Good day, ladies and gentlemen and welcome to the Fourth Quarter 2013 Kadant Incorporated Earnings Conference Call. My name is Azkaban and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Thomas O’Brien, Chief Financial Officer. Please proceed. Thomas O’Brien - Chief Financial Officer: Well, thank you operator and good morning everyone and welcome to Kadant’s fourth quarter and full year 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 into the teleconference. The dial-in number is available in our press release issued yesterday and 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 Kadant’s future expectations, plans and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our quarterly report on Form 10-Q for the fiscal quarter ended September 28, 2013. Our Form 10-Q is on file with the SEC and is also available in the Investors section of our website at www.kadant.com under the heading SEC filings. In addition, any forward-looking statements we make during this webcast represent our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and you should not rely on these forward-looking statements as representing our views on any date after today. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading Investor News. With that, I will turn the call over to Jon Painter, who will give you an update on Kadant’s business and future prospects. Following Jon’s remarks, I will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thanks, Tom. Hello, everyone. It’s my pleasure to brief you on our fourth quarter and full year results as well as our outlook for 2014. Overall, we had a solid quarter with strong gross margins and better than expected earnings per share performance. I will begin today’s business review with the Q4 and full year financial highlights. We finished the fourth quarter with revenues of $95 million, which was up 21% compared to the fourth quarter of 2012 and 4% sequentially. Gross margins in the fourth quarter remained strong at 44%. Adjusted operating income was $9 million, up 38% compared to Q4 of last year. Our adjusted diluted earnings per share of $0.51 in the fourth quarter of 2013 increased 16% compared to Q4 of 2012. Our GAAP diluted earnings per share of $0.52 beat our guidance of $0.47 to $0.49. Incidentally, our guidance did not include the dilutive effect of the Carmanah acquisition, which was $0.05 in Q4. Our bookings in the fourth quarter increased 11% to $84 million compared to the same period last year. Cash flow continued to be strong in the fourth quarter at $9 million. Also in the fourth quarter, we completed the acquisition of Carmanah and the integration into our organization is proceeding according to our plan. In addition, we also completed a small, but exciting technology acquisition of the European producer of ceramic creping blades in early Q1 of this year. This will expand our creping blade offering to tissue customers to include high-performance longer life ceramic blades. The ceramic blade market is estimated to be $50 million and is growing as tissue producers using the new TAD process are increasingly using ceramic blades. Looking at the full year financial highlights, we had a solid 2013 setting a new gross margin record and…

(Operator Instructions) It looks like our first question comes from Walter Liptak with Global Hunter.

Hi, good morning guys.

Hi, Walt. Thomas O’Brien: Good morning, Walt.

Congratulations on a good year especially the gross margin looked terrific. So, I want to ask on the gross margin guidance and maybe I missed this in your prepared remarks, you guided to 44% to 45% gross margin, which is going to be down a little bit year-over-year, what is that related to? Thomas O’Brien: I would say, well, that’s pretty much in the range in our forecasting accuracy. So, we’re still in that 44% to 45% range that we talked about even in the last call. There’ll be a little bit more capital business, I think in 2014 versus 2013 particularly all come out as some capital business and also in our stock-prep business as well. But I think that’s about as close as we can get.

Okay, I get it. So we shouldn’t really read anything into the range being down a little bit year-over-year when it’s all said and done it could be above that? Thomas O’Brien: Historically we have been…

44% or 45%, I think 2013 was an exceptional year for gross margin so, I would say it would be at the top of our normal range and what we’re saying for next year is more or like our typical range.

Okay. I want to make sure, excuse me, I am understanding the guidance correctly so, you’re including the accretion from the Carmanah deal, but excluding any purchase accounting or any other special charge from that deal or anything else in that $2.60 to $2.70, is that right? Thomas O’Brien: No, the $2.60 to $2.70 is the gap guidance so that includes everything, that includes all of the purchased accounting adjustments that we’ve been talking about the amortization of acquired profit inventory, backlog etcetera. But we are saying is that we’ve given you some guidance on that where we can in the sense that we think the most of that amortization will be – most of those amounts will be fully amortized in the first half of the year and we said that we expected about $0.15 of amortization from those items in the first quarter of 2014. And I would say that the number in the second quarter is up $0.04 or $0.05, it’s about $0.20 for the year. But the guidance includes those amounts, Walt.

Okay, great. So when we look at your full year 2014, sorry, we would be looking at $2.60 to $2.70 plus for one to adjust and add back the purchase accounting? Thomas O’Brien: Yes, I was just going to say that. That is exactly right.

Excellent question.

Okay, okay, thanks. And Jonathan, on your comments about Carmanah ordering in China, I think they have some initiative there, but part of the acquisition strategy was to leverage your global channel strategy or your channels. Are there synergies that are happening already for Carmanah?

Yes, absolutely. China is a good example. So, our – one of our lead sales people in China with the group at Carmanah when they’re talking to customers, there is in fact some overlap in terms of customers at least know each other traveling the same circle so, yeah, we’re definitely it’s helping them as much, in the end they have to sell the product themselves obviously and the products speak for itself, but giving them some guidance about how business is done in China and that sort of thing is I believe our team on the ground in China has provided a big help to them.

Okay, great. And I was hoping that we could just talk about some of the geographic regions and just get a little bit more color. A year ago I would have thought that China for example would have done a little bit better that they would have absorbed some of their capacity and starting to reinvest in new capacity. I think there were shutdowns that were happening related to pollution and it sounds like it’s still pretty soft. Is that economy related or how do you view the China market?

Well, I can agree with you, Walt. I would have thought that they would – probably have a little more to pickup and probably most people did by now, but yeah, it’s still relatively weak and there is still dribbling in business, it’s not like there’s nothing. There is still some projects, but I would say there is still – an overhang continues to be there. I think the slowing economy is certainly reduced the – typically the economy grows into that overhang of capacity so that absorbing the capacity has been slowed by the slowing economy. That said, it’s still growing, we still have a big population moving to city and the per capita consumption is going to go up, but it has been slower in 2013 than probably in any year at least in the last several years.

Okay. Then if we could switch back to North America, the bookings were up year-over-year, is Carmanah’s bookings included in that?

Yes, they are and Carmanah has a heavy percentage in North America. North America is where a lot of the wood houses are so you’ll see going forward Carmanah will contribute a little more over way to the North American market than the other ones. I would…

Okay, so…

Kind of perspective, places like China are a growth market, a future market, but they don’t have a very good position there now.

Okay. What were in North American core bookings if you take Carmanah out? Were they up or down? How did they look?

I thought… Thomas O’Brien: Carmanah’s bookings are about $6 million in the quarter.

Yes, most of that were (indiscernible).

Okay. In the North American market, if you could provide some color on what the outlook is there for 2014?

Excellent, pretty good. I would say we’re pretty encouraged by our bookings so far this year. There is decent, this is in the big capital market. There is decent sort of flow business in really all the product lines. So, I feel best about North America than even anywhere in the world right now.

Okay, great. And then last…

North America, but stock-prep is $11 million and that’s slowed in North America.

Okay. I want to ask about that too. The phone cracked a little bit, I think when you were doing your prepared remarks. Could you talk about what orders came in the first quarter, the $11 million?

The biggest one of note is a stock-prep order of the $11 million for customer in Mexico. So, that’s one of these turn key stock-prep systems in Mexico. But I would say we have decent activity in South America also for stock-prep so, I would affect that we’ll see some activity there as well.

Okay, good. And then last if we could just switch to Europe and sorry for asking so many questions. But the bookings look pretty stable there and I wonder if you could talk about what you’re seeing for 2014, any early order activity so far?

Europe has historically been quite weak. I would say it’s improving modestly, maybe you couldn’t hear because of phone problems, but we talked about some orders in Turkey. We got a couple of stock-prep upgrades in Turkey around $2 million and we’ve also had some orders for drying systems in Russia about $1 million. I will say Russia, in other calls I talked about that it’s being an area of concern in the sense that we haven’t trouble – lot of our customers haven’t trouble getting financing that in 10 years as you know the rubles really falling and I’m sure that’s not making it easier. But in general, I would say Europe overall is a little bit better.

Okay, great. Well, thanks for the color, guys, and we can do a follow-up probably I think for the rest of my questions.

Okay, thanks, Walt. Thomas O’Brien: Thanks, Walt.

Okay, thanks.

Our next question comes from Rudy Hokanson with Barrington Research.

Good morning. Nice job on the quarter. Question – a couple of questions, one, in the slide presentation, you showed that the cash cycle I believe had slowed down a bit and I was wondering if that was due to acquisitions being accounted for at the end of the quarter or if there’s anything going on in any of your geographies? Thomas O’Brien: The one of the key numbers that I look at, Rudy is the overall working capital management and one of those numbers that I showed was our working capital as a percentage of the last 12 months revenue was 16.6%. That is – that was affected somewhat by Carmanah because the way that calculation is they were putting all of their working capital in the numerator and only two months of revenue in the denominator. But having said that, there was some deterioration in it, but I think all of those metrics you have to look at the trend is up here is not just one data point. So, the one I really keep my eye on is the days in inventory, that did come up a bit sequentially and so we’ll keep our eye on that one, but we know some of that’s being affected because we have a couple of larger stock-prep systems awaiting shipment, one of which comes to mind in our European operations. So, I’m not overly concerned with it. I still think the 16.6% is a very good performance and it’s a little bit high partly due to the acquisition of Carmanah, yes.

Okay, thank you. And then again in terms of the mix, last year, you were pleasantly surprised at the improvement in margins in large part because of the mix and the amount of consumables, etcetera and parts that were being ordered. And now in the discussion, it’s – we’re hearing a lot more about bookings and capital equipment being ordered. I’m wondering if you’re seeing because of what was going on in the particular markets, the economies, or the nature of your sales efforts. If in 2014 and maybe this is part of the issue on your margins for 2014, are we going to be going back towards maybe a more historical mix? I know you’ve sort of implied this in various things you said, but I’m just wondering if you just maybe flush it out a bit. If that means that we can expect maybe more upside on the revenue side that it would be probably larger items, capital items? Thomas O’Brien: Rudy, I think this fits best to how finely we can calibrate our guidance, but I would say that our mix will be probably in the range of where it was for 2013, maybe a little bit heavier in capital. But I think at this point, it’s really nothing significant in that. I think our margins guidance reflects pretty much where we’ve been, we were at record levels in 2013 will be low, but it’s still in a very, very solid range. And that could be impacted, for example, there is a $11 million order – pending order that Jon mentioned in Mexico, that won’t be at 45.8% margin unfortunately, but it will provide a lot of margin dollars in income. That would – if we get a few more of those that would tend to way in the margin percentage.

Yeah, of course that’s about it. Of course, you lose it on the gross margins, but you more than make up for typically in the SG&A level so, in the bottom-line it’s good news.

I was just wondering if you’re finding customers being more interested in or at least talking to your sales people about more capital investments right now than they may have before at least as far as an interest or inquiry level?

I would say it’s probably likely more in Europe, it’s in the U.S., I would say no significant change particularly and in China it’s probably flat just slightly down.

Okay.

Sort of capital activity, yeah, maybe, maybe flat would be better term for China. China is a little bit of a wildcard.

Okay. And then on your repurchase program right now, could you remind us how much you have remaining and also what – given your current balance sheet? What you would anticipate in terms of turning out the repurchase program anything in terms of timing or urgency, anything like that? Thomas O’Brien: I think we have about a $20 million authorization that the board approved in early November of ’13 and I think you probably only used about million or so, $1 million or $2 million so, most of that left so, we say $18 million is left. And the way we’ve always approached that, we’ve been doing this for a number of years since we’ve been opportunistic and when we do our repurchases, I think the key point that we try to make during the earnings call of the fact that we returned almost $10 million of capital to our shareholders in 2013 with a combination of both the repurchases and the dividend program, which of course we instituted last year. So, we continue to return to shareholders 45% to 48% of our net income each year and I think that’s something that we’re not guaranteeing that year-after-year because there are other cash uses that sometimes will come up, but I think that’s generally the tone from the management here is to do that.

Okay, thank you. Those are my questions.

Alright, thank you, Rudy.

Our next question comes from Lawrence Stavitski with Sidoti & Company. Lawrence Stavitski - Sidoti & Company: Hi guys. Congratulations on the quarter. Can you guys just get into the OSB market in China a little bit, I know Jon touched on it, but maybe in terms of growth rates and just a little bit more color on that?

Sure. I mean, in terms of the offshore market I would say China is one of the more interesting one. There isn’t a lot of wood houses in China as you would expect. We have a lot of apartment buildings, but they need things like sub floor and they need – they also do a lot of things you wouldn’t think it’s a lot of panel board, but it is things like bed liners for containers. So, they do have a lot of need for panel. They don’t have big forests with big gigantic trees, but they do have smaller trees and one of the advantages of OSB is that actually can use trees when they are small, it doesn’t need big mature trees like plywood does. So, it’s a good market. They have very little production right now. So, talking percentage growth rates doesn’t make a lot of sense, but people talk about several OSB mills being constructed there over the next few years. Lawrence Stavitski - Sidoti & Company: Okay, that’s helpful. Thanks. Now in terms of the acquisition front, you guys were pretty successful in ‘13. You continue to look in ‘14 and if so, would it be one of your current business segments or would it be something like a Carmanah where you’re going to go outside and look for kind of a little different spin on what your core business has been?

So, I would say we’re continuing to look at acquisition sort of the same way we did in 2013. The ones with high synergies tend to have the highest returns like the paper ones I would call in – that we did last year. That Carmanah as well not that we have acquired it and I do book Carmanah’s end markets are growing faster than our pulp and paper markets for example. We have other industrial markets that are going pretty well than our pulp and paper markets, the OSB type market is growing faster so, yeah, we would love to do a more acquisitions in that space that fit well with Carmanah and we would look at acquisitions and those are areas just as we do in pulp and paper. Lawrence Stavitski - Sidoti & Company: Okay, okay, great. And just the tax rate going forward for ‘14, do you see any kind of range of what it would be? Thomas O’Brien: I would use somewhere in the range of 33%, that’s going to vary somewhat maybe perhaps quarter-by-quarter, but I would say for the overall for the year in that range. Lawrence Stavitski - Sidoti & Company: 32% you said? Thomas O’Brien: 32%. Lawrence Stavitski - Sidoti & Company: Okay, great. Thanks guys.

Alright, thank you.

It looks like there are no further questions in the queue.

Alright, thanks, Azkaban. Let me conclude today’s call, what I think there are several key takeaway points. First, we had a solid year in 2013 with a new record for gross margin and new records for EBITDA. Second, our cash flow remained strong at $40 million and with the second highest achieved in our company’s history. Third, our parts and consumables business continues to grow increasing 13% over 2012 with margins up over 200 basis points. And finally, we’re expecting a record 2014 with revenues up 18% to 21% and diluted earnings per share from continuing operations of 26% to 30%. I look forward to updating you next quarter on our progress. Thanks very much for listening. Bye.

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.