Good day, ladies and gentlemen, and welcome to the Kadant Inc. Q1 2018 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] I would now like to introduce your host for this conference call, Mr. Michael McKenney. You may begin sir.

Thank you, Kevin. Good morning everyone, and welcome to Kadant's first quarter 2018 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 known 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, 2017, and subsequent filings with the Securities and Exchange Commission. Our Form 10-K is on file with the SEC and is available in the Investor section of our website at www.kadant.com, under the heading SEC Filings. In addition, any forward-looking statements that 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 and the slides presented on the webcast and discussed in the conference call, which are 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'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jon?

Thanks Mike, and thank you all for joining us this morning to review our first quarter results and update our business outlook for 2018. Overall we had a great start to the year with solid operating performance leading to an earnings per share beat as well as record bookings. I'll begin with the Q1 financial highlights. Without question the highlight of the first quarter was our record bookings of $182 million up 53% from Q1 of last year. This was driven in large part by strong capital bookings in North America and Europe and record parts and consumables bookings. Revenue was up 45% to $149 million. Gross margin remained healthy at 44%. Adjusted EBITDA was up 49% to $24 million or 16% of revenues. We generated $0.96 of GAAP diluted earnings per share, handily beating the top end of our guidance of $0.81. Our adjusted earnings per share was up 30% to $1.07. And finally cash flow in Q1 which is historically a weaker quarter increased significantly compared to the same period last year to $7 million. As was the case last quarter, FX had a modest impact on our results while we saw a large impact from the acquisitions we made in the second half of 2017. Our internal revenue growth which excludes FX and acquisition was 5% in the first quarter. Internal revenue growth and adjusted earnings per share was down 7% compared to a very profitable Q1 of last year which had gross margin of nearly 48%. Internal growth in bookings increased 12% compared to a relatively strong first quarter of 2017. Our internal revenue growth for parts and consumables in Q1 was modest while bookings were up 3%. While a big part of our revenue and booking success in the first quarter was the contribution of…

Thank you, Jon. I'll start with our gross margin performance. Consolidated gross margins were 44.3% in the first quarter of 2018 down 340 basis points compared to 47.7% in the first quarter of 2017. As Jon mentioned, our first quarter of 2017 gross margins were one of the best quarterly performances ever and were influenced by a high percentage of parts and consumables in our overall product mix. Our parts and consumables revenue represented 64% of total revenue in the first quarter of 2018 compared to 68% in the first quarter of 2017. In addition to the lower percentage of parts and consumables in 2018, our gross margins were negatively impacted by the inclusion of the lower margin timber harvesting product line which we acquired with the forest products business last July and lower margins in our parts and consumables business. Now let's turn to Slide 16 and our quarterly SG&A expenses. SG&A expenses were $45.8 million in the first quarter of 2018 up $11.2 million from the first quarter of 2017. This included an increase of $7.2 million from our acquisitions and $2 million from an unfavorable foreign currency translation effect. SG&A expenses in the first quarter of 2017 included $0.3 million of acquisition costs. SG&A expenses as a percentage of revenue decreased to 30.7% in the first quarter of 2018 compared to 33.7% in the first quarter of 2017. We expect continued improvement in this metric in the second half of 2018 as our revenue increases. Let me turn next to our EPS results for the quarter. In the first quarter of 2018 GAAP diluted EPS was $0.96 and our adjusted diluted EPS was $1.07. The $0.11 difference relates to $0.05 of restructuring costs, $0.04 of discrete tax items primarily associated with the new U.S. tax law and…

[Operator Instructions] Our first question comes from Walter Liptak with Seaport Global.

Hi thanks. Good morning guys. I want to ask first about the gross margin and I think in the prepared remarks you said that, the gross margin looked good kind of for a first quarter, but you mentioned that parts and consumables had a lower gross margin. I wonder if that was a product mix issue or if there's a price cost issue with parts and consumables?

It's a mix issue.

Okay, could you care to elaborate on what shifted was lower margin?

Yes, well within the family of parts and consumables there is quite a wide range of margins and in this particular quarter that mix just lead to a lower overall gross margin and I will say last year's first quarter and actually the second quarter were, they were in the top three our performance of all time right.

Okay and based on your commentary it sounds like you've got a big enough moat around parts and consumables that you can increase prices for inflation?

Yes, it’s not so much that. I mean sometimes you get a little catch up but it's mainly mix, occasionally will have some large parts that come in like in the quarter that have fabulous margins and they'll kind of skew it up a bit but it's nothing, I wouldn't say there's a trend here.

Okay and switching gears to North America you commented that the order activity is good, could you help us by breaking out the organic versus total bookings growth and the tone of the underlying market?

Well, I would say, I said in my remarks one of the things I like and maybe I'll answer a little more broadly, but one of the good things was that the organic growth was pretty broad based both geographically and product lines, North America absolutely a major big part of that. In North America both our forest products and our Stock-Prep-recycling business both had were strong in North America. If you think along product lines you've got the Stock-Prep recycling being a big one. In addition to North America of the Baylor business in Europe and also a little bit in North America is a contributor. Our Fluid-Handling business was very strong in North America that’s organic and our OSB business, the stander business was strong in North America but also strong in China as we said on our call. So to me it's Stock-Prep, Fluid-Handling and OSB largely North America and OSB a bit in China as well.

Okay, is this the kind of year where the orders come in early in the year and then ship as time goes on or I wonder if you can address the pipeline or the funnel of projects that are in front of here?

Right, a lot of you can tell from the guidance to that we're expecting a very strong second half, so we've got the bookings and I think we expect to have reasonable bookings in Q2, but that the shipments really will be in the second half.

Okay, is there a funnel that goes beyond the second quarter, are you, is there still more capacity projects or conversion projects?

In terms of the outlook on bookings?

Yes, on bookings.

Yes, I would say that the only area that I've kind of expressed some caution frankly in bookings trends is Stock-Prep second half of China. I actually expect pretty good booking Stock-Prep second quarter China, but I wouldn't say that we're projecting a softening in other regions in the world. It's just that one product line in that one country and as we kind of noted there's other offsets; one is the strander business in China and two with bookings in Asia outside of China that I think will help offset that that decline in the Stock-Prep capital.

Okay, great and then speaking with North America, the Ohio factory that is being expanded how is there a ramp period to the production there and is there any disruption from that and after that the plant is expanded is there some kind of inefficiency or payback on the facility or just pure capacity?

So, we do expect - there's a learning curve. It's a lot of new workers. We were lucky that a lot did come from Alabama but it's absolutely a lot of new hires and we've kind of assumed that we'll have a learning curve that we'll see in the second quarter and probably a little bit in the third quarter as well. So that's kind of in our guidance if you will. I talked a little bit about the payback earlier, it was kind of in that 8% range. And that that's without taking really much to impact that what we need to do with the Baylor [ph] business there.

Okay, great thank you.

[Operator Instructions] We have a followup question from Walter Liptak with Seaport Global.

Hey, Walt.

Okay, yes I’m back.

You are, and by the way before you - I should say 8% after tax was the return we talked about before?

Oh, that’s great. Okay. I wonder if we switched you to Europe and you talked about a good I guess pretty healthy was I think the comment that you mentioned. Is there the same sort of dynamics that are going on there with OCC prices down and pricing good and you received, some of the same trends that are happening in North America with capacity ads are run conversions to paperboard that could happen in Europe?

Yes, the short answer is yes, they also, China is restricting imports on OCC for cleanliness and they've obviously banned waste, so that has helped from a producer's point of view helps they have lower raw material cost in Europe just like North America. The containerboard grades in Europe are the strongest grades and that's where we're seeing kind of projects in the works. There's a big conversion project in Spain that's just sort of starting up right now, but they've got others in the works as well. So it’s yes, I would say similar to the U.S., the U.S. is probably a little stronger frankly. The U.S. is - the players it's much more fragmented market in Europe, so you don't necessarily have sort of big projects like you have in the U.S. but directionally it's the same. OSB in Europe as I said is much less of - there's not - the houses are made of wood so much there, so it's not as big a deal there whereas the U.S. housing market is quite strong and so it's a big difference.

Okay. Yes, with that said on the paperboard side, is it just timing of orders do you think or you are already expecting that the funnel is going to build as you get into 2019?

Europe is good, I mean Europe is strong. And I wouldn't say it's a strong as the U.S. but it's relative to how Europe typically is, it's good. So I wouldn't want to lead you to believe that we're down on Europe in any way.

Okay.

Let’s say it looks good for the rest of the year.

Okay. And maybe a last one and then we can take the rest of them offline but you mentioned a number of times even with the last call about the Stock-Prep and you mentioned again on this call. I wonder if you could just clarify for us why the second half will be weaker obviously the orders shipped I guess will be weaker in the second half, but can you talk to us about the supply demand in China and why stock prep would be weaker and maybe if we think about longer term 2019 and what that?

Okay. So if you the pattern in China for the last 20 years is they are very aggressive at adding capacity and they often kind of overshoot a little bit, then the economy grows and then they need to add capacity again, but it kind of goes in waves. So we've had really very strong bookings for our Stock-Prep capital in China since the fourth quarter of 2016, I think we've said right from the beginning that this is a little bit of a burst of activity that will slow down at some point. The good news of course is, we've built up this is all building of a big installed base that gives us better spares. We don’t expect - it's just a question of that capacity gets a little bit ahead of demand and they'll slow down a little bit until the economy absorbs it.

Okay, all right, it makes sense. And maybe one last one is, Mike, you mentioned in SG&A there was $300,000 of M&A costs, was that related to prior deals or was that - is there an M&A deal in the pipeline that you do indulge in?

Nice try. That was the first quarter of 2017 that I was referencing. But to your point if you go back and look at the first quarter of 2017, you wouldn't see it. We didn't announce it until the second quarter of 2017 that we had incurred those costs, when we announced the transaction. So to your point we couldn't tip our hand too early, so we had to wait and hold off.

Okay, got it. All right, thanks guys. Well may be one last one then. The tax rate you said that the U.S. taxes and foreign earnings are not clear yet, so just to understand you’ll be booking more taxes until there is some clarity around what the earnings are. So there could be a drop in the tax rate in the back half of the year back to that 27.5% to 28% range.

Yes, correct. Well the issue is the rules aren’t clarified right now on how foreign earnings are going to be taxed. So we have to go by the letter of the law, but there is a lot of discussion amongst the tax professionals that the law is going to be adjusted that there is a flaw in the calculation and that will get adjusted this year, so that's why I said hopefully want it to clarified our rate will go back down.

Okay, what’s the timing that your tax experts have given you for the clarification?

Well, you're talking about yes, 2018 but this is the Government in action, so but we're hoping that it will be clarified in 2018. It's a pretty meaningful misstep we believe, most tax professionals believe, so we do think they will step up and correct it this year.

Okay, great. All right, thank you.

Okay, thanks a lot.

And I'm not showing any further questions at this time. I’d like to turn the call back over to our host.

Thanks. Before I let you go, let me summarize what I think of the three key takeaways from the quarter. First, we have excellent performance in Q1 with record booking of a $182 million. Second, we had record parts and consumables bookings and revenue and finally we're raising our full year guidance with the expectation of record revenue and earnings per share in 2018. Thanks for joining us on the call today. I look forward to updating you next quarter.

Ladies and gentlemen that concludes today's presentation. You may now disconnect and have a wonderful day.