Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Kadant Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I would now like to turn the call over to Senior Vice President and CFO, Mr. Michael McKenney. Please go ahead.

Thank you, Andrew. Good afternoon everyone, and welcome to Kadant's second quarter 2017 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 31, 2016, and subsequent filings with the Securities and Exchange Commission. Our Form 10-K is on file with the SEC and is also available in Investor section of our Web site 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 second quarter earnings press release issued today, which is available in the Investors section of our Web site 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'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jon?

Thanks, Mike. Hello, everyone. Thank you for joining us this afternoon to review our second quarter results, and discuss our outlook for the second half of the year. Overall, we had another terrific quarter with record bookings, record adjusted EBITDA, and record adjusted earnings per share. I'll begin with the financial highlights. To tell you the truth, the second quarter is one of those quarters with so many highlights it's hard to know where to start. But since it's at the top of the slide, I'll start with bookings. We had record bookings of $120 million, which beat the previous record set last quarter. This was driven in large part by continued strong capital bookings in China and Europe. Other highlights include, gross margin, at 48%, was the third best in our history, and was due largely to a high percentage of parts and consumables at 64% of revenue. Adjusted EBITDA was a record $19 million or 17% of revenue. We generated $0.72 of GAAP diluted earnings per share, but more important to us, our adjusted earnings per share which excludes the acquisition costs for NII was a record $1.04. Generating over a dollar share is an important milestone for us, and we're very proud of it. Cash flow is also outstanding, at $24 million. And net cash at the end of Q2 was $22 million. Soon after the quarter closed however we happily eliminated our net cash position with the acquisition of NII. We're currently working on the integration of NII, which is going well. This is an important acquisition for us, and so far we're feeling great about it. The markets for their products are quite strong, and their management team has done a great job with the transition. Mike will give you the details of the impact…

Thank you, Jon. I'll start with our gross margin performance. Consolidated gross margins were 47.9% in the second quarter of 2017 up 300 basis points compared to 44.9% in the second quarter of 2016. The increase in gross margins from last year's second quarter was principally due to higher margins achieved in both our capital and parts in consumables business. Our parts and consumables revenue represented 64% of total revenue in the second quarter of 2017 compared to 62% in the second quarter of 2016. Looking ahead with the inclusion of NII, we expect full year 2017 consolidated product gross margins will be approximately 45%. We anticipate quarterly gross margins will be lower in the second half of the year than the first half due to a significant increase in the shipment of capital orders which will change our overall product mix and amortization expense associated with the acquired profit and inventory. Now let's turn to slide 16 in our quarterly SG&A expenses. SG&A expenses were $39.2 million in the second quarter of 2017, up $3.1 million from the second quarter of 2016. The second quarter of 2017 included $4.1 million of acquisition related costs and a favorable foreign currency translation effect of $0.7 million. SG&A expenses in the second quarter of 2016 included $1.7 million of backlog amortization expense and acquisition costs associated with the PAAL acquisition, excluding acquisition cost, backlog amortization expense and the foreign currency translation effect, SG&A expenses were up $1.5 million. SG&A expense as a percentage of revenue was 35.5% in the second quarter of 2017 compared to 32.3% in the second quarter of 2016. Excluding the acquisition cost and favorable foreign currency translation effect, SG&A as a percentage of revenue was 32.5% in the second quarter of 2017. Let me turn next to our…

Thank you. [Operator Instructions] And our first question comes from the line of Walter Liptak with Seaport Global. Your line is now open.

Hi, good afternoon guys.

Hi, Walt.

So, great quarter, and I guess the first question is on the gross margin, and I understand parts was the big part of the gross margin expansion. I wonder if you could just repeat again what the percentage of revenue was from parts, I didn't catch that? And if there was something that you guys did differently to get that level of parts, is it selling efforts, is it anything strategic. And maybe we can start there on the gross margin.

Yes. Well, the split was 64% parts and consumables. If you recall, last year, we came in at 62% in total. So the mix was a little higher to the favorable side on parts and consumables, and Jon, if you want to…

Yes, the other -- I would say that our margins, actually for both capital and parts were good in themselves. I would say particularly in China. That factory is running full-out. And overhead is being absorbed so that that has a good impact on all the margins. And we had some particularly good jobs in there, I would say.

Okay, great. And I think in your prepared remarks you talked about the gross margin for Stock-Prep was good. Was that related to parts as well or was that something else?

It was both. Well, it was both parts and consumables and capital. The execution on the capital jobs in the quarter was quite good.

Okay, what geographic region was that in?

I would say that was primarily out of China.

Out of China, okay great. Okay, and then, I guess, moving over to China then, you mentioned the WTO changes to the mix paper, and that's putting OCC costs higher. I wonder if the productivity gains from your equipment is going to be enough to offset the OCC costs, or how should we look at that if some of your customers are seeing margins come down, will that slow investment in China?

Sure. So, I mean, it's speculation on how much it will impact the price of OCC. It's just that the OCC is going to have to fill the demand that that mixed office waste or waste paper was filling up before. I would say that I doubt our equipment -- people buying our equipment will offset the increase of OCC. So they'll probably have higher fiber costs and higher overall operating costs, and they'll probably pass those on to their customers, or certainly try to. But my point really was is that our stuff; particularly on the stock-prep side is often sold on a return on investment on fiber savings. And when the fiber is more expensive that return on investment is a better calculation. That said, you don't want OCC so high that virgin looks attractive. We probably have a bias towards recycling. But I think we're probably safe in that regard. These things have a way of balancing themselves out.

Okay, great. And good work on the guidance for accretion from the NII deal. I wonder if we could take a step further, and if you have thought at all about what the accretion is going to be for 2018? And I imagine the purchase accounting will be done by the time you get into 2018?

Yes, I'll make a few wild comments there, Michael. Correct it. But we haven't done anything at 2018. Mike would want me too say that. I would say if I were sitting in your shoes, I would go back to the comments we made when the bought the company, that this is a business with an EBITDA of around $20 million-$21 million. And then calculate what that is.

Okay.

And Michael…

Yes, I wanted to say, well, we're giving some good color on what we expect here in the second half, but just for full disclosure, we haven't completed the valuations yet. So those could move. But to your point, we do expect the kind of one-time. So the inventory right [off] [ph] the backlog amortization, we expect to be essentially through that in 2017.

Okay. And just to be clear, the adjusted EPS for the third quarter, the $1.12 to $1.16, that excludes any purchase accounting, any deal-related costs that -- the incremental operating income before any of those special items?

Yes, that's correct.

I guess the other thing I would just say, we've kind of said a few times is the third quarter for NII is pretty strong. They have that every once in a while. Their forth quarter last year was pretty strong. But I wouldn't just take our second half and double it for next year either. It's probably -- touch wood, maybe I'll come true, but we're not expecting it to be that good in 2018 necessarily.

Okay, and one last one for me and then I'll get back in queue and let someone else go. In Europe bookings, you mentioned that they were strong, including in Russia. And why do you think the bookings are picking up there? Is it a pent up demand from underinvestment, especially in Russia?

Well, in Russia, no question, the weak ruble is helping them. Any mill in Russia that's exporting, and a lot of them are exporting to China, is making a lot of money, and the same thing goes true for lumber. They're selling a lot of lumber to China. And when your costs are in rubles and your revenue are in dollars or even renminbi, that's great. So that's sort of, I would say, the driving force behind Russia. Europe, I think it's exactly what you say. It's sort of pent up demand. You see Spain picking up, Italy, these countries that really had been on their knees for quite a while are -- seems turning the corner.

Okay, great. Okay, thank you.

And our next question comes from the line of Dan Jacome with Sidoti & Company. Your line is now open.

Hi guys, how are doing?

Hi, Dan.

Hi, Dan.

Okay, nice job. Just two quick questions, first then on the WTO, why are they putting that ban into places, so I have a better background understanding of it?

What they're saying is that this -- they feel like they're importing garbage from the world, and it kind of ends up in their environment and their waste -- in their landfills, and in their streams and rivers. So that's really what they're saying.

Okay, so the idea is, as you said, OCC is going to pick up the slack if that goes into place? What sort of timeline on that? I know you don't have a crystal ball, but when exactly would that happen?

They said by the end of the year they're going to impose this thing. They just announced this, by the way, like two weeks ago. So it's…

Okay, yes, I missed it obviously. So I'll go have to Google that.

Pretty fresh news.

Okay.

And not everyone blends in mixed office waste to OCC. What I don't have is a handle on how impactful it'll be. I'm not sure anyone does.

Great, no, I appreciate it. I missed that, so we'll be tracking that. And then on the NII acquisition, obviously you're still very bullish on, I guess, lumber demand and the housing cycle exposure which you have. But what about that timber harvesting equipment, do you still have an update on that. You still feel positive about it or -- I was just curious?

Yes. I mean, to be candid with you, we were much more excited about the debarking equipment versus the timber harvesting. But the timber harvesting has done extremely well. They're sold out for the rest of the year. Yes, we are production-limited right now.

Right.

And we're going to have to look at what we do about that.

Yes, well you got to get the saw logs from somewhere, so that's how that's going to impact that business, right with…

Yes, but this was a business that was up towards $100 million 10 or 15 years ago. So we're having requests from customers to say, hey can you introduce this model, can you introduce that model. And it's sort of more than we can handle right now. So we're kind of working through that.

Okay. And then lastly, I think you mentioned something about North America paper, were you talking about uncoated free sheet or what were you mentioning there?

I was kind of making a general comment. Linerboard is biggest one.

Right.

But it's a nice healthy stable environment. They're put through a $50 price increase at the end of last year; they put another in this spring. The mills are doing well. They have rising input costs, particularly OCC. But it's a relatively tight supply market, and they're, I would say, pretty healthy.

Right. Yes, we know linerboard is doing well, but what about uncoated free sheet. I know your exposure to that has been going down drastically over the years that -- there was one company that made a major capacity adjustment just two days ago, so I'm just wondering if you're seeing any impact there, if you even have any high-level comments for me, which are always appreciated?

I'd tell you, Dan, I look at it over a longer term. I think the uncoated free sheet, not as bad as newsprint, but they have a tough hand. They will be shrinking all the time. And it'll be kind of a steady decline. It's a relatively small percentage of our business. I think printing and writing is kind of 8% of our sales last year.

You have to get in smaller…

Yes…

Yes, exactly. All right, well, nice job on the first half. You've set the bar pretty high for yourselves for the rest of the year, but thanks a lot.

Okay, then.

Thanks, Dan.

And I'm showing no further questions at this time. So with that, I would like to turn the call back over to President and CEO, Mr. Jonathan Painter.

Okay, thank you Andrew. Before I go, let me summarize what I think are the key takeaways for the quarter. One, we had record adjusted earnings per share of $1.04. Two, we had record bookings of $120 million. Three, we completed the acquisition of NII in early July, and the integration is going well. And finally, four, we're raising our full-year revenue guidance by $51 million to $61 million, and our full-year adjusted earnings per share guidance by $0.70 to $0.72, leading to an expected record year in 2017. I tell you, after a quarter like this one, I want to take a moment before I let you go to publicly acknowledge the folks in our operating units whose hard work has produced the results that it's been my please to share with you today. I also want to give a shout-out to the team at our corporate office and at NII who've worked nights and weekends for months on the acquisition and integration of those businesses. So your dedication is really an inspiration. So thanks very much for listening in, and I look forward to updating you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone have a wonderful day.