Good day, ladies and gentlemen, and welcome to the Q1 2015 Kadant Inc. earnings conference call. My name is Devon, and I will be your operator for today. [Operator instructions] I would now like to turn the conference over to your host for today, Mr. Thomas O'Brien, Chief Financial Officer of Kadant. Please proceed.

Thank you, operator. Good morning, everyone, and welcome to Kadant's first quarter 2015 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer; and Mike McKenney, our Vice President, Finance and Chief Accounting Officer. As we previously announced that Mike will succeed me as Chief Financial Officer on June 30. 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 January 3, 2015. 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 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 first quarter results as well as our outlook for the remainder of the year. Overall, we had a solid quarter with excellent gross margin and better than expected earnings per share performance. I'll begin today's business review with the financial highlights of the quarter. We finished the first quarter with revenue of $92 million, which was down 1% compared with the first quarter of 2014. Foreign currency translation had a significant impact on revenues, and excluding the effect of FX and acquisitions, our internal growth was up a strong 5%. Gross margin in the first quarter was excellent and near record at 48%. Our adjusted EBITDA was $13 million or 15% of sales, up 6% compared to Q1 of last year. Our GAAP diluted earnings per share of $0.62 in the first quarter exceeded the top-end of our guidance by $0.03 and was up 38% compared to Q1 of 2014. Our adjusted earnings per share was up 5% to $0.63. Our bookings of $108 million were the third highest in our history, but were down 6% compared to Q1 of last year, which was the second highest in our history. Excluding FX, our bookings were up 2% compared to last year. And our backlog at the end of Q1 2015 was a record $136 million, up 15% from Q1 of 2014. And finally, we set new record for parts and consumables bookings and revenue, which were up 4% and 8% respectively in Q1 compared to last year. We received a lot of positive comments about the slide we presented in the Q4 call, showing the impact of FX translation and acquisitions on some of our key metric. Since the U.S. dollars continue to strengthen against most major currencies…

Well, thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 48.1% in the first quarter of 2015, up 290 basis points compared to the first quarter of 2014, and were the second highest level achieved in our company's history. The increase in gross margins from last year's first quarter was due to lower amortization associated of acquired profit in inventory, as well as a favorable product mix. Our higher margin parts and consumable revenue represented 71% of total revenue in the first quarter of 2015 compared to 65% in the first quarter of 2014. Looking ahead, we expect our full year 2015 consolidated product gross margins will be approximately 44.5% to 45.5% or 50 basis points higher than we had guided to during our previous earnings call in February. Now, let's turn to Slide 17 in our quarterly SG&A expenses. SG&A expenses were $32.2 million in the first quarter of 2015, down $300,000 from last year's first quarter and included a favorable foreign currency translation effect of $2.4 million. Excluding the translation effect of $2.4 million and the SG&A from acquisitions, as well as the transaction expenses of acquisitions, SG&A expenses were up $1.7 million or 5%. SG&A expense as a percentage of revenue was 34.9% in the first quarter of 2015 compared to 34.8% in last year's first quarter. Looking forward, we expect the SG&A spending in 2015 as a percentage of revenue will be approximately 30% to 31%. Let me now turn to our EPS results for the quarter. We reported GAAP diluted earnings per share from continuing operations of $0.62 in the first quarter of 2015 compared to $0.45 in the first quarter of 2014 or an increase of $0.17. This increase of $0.17 in diluted EPS consists of the following:…

[Operator Instructions] Your first question comes from the line of Dan Jacome from Sidoti.

Tom, best of luck in your future endeavors, and appreciate all the color on the currency. I was just wondering a little bit more on, you said, paper capital equipment trends have been down, I was just wondering if you can give us a little bit of color on that? I think you have pretty good exposure to containerboard, and it appears that they will be adding a lot of capacity in 2015 and '16. Any color there would be great?

Sure. I was largely talking about North America. So just to put it in perspective, we've had a tremendous booking period for capital orders, both for recycling, but especially for virgin. So well, I'd say, it's coming off of that high, it's still a healthy market. On the other side, I was talking about on our Wood Processing side, it's actually, I would say, building. And we're chasing a number of pretty interesting projects in North America.

And then on the substantial gross margin upside this quarter, obviously, impressive, but it sounds like the spare part penetration into mix at 71% is a little bit abnormal. Can you just give us a little bit more details on that as well? I mean, are we not going to see 71% again for several quarters, or years, or how should we think about that?

Well, kind of, as I said my main remarks, yes, 71% kind of popped a little high. It's going to drop not so much, because the parts business drops, but because if we had some bigger capital shipments later in the year, that's going to really offset -- that's what's going to drive the mix down. When we think of our parts business, we think of growing it as strongly as we can, I think it's absolutely critical to our business. But I don't really think about a ratio, in particular, because obviously we have a lot of initiatives growing our capital business as well.

And then last, just on your OSB facing business, I guess the first quarter was a bit of speed bump for a lot of the home builders, construction given the weather. I was just kind of wondering if you saw any impact there or what exactly is happening? We don't have a lot of insight into this, because you only had the business for a little over a year I think, so any color there would be good?

I mean the OSB producers not unlike the paper producers. They take a very long-term view. When you're going to set up, spend a hundreds of millions of dollar setting up an OSB mill, you're looking well beyond a housing starts for any particular month, quarter, or even year. They're looking over a long period of time. And the fundamental basic thought underlying all of this activity is that we've had under building in the housing market in the U.S. for really since 2007, 2008. So I think that's what's driving them, as opposed to the short-term housing starts going up and down and weather and so forth.

And then just one last one, and then I'll hop back into the line here. You mentioned, you're seeing some success with your spare parts business in China, I believe. I was just wondering, you said that was for the doctoring holders. Just wondering how that's happening? Is it because of, you have better technology, or maybe some pricing concessions? How should we think about that?

So in China, in parts, many times we're competing with the local competitors who have substantially lower prices than us. So we really have to demonstrate the value of our products through the technology, and the return on investments that the customer gets by using those parts. So that doctor holder is a good example. It's very impactful on the performance of the paper machine. So he'll pay extra, because he can run faster, have less machine break, web breaks, and things like that. One of the benefits that's happened over the last couple of years when much of the paper producers on the coast in China have, sort of, shifted from building as fast as they can to actually high levels of performance is they are focusing very much on the efficiency of their paper machines, and we're helping them do that. We're helping them run our equipment better, which means in many cases using our parts.

Your next question comes from the line of Walter Liptak representing Global Hunter.

Congratulations, Tom, good work through the years, and I hope you have a good time in the retirement. Wanted to ask about the guidance, and if you have any comments on the timing of shipments that are coming out of backlog? And it really looks like with the second quarter guidance, you're more back-half loaded. And just asking, I guess, why that is? And how confident you are in those shipments?

I'll maybe take a first shot and then maybe Tom will want to add a little bit. But yes, I kind of said in my remarks that we expected the quarters to build through the year, and what is going to build the revenue side of that is some more capital, I would say, shipping towards the second half. That had lot to do with just timing of shipments, it's just when the customers want them. And as we do that, it will probably negatively impact our gross margins in those later course, but we'll have better operating leverage, so it will net-net be better. I covered it all.

But just to add, if it were not for FX, our backlog would have been over $140 million at the end of the quarter. So we have a pretty strong backlog going into the remaining three quarters here, which I think is encouraging. I think, parts business was strong as well. So I think that gives some more validity in the second half of year projections.

Let me try one on parts. The higher mix, it sounds like it just happened. They are always pushing. But I wonder if you can provide some color about what geographic regions surprise you, the kind of products that surprise you? And then maybe importantly, is the higher part sales because of efforts to grow that business, or is it some kind of an indication that capital investment from your customers is going to be lower going forward, and they're just doing more on parts and maintenance?

The real start, I would say, in parts sales is three. The two biggest or probably our Stock-Prep group and our Wood Processing group in North America. One of the real drivers on the Wood Processing side is they've come up with a disposable knife to replace the traditional knives that these machines, where you take these big heavy knives out and grind them and put them back. These are knives that you can weigh very little, and they can switch in and out very quickly. And they had great, great success with transferring customers from using these sort of grind your own knife to using these disposable knives, so that I would say is one driver. Also in the U.S. on the Stock-Prep side, we did a couple of acquisitions, both of that cleaner business and the screen basket business, and those sometimes take a little bit of time to get traction, and they continue to build as they do. So we've seen some success there. And then the final area, I would talk about is China, as I talked about with Dan. We've done a nice job really partnering with our customers in China to grow our -- to help them running their machines more efficiently, but it also very much has helped our parts business in China.

The only thing I would also add to that maybe would be our blade business as well. We have an exciting project going on with expanding our presence in the ceramic blade business. And there is an opportunity to increase our parts business even more down the road.

Yes, it's a very exciting effort. I think it's going to have more impact in 2016 than 2015, but I think in the long run we have high hopes for that ceramic blade effort.

So it sounds like its independent of capital investment. I wondered if you'd comment on, just kind of --

I don't think people say, okay, we're going to buy more shares, because we're buying less capital. That's not really -- that wouldn't come.

And want to ask about share repurchase. Your stock is down today. I wonder what your thoughts are on using capital for that.

We didn't buy any stock last quarter and people may kind of wonder why. As you know well we're very opportunistic buyers. I mean, when we've kind of shift our buyer head on, we want to buy it at the cheapest price we can. So one of the nature of the first quarter is, we're not allowed to buy stock until after we file the 10-Q. So the window is pretty small and we really didn't see an opportunity to buy it during that time. And as well, if the stock is making a big move up as we've seen it do over the years, we would rather stay out of the way of that, than add to it with our own purchasing. We really don't buy to support the stock. We buy the stock to increase every shareholder's ownership of the company. And we want them do it at the cheapest price possible. Obviously, with the stock dropping, as it did today it's more attractive than it was in Q1.

And going back to the second quarter guidance, I mean is that kind of the number that you thought you're heading for earlier in the year, and we just didn't understand the magnitude of how back-loaded it was? Or did you see some shipments that were supposed to be out of backlog that pushed into the second half?

Well, it was no big surprise to us particularly. I mean, I think in the first quarter call, we made the same comments that I did this time. I think it was in Tom's remark last time that we expected each successive quarter to be stronger than the other. I mean, I know that's not much help to you guys to try to figure out exactly where it's going to be, but this quarter would fit into it steadily increasing our quarterly performance.

Your next question comes from the line of Dan Jacome representing Sidoti.

Just following-up on the question on repurchase. I think historically your 10-Q comes out about seven to nine days after the earnings release. Is there anything that would prevent that trend occurring this year?

I'm not sure what do you mean by prevent that?

Should we expect the 10-Q to come out as it normally does about seven days after your earnings release?

Yes, basically. I wouldn't say this quarter is any different.

And then on the M&A side. Have you seen anything open up incrementally, since we last spoke, maybe something on the technology side or something else in the housing facing industries?

I would say we're actively looking at M&A. I would say we have a number of things we're kind of pursuing. Always the chances against any one of those happening is low. I will also add that that's always competing with stock buybacks of course for capital, but we do see some stuff that looks pretty interesting to us.

There are no further questions in queue. I would now like to turn the call over to Mr. Painter. End of Q&A

Thanks operator. Let me conclude today's call with, what's to me are the, key takeaway points. First, despite the strong FX headwinds, we had another solid quarter with near record gross margins. Second, when adjusting for FX and acquisitions, we had very strong internal growth of 5%. Third, we continue to grow our parts and consumables business, which saw revenues increased 17% when excluding FX, setting a new record. And finally, we expect improvements and profitability to offset the negative impact of FX on our earnings per share in 2015. I look forward to updating you on our progress on future calls. Thanks very much for listening.

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