Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Kadant Incorporated Earnings Conference Call. My name is Katina and I will be your coordinator for today. [Operator Instructions] And we now would like to turn the presentation over to your host for today’s call, Mr. Mike McKenney, Chief Financial Officer. Please proceed.

Thank you, operator. Good morning, everyone, and welcome to Kadant's First Quarter 2016 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 January 2, 2016. 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 Mike. Hello everyone. It’s my pleasure to brief you on our first quarter results and provide some information on our recent acquisition of the PAALGROUP. Overall, we had a solid quarter with better than expected revenue and earnings per share performance. I will begin today’s business review with the financial highlights for the quarter. We finished the first quarter with revenues of $97 million, which was up 5% compared to the first quarter of 2015. Foreign currency translation once again had a significant impact on revenue and excluding the effect of FX, we are up 9% compared to Q1 of 2015. Gross margin in the first quarter was excellent at 46%. Our adjusted EBITDA was $14 million or 14% of sales, up 2% compared to Q1 of last year. Our adjusted diluted earnings per share of $0.72 in the first quarter, was up 14% compared to Q1 of 2015. Our adjusted earnings per share result exclude an expense of $0.12 related to the PAAL acquisition and a gain of $0.02 on the sale of building in Sweden related to our reorganization there. Our GAAP diluted earnings per share of $0.62 was the same as reported in Q1 of 2015 and beats the top end of our guidance by $0.04. Our bookings of $97 million were quite good but down 10% compared to Q1 of last year, which was the third highest in our history. And finally after the close of the quarter, we completed the acquisition of the PAALGROUP, the leading European supplier of baling equipment used in recycling and waste management industries. I will provide some detail on this business and the potential synergies with Kadant later in my remarks. The relatively strong dollar and corresponding FX translation continued to have a significant effect on our results. As…

Thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 46%, or 45.6% in the first quarter of 2016, down to 250 basis points compared to 48.1% in the first quarter of 2015, which was the second highest in the company’s history. The decrease in gross margins from last year's first quarter was equally split between an unfavorable product mix and lower margins, principally in our parts and consumables business. Our higher-margin parts and consumables revenue represented 65% of total revenue in the first quarter of 2016, compared to an exceptionally strong 71% in the first quarter of 2015. Looking ahead, with the inclusion of PAAL, we now expect full-year 2016 consolidated product gross margins to be approximately 45%. As is normally the case, there is likely to be some variability by quarter due in part to product mix, as well as the timing of larger capital orders. Now let's turn to slide 23 and our quarterly SG&A expenses. SG&A expenses were $32.5 million in the first quarter of 2016, up $0.3 million from last year's first quarter and included a favorable foreign currency translation effect of a $1 million. Excluding the translation effect, SG&A expenses were up $1.3 million or 4% compared to the first quarter of 2015. The increase in SG&A was due to a $1.4 million of acquisition costs incurred in the first quarter of 2016 related to our recent acquisition of the PAALGROUP. SG&A expense as a percentage of revenue was 33.7% in the first quarter of 2016, compared to 34.9% in last year's first quarter, a decrease of 120 basis points. Looking forward with the inclusion of PAAL, we expect that SG&A spending in 2016, as a percentage of revenue will be approximately 31.5% to 32.5%. I would note that…

Thank you. [Operator Instructions] Your first question comes from the line of Walter Liptak representing Seaport Global. Please proceed.

Hi. Good morning, guys.

Hey Walt.

Hi, Walt.

Well, first question for me. Let me ask about the second quarter guidance and you mentioned a couple of things. I think the timing of some capital orders and some other index and gross margin. I’m wondering if you could just review that with us so we have an idea of what the gross margins maybe looking like during the quarter.

Sure. I mean as -- I will give kind of a big picture comment and let Mike give a little more detail comment. As you recall in our guidance in February, we kind of said we expected each quarter to be sequentially better. And essentially what happens is Q2 and Q1 flipped and the reason for that is largely these capital orders that we expected in Q2 really fell into Q1. So that -- and broadly is -- Mike, maybe you want to comment with a little more detail?

Okay. Well, Walt, you saw the change in our revenue guidance, right. We basically had an uptick of $42 million from our past revenue guidance and that's principally due to the PAAL transaction and that’s kind of spread relatively evenly by quarter through the remainder of the year. So, we gave revenue guidance in the quarter of $103 million to $105 million and you can assume PAAL’s in there for approximately $15 million. So that would give you Kadant without PAAL at revenue guidance of approximately $89 million to $91 million, which is pretty much in line with what happened in the first quarter in terms of our guidance. And if we were to give guidance just on that, we would've guided $0.57 to $0.60 per share. And when we layer in PAAL that is dilutive about $0.07 a share, so we get down to the $0.50 to $0.53, our guidance that we gave. Okay?

Yes. That sounds good. What are the transaction costs like in -- can you quantify that for us in millions of dollars that you will have in 2016?

Yes. It was actually a pretty expensive acquisition because it’s in Europe. They really have operations in Germany, U.K., France and England. I mean France and Spain and so. And we did it on a relatively condensed timeframe, which was kind of required from the seller. So, we had what we had. We incurred a $1.4 million in the first quarter. We are projecting pre-tax $0.3 million in the second, so $1.7 million for the total acquisition cost.

Okay. Got it. And then I guess, just thinking about PAAL you mentioned that the growth rate was 5%, which sounds really impressive considering that a lot of those countries happen in really slow growth in environment of recession. I wonder have you seen improvement over the last year to get the 5% CAGR and you are looking at growth rate or you thinking about you over the next 12 months?

So, you're right. It was quite impressive that they grew 5% over the last couple years in a market that’s much slower growth than 5% particularly for balers. So the market in Europe probably is growing about 1.5% for the sort of EU type, EU-28 or whatever they call it. When we did our modeling, we didn't have it growing at quite that high. I think that much of their growth is really going to be through geographic expansion in South America -- Latin America, Mexico in particularly where they have already got some good progress and then hopefully with some of assistance from us in the U.S. and China. I would say China will be a longer, a little bit of a longer term play because at this point China, I don't know that that market would be willing to pay the prices for this kind of high-cost premium products. But knowing China and how they work, this is a country that does everything in big economies of scale. So they at some point, I think they will be moving towards large efficient waste management centers and when they do, I think that will be a good opportunity for us.

Okay. Well, it sounds like there is an effort to do and bringing product into the U.S. How long do you think that process will take and will you be exporting out of Europe into the U.S.?

One thing I will tell you as well, Walt and I think I had mentioned this to you before. Sale synergies are the hardest of all to get. So, I expect it to take many years. We would be manufacturing out of Europe for the foreseeable future let’s say. One of the things in the U.S. market that’s kind of opportune for us is the largest baler manufacturer in the U.S. bought like the second and third, or third and fourth biggest baler manufacturers. And the second biggest baler manufacturer actually has withdrawn from the market and left the U.S. more or less. So, customers who had kind of four, five choices of baler manufacturers are largely down to one and they don't like that. And I think they like to see some additional suppliers in the market.

Okay. Okay. Great. And I will just switch over to just the bookings in North America if you don’t mind. I want to ask about -- the bookings in North America didn't look bad and I wonder about if you could talk a little bit about the pipeline of larger systems orders and it seems like some of the general industrial is starting to pick-up and if you think that might flow through to a little bit better order trends in North America this year?

I kind of think of. North America is more or the same. We have some stuff we are chasing. I don't expect it will be at the level we had in 2015. So that's really -- we don't see much on the -- a strander on the Wood Processing side.

Okay. And your comments about Asia were that you are expecting it still to be weak. The only thing that you can point to is that financing issues like we've seen in the past or was it just the slow industrial economy there.

I think it’s more of the slow industrial economy. We had financing issues with that Gotye project that we reversed but that's really it. Financing is not the major issue right now. It’s really just to have some overcapacity in certain areas and people are little bit cautious.

Okay. Got it. Okay. Thank you.

Thanks.

[Operator Instructions] Your next question comes from the line of Dan Jacome representing Fidelity. Please proceed.

Hey. Good morning. Thanks for your time.

Hey, Dan.

Hey. Apologies if I missed it. I was at another call, so was hoping back and forth. But the capital equipment that got put forward this quarter what was the geography and the product line for that?

There was a fair bit in China.

Some in Europe and some in America.

Yes. But really all three, maybe a little more in China.

And was that Stock-Prep because it looks like you had a good quarter for Stock-Prep all-in?

A lot of it was…

Yes, it was Stock-Prep, yes.

Okay. Great. And then, I know we got a lot of questions about PAALGROUP, so interesting transaction. Just looking at -- you said that revenue synergies are going to be harder to capture, but just in terms of cost synergies, longer term, is there any room for that because it sounds like you are going to keep most of the manufacturing in Europe, is that correct so?

Yes. I should say it’s European manufacturing mainly in Germany but also a little bit in the U.K. But they have a sort of heavily outsourced model. So, our intent is to keep that and they make a very precise high-quality product. So, our intent is very much to maintain those operations there but we will look to see if there is opportunity on some of the outsourced components is to whether we can make those in China.

Okay. Good. And then my last question. It’s kind of a random one but just remind us again, for the tissue business that you do, what’s your exposure to at-home versus away from home because I was just looking at the some of these at-home tissue numbers from some of the guys that are ready to report and they have excellent numbers? So, can you remind -- what’s your exposure there?

Yes. I would tell you, we do globally track what grade our orders are going into and we did, we instituted that a little while ago but more or less, we don't breakout at-home versus away from home for tissue. So, I can't really give you a good answer on that.

But in terms of the geography though it’s mostly U.S. customers, right?

Our tissue business?

Yes.

No. No, I wouldn't say it’s mostly U.S.

Okay. Okay. Does it attract all of the geographic mix?

Yes. I mean over the longer run. Don't forget that our Stock-Prep exposure to tissue, okay, which is one of the bigger pieces that’s recycled tissue and that is Europe and South America. It is really not U.S., hardly at all. The U.S. just for preferences doesn’t use recycled tissue particularly.

Right. Okay.

But our other businesses are, doctoring, water management business, those kind of businesses. They of course would sell through the virgin tissue mills.

Okay. Thanks a lot for clarifying that. Thanks.

With no further questions at this time, I would now like to turn the call back to Mr. Jon Painter for any closing remarks.

Thanks, operator. I want to conclude today’s call with what I think are several key takeaway points. First, we had another good quarter with excellent internal revenue growth of 9%, excluding FX. Second, we are moving quickly with the integration of the PAALGROUP into the Kadant organization to capitalize per share guidance to $2.97 to $3.07 on revenues of $412 million to $422, largely due to the PAAL acquisition. I look forward to updating you next quarter. Thank you very much.

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.