Good day, ladies and gentlemen, and thank you for standing by and welcome to the Kadant second quarter 2019 earnings conference call. [Operator Instructions.] And now it is now my pleasure to turn the call to Michael McKenney, Executive Vice President and Chief Financial Officer..

Thank you, Carmen. Good morning, everyone, and welcome to Kadant’s second quarter 2019 earnings call. With me on the call today is Jeff Powell, 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 plans and expectations, financial and operating results 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 29, 2018, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and 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 the 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.kadant.com under the heading Investor News.

With that, I’ll turn the call over to Jeff Powell, who will give you an update on Kadant’s 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. Thank you for joining us this morning to review our second quarter results and to discuss our outlook for the second half of the year. Overall, we had a good quarter with record revenue performance and a solid EPS beat. I’ll begin with our financial highlights for the quarter.

Our Q2 revenue was up 14% to a record $177 million. The contribution from our recent acquisition and stone shipments for both capital and parts and our wood processing product line led to this growth. Bookings were down slightly to $174 million but increased 2% when excluding the negative impact of FX.

Our gross margin was 42%, and adjusted EBITDA was up 25% to $33 million or 18.5% of revenue. GAAP diluted EPS was up 31% to $1.42, while our adjusted EPS was up 33% and also $1.42. And finally, we finished the quarter with net debt of $289 million and a leverage ratio of 2.19.

As you can see on Slide 6, foreign currency translation had an unfavorable effect in the second quarter, while our newly acquired material handling business made a significant contribution to our financial results. Our internal revenue growth, which excludes FX and acquisitions, was 5%, continuing the strength we have seen in the last few quarters.

Internal growth in bookings, however, was down 10% due to weak demand in China. As you may recall, the second quarter of last year was at the time our second-best bookings quarter ever. Our internal revenue growth for parts and consumables was up 4% and bookings were up 1%.

Following our record bookings in Q1 of this year, our bookings performance in Q2 was solid at $174 million. We benefited from strong capital bookings and a stock prep product line in Europe and our wood processing product line in North America. I’ll provide more details on this when I discuss our regional performance.

Q2 revenue set a new record at $177 million, primarily due to our material handling acquisition, which contributed 13% of our revenue growth. Our internal growth, which excludes FX and acquisitions, was very strong in our fluid handling and doctor, cleaning and filtration product lines, up 10% and 7%, respectively.

Revenue from parts and consumables in the second quarter increased 18% to a near-record $112 million and represented 63% of our total Q2 revenue. Parts and consumable bookings were up 14% to $109 million. The largest contributor to this growth was our material handling acquisition. Excluding the acquisition and impact from FX, bookings were up 1%.

Our parts and consumable business for the first half of this year has been excellent, with both metrics being at all-time highs. As you may know, Q1 is historically a stronger quarter for parts as customers prepare for maintenance outages, and this year was no exception to that.

Next, I would like to review our performance in the major geographic regions where we operate, and I’ll begin with North America. The packaging market in North America is working through issues of oversupply and weaker demand.

While demand has slowed, significant new capacity is being added and more is scheduled to be added over the next several years. Even with an expected seasonal second half pickup in demand, RISI economist forecasts growth in U.S. box shipments to be less than 1% in 2019 compared to last year.

On the housing front, June results came in somewhat mixed, as housing starts were up 6% compared to June of 2018, while residential building permits were down the same amount.

The overall housing sector continues to grapple with high prices and low inventory, with seasonally adjusted annual housing starts averaging around 1.2 million over the past 12 months compared to the longer-term average of 1.4 million.

On a related note, we are seeing a growing number of sawmill closures in western Canada, primarily due to the timber shortage that’s associated with a widespread pine beetle infestation.

As we discussed last quarter, capital project activity in the wood processing sector has softened, and we expect weaker demand for our products in 2019 compared to the historic demand of last year, but still at a reasonable level.

In the mining and aggregates market, which are primarily served by our new material handling group, project activity in the first half of 2019 was good, and we expect that to continue in the second half of the year.

While some markets are experiencing a slowdown, others such as construction and food are showing signs of increased demand, and we believe we’re well positioned in these markets. As you can see on Slide 9, revenue was up 31% in the second quarter to $99 million, second only to our record-setting performance for North America last quarter.

Contributions from our material handling acquisition and strong performance by our DCF and fluid handling product lines led to this growth. Excluding the negative impact of currency translation in our acquisition, our North American revenue increased 8%.

Bookings in North America were up 17% to $94 million, due entirely to our material handling acquisition. Excluding the FX impact and the contribution of our acquisition, bookings declined 6% in Q2. That said, we do have a number of active projects in the pipeline, and we expect decent project activity in the second half of 2019.

Before leaving North America, I just wanted to give a brief update on our recent acquisition. The integration of Syntron is going smoothly and the company is performing well. We continue to believe it is a great addition to the Kadant family.

Turning now to Europe, packaging producers have had some challenges with downward price pressure, though demand still remains solid. Industrial production in the Euro Zone, however, is still sluggish, and major manufacturing countries like Germany and Italy are suffering, due in part to their large exposure to exports.

That being said, our Q2 bookings in Europe were a record at $51 million. I’m particularly pleased with these results given the relatively weaker market conditions in Europe.

While capital project activity consisted of many smaller orders for our balers, fluid handling equipment and debarking equipment, we did book two large stock prep systems in the second quarter, one for tissue production and another for packaging, with a combined value of approximately $8 million.

Second quarter revenue was down 3% to $44 million compared to a strong Q2 of last year. The impact of FX on our revenue was notable. Excluding the FX, Q2 revenue was actually increased by 3%. Moving to Asia, as you can see on Slide 11, our second quarter bookings were down significantly compared to our record-setting performance in Q2 of last year.

Project activity in China has slowed, and our bookings reflect this slowdown. Market demand is weak and the continued deceleration of growth in China is further fueled by uncertainties in trade relations with the U.S. Outside of the tissue sector, we have seen this impact across most of our major sectors we serve, including packaging and OSB.

Revenue was down 7% to $24 million. We had good performance from our DCF product line, up more than 20%, while performance from our other major product lines was down compared to the same period last year.

As we have discussed on prior calls, our Chinese customers are building wastepaper recycling plants in Southeast Asia to offset the fiber shortage resulting from the government-imposed wastepaper import restrictions in China.

While we have received orders for 16 of these new installations, most of them are not operational yet and therefore not generating any parts business. We would expect to see the parts and consumables revenue from these installations after they begin to start up later this fall and through 2020.

And finally, I wanted to make a comment on our business activity in India. We reported during our Investor Day event earlier this year that India was a strategic focus for us. We continue to build our capabilities there and believe we are well positioned to capture business in this fast-growing market.

We’ve actually been in India for a long time and enjoy strong market share in our target markets. Our business is growing nicely there, and we recently received orders for several large stock prep systems and dryer drainage systems from some of the country’s largest packaging and paper producers. And finally a few comments on the rest of the world.

Our rest-of-the-world revenue, which is largely South America, was $11 million in Q2, up 22% compared to the same period last year. Bookings in Q2 were $10 million, down 7% from the same period last year but up sequentially after relatively weak results in the preceding two quarters.

Despite this decline, we had several notable capital bookings during the quarter, including an order for our fluid handling equipment for a dissolving wood pulp application and another for a stock prep system for a tissue producer. I’d like to conclude my remarks with a few comments on our guidance for Q3 and for the full year 2019.

The solid start to the first half of 2019 has positioned us well for another record year of financial results. Our material handling acquisition provided a nice boost to our financial performance in the first half of 2019, and all of our businesses had solid operating metrics. While we are performing well, two factors impact our guidance.

The first is the impact of the stronger U.S. dollar, which negatively affects our foreign earnings when translated into U.S. dollars. The second is the impact of the global trade slowdown, which we believe is tempering investment in capital projects.

That said, for the full year 2019, we are maintaining our revenue guidance of $700 million to $710 million and are raising our GAAP diluted EPS guidance to $4.97 to $5.09 from our previous guidance of $4.84 to $4.99.

We’re also raising our adjusted diluted EPS guidance, which excludes acquisition-related costs and other items, to $5.26 to $5.38 from our previous guidance of $5.20 to $5.35. For the third quarter of 2019, we expect to achieve GAAP diluted EPS of $1.19 to $1.25 on revenues of $170 million to $174 million.

With that, I will now pass the call over to Mike for additional details on our financial performance in Q2.

Mike?.

$0.19 due to a lower effective tax rate, $0.11 due to lower operating costs, $0.05 due to higher revenue and $0.02 from the operating results of our acquisition net of interest expense related to borrowings to fund the acquisition. These increases were partially offset by $0.02 due to lower gross margin percentages.

Collectively, included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.06 in the second quarter of 2019 compared to the second quarter of last year due to the strengthening of the U.S. dollar.

Let me also take a moment to compare our adjusted diluted EPS results in the second quarter to the guidance we issued during our April 2019 earnings call. Our adjusted diluted EPS guidance for the second quarter of 2019 was $1.07 to $1.13. We reported adjusted diluted EPS of $1.42.

The $0.29 increase over the high end of our guidance range was principally the result of better-than-expected revenue, primarily from our stock preparation product line and to a lesser extent, our wood processing product line.

The adjusted diluted EPS results in the second quarter of 2019 also included an $0.11 tax benefit related to the exercise of stock options. There could be additional tax benefits over the next three to four years associated with the exercise of previously awarded employee stock options as unexercised options reach their 10 year expiration dates.

In addition, our adjusted diluted EPS for the second quarter of 2019 included a $0.05 increase in intangible amortization expense compared to our guidance as a result of updated purchase accounting estimates. As I indicated on our last call, the evaluation associated with the material handling acquisition had not been finalized.

Based on current estimates, our intangible amortization expense will be $0.10 higher for the year. This amount has been reflected in our updated EPS guidance. I should note that our estimates are still subject to change as we review and finalize the valuation of our acquisition. Slide 18 presents our quarterly adjusted EBITDA performance.

Adjusted EBITDA is an important metric for us since we have a significant amount of noncash depreciation and amortization in our operating expenses related to acquisitions.

Quarterly adjusted EBITDA was our second highest ever at $32.7 million or 18.5% of revenue compared to $26.1 million or 16.9% of revenue in the second quarter of 2018 and up $6.6 million or 25%.

The improvement in our adjusted EBITDA as a percentage of revenue was driven by strong contributions from our wood processing and material handling segments, which had adjusted EBITDA margins of 29.5% and 21.1%, respectively, in the second quarter of 2019.

Adjusted EBITDA for the first six months of 2019 was $62.7 million, up $13 million or 26% compared to the first six months of 2018. Now let’s turn to our cash flows and working capital metrics, starting on Slide 19. Cash flow from operations was $22.6 million in the second quarter of 2019 compared to $28.4 million in the second quarter of 2018.

As you can see on the chart, we had a $4.3 million use of cash related to working capital, primarily due to cash outflows related to inventory, which was offset in part by cash received from customer deposits.

Free cash flow decreased $2.7 million compared to the second quarter of 2018 but increased sequentially to $20.6 million in the second quarter of 2019 compared to $7.7 million in the first quarter of 2019. Free cash flow increased 12% to $28.3 million in the first six months of 2019 compared to $25.4 million in the first six months of 2018.

We had several notable non-operating uses of cash in the second quarter of 2019. We paid down bank debt by $15.7 million, paid a $2.6 million dividend on our common stock, paid $2 million for capital expenditures and made a final payment of $1.6 million for our material handling acquisition related to working capital acquired.

Looking at our overall working capital position, our cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was $117 million at the end of the second quarter of 2019.

Working capital as a percentage of revenue was 15.4% in the second quarter of 2019 compared to 14.9% in the first quarter of 2019 and 10.2% in the second quarter of 2018.

Net debt – that is, debt less cash – at the end of the second quarter of 2019 was $288.7 million, up from net debt of $145.7 million at the end of the second quarter of 2018, but down sequentially from $303.7 million at the end of the first quarter of 2019. After quarter ended, we repatriated $71 million of cash from our European operations.

$56 million of this was through euro-denominated borrowings under our credit facility, with the remainder coming from cash on hand. These funds were used to pay down U.S. debt that is outstanding under our credit facility. As a result, we’ve paid down an additional $15 million of our debt and exchanged higher interest rates associated with U.S.

debt for lower interest rates on the euro-denominated debt. With market interest rates at current levels, the annual savings would be approximately $1.3 million. In addition, it will make it easier for us to utilize the cash flows from our European operations to pay down debt.

As you can see on Slide 22, our leverage ratio, calculated in accordance with our credit facility, decreased to 2.19 at the end of the second quarter of 2019 from 2.33 at the end of the first quarter of 2019.

Under our credit facility, this ratio must be less than 4.0 for the first three quarters following a material acquisition as defined in our credit agreement, and then the ratio requirement steps down to less than 3.75. A few comments on our guidance for 2019.

Our updated adjusted diluted EPS guidance includes the $0.11 tax benefit associated with the exercise of employee stock option awards and the $0.10 increase in intangible amortization expense associated with the revised valuation estimate related to the material handing acquisition.

With the changes to our debt discussed earlier, we now estimate our net interest expense for the year will be approximately $13.1 million to $13.3 million.

Our tax rate for the second quarter of 2019 was 16%, which included a tax benefit of $0.11 or 6% of pretax income associated with the exercise of employee stock option awards and a $0.10 benefit or 6% of pretax income related to changing our permanently reinvested position on a portion of our European earnings.

We expect our tax rate for the remaining quarters of 2019 to be approximately 29%, which does not include any potential future tax benefits associated with the exercise of employee stock option awards.

With the change to intangible amortization expense discussed earlier, we now estimate depreciation and amortization expense for the year will be approximately $32 million, which includes $1.4 million of backlog amortization expense.

And one last item, during the fourth quarter of 2018 we took a charge related to freezing and terminating a defined benefit pension plan and a supplemental benefit plan at one of our U.S. operations. We are working towards final settlement of both plans.

We currently have not included an impact in our guidance, as the timing and amount of the final settlement have not been determined, but they will likely occur in late 2019 or early 2020. 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. [Operator Instructions] And our first question is from Chris Howe with Barrington Research. Your line is open..

Good morning Jeff and Mike. Let’s see where to start here.

I guess in regard to the 16 new installations within Southeast Asia that are yet to be operational but expected to be this fall or perhaps in 2020, when should we expect the P&C revenue to start to accrue for these installations? And I’m assuming that any revenue from this hasn’t been included in guidance..

So typically, though, they may order some – this is Jeff, of course – they may order some parts as they start up so they have some inventory on hand. But the consumable piece that usually we start to see about six months, kind of a six to 12 month period for the consumable piece.

And the parts piece is really a function of the run rate, so that tends to come a little later. But the large consumable pieces typically start wearing out within six months and typically have a six month to 12 month life on them.

So we’d start to expect to see some flow with the startup and then six to 12 months out, you’ll start to see the more regular flow of the parts and consumables..

Got it. That’s helpful. And then just based on some research I’ve been doing, I’ve read some articles about the potential contraction of the consumption of containerboard as it relates to e-commerce shipments. Previously you mentioned a three times to six times multiple for more containerboard per shipment.

Are you seeing any contraction of this multiple, or are expectations for e-commerce still consistent with your prior expectations?.

Well, it’s interesting. So I saw that e-commerce was about 17% of retail in the most recent data out but actually required more than half of all the box shipments to retail. So you can see that it’s still consuming a disproportionate amount of the boxes out there.

And I think if you run the math and say, okay, retail goes up to maybe 30%, and you look at the box consumption, it really says that they need to do something to reduce the consumption. It’s just – it’s consuming much too much of the box capacity out there. So there is a lot of programs underway to try to reduce that. We’ve not seen much of that yet.

I think that’s still in the early stages. What I think the e-retailers are going to do is they’re asking the manufacturers to package their product in a container that’s shippable, which means really, if you think about the containers that your product comes in from a brick and mortar, it tends to be a fairly thin cardboard box.

Well, now they’ll probably have to go to a corrugated box that can withstand the shipments. I think, I mentioned at the Investor Day that the average product is dropped 17 times from the time it leaves the manufacturer until it arrives at your front porch, and so they’re going to require a protective barrier there of some sort.

And I think there are several different programs going on out there to just determine which will be the best for that.

One of the challenges the manufacturers have is, of course, they like the high-gloss graphics that advertises their product on the box, and so now they’re faced with maybe having to package differently for brick and mortars than for e-commerce.

And so I think the manufacturers are struggling a little bit with exactly how they’re going to meet these two goals of advertising in the brick and mortar with their product graphics and also have something that can be shipped direct that has enough protection to prevent breakage or damage. So we do expect to see that the packaging will drop.

That multiple of three times to six times will go down, principally because it almost has to. It just – it’s going to consume too much packaging if they don’t..

Okay, that’s great. That’s very helpful. Thank you. And one more question, just circling back to Asia. I’ve been doing some reading, and I came across unbleached kraft pulp and recycled pulp.

With your help, can you help me wrap my mind around the opportunity here as it pertains to the fiber shortage in China? I know Nine Dragons just built a facility not too far from here.

So what type of opportunity is this?.

Well, so as you know, China has principally been a recycle country. They really don’t grow trees, and they don’t have – they have very little in the way of virgin pulp production. So they have historically gotten almost all of their fiber through wastepaper, be it imported from outside of China or the wastepaper that’s collected in China.

The Chinese government decided that there was too much waste coming in, too much unprocessable waste coming in with the wastepaper, and so they’ve put restrictions on how much waste can be in the wastepaper – how much plastics and glass and other things like that – and they also are marching towards probably a complete ban of wastepaper being imported.

So our customers are really right now, I think, scrambling a little bit in trying to decide how they’re going to replace fiber. One way to do it is to process the wastepaper outside of mainland China and then ship that back in. The other is to actually buy pulp, virgin pulp, and bring that in. It’s a much more expensive option.

And the third is, is to actually start to build maybe some pulp mills in China, where they would bring in wood chips or logs and chip them and actually create virgin pulp. But I think for the foreseeable future, the vast majority of fiber is still going to come from recyclable content.

And the question will be will they ship it in from these 16 orders that we received? They are Southeast Asia countries that ring China. And so they’ll ship it in from there. They are making some purchases and installations in the U.S. They’ll ship it from there.

They might actually ship some actual imports and actual linerboard that’s already been produced. So I think we’re going to see several options to replace this fiber shortage, but I’d be surprised if a lot of it comes from virgin fiber because the cost of virgin fiber is quite high..

Thank you. And then one more question just for Mike. As it relates to the longer-term outlook for adjusted EBITDA margins, you were pretty close to 20% this past quarter.

Any potential for margin expansion here, or will most of that come through potential M&A if the pricing environment is fair?.

Well, we guided to, for the year, I think a margin of 18.3% to 18.5%, and I believe we can still hit that. But we’re a little bit of pressure on that. That would imply EBITDA of $128 million to $131 million. That was in our initial guidance.

And we’ve got some – I still think we can be in that range for the year, but there is a little bit of pressure on that currently. And I would say if I was reguiding, I’d be looking at $127 million to $130 million, so down very modestly on EBITDA. And that would imply margins of 18.1% to 18.3%..

Okay, but the five year target at 20% is still…?.

Yes, still good. And it will be a mix of internal initiatives with 80/20 and lean and acquisitions..

Thank you so much for taking my questions. I’ll hop back in queue..

Thank you. [Operator Instructions.] Our next question is from Dan Jacome with Sidoti and Company. Your line is open..

Hi good morning. Good morning, Dan..

Dan, how are you?.

Not too bad. Thank you. Thanks for taking my questions. I just had a couple. First, can you talk a little bit more about what you’re seeing on the wood product segment? You talked a little bit about the capacity realignment activities. You’re seeing that the Canadian sawmill is definitely – I’ve seen that because of the lumber prices ebbing.

But what I’m trying to understand is do you think we’ve hit a bottom? I’m looking at your 1Q 2019, 2Q 2019 wood products segment. Bookings down pretty sharply.

You are lapping a pretty tough year-over-year compare, but what sort of pressure points are you expecting for the second half of the year? Do you think we’ve seen the worst of it? Right now, the only reason I’m skeptical about some of these capacity cuts is if you look at the month-to-month premium lumber composites for North America, we’ve kind of stabilized, and then we were actually up a little bit in July.

So I’m trying to figure out on my end.

Maybe they overshot on some of their capacity adjustments, or what do you think about that?.

Yes, I’ll first speak to the western Canada. As you know, there’s really – I mentioned the pine beetle infestation, which really devastated the forest up there. Most of that’s been harvested, or a large percentage of that’s been harvested now. They’ve also had a fair number of wildfires up there, which has also impacted it.

And so the cost, the fiber shortage and the cost of fiber up there is making it – the model doesn’t work. And that’s why you’re seeing curtailments and close – and things closing there. Now what they do is they move down to the Southeast.

And because of our very high market share, we’re going to get the business whether the fiber’s coming from whether the mills are running in the Southeast or the Northwest. We’re going to – from an operating rate, we’ll get that business. And you can see that in our aftermarket, and our parts have held up nicely.

But I think where we’re seeing the drop-off is in the capital. As you said, prices had softened quite a bit; they have come back. But we had such an exceptional year last year. The bookings in our wood processing group were not only records, but they were substantial records.

And so we just saw so much new equipment being purchased last year that it takes some time, I think, for them to absorb that, to install it and for things to rationalize. And so I’m – we’re not expecting any big pickup on the capital bookings side here for the back half of the year.

I think – we think the aftermarket will hold its own, but I think the capital side relative to last year will continue to be softer because they just had such a strong year. And of course, we haven’t even delivered everything they purchased last year, so there’s still a lot of capacity and new equipment to come online..

Right. Yes, I know, it’s just a tough compare. You did $100 million wood product segment bookings first half of 2018, so definitely a high hurdle. Okay, that’s helpful. Just, I’ll throw you a question that I should probably know the answer to, but I forgot.

So the OSB strander, where’s that going to be? Is that on – that’s bucketed as consumables generally, or is that like a big-ticket item, the stranders?.

Our strander business has a very, very high consumable percentage because as you recall, we have these knives that get replaced every eight hours. But we still have, from quarter to quarter, a fair amount of capital also. And so the consumables are continuing to run well. That’s a function of run rates.

The capital tends to be somewhat volatile in that particular business. There aren’t that many OSB mills around the world. We have a very large market share, but the capital can be a little more volatile in that business because you have fewer customers. But generally speaking, OSB’s holding up..

Okay. Great. And then two more quick ones on the materials handling segment. Sorry I missed it. Are you free to talk about it [indiscernible]? Do you guys have target margins? I think you’re at 21% 2Q. First quarter was somewhere in that ballpark.

You only have two quarters under your belt with these newer operations, but have you publicly put out there some sort of target margin, like in a mid – anything on that end? That’s one question I had..

Yes, Dan, we had said when we acquired it, they were in the 20% to 21%, which is where they’re operating currently, and that was our guidance on it..

Okay. So you’re maintaining the run rate of when you acquired them. All right. We’ll see how that trends out for the rest of the year.

And then lastly, did you give out an effective tax rate guidance for the year, just to get an idea of the tax noise in the quarter?.

Yes, well, two bits of helpful information for you on that, Dan. We’re – I mentioned guiding to 29% for the third and the fourth, approximately 29%. But for the year, I think that should get you to approximately, say, 27% if you exclude the item we outboarded, the discrete tax item for this quarter.

If you take that out, we’ll come in at roughly 27% for the year..

27%, including the mid-teens rate that you reported in the second quarter?.

Correct. That’s correct..

Okay, okay, that’s kind of where I’m shaking out. All right..

Hey Dan, but remember, that mid-teens rate included the discrete item, so you have to – if you back that off, you’ll – that will get you to the right rate..

Back it out and then get to the 27%..

Correct, correct..

Okay, I’ll work on that. Thank you very much. Good luck with the rest of the quarter in a tough environment out there, but definitely encouraging. Okay, thank you..

Our next question comes from Bill Hyler with WDH Capital..

Yes, I guys. Good morning. Appreciate the call..

Good morning, Bill..

Yes. I’ve got a couple of questions on Syntron. It looks like revenues are running at a somewhat slower rate than the trailing 12 months when you announced the acquisition. I think you mentioned construction aggregates and food processing are relatively strong.

Is the weakness more coal, mineral mining, some of the industrial segments? That’s the first question there. Maybe you could just elaborate on that..

Yes. So Bill, I think we’ve been quite pleased with the bookings in the first six months for these guys. The nature of the bookings is such that the deliveries have just been slowed down.

So I think it’s, if you look at the book to bill for these guys for six months, it’s really been just the nature of the projects have been such that they’re a little longer lead times, a little longer deliveries, and so that’s affected revenue.

We tend, especially early on in a deal like this, we really look hard at how the bookings are tracking relative to prior year periods, and we’re quite pleased with that. So I would expect to see those bookings translate into revenue going forward. So I think we’re probably okay there..

Okay. And I’m trying to recall. This is primarily a U.S.

business, isn’t it? Your geographic sales?.

Yes. And they do some – we do have a Chinese operation. We do work in China and other places. But it’s primarily a North American business..

Is there an opportunity to expand internationally, or is it just limited by your distribution and manufacturing and maybe the – I don’t know what the competitive pressures are overseas, but is there an opportunity maybe to increase international sales down the road?.

I think longer term, there is. Obviously, the first year, we want to get them integrated and make sure everything’s running well. But as we look strategically at their growth opportunities going forward, certainly geography would be one.

Whereas you know we have a pretty broad international footprint with most of our product line, so that’s something that we will be looking at going forward as we put together our strategic plans for them..

And the facility in China, does that just basically serve that local market?.

No, it does some manufacturing that gets exported back to the U.S. But it does support the local market and the regions around there in addition to the products they export back to here..

Okay. Appreciated. Thank you..

Our next question comes from Walter Liptak with Seaport Global..

Hi, thanks. Good morning guys..

Good morning, Walter..

My question is about your comments around the EU. You called out some pressure on industrial production being sluggish in Germany and Italy. But then with the record bookings, it seems to be a disconnect or whatever.

So I guess the questions were your comments about the strength that you’re seeing in the EU, is that because of the bookings that were recorded this quarter, and I guess what’s the funnel looking like for other projects in the back half?.

It’s a good question, Walt. We actually have been quite pleased with how well that segment’s doing relative to what’s going on over there economically. I think there are several things.

We’ve been successful in winning some large projects that are still occurring, some in Eastern Europe, which is doing a little better than Western Europe in some regions. Also, some of our – one of our – as you recall, one of our 80/20 companies was in Europe, and we’re seeing some very encouraging results from that particular company.

And we’re talking about bookings, say, in their aftermarket which are extremely, extremely strong, much stronger than we’ve ever seen before. And they attribute part of that to the 80/20 program and the focus on our better clients.

So I think the combination of winning some nice projects and then just continually trying to improve our internal operations that are giving us those kind of results. So we were quite pleased with that concerning the general overall market conditions there..

Okay. Sounds great. Thank you..

Thank you. And I’m not showing any further questions in the queue. I would like to turn the call back to Jeff Powell for his final remarks..

Thank you, operator. Before I let you go, I would like to summarize what I think are the key takeaways from the quarter. Number one, first we had a very good operating performance in Q2 with record revenue and internal revenue growth of 5%.

Second, China’s decelerating economy and global trade uncertainties are expected to continue to create a drag on our business activity in China. And finally, we are raising our full year GAAP and adjusted EPS guidance and expect to achieve record revenue and adjusted EBITDA in 2019.

With that, I want to thank you for joining our call today, and we look forward to updating you next quarter..

And with that, ladies and gentlemen, we conclude our program. You may all disconnect. Have a wonderful day..