Good day, ladies and gentlemen and welcome to the Q2 2014 Kadant Inc. Earnings Conference Call. My name is Mark 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 Thomas O’Brien, Chief Financial Officer. Please proceed, sir. Thomas O’Brien: Thank you, Mark. Good morning everyone and welcome to Kadant's second 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 report on Form 10-Q for the fiscal quarter ended March 29, 2014. Our Form 10-Q is on file with the SEC which 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 represents 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 second 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 will give an overview of our financial results for the quarter and we will then have a Q&A session. Jon?

Thank Tom. Hello everyone. It's my pleasure to brief you on our second quarter results as well as our outlook for the remainder of the year. We had a fantastic quarter with a record number of records including revenue, bookings, backlog, adjusted operating income, adjusted EBITDA and adjusted earnings per share. I hope you would like the word record because you're going to hear it a lot today. I'll begin today's business review with the financial highlights of the quarter. We finished the second quarter setting a new record for revenues at 105 million which was up 28% compared to the second quarter of 2013 driven by both internal growth and acquisitions. Gross margins in the second quarter was strong at 43%. Adjusted operating income was up 47% to a record 13 million representing 12% of revenue. Our operating leverage improved leading to an adjusted operating income margin of 12% even with a drop of gross margin. Our adjusted EBITDA was a new record at $15 million or 15% of sales, up 39% compared to Q2 of last year. Our GAAP diluted earnings per share of $0.70 in the second quarter included $0.04 of expense related to acquire profit and inventory and backlog associated with businesses acquired in 2013. The adjusted earnings per share was also $0.70 and this was also a new record. We also repurchased over 255,000 shares of common stock during the quarter for $9 million. And finally, our bookings increased 32% over Q2 of last year to a record a $115 million and we ended the quarter with a record backlog of $129 million. Turning to our revenue performance in the second quarter, you can see that all of our product lines are up. The strong growth in revenue was led by our stock-prep and fluid-handling…

Thank you, Jon. I'd like to give you an overview of our financial results this quarter beginning with the gross margin performance. Consolidated product gross margins were 43% in the second quarter of 2014, down 560 basis points compared to the record quarterly results in the second quarter of 2013. The decrease in consolidated gross margins from last year's second quarter was largely due to a decrease in margins in our stock-prep business which had unusually high gross margins in the second quarter of 2013. Gross margins in our other major product lines were only slightly below last year's levels. Consolidated margins decreased by approximately 50 basis points due to the effect of amortizing the acquired profit and inventory associated with the Carmanah acquisition which we made in November of 2013. I should point out that all the acquired profit and inventory from that acquisition has now been fully amortized and therefore, there will be no further impact on gross margins going forward. Also we had an unfavorable mix of products in the second quarter of 2014 compared to the second quarter of 2013 that is proportionately more capital revenue and less spares and consumables revenue. And this reduce consolidated gross margins by 94 basis points. We've noted before that there is some variability in our margins from quarter-to-quarter but looking ahead, we still expect that full year 2014 consolidated gross margins will be approximately 44% to 45%. Now let's turn the slid 18 and our quarterly SG&A expenses. SG&A expenses were 31.6 million in the second quarter of 2014, up 2.1 million 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 $1.9 million over last year’s second quarter, entirely due to a $2 million increase…

(Operator Instructions). Your first question comes from line of Rudy Hokanson from Barrington Research. Please proceed.

Good morning. Could you maybe speak more about what you’re finding with Carmanah in terms of their penetration of markets and also up on discussion in the first quarter call, a little bit about the sales opportunities that you’re seeing in China?

Sure. So, kind of as I said in my earlier remarks Carmanah has exceeded our expectations, really a terrific management team, and have terrific opportunities both in North America and abroad. The main benefit in North America is really these idle oriented strand board operations that are starting up which kind of kicks up spare parts business for us. The other thing that do as they’ve got kind of good innovation with a disposable knives. Traditionally, the stranding operations would have knives and they would grind them by hand kind of every eight hours and they have a dedicated grinding shop, which has a lot of manpower, time consuming but it also was a bit dangerous because these things have big heavy sharp knives. So Carmanah has introduced these disposable light weight knives that are easier to change, but it's a nice, now that's a spares business to us and they've done nice, job particularly in North America increasing the number of customers to use that those disposable blades inside of the traditional blades are drive. So that's been a nice source of spare parts grow for Carmanah. Internationally China I would think, I would say is the big story for them. Internationally, you wonder where the trees are, and where there is wood, housing and things like that or other needs for panels its China and Russia, Russians obviously a little slower for all the reasons that we all know about. But China is a nice opportunity and basically they've got those two orders that they got in China earlier this year, we'll probably be the capital orders for all of China in 2014. So you can do much better than that before that goes. So those systems will kind of the delivered towards the end of this year early next year, and then we'll see where goes from there. As I can said in my early remarks that is a new product in that market. So those are customers that will have a little bit of year in work to introduce OSB as a alternative supplier.

Okay. And on general consumable soft in terms of you legacy business. Could you talk about what you're seeing in terms of utilization in the paper industry on the equipment right now, it's their way of tracking with what's happening with your consumables relative to perhaps the activity level in the paper industry that might give us some kind of front line over the last couple of quarters?

Sure I mean I would tell you Rudy one of the statistics and I think you can see that we had a superb quarter. We have record after record but frankly one of the numbers that I am the most proud of is that we had an 8% internal bookings growth for parts and consumables and that really speaks well kind of hard work that our various subsidiaries are doing. The production and operating rates in North America and Europe are pretty stable and haven’t changed much. I would say production rates in China are improving a little bit. I’ve talked earlier about how we are often partnering with our customers in China to help them operate more efficiently and that often entails using more of our parts coincidently. So I hope that kind of answers your question on that.

Okay, fine. Thank you very much.

Thank you.

Your next question comes from the line of Walter Liptak of Global Hunter. Please proceed sir.

Hey Walt. Walt?

Walter, please make sure that your phone is not mute.

Hi, good morning everyone. I wanted to ask about Carmanah sales. If we could break out what the sales bookings were in the quarter?

We do have that in our press release, no we don’t actually. Thomas O’Brien: Yes we have the Carmanah sales in the press release so you can see in the wood processing segment there it’s 9.8 million of revenues in the second quarter.

Okay, okay. Sorry about that, was bookings and backlog in there as well? Thomas O’Brien: That’s right below the paper making systems segment number there.

Okay, great.

But my point is right around [you].

Okay, great. Wanted to ask about China and these, the nice bookings that you took-in in the quarter. Is that sustainable, do you think? And it sounded like you took in an order for $4 million. I thought I heard you say post the end of the quarter, is that right?

I would say the short answer Walt is $29 million that isn't, that's hardly the new normal. That's not really a sustainable everyday kind of thing. So that timing of capital orders absolutely benefited us Q2, not only we did, we have this $15 million of stock-prep systems, we had $4 million of those two stranding systems I talked about. So, the short answer is the $29 million is a bit unusual. But as I kind of said in my remarks, in Q3, while we're not going to do $29 million, we're going to have a very respectable quarter, because we've already booked $4.5 million of capital. So, I expect not to repeat the $29 million we did in Q2, but to still have a pretty decent and higher than average let's say booking quarter in Q3.

Okay, got it.

And Q4 is now looking terrible either. You never know the capital on China we hate predicting, as we hate predicting revenue. Because the orders are so big that if one flips out, suddenly you missed your number completely.

Right. So just to get a little bit more color on these, the stock-prep orders and the strander orders. Were those all one customer or was it just coincidental that you took in multiple orders from different customers?

I'll tell you actually how we -- the short answer is not all one customer. The way we defined in order as we might have three orders for one line on one paper machine we are convinced as we'll call that one order because that's basically for one stock-prep line. But we also might have a customer who is ordering two lines or three lines and we'll call that three orders. That's kind of when I say there is five orders, that I mean for five lines. Five fiber processing lines for five paper machines.

Okay. So I guess….

(Inaudible) more orders technically speaking separate CEO, but I think that's a short hand way to think about.

Okay, makes sense. So as you look into the second half are there other projects out there like what percentage of your pipeline do these orders represent?

Well it's there is still an active pipeline absolutely as I mentioned in Q3, we have already booked around 4.5 million. So that's a pretty good for half way through the quarter, that's not so bad. You can never tell when of these things fall, but we don't expect another quarter like Q2 for the rest of the year.

Okay. Got that. So the project that pushed out that was just a push from the shipment from the third until the fourth is that right?

There was, yes, there was. And let me start by saying, this happens all the time, projects get shift routinely because typically especially in China because it's not just they're building a building, they are putting a paper machine, there is a million different things going on. It's not someone ordering equipment for an existing milling you just sent it and it goes. There is kind of a lot of moving parts with the Greenfield mill. So delays are not at all unusual particularly in China. Frankly we had some stuff shipping from three to four and four into 2015. It’s just and a little bit we’re guessing on – we’ll go buy the facility and see how the building is coming along and kind of use a little bit of our own judgment as to when that customer will actually be able to take that. And of course, the other thing I’d add is one of the issues in China is we don’t ship typically till they make the final payment and they really don’t make the final payment till they’re good and ready and they need equipment. I mean that’s just the way life works in China.

Okay. How does the pricing look on these orders in China and what are you expecting for the gross margin when they do ship?

We don’t give into gross margins by product line or by region but I think we’ve said in the past that our margins including our capital margins in China are quite respectable. It’s not like a lot of companies; they almost lose money in China. I would not say that’s the case with us. We have, I would say the pricing is lower than the rest of the world but the costs are lower than the rest of the world and we have very respectable margins there.

Okay. Got it.

Both capital and [others]?

Okay. And then Tom, this is just one for you; I guess kind of at high level and you addressed some of the gross margin. Was it a surprise at all to you where the gross margin came in for the quarter? I guess the way that I am looking at it is that the gross margin was lower than I expected but you offset that with lower SG&A cost, lower overhead. Thomas O’Brien: Yes.

Was it gross margin what you expected and then… Thomas O’Brien: I would say pretty much this kind of an inverse relationship between the level of revenues and the gross margin percentages, because typically when we have more revenues it’s going to carry -- it’s going to be a result of more projects, more stock-prep orders et cetera, which have a lower gross margin percentage, it’s good gross margin dollars, but lower percentages. So that certainly was within our range. I think the other two factors which I mentioned was we saw a decrease in margins of about half a point, so 50 basis points due to the amortization of the step-up in inventory from Carmanaha. And as I just mentioned, it was almost a point or 94 basis points for the effective mix.

So basically add those, the 43 or 45ish which is about where we physically are. Thomas O’Brien: Yes. So we said back in our earnings call in February that we thought margins would be 44% to 45% for the year and we're still tracking to that. There will be variability quarter-to-quarter. As I said generally, the higher the revenue, the lower the margin percent, because generally the higher the revenue means the more capital we have in that mix.

Okay, got it. Okay.

On a slightly different. Well, I'm actually kind of pleased that we have this 12% adjusted operating income margin with for us relatively on the lower end of the scale gross margins. So that actually makes me kind of feel good about the future.

Yes. And I guess it's kind of where I was going with the question is on the overhead cost, the SG&A was lower and I’m wondering is that something that you reacted to or that’s just from ongoing cost control at that administrative level? Thomas O’Brien: Yes. I think we have good cost control, but I think if you look at the overall level which has slightly down sequentially the SG&A. So it was pretty close, I don’t know if we can go back to that slide, but if we could, you can see that the level of SG&A was pretty close sequentially in the second versus first down a little bit. But the leverage we got was obviously with the higher revenues the percentage of SG&A to revenues went to 30% from whatever the previous quarter was the 34% or so. So had good as Jon mentioned we had good operating leverage which led to good operating margins in the quarter.

Yes, okay. All right, sounds good. Then just the last couple of things. What are you expecting for tax rate in the back half? Thomas O’Brien: The tax rate for the year we are saying will be about 33% to 34%, and there could be variability again by quarter, but for the year we are still in that 33% to 34% range.

Okay. Okay. The cash flow continues to be impressive and I guess we would continue to see share repurchase at the current level? Thomas O’Brien: The cash flows were I would say good they weren’t the record setting like many of the other records but I still think we will have a very good year for cash flows in 2014. If you take our net income implied with the guidance it’s about 29 million, add D&A back to that of 11 we have some equity compensation in the range of 6 so you can easily get up to say $45 million $46 million and then say 8 million or so for CapEx so we will have free cash flow in the high 30s assuming the guidance and all those other factors that goes on to it. So that will be a very strong free cash flow performance for us so that’s just a good second half in cash flows and that's certainly what we're hoping for.

Okay, and the primary use of cash at this point is that share repurchase? Thomas O’Brien: Yes. I mean we paid $15 million down in debt, we may continue to do that. And our share repurchases have been more opportunistic, we saw good opportunities in the second quarter and we took advantage of those to the effective $9 million or $9 million in the second quarter.

Alright, okay. Okay, sounds good. Thanks. Thomas O’Brien: Okay, great. Thanks Walt.

(Operator Instructions). That appears to be no further questions. I would now like to turn the call over Jonathan Painter for closing remarks.

Thanks Mark. Let me conclude today's call with a way, I think several key takeaway points. First, we had an outstanding quarter with new records for revenue, adjusted EBITDA, adjusted earnings per share, bookings and backlog with solid contributions from our acquisitions as well as from our existing business. Second, we're seeing improving market conditions in China and Europe. And finally although we're lowering our revenue and earnings per share guidance for 2014, the reason for this is timing of capital orders and decidedly not weakening market conditions. I look forward to updating you next quarter on our progress. Thanks for your attention. Bye, bye.

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.