Good morning. My name is Letricia and I will be your conference operator today. At this time I would like to welcome everyone to the Kadant Incorporated Second Quarter Earnings Business Update. 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). Thank you. I would now like to turn the conference over to Mr. Thomas O'Brien, CFO of Kadant Incorporated. Please go ahead sir.

Well thank you operator and good morning everyone and welcome to Kadant's second 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 quarterly report on Form 10-Q for the fiscal period ended April 3rd, 2010, which is on file with the SEC and is also available in the Investors 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 these non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second 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 the Q&A session. Jon?

Thanks Tom. Good morning everyone. It's my pleasure to give you an update on Kadant's second quarter performance and comment on our outlook for the rest of the year. We had an excellent second quarter by almost any measure. Let me start with the financial highlights from our continuing operations and I'll then provide you with an overview of the trends we expect to play out during the second half of the year. Second quarter revenue of $69 million was up 38% from a very weak quarter of last year and our fourth consecutive quarterly increase. On a sequential basis our revenues increased 13% from Q1. This increase was led by our stock preparation and water management product lines with sequential revenue increases of 41% and 32% respectively. Our bookings for the quarter were $74 million, an increase of 57% compared to the same period last year and up 6% from Q1. This was our fourth consecutive sequential bookings increase as well. Our bookings in the second quarter benefitted from strong performance in our stock product line that recorded sequential increases of 46% compared to the first quarter. This bookings increase however was offset by a 14% decline in our fluid handling business compared to a very strong Q1 bookings level. Parts and consumable bookings were also down 6% sequentially, compared to the strong first quarter pace due to weaker demand in North America and Europe. As I noted in our Q1 earnings call, we believe the pent up demand from 2009 contributed to a significant increase in order activity in Q1 and the subsequent softening in our bookings levels for parts and consumables was expected. One of the most impressive results for the second quarter was our gross margin performance of 45%. This was the highest gross margin recorded…

Thank you John. I'll begin with our revenue performance. Consolidated revenues were 69.1 million in the second quarter of 2010, 38% higher than last year including a 1% unfavorable effect from foreign exchange translation. The revenue results were at the higher end of our guidance for the quarter which was 67 to 69 million. Revenues in all our major product lines were higher than last year with particularly noteworthy increases of 66% in water management, 52% in stock prep and 33% in fluid handling. Water management revenues of 8.6 million reached their highest levels since the fourth quarter of 2006 and increase over last year was due to strong capital and aftermarket sales in North America. The increase in stock prep revenues was broadly based throughout all our major geographic territories. North America was up 75%, China was up 46% and stock prep revenues in our Europe based operations were up 31% including an unfavorable foreign exchange effect of 10%. The increase in fluid handling revenues was also well distributed. Europe was up 45%, including 9% of unfavorable exchange. North America increased 29%, including 2% of favorable foreign exchange and China was up 19% including 2% of favorable foreign exchange. On a sequential basis consolidated revenues in the second quarter of 2010 were up 13% compared to the first quarter of 2010 including an increase of 17% in the paper making system segment. Revenues in our all major product lines in this segment increased compared to the first quarter of 2010 with the more noteworthy increases in stock prep, 41% and water management 32%. The sequential increase in fluid handling was minimal compared to the first quarter of 2010. We are starting to see a slowdown in fluid handling activity, especially in the drier systems projects with essentially flat revenues…

(Operator Instructions). Our first question comes from Claudia Hueston with JPMorgan.

Hi, thanks very much. How are you?

Hey Claudia.

I was hoping you could just talk a little bit about the trends you saw in demand over the course of the second quarter and just if you have any early read on July, where there any major differences by geography or product really just as sort of the quarter trending?

I looked at that and we actually – the June wasn't bad, it wasn't like it was trending down the whole time most of the market. So, again that's looking at the base business, I think for some of the capital we did book some early.

Early in the second quarter, Jon?

Yeah early in the second quarter but we still, there is still capital on the pipeline. There is still I would say the activity level particularly in the developing world, maybe China maybe most of all. We are still seeing stuffs that kind of all through the pipeline. I don't know, I think it's a little too early into July to really call in trends here.

And just looking at sort of the emerging market, I mean how would compare that today versus two years ago when things are really sort of rocking and rolling there.

China, two years ago in China in '08 when things were starting to stop rocking and rolling. If you go back maybe three years ago it's not as frantic as that, it was almost a panicked attempt to how the Chinese can, they got a secure resources and they got a secure equipment. It's not like that, it's a much rationale broadly based I would say more methodical purchasing pattern, which is good.

Yeah I would agree, that's helpful and then just maybe if you could just comment a little bit on cash and the acquisition environment that you see out there and also if you just have an end of quarter share count that will be great.

Okay on cash and acquisition environment, our cash flow has been excellent and Q2 was terrific. I mean we are particularly delighted to be growing revenues and still throwing off the kind of cash we are throwing off. That's all good; I mean the second part is what we are going to do with that cash. We are looking at acquisitions I would say we are proactively and systematically seeking acquisitions and trying to evaluate acquisitions. So, that certainly on our radar screen is one of the things we are going to do with the cash. Thomas maybe you can comment on changes in the share count.

Really there wasn't much of change. I think the share count fully diluted was 12.5 million Claudia at the end of the quarter.

Okay and just in terms of the M&A environment and do you feel like buyers are sellers are sort of getting closer at this point. Do you feel like there is more sellers who might be more willing to sell than they were a couple of months ago?

Last year you really didn't saw unless you had and they were kind of it seemed like you might have had fire sale price. So, right now we don't see fire sale prices unfortunately. The EBITDA multiples are kind of normal I would say. Now and you have always had that question, what is normal EBITDA, is the EBITDA numbers they are giving, is that there a new normal in EBITDA or 2009 unusually low which probably was. So, I think there is more people out there definitely than last year who are more willing to talk and I would say that the pricing is not fire sale pricing.

Okay. Thanks so much. Good luck guys.

Your next question comes from the line of Walter Liptak with Barrington Research.

Hi Walt.

Hi thanks, good morning guys and nice quarter. I had a couple of questions just on sort of some of the trends and I guess I been a little bit surprised by the it's nice to see the strengthen coming through, it's consistently as it is. But with the 21% North American improvement, are you seeing that more on systems or are you seeing it more on, more of the consumable replacement parts.

You are talking about revenue for North America?

Yeah.

It was pretty broadly based, it was pretty broadly based I think the trends, if you talking about trends regarding the future I would look at bookings and the bookings in North America were a little softer than Q1 and that's despite stock prep holding up having a positive increase and some of that is capital growing into the (inaudible). So, I think we overall see a some what of a deceleration in North America and as we said earlier in the comments, a lot of it had to do with; we had a pretty big burst in the first quarter from a bookings perspective.

Okay and I thought the bookings were slowing down because of the drivers systems.

I would say the – if you would look at fluid handling and dryer systems is part of our fluid handling group, you know that group had the biggest increases in the first quarter. So, the comparison for them Q1 to Q2 is the weakest but it's, all of our product lines other than stock preps are little softer second quarter booking rate versus first quarter booking rate.

Okay and I guess what I am trying to get at is what's the increase spending, is it pent up demand is it up keep on systems, is it payback on more efficient systems.

I definitely think there is some pent up demand in there and that's, we saw it more significantly in the first quarter. Still pretty good in the second quarter, so yeah I think there is a little bit of pent up demand in those numbers.

Okay and the China looks very strong on revenue and you go back just a year ago and the utilization rates sounded like they were pretty low. Are China utilization rates back up to normalized levels, is that why we are seeing the…

We don't have a copy, we don't have a great information about utilization numbers in China, but what we hear is that yes its China seems to be quite robust. I will say that the government stimulus has targeted a bunch of industries in one of which is paper so, in terms of expansion and capacity additions they do, in some cases have financing available from the government which is a positive but it seems like it's, they are consuming that paper.

Yup okay. And Tom I wondered about the corporate and other expenses. It was little bit higher than I was expecting, maybe I missed something in your commentary, those were a 1 million high reserve. Something special in there or is there incentive comp that…

Incentives were a big piece of that, of course we also had the acquisition cost I refer to also.

What was the acquisition cost?

I think it was a couple $100,000 somewhere in that range.

Okay.

Some of those things won't repeat, that's why I think that the rate should come down somewhat in the third and the fourth quarters 86 million

Okay got it, okay thanks very much guys.

Next question comes from Eric Prouty with Canaccord.

Hi Eric.

Nice second quarter guys. Maybe just a little discussion around what you are seeing over in Europe and how that played out during the quarter. Did you see any impact at all from the ups and downs of both the currency and the financing crisis over there? Was it pretty much business as usual through the quarter?

I would say generally speaking, our bookings were stable than I though they would be down the way both potentially sort of looking for problems there and it seemed its okay. I will say that when I look at our Europe. We report our numbers for our European operations and those – they do sell outside of Europe into South America, in some cases India, Africa places like that and their bookings based is also strong for most reasons. But Germany is having good demand for paper, they are manufacturing business in picking up and they are actually needing liner board. So, you see I would say in many cases two lower levels of liner board and mills trying to catch up.

Great and then any impact you mentioned some of the currency impact and the results but from a competitive standpoint, does that change the competitive landscapes. Some of this currency movements or is that kind of nullified given that you produce globally.

We do produce globally, so the currency sort of one of our businesses win, one of our businesses losses. The weaker euro is certainly good for our, for the paper customers in China and good for German exports which is good for us because they need paper and we want to sell it to them. It's obviously not as good for our European operations that use manufacturing in China because it's less, the savings is less good it's still pretty good but it's not as good as otherwise it would be.

Sure and then finally big rebound back in the price of recycled fiber. So far this year, is that changing your customers orders or your mix of business at all or is that just part of kind of long-term movements that just wind up equaling. So, have you guys noticed any impact in your customer enquires etc., because of the big rebound back in fiber prices?

Yeah I mean the fiber prices I would say is very frustrating for our customers because it's so volatile and the volatility has lot to do with whether China is buying a lot of paper whether or not and part of was the reaction for them is that some times you will hear they want flexibility to be able to accept a lower grade of waste paper if waste papers, a certain grade of waste paper go up. But, that's all that we see from that.

Okay and then just finally the R&D spending, they have been doing out, is there any specific areas that money is going towards. Do you expect any new product enhancements or new product developments coming out over the next year or so?

Yes we do, I think broadly speaking our areas of R&D are in the area of energy, fiber savings and I would say ease of maintenance, making things ease, parts and consumables easier to change. But we are in final stages of a new (inaudible) cell, refiner, we have got a number of blades that are various levels of testing. I am not sure I call anything a revolution but that's just not really the nature of our industry but we do have a good pipeline of products that we are at various stages of near introduction or introduction.

Great. That's all for me. Thanks a lot guys.

Thank you.

Thank you.

(Operator Instructions). Your next question comes from Rick Hoss with Roth Capital Partners.

Hey Eric.

Hi Good morning.

Hi Eric.

Gross margin, would you say that your typical range has now move up, I know some of this is product mix but you are talking about the benefit from some of your movement overseas and movement in Mexico. So, can you give me a range of what you think is normal?

So, I think on the 45% there is a few things involved in that but I would say that the fundamental thing is that we did lower our manufacturing overhead expense and we have shifted products towards China. So, you might get a couple of point that would be above our normal margins. We also benefited from a good capital margin, so we had some projects that everything sort of worked out well. We were in a very strong competitive position in terms of whatever that particular customer may have wanted so we have, those were rather call just good jobs that might not always be there. So, there is some of that probably that will shift and I do think that the mix will shift as we get some larger systems coming through into revenue. But I would say a couple of points above our normal rates, would be pretty reliably there.

So, historically it looks like you have kind of flirted with 40 so and the future it will be easily above or I shouldn't say easily but comfortably above 40?

Yes.

Okay and then Tom do you have any read what you anticipate taxes next year percentage?

Next year? Well I think we mentioned that the order position where we have over 13 million of foreign tax credit. So, we had fully valued, they will be fully reserved for those foreign tax credit from prior period. So, there is a lot of moving gears in this but assuming that we have the taxable income and we have enough foreign source income in the U.S. and notably be able to utilize those credits. The rate should see stay below 30 in the next few years again with those caveats.

Okay and then last question from me, any read on your market share in China, are you gaining? Are you holding? Are you losing?

I would say in, you have to look at the products, so we have historically have had excellent market share for stock preparation and fluid handling and I would say those are holding stake on the capital side and we are talked in my remarks I talked about pretty good heavy weight we are making in spares. So, they sensed that there is a market share and stock preps spares we picked up good market share there. The area of our accessories and water management, we have pretty small market share and we are definitely picking up there. They had grew over kind of quarter-over-quarter maybe 30% mainly out from small base but we are in a good position to grow because we are relatively small there and I think we have the right tools in place to do that.

And remind me, have you sold blades over there before?

. :

And is there the ability to differentiate?

Between us and the local blades?

Correct.

Well it's a combination, so, they have local blades and yes we can certainly differentiate on the local blades. They also have blades from (inaudible) our Germany manufacturer as well as Japanese manufacturer who have good blades. I would say what we were trying to distinguish ourselves is literally the service. It's the same formula we use in U.S. and Europe where what the customer really values as much as the blade is the applications now as it comes with that sales man and our company as to how to apply that blade? Where it should be it applied, which -- there is 60 different types of blade that can be put on various positions on various rows. I am always surprised kind of been some one new to the blade side, there is art and science and craft to it and that's really in the broader sense what we try to offer the customer and this is a process to get customers to appreciate that and sell and be willing to set higher prices for that service.

Thanks guys. I appreciate it.

Thanks Rick.

Thank you.

Our next question comes from Brent Miley with Rutabaga Capital.

Hi.

Hi guys. Two questions, one I was wondering, I know fluid handling, somewhat had a very tough comparison sequentially. But could you talk about that business if you mentioned that I think I heard you say that it might go down somewhat in the coming quarters and obviously the pay backs are still high maybe it's gas prices or something but just curious as to whether something has changed there or that just kind of the business trend and then secondarily on your this small acquisitions you did, is the main opportunity there to sort of take the screen basket and I guess some of the other technologies and kind of put them to your distribution channel, is that sort of the general theory there?

Absolutely let me start screen baskets since you ended with that. On the screen basket we will take that technology and manufacture it in our operation in China and that technology will be incorporated into streams and almost just as important as our streaming product line. It's not just a after market baskets but it does enhance the performance of our own capital. So, that's another hit from that. The other question, fluid handling, so you are absolutely right, it is a tough comparison. If you look at their booking grow to second quarter over the last five quarters, it was the second highest quarter, it just wasn't the highest the first quarter which was terrific. You might remember when you were talking about Q1 we said that fluid handling bookings were up like 26% something like that if memory serves. So, that's a tough I don't want to underestimate that tough comparison that they have. That said the system business and fluid handling as Tom had said in this remarks is falling and when they look further down in the early stages of the pipeline if you will. They don't see as many of sort of projects in the formation stage. That's probably a combination they did a lot of the projects as well some caution on the part of the paper industry. Listening to their reports there particularly in North America and also in Europe, they are concerned about what the second half will bring. I think it will be helpful just to get a little time between us and that kind of little mini shock we had with the sub-debt thing and get the people more comfortable that the world is not going to fall apart.

Okay fair enough. Thank you.

Thank you. There are no further questions at this time. Are there any closing remarks?

Yes. Thanks operator. As Rick said in this remarks and we alluded, I think in the second quarter you can see some of the fundamental changes that we made in our business and improved its profitability. We have talked a little about the gross margins and that as I said earlier, that effort is to some extent permanent for at least a couple of points of that. I don't know it will stay at 45% but we will have I think higher gross margins I mean historically we have had. Similarly, our operating income of 11%, relatively modest level of sales compared to pre-recession times give some example of the operating leverage we can generate because of the restructuring we did and I believe that as the recovery picks up a little steam and we get little more revenues we are going to continue to see good operating leverage. We still got a lot of work to do on our business and it's a challenging environment but I really think we are well positioned to take advantage of the recovery, as it develops and I look forward to reporting you on our progress in the first half – in the second half of 2010. Thanks very much.

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