Good day, ladies and gentlemen, and welcome to the Q1 2014 Kadant Inc. Conference Call. My name is Whitney, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Thomas O'Brien, Chief Financial Officer. Please proceed.

Thank you, operator, and good morning, everyone, and welcome to Kadant's First Quarter 2014 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 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 annual report on Form 10-K for the fiscal year ended December 28, 2013. Our Form 10-K 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 first quarter 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 would 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 first quarter results, as well as update you on our outlook for 2014. Overall, we had a great quarter with record bookings and adjusted EBITDA. I'll begin today's business review of the financial highlights of the quarter. We finished the quarter with revenue of $93 million, which was up 23% compared to the first quarter of 2013. Gross margins remains strong at 45%. Operating income was $7.6 million, up 3% compared to Q1 of last year. More importantly, our adjusted EBITDA was a new record at $12.7 million or nearly 14% of sales, up 36% compared to Q1 of last year. Our GAAP diluted earnings per share was $0.45 in the first quarter, including $0.02 of restructuring costs and $0.13 of expense related to acquired profit in inventory and backlog associated with the businesses we acquired last year. Without question, the highlight of the quarter was our record bookings, which increased 27% over Q1 of last year to $115 million. Turning to our revenue performance. You can see that all of our product lines are up for the first quarter. The most significant contributor to our year-over-year revenue growth was our acquisitions, which contributed $19 million to Q1 revenue. Excluding acquisitions, our Q1 revenues were down slightly compared to the same period last year. I'll discuss this in more detail when I cover our business activity in the specific regions of the world. As I noted, the highlight of the quarter was our record bookings. I also noted on our last call that we anticipated a significant step-up in bookings in the first half of 2014, and I can say they're coming in about as we expected. Our bookings of $115 million in Q1 were up 27% compared…

Well, thank you, Jon. I'll begin with an overview of our gross margin performance. Consolidated product gross margins were 45.2% in the first quarter of 2014, down 210 basis points compared to the first quarter of 2013. The decrease in consolidated gross margins from last year's first quarter was almost entirely due to the effective amortize in the acquired in inventory, associated with acquisitions we made last year. Excluding this item, consolidated gross margins would have been 47% in the first quarter of 2014 or 30 basis points lower than last year. Our Papermaking Systems segment gross margins, which do not include the result of Carmanah, were 47.5%, the second highest level ever achieved in our company's history. Now let's turn to Slide 18, and our quarterly SG&A expenses. SG&A expenses were $32.5 million in the first quarter of 2014, up $5.5 million from last year's first quarter, and included an unfavorable foreign currency translation effect of $300,000. Excluding the translation effect, SG&A expenses were up $5.2 million over last year's first quarter, including a $4.9 million increase associated with the SG&A and transaction expenses of acquisitions. SG&A expenses as a percentage of revenues were 34.8% in the first quarter of 2014, compared to 35.4% in last year's first quarter. Looking forward, we expect that SG&A spending in 2014 as a percentage of revenues will be approximately 31% to 32% compared to 34% in 2013. Let me turn to our EPS results for the quarter. We recorded GAAP diluted earnings per share from continuing operations of $0.45 in the first quarter of 2014, compared to $0.47 in the first quarter of 2013. The first quarter of 2014 included $0.02 of restructuring expenses. Excluding this item, adjusted diluted EPS was $0.47 in the first quarter of 2014, equal to last year's…

[Operator Instructions] Our first question comes from the line of Walter Liptak.

Well, I wanted to start by asking a little bit about the guidance for the year. And the bookings look good, but I wonder if you can provide a little bit of color on what you think the mix of businesses in bookings with the gross margin might look like for the rest of the year?

In terms of gross margins, well, I think we're still anticipating 45% to 40% -- 44% to 45%, which I think is what we've said last time. So no big change there. That includes about 0.5 percentage point reduction for the amortization of acquired profit in inventory, as well, which we noted that effect in the first quarter. So no real change in our thinking in terms of gross margins.

Yes, in terms of the mix, we'll have obviously a little more contribution from North America or the U.S. as kind of we said, relating to the tax. I don't know, but I would call out a mix in the product lines, particularly, a change.

Okay. Is North America, typically -- is the gross margins about the same there as other parts of the world, or is it higher?

It really -- it depends on the capital spares mix. As you know, our spare parts understandably have a little higher gross margins. And so part of the uptick in North America was capital, in an area that is largely spare parts market, if you will. So I mean that would probably bring them down a little bit from where they are on average. But I think Tom is right on the overall margins, they'll be about where we thought.

Okay, great. And the trend globally is pretty clear that North America is strong. So maybe we can start there and just talk about what kind of products booked in the quarter? And then is it possible -- or how do you think about the quarter business excluding Carmanah in terms of bookings?

Sure. One of the -- commenting on North America. So obviously, the $11 million Stock-Prep order was a big order. That doesn't come along everyday, right? So that's a little more unusual, an order of that size. But I can't -- I was kind of pleased that we have pretty strong results in our Doctoring capital business, our Fluid-Handling business. I think our Stock-Prep capital business even going forward has a lot of opportunities, probably more on the virgin side than recycle. So pretty broad for North America. Carmanah, because housing is heavily in North America, that's kind of their strongest market. And the housing market is in continuing to grow, OSB mills are turning on, which gives them a spare stream where there -- or sometimes, you'll have ones that are converting to our ring, as they call it, which will be a nice large spare part plus a follow on stream of spares. So it's very, very promising on the Carmanah side, as well. China is weaker, but as I said, I think the second quarter's got some capital in it. We had strong stuff on the housing side with those OSB mills, and we've already booked a pretty significant recycling order.

Okay. Just to go back to North America for a second. Can you tell us what the growth rate would have been without Carmanah in there in terms of bookings?

It would have been very good. I don't have that off the top of my head. But I can tell you the -- with all of our businesses...

I think if you go back to the chart that we showed in North America, I think that it was about $11 million of bookings in there for Carmanah, if I remember the number right. But you could do it from there, Walt. I don't have that right in front of me, but...

And the overall North America was up about $28 million, so. It was still excellent.

Yes.

Okay, yes. Sounds like it. It sounds like it's very good. So in China, I hear you that capital -- there might be some spending in the second quarter, you've got some visibility to it. Why do you think we have this slower period during the quarter for bookings? Was it from the government related there or...

Well, they do -- they are in a kind of an overcapacity position. So there is overall, a little bit of a downward pressure because of that. So I think that's as much as anything. And then, these capital things are kind of lumpy. Those 2 orders for the strander mills, they could have come in Q1, they just happened to come in Q2. That said, I don't -- these stranders are a little bit unusual. So it's not like I'm expecting to get 2 a quarter for the rest in the year in China. That -- this might well be it for strander orders for China. That's a significant -- they're significant investments for the overall mill. And what's good about them, of course, is it leads to a spare parts stream for us in China. The -- on the recycling side, we -- it was the timing of the orders seem to be falling in the second quarter and after. There's still plenty out there that could provide opportunities, some sizable systems, I would say.

Okay. So is this market -- I guess we've seen the orders or the bookings kind of bounce around here for the last year. Is this market, you think finally starting to turn with some of the visibility you see in the second quarter?

I would say that we have a decent number of projects. I can't tell what the timing is or how long they'll -- whether they'll actually turn into orders. But we have a significant amount of projects in China right now. I have to say, there's a little disconnect between that and what you might read in the mag -- in the press about some oversupply. I will say that we're mainly in container board and that's the best grade to be in, it's probably the one that's most in balance. So I think as their economy becomes more internal with people buying washing machines and houses and stuff like that, it should generate internal demand for boxes, which will be -- will lead to more capacity additions.

Okay. Okay. And then you mentioned the strander board sales, those 2 orders, those were related to Carmanah, is that right?

Correct. Yes.

Okay. So again, the integration is going pretty well and you're already starting to book some sales there. What do you think the market potential is? And how do you get there? What kind of channel do you need?

Well, so the -- it's a pretty new market in China. I don't -- they don't have wood houses, so it's not like it's going to be like the U.S.. But they use a lot of wood; in container boards, crating, flooring for these houses that are largely cement and the forms. I can't tell you how quick the uptick's going to be, frankly. I would say it's too new, but I think it'll take a while.

Are there any big channel partners that you can sell through? I don't know if you have buildings over there...

We do have a -- we have a very significant channel partner, if you will. There's a company in Germany called Dieffenbacher, and they sell the press, which is really the heart of these OSB mills. And we're essentially partnering with them for these types of sales. So we're partnering with them in these orders in China. And we're also partnering with them for some other orders in developing countries, if you will.

Your next question comes from the line of Rudy Hokanson, Barrington.

I'm going to ask the question about China a little bit differently. And I know that as soon as you made the acquisition, you started putting the sales force that you have in China and teamed them up with the acquisition. And I was wondering, what's the strategy on the sales effort going forward in terms of building that base and working together with your traditional product lines, as well as introducing the new ones? Because you said, it's not just housing. There's a lot of different usage for the products. And it seems that, that -- the $4 million off the -- I know it's not off the bat, but still, relatively quickly, is something that points to a reception for your product line there, the OSB. And I was just wondering, if you could maybe flesh out that strategy a bit more because China is an important part for Kadant down the road.

Okay, sure. So just talking about our Carmanah product, if you will, the OSB in China. So I would say as overall for growth in capital, China is the most important market. And I say that only because North America is mature, it's not going to add as much capital as you might see in other parts of the world. What we really provided in terms of sales synergy in China was not so much using our sales force to sell stranding products. We really -- it's a unique product, it's a technical sale, the Carmanah people themselves are the ones who really make that happen. What we probably provided on the sales side is just familiarity with how businesses are done in China. We had some of our recycling and stock-prep sales guys travel with them. They are at the table kind of helping them interpret things and so forth. The other thing we're utilizing from a selling channel point of view, as I've mentioned earlier, was our relationship with Dieffenbacher. They are the largest press manufacturer in the world. They are a great partner to have. And between -- they're good to also weigh to get ourselves in there. The other thing I would say in China that's probably helped us in China is the fact that we're there. We're able to say, "We're going to do some manufacturing in China," we're able to say, "Hey, you're going to have a place where you can get your spare parts with infrastructure, if you will, in China." So I think it's helped them that way, as well. Does that answer your question?

Yes. Now another question, in terms of the tax rate, as you pulled cash from overseas to help pay down debt, is that -- are the taxes that you would have paid to pull the cash, did they contribute also to a higher tax rate?

Well, it's a very good question, Rudy. And the answer is they did, to some extent, yes. Because there were some withholding taxes that were not creditable, but we didn't actually take that cash and bring it back to the U.S. Essentially, what we did is we lent it from one of our China operations to one of our subsidiaries in Canada, and then they pay down the debt. So the cash never really came back to the U.S.. So therefore, we didn't have to pay the higher tax rate in the U.S. But there were some -- there was a little friction there with some withholding taxes that did contribute to the higher rate. The main -- I'd say the main reason for the increase in the rate again is the difference in the geographic distribution of our earnings. So we estimate this every quarter. And we did have, as we mentioned, more income coming out of the U.S. than previously in our previous guidance. That was the main reason for the increase in the rate. But you're quite astute to pick up on that point, that was -- that did contribute, as well.

Okay. And could you just repeat for me what you said the effective impact of the higher tax rate will be in the second quarter? I mean, for the year, you said it'll be $0.11. What will it be in the second quarter?

I don't think we actually gave a number for the second quarter, Rudy. So it's probably in $0.02 to $0.03 range, something like that.

You'd also tried to talk about the different applications for OSB and talk about how the using in crate is quite different than use in housing and so forth. That's not something we get involved with. We only sell our products to the guys who make the OSB. And then all of those different applications and having OSB penetrate those different applications from liners -- bed liners for containers or furniture, whatever, is their -- that's their business, not so much us. We don't have to get out there and talk to people who make furniture and get them to use OSB.

Is there any market research -- is there -- might be in the U.S. and China in terms of growth rate for demand for OSB?

What we looked at when we're doing the acquisition is as much just projects in the pipeline that we already saw. It's -- I think it's a little tricky to say how quick that uptick's going to be in China.

[Operator Instructions] There are no further questions in queue.

Okay. Thanks, operator. Let me conclude today's call with what I think are the 3 key takeaway points: First, we set a new record for bookings at $115 million with solid contributions from our acquisitions, as well as from our existing businesses, particularly in North America. Second, we had record revenues in bookings for Parts and Consumables business. And finally, we set a new record for adjusted EBITDA at $12.7 million, up 36% compared to Q1 of last year. I look forward to updating you on our progress on our next call. 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.