Good morning. My name is Courtney, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Thomas O’Brien, Chief Financial Officer. You may begin your conference. Thomas O’Brien: Well, thank you, operator. Good morning, everyone, and welcome to Kadant’s first quarter 2010 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer. Before we begin, let me read the 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 discussed in our Annual Report on Form 10-K for the fiscal year ended January 2nd, 2010, which 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 on this call 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 call, we may 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 Investor Section of our website at www.kadant.com under the heading Recent News. And 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, Tom. Good morning, everybody. It’s my pleasure to give you an update on Kadant’s strong first quarter performance and comment on our much improved outlook for the rest of the year. During our February earnings call, I commented that the first six weeks of 2010 had gone well, but we were still concerned about the sustainability of the recovery. I’m pleased to report that bookings and revenues continued to improve throughout the quarter and combined with the restructuring initiatives we implemented in 2008 and 2009, we had a very strong first quarter of 2010. Let me start with some financial highlights from our continuing operations. Revenues at $61 million exceeded our guidance and was our third consecutive quarterly increase. On a sequential basis, our revenues increased 8% from Q4 2009. All of our product lines, except Stock Prep had sequential increases in revenue and in addition, our fiber-based products business achieved record revenues of $3.7 million. Our bookings for the quarter were $70 million, an increase of 45% compared to the relatively weak levels of bookings during the same period last year. More importantly on a sequential basis, bookings were up 9%, our third consecutive sequential bookings increase. All of our product lines saw major increases in bookings in Q1 compared to the same period last year with our Stock Prep and fluid-handling product lines leading the growth with increases of over 50%. In our Paper-Making Systems segment, bookings for capital and after market products in Q1 2010 were up 103% and 26% respectively compared to the same period last year. Most importantly, parts and consumable bookings were up 21% from Q4, resulting in our third consecutive quarterly increase in bookings for this important segment of our business. The strong recovery in parts and consumable bookings throughout the world…

(Operator Instructions) Your first question comes from the line of Claudia Hueston with J.P. Morgan. Claudia Hueston – J.P. Morgan: Hi, thanks very much. Good morning. Just a couple of questions, one, I was just hoping you could talk a little bit more about the restructuring and how that contributed to the improvement in the margins in the quarter. Obviously, the mix was better too, but it did seem like the restructuring really seemed to bear some fruit in the quarter? And then, if you could just talk about sort of where you feel like where you are in terms of achieving restructuring savings at this point?

I can start with that and then maybe Tom will correct me where I make a mistake. On the restructuring side, a lot of the restructuring, you compare Q1 of last year to Q1 of this year, a couple of points on that. One is some of the restructuring took place in 2008. We really started both in the U.S. and in China in the middle of 2008. So, the comparison of things, SG&A aren’t exactly apples-to-apples, if you will, for the changes we made during the downturn in the economy. Secondly, in 2008, we, in addition to restructuring, we did a lot of things that were more short-term. People took furloughs in Europe and in China. We had pay reductions that were temporary freezes, things like that, no bonuses. Those things are, I would say, back to normal now, so that also offset some of the changes we made. So, in the end, I think you really can see the changes in the gross margin line. The SG&A line is a little bit masked by these other currents that are going there. The main thing we have going forward is really the restructuring in Lamort, which we say will be completed the middle of this year and will be about $2.6 million of savings. I don’t know if you have anything to add to that, Tom? Thomas O’Brien: No, I got, I agree with that. The only other thing I would say, Claudia, is you kind of hit to that and your question is the improvement in the margins in the first quarter, there was an improvement due to mix, but that was actually the lesser of the factors. The main factor was really cost reductions that took place in our indirect manufacturing operations, better efficiencies in manufacturing. And that’s encouraging to me, I think, ultimately because we expected the mix may continue on the way it is and it be slanted somewhat toward the higher system projects, like I mentioned in my remarks, but it still suggests that we have some upside potentially on the margin line going forward. Claudia Hueston – J.P. Morgan: Yeah. No, I was pleased to see it; it was a nice surprise for star forecasts and it was nice to see that coming through. I know you guys have been working hard on that for the last couple of quarters? The other question, I just had, in the past, you’ve talked about delays in orders and some orders being pulled back, particularly in China. As inquiries have picked up, as activity has picked up, are you see seeing any of those projects sort of dusted off or revisited at this point?

Yeah. We are, I mean, as I kind of said in my remarks, the quarter was excellent and the pickup really in every region of the world was stronger than we expected. So, some of that stuff we believe is probably from pent-up demand, stuff that was, as you said, dusted off and pushed forward. The good news really is that even looking forward, our people in China in particular, there’s a project in all levels of the pipeline. So, we’re fairly optimistic about China and most regions of the world really for the year. Claudia Hueston – J.P. Morgan: Have you noticed any change in the competitive environment there from a supplier standpoint?

I would not say we had really noticed a change in the competitive environment. Most of our competitors are large multi-nationals and they’re still there. The smaller players are not major competitors. They may have suffered a bit, but they’re not really major competitors of ours. Claudia Hueston – J.P. Morgan: Okay. Great. Thanks so much, guys. Take care.

Your next question comes from the line of Eric Prouty with Canaccord.

Hi. Thanks, guys, and very, very good quarter and outlook here. A couple of housekeeping questions, first, on the tax rate, it sounds like blended for the year 20% to 22%, as you said. How will that flow through the year? Will that be kind of an even across the remaining quarters, or will they be another very low rate in June and then it will kind of creep up from there? How do you think that will play out? Thomas O’Brien: Well, the way we’ve incorporated our guidance is that would be, I’ll say, evenly, the same amount for the next three quarters.

Okay. Perfect. And then do you expect any of that to carry through to 2011 or do you think you go back up to more of a normalized rate in 2011? Thomas O’Brien: That’s a very good question, Eric and it kind of gets back to why the rate was so low in the first quarter and essentially, we have almost $13 million of foreign tax credits that we can utilize. They’re only expecting to utilize about $1.4 million of that $13 million pool that we have, so it’s a very complicated area. There’s a lot of caveats and cautions to this, but we do expect, I think, it’s reasonable to expect that we would be able to continue to use these foreign tax credits into 2011, 2012, assuming that we have the same levels of operating income in the U.S. and the same levels of foreign source income in the U.S. So, there’s a limitation in our ability to utilize those foreign tax credits, but we should still see the benefits of those going forward the next few years, all other things being equal.

Great. That’s good news. And then, if I do look at your guidance, the guidance you gave for June and then the full year guidance, it would seem that you’re expecting, I guess, less from a revenue standpoint, maybe more from an earnings standpoint for there to be a slowdown or a pullback in earnings in the back half of the year as opposed to the front half of the year. Is that attributable just to kind of this potential catch-up in orders that you might be seeing now and expecting things to weaken off a bit, moderate off a bit come September and December, or is that some sort of seasonality at work?

Well, the point, you might remember if you can go back to our December call, we kind of saw the recovery as kind of a long, slow slug, uneven, with higher quarters and lower quarters. So that is kind of a prevailing view. In that kind of thinking, the first quarter definitely came as a pleasant surprise, but a surprise. So, we’re kind of looking out at the overall economy and say, it seems like that level of increase is not going to stay, given that there’s still high unemployment and all the macro issues that you all are well aware of. So, we’re kind of assuming that maybe there is some fallback, but it’s more a broad macro assumption than anything we’re specifically seeing in terms of booking trends in the market right now.

Okay. So, I guess, it would be fair to categorize, I guess, what’s built into your estimations as a conservative economic outlook for the back half of the year?

Yeah. I mean, it really since there’s a little bit, just as we had during last year, we felt, our business came down much more dramatically than [start] and we kind of said this can’t continue. I mean, we were actually surprised how long it did. I think we’re now seeing the other side of it. We’re recovering much more strongly than the paper industry would imply that we should be and we’re kind of also saying, well, that probably won’t continue. Well, eventually, it kind of moderated.

Sure. No, that’s fair enough and being conservative is not a bad thing in this.

Yeah. Conservative is better than the other one.

And then finally and you’ve talked about this in many different ways, but I’m just going to ask for a tiny bit more detail again then. The gross margin was very impressive. The movement you had in that sounds like that might moderate a bit. Would the moderation, it sounds like it’s really more a kind of product mix shift moderation being expenses going back up because of new investments, et cetera. What kind of goes into that forward outlook of moderating gross margin? Thomas O’Brien: You know, I think you have it there, Eric. The fact that we’re looking for more existence projects in the second half than what we had in the first half. So that will tend to decrease the margin percentages going forward.

Okay. And then given this improvement in the environment, I mean, obviously you just went through a year of a lot of cost cutting. I mean, what can we expect that the SG&A will kind of go up as revenue starts going up? I mean, you won’t be able to hold that flat going forward, will you, as revenue and earnings continue to improve?

Well, we are definitely, in our divisions are feeling some strain with the increased volume and their lower staffing rates. From our end, we’re certainly encouraging them to kind of hold the line as best they can because again, we don’t know that this is going to stay. I do think that some of the changes we made. For example, consolidating our water management business into our accessories business and combining our sales force, so those are fundamental changes that will keep for a while. Some of the other stuff, yeah, there will be some slippage, but we’ll certainly, we’re going to watch it very carefully and keep it to a minimum.

Great. And then finally, you’re in very good financial health with just a tiny bit of debt, a lot of cash. I mean, what’s topping, you already said, potential acquisitions still topping your priority list for potential cash usage? And then, what are you seeing out there? Has this bad economy created any opportunities out there, folks still asking too much for their businesses?

With this level of cash, certainly acquisitions would be one of the prime things that would be an opportunity for us. I would say we’re always looking at acquisitions both inside and outside the paper industry, particularly inside the paper industry. It seems that there’s more stuff potentially coming around. I don’t know enough to say about what evaluations are reasonable enough for now at this point, but it’s something we kind of monitor and we have an eye to the ground, ear to the ground for.

Sure. Great. I’ll hop back in. Congratulations.

(Operator Instructions) Your next question comes from the line of Walt Liptak with Barrington Research.

Hi, thanks, guys. Good morning. A good job too. I wonder, if you can just help me, I mean, at the beginning of your comments, you talked about parts and after market really being a big driver for this quarter. And maybe I missed this, but have you broken out parts of this quarter as a percentage of sales and how much that was up year-over-year versus systems?

I think we did about $35 million in parts. Thomas O’Brien: Yeah. I think if you look at it as a percentage of the segment revenue, there was a little over 60%, I think, somewhere in that range.

Okay. And what is normal? Thomas O’Brien: I think just a follow-up on that though, Walt, the interesting point of that is that it’s about, it jumped to $35 million. That’s well below.

I mean, but of course, the economy is well below its historic run rate. I think just to go on a little bit about parts, to me, the news of the quarter, one, is Fluid-Handling doing so well and the other is parts. And its parts really every part of the world in almost every product line, so, we’ve always said keep an eye on our parts recovery and my mind, that’s probably the most encouraging thing that we saw in Q1.

Okay. And why do think the Fluid-Handling part of the business is doing well at this point?

The Fluid-Handling business is one that has a nice return on investment on energy. It’s also not a huge cost per product, so it doesn’t have very long lead times for stuff to come online and we have good markets everywhere in the world. So, we kind of look at Fluid-Handling as a good barometer of the overall state of the industry.

Okay. And then Stock Prep, obviously that’s larger systems, right?

Yeah.

And what does the pipeline look for deals or utilization rates? Do you expect that that’s going to come back at some point by the back half of the year or something?

In my remarks, you might have noticed, we actually recently booked, in fact, even in Q2, booked a number of Stock Prep Systems. China is the area where a lot of that stuff goes and the pipeline in China seems pretty reasonable, certainly much, much better than last year. Whether that settles down, who knows? But where we’re sitting right now, it looks pretty good.

Okay. And if I could just switch gears and kind of go back to I think what Claudia was talking about and maybe ask about, you were at a run rate of revenue that had an incremental $100 million or something like that to get to like the $350 million range again. What kind of leverage would you expect to get on that considering the mix of some systems coming back? And if you were to get back there, would we be seeing operating margins significantly higher because of restructuring? Thomas O’Brien: You’re back to the $300 million case, Walt, then, right?

Okay. Fine. Yeah. Thomas O’Brien: So, I think, thank you for asking that, by the way. That 300 million we’re saying if margins are in the 42%, 43% range, in SG&A, maybe $87 million or so. There’s going to be some increase in SG&A, but we should get some good leverage out of that. And you do the arithmetic that would suggest an operating income of $35 million, somewhere in that range. At the tax rate we’re talking now, that would be and EPS is 180 plus, 190. So, that in past a lot of things obviously. The $300 million revenues, the mix of that parts to consumables versus systems, et cetera. But we’ve talked about this before and I think the point that we’re trying to make with that $300 million case is the fact that we do have good operating leverage going forward because of all the efforts that our operating people took in the last 18 months to restructure the business. And we’re benefiting from that today, not only from the SG&A leverage, but also as you can see in the gross margin leverage and we’re seeing some of that in the first quarter.

Right. Okay. Good. Yeah, that’s actually more than I thought I was going to get. So, I’ll stop right there, thanks, guys.

We didn’t project, you got a million avenues for 2010.

Okay.

Your next question comes from the line of Rick Hoss with Roth Capital Partners.

Good morning. Tom, quickly, working capital, is that going to be a use of cash all year for fiscal ‘10? Thomas O’Brien: Well, that’s another good question and again, it’s a tough thing to predict, but I think it would be reasonable to assume, yeah, that even though I think we’re doing a good job of the working capital management, as we’re building revenues, we will be investing in working capital. So, for the year, we could be talking $5 to $8 million investment in working capital depending upon where the volumes end up. We’ll obviously continue to work on the working capital metrics, I outlined, but I think it is reasonable to assume we’ll have some investment there in 2010.

And then the SG&A target you gave, is that a reflection of FX working against you? Thomas O’Brien: It’s a little bit of that, yeah.

Okay. And then, can you quantify the benefit of the inventory restocking? It sounds like the first quarter obviously benefited from that?

No. You know, I should say also, our comments about inventory restocking and this is not scientific in any way. This is just anecdotal and our own sense. Just as we had a sense last year that our business dropped much more then, we were wondering if they had a secret stash of spares somewhere because we couldn’t understand why the orders dropped them the way they did just and now it seems like they’re ordering higher than the run rates would imply. So, it’s not anything more than that. There’s no way to quantify it at all.

Okay. But certainly the recovery in the industry as a whole can offset some of the domestic uncut appreciate white paper type grades, which I think there’s still expected to be some closures in this year or next.

Yeah. I mean, the picture in North America is certainly, there is consolidation and closure. So, the thing I think is kind of important to keep in mind when you look at us is our exposure by grade, our two big grades are containerboard and tissue. And those, metrics for those businesses, unlike the newsprint or uncoated free even, are much stronger along the line.

Thanks for your insight.

We have no further questions at this time.

Okay. Thank you, operator. In closing, I’d like to thank our employees around the globe for their hard work that contributed to our strong Q1 performance. I think, we’re in a great position to take advantage of the economic recovery that appears to be taking shape. And I look forward to reporting on our progress throughout 2010. Thanks very much. Bye-bye.

This concludes today’s conference call. You may now disconnect.