Good day, ladies and gentlemen, and welcome to the Kadant Inc. Third Quarter 2017 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] As a reminder this conference call is being recorded. I would now like to turn the call over to Mr. Mike McKenney, Senior Vice President and Chief Financial Officer. Sir you may begin.

Thank you Andrew. Good morning, everyone, and welcome to Kadant’s third 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 the Investor 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 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. Happy Halloween everyone. And thanks for joining us on our third quarter call. If you’ve read the press release, I think, you agreed we have plenty treats to talk about today and tricks. I’d say you without question the third quarter was one of the best quarters in our history. It was one of those quarters when everything that could go right went right and then some. Our results were driven primarily by a combination of excellent performance by our newly acquired Wood Processing business, as well as double digit internal growth and outstanding execution from our existing businesses. Let me start with the financial highlights for the quarter. Q3 was a quarter of record for Kadant in fact, I think, we had a record number of records in the quarter. Bookings were a record up 43%, revenue was a record up 45%. Adjusted operating income was record up 91% or 16% of sales. Adjusted EBITDA was a record $30 million, or 20% of revenue, which was also a record. GAAP diluted earnings per share was a record and up 43%. Our adjusted earnings per share, which excludes acquisition related costs, was also a record $1.49 up 84%. As expected our gross margins at 42% was below our historical average due to the impact of purchase accounting and the high percentage of capital revenues during the quarter. Excluding purchase accounting expenses our gross margin was 45%. Cash flow from operations of $7 million was also below or typical run rate due to the acquisition expenses we incurred during the quarter and the high level of capital shipments in the quarter. Mike will provide details on this during his remarks. Net debt at the end of the quarter was $187 million. As you can see on Slide 6 acquisitions…

Thank you, John. I'll start with our gross margin performance. Consolidated gross margins were 42.3% in the third quarter of 2017, down 330 basis points, compared to 45.6% in the third quarter of 2016. The consolidated gross margins in the third quarter of 2017 are negatively affected by the amortization of acquired profit and inventory related to our recent acquisitions, which lowered consolidated gross margins by 220 basis points. Excluding the impact of the amortization of profit and inventory consolidated gross margins in the third quarter of 2017 were 44.5%, down 110 points, compared to last year's third quarter. As we had indicated in our last earnings call, we anticipate lower gross margins in the second half of the year due to the increase in capital shipment. Our parts and consumables revenue represented 55% of total revenue in the third quarter of 2017, compared to 58% in the third quarter of 2016. Our recently acquired Wood Processing business had a very strong quarter for capital revenues, which contributed to the high overall percentage of capital revenue to total revenue. We continue to expect that full year 2017 consolidated product gross margins will be approximately 45%. We anticipate that product gross margins in the fourth quarter will be negatively impacted by approximately 120 basis points, as we recognize amortization expense associated with the acquired profit and inventory. We expect this amortization expense to be largely completed by the end of the fourth quarter. Now let's turn to Slide 18 and our quarterly SG&A expenses. SG&A expenses were $42.5 million in the third quarter of 2017, up $9 million from the third of 2016, including $6.8 million SG&A expenses from our recent acquisitions, which includes approximately $1 million in acquired backlog amortization. In addition, during the quarter we incurred $0.6 million in…

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

Hi good morning guys.

Hey Walt.

Hi Walt.

Hi congratulations on all the records. I want to ask first for 2017 you’re looking forward to a record for the full year too?

Yes.

I think if we restock them now we might record.

Alright. Well let me ask maybe first just about some of the amortization costs that are running through your SG&A. For example, the back log amortization of $1 million does that run off after this quarter or next quarter or is that a an ongoing expense?

That’s both in inventory well and the back log are run off in the short term. So the back log will re-anticipate will run off in the fourth quarter here.

Okay and yes. And I want to ask you about that inventory that’s in the gross margin too.

Yes.

How much was that in millions of dollars?

It was about $3.4 million in the third and we’re looking at about $1.8 million in the fourth. And then we should be at the end of it. It might trickle into 2018 a little bit but we should…

[Indiscernible]

Yes not much left on that.

Okay. We had great EPS this quarter, but it sound like if you exclude those two things it would been even significantly higher. So it will be an easy comp this year.

So that’s what we’re doing to get you to the adjusted, right. So the GAAP numbers include those costs and the adjusted numbers we exclude those.

Okay. It’s alright.

Yes.

The purchase accounting amortization, the stuff that's transient, I would say, it's going to be over within a couple of quarters in our last quarter end before.

So if you are looking at the third quarter loss those were quite large, where two of those combined that process inventory, amortization to backlog amortization, those two combined were about $0.28.

Okay. Alright I thought the 42.3% was part of the adjusted – what’s the adjusted number so that it looks to me like it also included some inventories.

Yes, so the 42.3% is all in, so you have the inventory in there and that I noted in my comments that the impact was 220 basis points related to amortizing the acquired profit in inventory. So you can add that back to the 42.3%. And then we come up to about 44.5%.

Okay, then the 44.5% is what gets you to the $1.49 part of the number in the dollar?

You can kind of think 42.3% as a GAAP type gross margin of 44.5% is more adjusted.

Okay.

I think the point is both of those, the acquired profit inventory and backlog, those get amortized very quickly and they'll be behind us here, going into 2018.

Okay, great. Thanks for that clarification. I wanted to ask you about the NII growth rate and the out performance. Was there an out performance of the housing market? Was it a market share gain or was it just sort of an in-line based on what you saw from the marketplace?

So this a couple of things, so overall the market particularly in North American is extremely strong. But as Mike kind of alluded to there was an element of it that they came in and gave us kind of a blockbuster third quarter number that we, I would say, were a little concerned about just passing that on to the investment community and we were somewhat conservative in what we did with that. Well front of the gun they did better than even they said that they would do. So that element is just to do really with the timing of capital orders, it's not a sort of steady state growth rate. When we talked about at the time we bought them we said that globally you can expect that their markets will grow like 2.5%, a little higher in North America. We were just at a conference a couple weeks ago and it was very upbeat on North American housing but it still comes down to about maybe 3% growth in North America for lumber, which isn't about what we had.

Okay, great. Okay. And then just from a high level just looking at your organic growth on the paper and packaging side it looks like outsized organic growth compared to what this industry does long-term. What do you attribute the you call that e-commerce and a few other things. I guess what do you attribute the strength and the organic revenue on the paper and packaging side?

Sure, so part of it when no question is driven by the very strong growth in China right now. So globally that’s a big part of it but I kind of went through the other markets it's pretty strong everywhere. I will say that packaging for us which is by far the biggest part of our pulp and paper revenue is definitely getting a kick from this e-commerce. I mean as you think about it, you go to Wal-Mart and buy a toaster, that box is shipped to Wal-Mart with 87 other toasters and you maybe used up a half a foot of cardboard, but you have a toaster shipped to your individual house and you use five feet of cardboard. So it's an order of magnitude difference as e-commerce grows as a percentage of retail. So now we're talking about growth rates for the packaging in the developed world of Europe and North America, more in the 3% range, which is that's significantly better than what I've been talking about in the past.

Okay, alright, great. And I feel great about that. To me that's a permanent kind of structural tailwind if you will that we’ll enjoy for awhile. And I wonder if I can just ask the last one about cash flow. We understand about the weaker cash flow in the third quarter, but I wondered if – is there a question with some of those receivables in the fourth, were you expecting from cash flow in the fourth quarter?

Yes I would expect that we'll see a good portion of those receivables come in as cash in the fourth. As is sometimes the case for us our back end of our quarter had meaningful capital shipments. So hence we end up with those still in receivables. And as I noted it was a little over 15.9, 15.7 in receivable grow. But yes that'll come back to this cash.

Okay great. Alright, thank you.

Thanks Wal.

[Operator Instructions] One moment for questions. I'm showing no further questions – we do have a follow-up from Walter Liptak with Seaport Global. Your line is now open.

Hey Walt.

Okay guys I'm back. I like to ask a lot about Unaflex. In expansion joints, I think, for awhile you had an initiative to grow that part of your business organically. I wonder if that is what led to this acquisition and what you see kind of with your core expansion joint business and how Unaflex will be around maybe find some synergies with them?

So the real fit is with our rotary joint business. So they're both in a way joints. But what we loved about Unaflex is they're the leading provider of these rubber expansion joints. So they have a very strong market position that's kind of hard to grow into in these conservative process industries. When you have a critical component – it's hard to increase your market share organically. When you're not, you're not the number one player. So it's definitely a case of it's better to buy the number one player than try to grow there organically. So it's a nice little – it's a nice – it's a nice sort of little-to-medium size business that was a good fit for that.

Okay. Are there synergies with rotary joint as their channel strategy?

Yes, there are synergies with rotary joint for sure. It's kind of a natural extension of the product portfolio, it's really another kind of joint for cases where there's thermal expansion or vibration all that kind of stuff.

Okay. Alright great, thank you. I’ll take the reset of the questions offline.

Okay.

I'm showing no further questions. I would now like to turn the call back to Jonathan Painter for any further remarks.

Okay, thank you, Andrew. Before I let everyone go this morning, let me just summarize what I think of the key takeaways from the quarter. Number one, we had a fantastic quarter with record earnings per share, adjusted earnings per share $1.49. Number two, we had strong internal revenue and bookings growth of 15% and 19% respectively. Number three, we completed the acquisitions of the NII and Unaflex businesses, and the integrations are going well. And finally, for the third time this year we're raising our full year revenue and earnings per share guidance and we expect a record year in 2017. I look forward to updating you next quarter. Thanks very much.

Ladies and gentleman thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.