket business that this new installed base will generate. We believe this will offset the expected reduction in our aftermarket business in China as a more pulping capacity moves from China to Southeast Asia. In addition, several producers including Nine Dragons and Lee & Man have purchased mills in North America which they will convert to packaging grades. Nine Dragons alone has purchased two U.S. mills and recently announced plans to acquire a third mill this year. And finally our wood processing group has several active OSB projects which we hope to secure in Q4 or early 2019. Turning now to the rest of the world. Our revenues and bookings for the rest of the world saw a nice jump in Q3 setting new records. Bookings increased 59% to a record $20 million thanks in large part to an order for a stock preps system for recycled tissue mill in South America. This project along with solid bookings from our doctoring, cleaning and filtration and fluid handling product lines contributed to this record performance. Revenue is 9% compared to the third quarter of last year which was the previous record. This uptick in revenue is the result of shipments of the relatively large bookings in the second half of 2017 and the first quarter of 2018; excluding the negative impact of FX which is in the case of Brazil was considerable revenue was up 17%. While these results are encouraging this region continues to be our most challenging due to political and economic headwinds that lead to uncertainty particularly with regard to investments in capital projects. Hopefully the result of this past weekend's presidential election in Brazil will lead a stronger business and consumer confidence. I'd like to conclude my remarks with a few comments on our guidance for Q4 and the full year of 2018. Our strong booking and revenue performance in the first three quarters has positioned us for a record year. That said the timing of capital bookings and shipments as well as some modest currency headwinds have led us to revise our guidance. I will say that some of the delays we're seeing are not from concerns about the economy but rather strains in the supply chain due to tight labor and capacity conditions. This is impacting the timing of some of the projects who are involved with and thus delaying some of our shipments. For 2018 we expect to achieve GAAP diluted earnings per share of 493 to 498 on revenues of $628 million to $632 million. We expect adjusted diluted earnings per share to be $5 to $5.05. For the fourth quarter of 2018 we expect to achieve GAAP diluted earnings per share of a $1.24 to $1.29 on revenues of $158 million to $162 million. On an adjusted basis we expect diluted earnings per share of $1.33 to $1.38. I will now pass the call over to Mike for additional details on our financial performance in Q3. Mike?

Thank you Jon. I'll start with our gross margin performance. Consolidated gross margins were 44.1% in the third quarter of 2018, up 180 basis points compared to 42.3% in the third quarter of 2017. The consolidated gross margins in the third quarter of 2017 were negatively affected by the amortization of acquired profit and inventory which lower consolidated gross margins by 220 basis points. Excluding the impact of the amortization of acquired profit in inventory consolidated gross margins were 44.5% in the third quarter of 2017. Our consolidated gross margins in both periods were negatively affected by a lower percentage of parts and consumables products. Our parts and consumables revenue represented 56% of total revenue in the third quarter of 2018 down from 64% and 61% in the first and second quarters of 2018 respectively. Our parts and consumables revenue as a percentage of total revenue was also lower in the third quarter of 2017 at 55% of total revenue compared to 61% of total revenue for the full year of 2017. Now let's turn to slide 16, on our quarterly SG&A expenses. SG&A expenses were $42.9 million in the third quarter of 2018, up $0.5 million from the third quarter of 2017. This included a decrease of $0.7 million from a favorable foreign currency translation effect. SG&A expenses as a percentage of revenue decreased to $25.9 million in the third quarter of 2018 compared to 27.7% in the third quarter of 2017. Let me backtrack on that and I think I said million there. The SG&A expenses as percentage of revenue decreased to 25.9% in the third quarter of 2018 compared to 27.7% in the third quarter of 2017. Let me turn to our EPS results for the quarter. In the third quarter of 2018 GAAP diluted EPS was a record $1.64 and our adjusted diluted EPS was a record $1.53. The $0.11 difference relates to $0.03 of restructuring costs and a $0.14 discrete tax benefit that relates to the reversal of tax reserves associated with uncertain tax positions. In the third quarter of 2017 GAAP diluted EPS was $1.17 and our adjusted diluted EPS was a $1.49. The $0.32 difference relates to acquisition related costs. The increase of $0.04 in adjusted diluted EPS in the third quarter of 2018 compared to the third quarter of 2017 consists of the following; $0.35 due to higher revenue and $0.01 from the operating results of an acquisition. These increases were partially offset by $0.11 due to a higher recurring tax rate. $0.11 due to higher operating costs. $0.05 due to lower gross margin percentages. $0.04 due to higher net interest expense and $0.01 due to higher weighted average shares outstanding. As I had mentioned on our last call the increase in our recurring tax rate can principally be attributed to few items. The primary cause of the increase in our tax rate is due to how the new U.S. law taxes foreign earnings. In addition to this we are now providing for repatriating in earnings from certain of our foreign locations as we move cash to pay down debt. Collectively included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.06 in the third quarter of 2018 compared to the third quarter of last year due to a stronger U.S. dollar. Let me also take a moment to compare our adjusted diluted EPS results in the third quarter to the guidance we issued during our July 2018 earnings call. Our adjusted diluted EPS guidance for the third quarter of 2018 was $1.36 to a $1.41 and includes $0.01 of restructuring costs. We reported adjusted diluted earnings per share of $1.53 which excludes $0.14 discrete tax benefit and $0.03 of restructuring costs. This $0.12 increase over the high end of our guidance range was principally the result of better than expected results in our wood processing system segments. Our adjusted EBITDA was a record $33.5 million or 20.2% of revenue in the third quarter of 2018. Compared to the third quarter of 2017 adjusted EBITDA increased $3.4 million or 11%. Excluding the impact of FX adjusted EBITDA increased 15% from last year's quarter. Now let's turn to our cash flows and working capital metrics starting on slide 19. Cash flow from operations was $17 million in the third quarter of 2018 compared to $7 million in the third quarter of 2017. On a year-to-date basis cash flow from operations is $52.6 million in 2018 compared to $32.3 million in 2017; an increase of $20.3 million or 63%. We had several notable non-operating uses of cash in the third quarter of ‘18. We paid down debt by $13.7 million. Paid $2.6 million for capital expenditures and paid $2.4 million for dividend. Let's now look at our key working capital metrics on slide 20. Our days and receivables was 57 days. Days and payables was 34 days and days in inventory decreased to 91 days from a 100 in the second quarter of 2018. Looking at our overall working capital position our cash conversion days measure calculated by taking days and receivables plus days and inventory and subtracting days and accounts payable was 114 days at the end of the third quarter of 2018. Working capital as a percentage of revenue remained excellent at 11.1% in the third quarter of 2018. Net debt that is debt less cash at the end of the third quarter of 2018 was $135.6 million down $51.8 million from the third quarter of 2017 as a result of the strong cash flows over the last 12 months. As you can see on slide 23, our leverage ratio calculating accordance with our credit facility was 1.37 at the end of the third quarter of 2018 down from 1.56 at the end of the second quarter of 2018. Under the credit facility this ratio must be less than 3.5. Before concluding my remarks, I like to discuss some of the guidance numbers we gave on the call today. As Jon mentioned we experienced some timing delays on bookings and shipments. We had approximately $ 10 million of bookings and shipment delays that impacted our fourth quarter guidance. As a result we have narrowed our 2018 guidance range to the low end for the range we gave in our July earnings call. As Jon noted our GAAP diluted EPS guidance for the fourth quarter of 2018 is $1.24 to $1.29. This includes an estimated $0.09 charge that will be reflected in our fourth quarter results related to freezing and terminating a defined benefit pension plan and a supplemental benefit plan at one of our U.S. operations. These plans have cost on average approximately $1.6 million or $0.10 per diluted share annually over the last several years. We anticipate that the final settlement related to terminating these plans will occur during 2019. Our adjusted diluted EPS guidance for the fourth quarter of $1.33 to $1.38 excludes this $0.09 charge. 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?

Thank you sir. [Operator Instructions] First question is coming from Chris Howe with Barrington Research. Your line is open.

Jon and Mike.

Hey Chris.

Hi Chris.

I have a few questions here. The first one is in regard to margin expectations and kind of what your expectations for margin, for the mix for 2018 and heading into 2019 and if you could add some additional color on how the 80/20 initiatives are progressing currently?

Okay Chris I'll tackle that one. For the fourth quarter again we're going to have a fairly significant capital shipments. So I think we'll see some pressure on margins in the fourth quarter. We are a little over 44% in the third. We might come in a little under that in the fourth quarter. We guided two for the year 43.5% -- 44.5% and I think we'll probably end up right in the middle of that for the year when we're all set and done.

Okay.

I guess I just give a couple comments on 80/20. We have a couple of units who are doing that they are more or less started at the end of last year, the beginning of this I would say we're at the point we've kind of yielded what I would call the low-hanging fruit which is right raising prices and on your smaller customers and your smaller products the real benefit of 80/20 actually is getting additional revenue as you transfer resources towards your best customers and your best products and that takes a little longer. I wouldn't say we're seeing that roll in yet but every indication are that it we expect it to.

Okay, and then one other question – a couple other questions before I jump back in the queue. The M&A environment. How would you characterize where it is now versus maybe what you were seeing at the beginning of this year? Has there been any change or shift in pricing with some of the candidates that you are looking at?

So I would actually say it's a little more active as the years gone on. There we see more deal flow as they say. A lot of companies that look pretty interesting. The pricing is still I would say too high and often the bigger the company the higher the price but the tax rules help in effect that you're going to get a higher after-tax return with with U.S. companies anyways because the lower rates but it's, I would say healthy but whether we find something at a price that we can live with I can't be sure but I would say the overall environment is pretty healthy.

Okay and then if I may sneak one more in. Just based on what you're seeing with the bookings growth reaching the near record backlog, I assume that orders booked after the tariff announcement have been pretty receptive to price increases and those have more or less pass through.

Yes. We have – so I would say different product lines are in different positions but in general we are certainly seeking to raise prices. I would say for a lot of our product lines it's an excellent price environment. Customers are expecting this and they understand that. Other product lines where we compete particularly for spare parts with local people it's a little longer slog and it'll probably be a take a little longer to fully pass those prices on.

Okay, thank you for taking my questions. I'll hop back in queue.

Our pleasure.

Next question is from Walter Liptak with Seaport Global.

Hi, good morning guys.

Hey Walt.

Good morning Walt.

Good morning. So my first question I want to talk about the guidance. We went back and looked at the last three quarters and you guys always guide lower than where we are for the quarter out and then you end up beating our number like you did this quarter and I wonder how much is the fourth quarter guide is these shipment delays that are firm versus just you guys being conservative on what you might be able to get out the door in the quarter.

I mean it's always, I tell you it's I will comment and Michael will have some comments but it's always a challenge when you have big systems that are not on percent complete and they're shipping in December. So a lot of times we'll say okay we've got five that are going to ship it's possible three will be delayed and we don't assume all five are going to ship sometimes all five end up shipping and we beat the number. So there is I'm not going to lie that there's a little bit of conservativism in our methodology but that's pretty much the extent of it to a lot of time I would largely.

I think Jon's characterized it correctly. We do have a lot of capital shipping in the fourth quarter and there's a good chunk that is going in December. So we're cautious in that regard but as a backdrop for that Walt you heard me mention in my closing comments we did have about $10 million in orders/shipment delays that stuff that was pushed in to 2019. So that, at the end of the day that really did impact where we decided to guide for the quarter.

I will also add – I will kind of add another little color Walt. I would say if these kind of robust times we're often a little bit surprised that how well our divisions are executing and what their margins are. So we have a little bit of catching up to do to fully appreciate the level they are performing at.

Okay. All right. I will move on from there. Just want to ask about the OSB markets in China and are you currently seeing the kind of growth rates that you're seeing in rest of the world's especially in North America?

No. No. China is much, in terms of capital in China I would say much stronger than the current growth rates of OSB in North America or Europe. So obviously North America is a much more mature market. There's many more standards but and China is just essentially getting started but no it's a multiple of what we have for strand orders in North America.

Okay got it. And then thinking about the comments that you made about China offering putting restrictions on waste paper by 2020. Are your customers thinking that regulations going to come to fruition? Are they planning to add more capacity outside of China?

I would I would say they are acting and talking like they expect this will happen. They of course don't have a crystal ball either but they are sounding like that they expect it to happen whether it's January 1, 2020 or phased in but I think they think that this is definitely the direction that the China is going.

Okay and I think you mentioned that there were 25 to 30 tons that was taken out that was inundated 11 new OCC systems. What's the capacity I mean to meet the 2020 regulation how many OCC systems need to go in?

Well, I mean I think I said we have 11 and that was 4 million tons so they are not always all the same size. So it's a little but you can use that as a rough measure. Not all of the 25 million tons is OCC. There's newsprint. There's printing and writing in there and it ends of course mixed waste. So I wouldn't – we are capturing I would say a substantial and that's an understatement portion of the orders for this expansion on OCC. I wouldn't necessary expect that would be the same for some of the other grades.

Okay. All right and then just switching over to the other regulation that you mentioned in Europe the removals and single-use plastics. Have you heard anything from customers yet what the market could look like as cellulose single-use products start going into the market? Is there any enforcement that's going on here is this a law or is this something that's 2019 at the end?

So how the EU is the Brussels adopt something and in Venice up to the states to adopt. France has already adopted something. The EU law is rather vague but that is definitely a trend I would say not only in Europe but even I think The Wall Street Journal today talked about that plastic cups and styrofoam cups of Dunkin Donuts and stuff are coming out of favor and got to be replaced with paper. So I couldn't tell you how big it is. I think it's actually pretty big particularly cups. So we'll see. I would say we are – we have actually done a lot of work on the recycling side to process kind of plastic a lot of these cups have kind of a coding on them and they can be recycled so long as you do it properly and we're one of the companies that have that kind of technology to be able to recycle some of these paper products that have a coating of some type.

Okay. All right. Got it. Okay. Thanks guys.

Thank you.

Next question is coming from Dan Jacome from Sidoti.

Good morning.

Hey Dan.

Good morning Dan.

How's it going? A couple questions just two. First on Nine dragons can you give us some more color on their plans specifically here in North America? I'm assuming it's mostly going to be recycled liner board but can you confirm that and then if it's not going to be just a liner board are you agnostic as to what type of packaging they may pursue here in North American and how might it impact your business?

Okay, so it's not all recycled. They've actually bought some integrated, an integrated mill. They've said they're going to convert this, a lot of these are in the white grades and they're going to convert these to the browns grades. I think the $64 million question is are they going to ship pulp back to China which they have to fully; dry are they going to ship liner board back to China and are they actually going to sell liner board in the U.S. So I don't know what the – they haven't really talked about what the answer there is. The only thing that really said is that they do intend to convert these mills to brown grade packaging mills. A - Michael McKenney: We have a great relationship with Brown Nine Dragons of course in China. I would, we will certainly if they have a project in the U.S. we will hope to participate in it.

Right. So the incremental gain longer-term could be on the stock per upside I imagine or?

Yes. As the machine converts it's kind of good for all of our product lines but stock prep is definitely the biggest to benefit from that.

Okay and then one last one I think when you did the acquisition of FPG last summer part of the business was a timber extracting product line? Can you talk a little bit about that if it's material at all and you I'm just curious what trends you're seeing on that end?

It's also got demand. So they're booking well, well towards the end of next year if you want to order, anyone want to order some timber harvesting equipment. So it's still relatively small but we are seeing very, very strong demand.

Okay. Where's that like in the southeast of North America I imagine or –?

They're more actually – I would say they're more specialized in stuff on steep slopes so not as much the Southeast as the Northwest.

Got it. Okay. Thank you.

Okay thank you.

[Operator Instructions] Next question is coming from Bill Hyler from WDH Capital. Your line is open.

Thank you guys.

Hey Bill.

Hey. I guess I think you answered most of my questions but maybe just a follow-up on the North American capacity growth, which another talking about 3 million to 3.5 million ton through 2021. How does the timing work on that and when it begins to hit your bookings backlog. And then you could talk over about that it's pretty fairly spread out another 2018 is probably already reflected but when do you get a better feel on how the 2019 impact and then the 2020, 21 is it 12 months of advance or –?

As a general rule and this is we're going to have some exceptions but typically when you talk -- when you hear about capacity announcements for next year we've of course had the booking and often made a lot of progress in terms of manufacturing it this year. So our bookings are well ahead of that obviously that capacity coming online. I would say – personally I'm talking about our stock prep businesses which I think you're asking about. Typically with this much capacity online I don't know that we're expecting a huge capital business next year. The wild card of course is what happens with China does this if China actually goes through with those wastepaper restrictions in 2020 there's going to be a lot of – the only way they can have their economy keep running is import a lot of liner board and probably North America would be right up there in terms of the people taking advantage. So if that happens that would have suck up a lot of this capacity going online and they may keep pushing forward with more.

Okay, I got you and then I guess a lag effect with the parts and consumables as the installed base growth rose that tends to come when you start to see that I would assume on the new capacity a year later or?

Yes. Nine months to a year later. It depends a little bit depends on the product line but yes something like that.

Got you. All right. Thanks.

Okay.

[Operator Instructions] At this time I would like to turn the call back to Mr. Jon Painter for further remarks. Sir go ahead.

Thanks Lisa. Before I let everyone go this morning I want to just summarize what I think of the key takeaways from the quarter. Number one of course we had a great quarter with record revenue, record adjusted EBITDA, record earnings per share, etc. Two, we had strong internal revenue bookings growth of 10% and 24%. Three the build-out on the public capacity in Southeast Asia and the OSB capacity in China which we talked about is providing a good growth opportunity for us and finally we're expecting to have a record 2018 for revenues bookings and earnings per share and of course [indiscernible] that's the other notable things of the quarter. Anyway, I look forward to updating you next quarter. Thanks very much.

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.