Good day ladies and gentlemen and welcome to the Second Quarter 2013 Kadant Inc. Earnings Conference Call. My name is Dave, I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Thomas M. O'Brien, Chief Financial Officer at Kadant. Please proceed, sir.

Thank you, operator. Good morning everyone and welcome to Kadant's second quarter 2013 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer. Let me begin by encouraging all participants in our business review today to participate via our webcast. You may access the live webcast by going to www.kadant.com, select the investors tab and then select the listen live option for the webcast. To participate in the question and answer session at the end of our prepared remarks, you will need to dial in to the teleconference. The dial in number is available in our press release issued yesterday. It will also be shown at the end of our presentation. Let me now remind everyone of our Safe Harbor statement. Various remarks that we may make today about Kadent's future expectations, plans, and prospects, our forward-looking statements, the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading risk factors in our report on Form 10-Q for the fiscal quarter ended March 30, 2013. Our Form 10-Q is on file with the SEC and is also available in the investor section of our website at www.kadent.com under the heading SEC filings. In addition, any forward-looking statements we make during this webcast represents our view only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release issued yesterday, which is available in the investor section of our website at www.kadant.com under the heading, Investor News. And with that I will turn the call over to Jon Painter, who will give you an update on Kadant's business and future prospects. Following Jon's remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Hello, everyone, it's my pleasure to brief you on our second quarter results. Overall, we had an excellent quarter with strong cash flows, record gross margins and better than expected earnings per share performance. Let me begin today's business review with the financial highlights of the quarter. We finished the second quarter with revenues of $82 million, which were down 1% compared to the second quarter of 2012 and down 8% excluding acquisitions. The decline in revenues was due largely to lower capital revenues. Our revenue guidance was $79 million to $82 million and included anticipated revenue from CBTI. Adjusting for the acquisition revenue from Noss, that was acquired after our Q1 earnings call and thus not included in the guidance, the adjusted guidance was $81 million to $84 million and our revenue of $82 million was within that range. Gross margins in the second quarter was at record 48.6% and beat the previous record by 100 basis points. We have generated GAAP diluted earnings per share of $0.51 in the second quarter. Our adjusted diluted earnings per share was also $0.51 which excludes $0.12 of acquisition related restructuring charges and the $0.12 gain on the sale of assets. This exceeded our adjusted diluted earnings per share guidance of $0.43 to $0.45 which excluded and estimated gain of $0.10 on the sale of assets. Cash flows continue to be strong in the second quarter at $11 million. I'm happy to report that we've generated $44 million in cash flows over the last 12 months which I think showed the real strength of our business. The strong cash flow in Q2 allowed us to end the quarter and the net cash position of $48 million, despite having spent $14 million for the Noss and CBTI acquisitions and returning nearly…

Thank you, Jon. I will begin with an overview of our gross margin performance. Consolidated product gross margins were 48.6% in the second quarter of 2013, a record high quarterly performance and remarkably increased 490 basis points compared to a very solid result in the second quarter of 2012. Gross margins were higher in all of our product lines in the paper making system segment and were especially strong in stock-prep, where margins were solidly up over last year in three key geographic territories, North America, Europe and China. On a consolidated basis the gross margin improvement from last year's second quarter was largely due to higher margins on both parts and capital products along with a favorable product mix. Regarding the product mix our higher margin parts and consumable revenues represented 64% of total revenues in the second quarter of 2013 compared to 57% in the second quarter of 2012. Looking ahead and including the results of the two acquisitions, we now expect that full year 2013 consolidated product gross margins will be approximately 44% to 45%, which if achieved will exceed the record 43.9% annual margins recorded in 2012. That said, we believe the gross margins in the second half of the year will be lower than in the first half of 2013, partly due to product mix as we expect to shift several larger systems in the second half. Now let's turn to slide number 18 and our SG&A expenses. SG&A expenses were $29.4 million in the second quarter of 2013, up $4 million or 16% from last year's second quarter and included an unfavorable foreign currency translation effect of $200,000. Excluding the translation effect, SG&A expenses were up $3.8 million over last year's second quarter. More than three-fourth of this increase is due to the SG&A…

(Operator Instructions). This comes from Walt Liptak at Global Hunter.

Congratulations on a nice quarter, especially the gross margin. And I wonder if we can get a little bit of, you mentioned that the gross margin is going to be down in the next year. Can you give us a little color on in terms of your shipping size, geographic region kind of product that they are going to be shipping?

Well, specifically, Walter a few large stock-prep systems in European operations headquartered in France that will be shipping to Russia and a few other locations, typically those larger systems carry lower gross margins with them, good gross margin dollars but lower margin percentages so that's why we expect somewhat lower margins in the second half, it's still generating very strong margins for the year.

Okay, got it. And just listening to the presentation and hearing about the capital constraints that are going still going on in the U.S. and Europe but sounds like China is starting to act a little bit better and I wonder if you could give us a little bit more detail on the upgrades that are going on in terms of new lower emission or better energy efficient capacity that's going into the region.

Sure. Yeah, it's funny, if you read in the headlines in China you think that it's much slower than it is when you talk to our people in the field. And we are seeing I would say a pretty strong particularly on the stock prep side activity on the capital markets and that's some of the stuff is more in the west, some of the stuff is basically up and down the coast of China and some stuff in fact is in Guangzhou which is a big concentration of the paper industry. They do continue to close these smaller inefficient mills, I think they're announcing another $6.5 million of closures within the last couple of weeks. When this happens, that's always good for us because those smaller mills that are closing tended not to be our customers and that supply needs to be absorbed by the larger mills. So I would say China has brightened a little bit over the course of this year, we'll see but it's encouraging I would say.

Do we think in the back half of the year the booking trend in China could continue to improve?

The problem with these big system is they're buying or either they come or they don't but we are set up that it could improve. If those orders impact fall and if we in fact win them which we're in a very strong market position. I would comment a little bit on U.S., and North America as well, North America is a primarily not a big capital market. This is a more of a spare parts and consumables market. And that side of the business is doing very well but I would say that, a couple of smaller projects we're seeing out there, in some cases are getting pushed back a little bit. They're competing with other projects that may have an environmental mandate going with them that sort of thing.

Okay, great. And along those lines and parts but just going back to China, the year-over-year and quarter-over-quarter is significant. I wonder if you can just talk about the initiatives, that you have you have going on to get more part sales in that region?

I mean, that is definitely a bright spot of the quarter and the group we have in China is doing an outstanding job on increasing our parts business. And you've been following us a while, you may remember, this is sort of a focus that we put on a couple of years ago to give some stability to a relatively volatile market. And I talked a little bit the last quarter about, we would get in this almost partnership relationships with our customers, where we would say, for example, hey we will do a daily run, or by weekly run into your mills, pick up some of your stuff that's worn and needs to be rebuilt, bring it back to factory conditions if you will, return to you and also do audits and help to give you guidance on operating machines. And that program, it's so far been quite successful and we hope to expand that to other customers. But that's just an example of some of the things we're doing. The nice thing that's happening in China is as the market does slow a little, down a little bit, the mills are focusing more and more in productivity and as they start to focus on productivity that really is an opportunity for us to one, help them, advice them on operating our equipment in the mills and two, convince them of the benefits of using our spare parts in consumables versus pirate spare parts and consumables.

Okay, got it, okay. Thanks very much.

You're welcome, Walt, as well.

Thank you. Your next question comes from the line of Rudy Hokanson at Barrington Research. Please go ahead.

Good morning, nice quarter. I wanted to talk a little bit more about South America and the momentum that you're seeing there even with the outlook for Brazil looking like slow growth, you still seem to be picking up some good numbers right now, and you've also got that acquisition down there. Could you may be give us a little more color on what you are expect out of South America in 2013 and maybe looking forward a little bit to 2014 now that you have your acquisitions?

So I will just give some sort of 50,000 foot comments in South America in general and then focus a little bit more on acquisition. In general and I would say and you have been following us a while at this point, one of our overall theme within Kadant is that the developing world is growing a lot faster than developed world and South America and Brazil in particular is no exception. They have a rising middle class. I think fundamentally over the next 10 years, it is going to be an excellent market as their per capita use of paper goes up. That said, in the short run Brazil is the market that is highly dependent on the commodity market and as the global world slow down they have certainly its healthy effects. So there I would say there I mentioned the growth rate of little less than 2%, they would I think was even little bit less than last year, so they are certainly going through a slow patch for sure, but I think the longer-term opportunities in Brazil are still fantastic. They have good hardworking workforce and fairly decent infrastructure once you get out of the city. In terms of our acquisition of CBTI, they had excellent bookings in the quarter. I would just kind of caution that they do occasionally books these large capital systems and in fact they did in the second quarter, so it won't be a steady -- it won't really be a steady rate there, but you know the paper industry seems to be doing somewhat better than the economy which suggests I would say. I think the key benefit from us in South America from an income point of view is combining our facility with in Sao Paulo with their facilities. So combining those two facilities into one, one strengthens our position in the market, we're a much bigger footprint, we have economies of scale and obviously it's [all of our efficient] to run one facility than two facilities.

Sir, you have no questions at this time. (Operator Instructions).

Is there anyone in the queue there operator?

No further questions for you now sir.

Okay. Thanks. Let me conclude today's call with what I really think are the key takeaway points. First, we had a solid lead of adjusted earnings per share and set a new record for gross margins. Second, we had another strong quarter for cash flows at $11 million and despite spending $40 million on acquisitions and $3 million on repurchases and dividend, we ended the quarter with a strong cash position of $48 million. Third, we completed the Noss and CBTI acquisitions. And finally, we raised our adjusted earnings per share guidance for the full year to $2.03 to $2.08 on revenues of $340 million to $345 million. I look forward to updating in next quarter on our progress. Thanks very much for listening. Bye, bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.