Good day, ladies and gentlemen, and welcome to the Q4 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 follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the call over to Michael McKenney, Chief Financial Officer. Please go ahead.

Thank you, Ayala. Good morning everyone, and welcome to Kadant's fourth quarter and fiscal year 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. These forward-looking statements are subject to know and unknown risks and uncertainties that may cause our actual results to 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 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 fourth quarter and full-year earnings press release and the slides presented on the webcast and discussed on the conference call, which are 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. Thanks for joining us this morning to review our fourth quarter and full-year results and to discuss our business outlook for 2018. The fourth quarter was an outstanding finish to the best year in our history, and our record quarterly bookings provide a solid footing for 2018. Our fourth quarter results were driven by a combination of excellent performance by our newly-acquired businesses, as well as double-digit internal growth and solid execution from our existing businesses. For the full-year 2017, we had record performance in nearly every key financial metric. I'll start with the highlights of the quarter. As you can see on slide five, our financial performance in Q4 was excellent. Bookings were a record $147 million and up nearly 30%. Revenue was up 49% to $149 million. Adjusted gross margins remained healthy at 44%. Adjusted operating income was up 93% or 14% of revenue. Adjusted EBITDA was up 88% to $26 million, or 18% of revenue. GAAP diluted earnings per share was negatively impacted by a one-time tax charge on un-remitted foreign earnings as a result of the new US tax law. Excluding this one-time tax provision and other acquisition-related and restructuring costs, our adjusted diluted earnings per share was up 65% to $1.14. Without a doubt, one of the highlights of the quarter was our record cash flow from operations of $33 million. Free cash was also a record at $24 million, despite spending $5 million in the quarter on a new manufacturing facility that I'll comment on later in my remarks. Our net debt at the end of the quarter was $165 million, and our leverage ratio as defined in our credit facility was 1.94. Let me turn now to our full-year results. 2017 was definitely one for the record books, while…

Thank you, Jon. I'll start with our gross margin performance. Consolidated product gross margins were 43.3% in the fourth quarter of 2017 down 270 basis points compared to 46% in the fourth quarter of 2016. The consolidated gross margins in the fourth quarter of 2017 were negatively affected by the amortization of acquired profit an inventory related to our recent acquisitions, which lowered consolidated gross margins by 120 basis points. Excluding the impact of the amortization of profit and inventory consolidated gross margin in fourth quarter of 2017 were 44.5% down a 150 basis points compared to last year's fourth quarter. A contributor to the 150 basis points decrease from last year if the addition of the Timber harvesting equipment product line which has a lower gross margin profile. Another factor was our products and consumables revenue represented 62% of total revenue in the fourth quarter of 2017 compared to 64% in the fourth quarter of 2016. For the full-year of 2017, product gross margin for 44.9% compared to 45.5% in 2016. Excluding the amortization of acquired profit and inventory in both periods, product gross margins were 45.9% in 2017 up 30 basis points from 2016. Looking ahead, we expect the full-year 2018 consolidated product gross margins will be approximately 44% to 45%. Now let's turn to slide 20, and our quarterly SG&A expenses. SG&A expenses were $44 million in the fourth quarter of 2017, up $10.4 million from the fourth quarter of 2016, including $7 million in SG&A from our recent acquisitions, which includes approximately $0.5 million of acquired backlog amortization. In addition, during the quarter we incurred $0.4 million of acquisition cost, and that was unfavorable foreign currency translation effect of $1.3 million. SG&A expense as a percentage of revenue was 29.5% in the fourth quarter of 2017,…

Thank you. [Operator Instructions] And our first question is from Dan Jacome with Sidoti. Your line is now open.

Good morning. How are you?

Good, Dan. How are you doing?

Good morning, Dan.

Not too bad. Okay, thanks for the time. Can you talk a little bit -- I think you said stock prep was up really solid in Europe; can you talk a little bit more about that? What sort of end market specifically, was it in packaging or something else?

Yes, I would say, broadly speaking, Europe is up. Europe is about as strong as we've seen it, I would say. So, specifically on the stock prep, I would say, Russia is an area of strength. And also Southern Europe, places like Spain, Portugal, that kind of thing, I would say, areas of strength.

Okay. I mean, where is that, like liner board?

Grade-wise, it's actually liner and tissue, both, but probably more on the liner side.

Tissue too, all right, okay. That helps. And then, I don't know if I got this wrong; did you say you had an OSB related order in Asia? Did I get that wrong?

We did have a number of OSB orders in Asia.

Okay.

You might be thinking of -- and also I mentioned one in the U.S. for around 4 million.

Okay. Because I know just OSB has been like the structural panel, you know, for choice here, but what's happening over there?

Oh, in Asia, oh I'm sorry; on Oriented Strand Board, we don't have an order, but I think we are -- it's looking good. There is a lot of activity. So, I'm encouraged by the potential for future bookings.

Yes. I never…

Yes. Well, we -- in 2014, we got two orders for OSB mills, but there is really only three modern OSB mills in China. I would say what's exciting about the opportunity in China is as you can imagine China makes a lot of furniture; I had always considered that OSB would be a nice substitute for plywood, for crates and bed liners and things like that. I hadn't really thought about it as a replacement for particle board in MDF in furniture, where it has a big weight advantage, which has all kinds of advantages we are making furniture and shipping it all over the world. So very new, and I would say, quite exciting. There are multiple projects in the works, so I can't tell you the timing, but in China for OSB mills.

Okay. That helps a lot. I know it's been replacing plywood here in the U.S. but on housing front, but then now you're talking about China on the furniture side. That was just kind of new news that I hadn't heard you guys talk about before.

Yes.

So, pretty encouraging.

That is new.

Okay. And then wanted to go back to -- well, at Analyst Day you kind of provided an earnings power algorithm that would factor in the acquisitions that some of the acquisitions would be very modestly kind of lower gross margin, but now kind of you're reminding us that some of these acquisitions are coming with a lower SG&A ratio, correct, I'm just going to -- just to a feel that what you highlighted at earnings excuse me at Analyst Day that you would be able to grow earnings even though you're buying slightly lower gross margin businesses because of the SG&A and other incremental benefits?

What I mentioned on the Analyst Day was that I expected that most companies will have lower gross margins than us, a better SG&A leverage netting to more or less the same EBITDA margins, that was my assumption. The fact of the matter is the acquisitions we made…

Actually better.

Yes, the acquisitions we made this year and the forest products one in particular, they have higher EBITDA margins there. So it's little better than what we are modeling if you will.

If you recall, Dan in that model we had the EBIT margins at approximately 15% and you can see now we've kind of moved up to the in the 17% range.

Right, and you haven't change are 20, I think it was 2021 or 2022 earnings goal?

That we need to because we're going up to…

Well, I saw that yesterday, when I saw your guidance and then I looked at your 2022 targets and so I mean it's a good prompt to have okay, all right. Yes. Okay.

Well, either change the guidance for five years out or take it easy for the next four years and we can…

Yes, well, all right. Okay, thanks a lot.

All Right.

Our next question is from Bill Hailer [ph] with WDH Capital. Your line is now open.

Yes, hi good morning. Thanks for the call. Can you remind us what end markets are in that 15% industrial revenue number on page 10 and perhaps update us on what progress you're making in penetrating the carbon synthetic fiber and rolling metal industries?

Sure, so it is amazingly diverse that industrial piece. There's not really a dominant segment particularly, so I would say its metals, carbon, plastics, textiles, machine tools, food is a big one, but there's not any one particular area. We continue to make progress and I would say in the carbon fiber front one of the bigger produces of carbon fiber is rolling our equipment out throughout their plants throughout the world. I would say we're also making some pretty nice progress in the food front. And I would say that's going as well.

Okay, let me have one follow-up if I may, what would it take to jumpstart the doctoring, cleaning and filtration business where revenues and bookings have been kind of flat for a few years. I would think, I know is a more traditional business is that but given the bigger installed base out there. I would think you would start to see some growth there and maybe are you're seeing any competition from new technology for cutting, writing maybe lasers?

We are not -- let me give a quick real comment on sort of the doctoring side of our business. As you may remember, about 10% of our overall end markets is tied to the declining grades of printing variety and newsprint. That's a little heavier in the doctoring side of the business. They have a bigger exposure to those declining markets. So, that's why a lot of times you'll see them as a little softer on the growth side. What we've been doing in that regard is focusing more and doing R&D on blades and that kind of thing, specifically for liner board, and got some promising technology kind of in the works. And we are trying to have -- be more of a problem-solver for the liner mills. But that's really the background on it. They have a little bit slower growth at times. The other side of that is the push to industrial; a big part of the push to industrial is in our doctoring and cleaning side, because you can think as rolls and belts that need cleaning all over the place, and things like food.

I see. So, the base of the declining paper market in general is going to affect that segment more than…

That particular segment has a little more exposure, yes.

Right. Okay, got you. Thank you.

Thank you.

[Operator Instructions] And I'm showing no further questions at this time. I'd now like to turn the call back to Jon Painter for any further remarks.

Thank you, Operator. Before I let everyone go, I thought I'd list what I think are the key takeaways for the quarter and the year. First, we have excellent financial and operating performance in '17, with record revenue, adjusted operating income, adjusted EBITDA, and adjusted earnings per share. Second, we ended the year with record Q4 bookings, and record operating and free cash flow in 2017. And finally, we expect another strong year in 2018 with record revenue and earnings per share. Thank you for joining us on the call today, and I look forward to updating you next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone have a great day.