Good day, ladies and gentlemen. And welcome to the Kadant Incorporated First Quarter 2012 Earnings Conference Call. My name is [Lacinia], and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] And now, I have the pleasure in turning the call the conference over to Kadant Incorporated Chief Financial Officer, Mr. Thomas O’Brien. Please proceed.

Thank you, Operator, and good morning, everyone, and welcome to Kadant’s first quarter 2012 earnings call. With me on the call today is Jon Painter, our President and Chief Executive Officer. Let me begin by encouraging all participants in our business review today to participate via our webcast. You may access the live webcast by going to www.kadant.com, select the Investors tab and then select the listen live option for the webcast. To participate in the question-and-answer session at the end of our prepared remarks, you will need to dial into the teleconference. The dial-in number is available in our press release issued yesterday, it will also be shown at the end of our presentation. Let me now remind everyone of 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 quarter ended December 31, 2011. Our Form 10-K is on file with the SEC, it 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 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 issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading "Investor 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?

Thank you, Tom. Hello, everyone. It’s my pleasure to brief you on our first quarter results. Well, despite the headwinds in the global economy, we had another very strong quarter. I’ll begin my remarks with an overview of our financial performance in Q1. We finished the first quarter with revenues of $84 million, which is up 17% compared to the same period last year. Gross margins at 46% were significantly higher than we anticipated, and Tom will provide the details behind the strong performance in his remarks. Q1 operating income increased 25% to $10.4 million and we generated GAAP diluted earnings per share of $0.61 in the first quarter of 2012. This beat our GAAP guidance of $0.41 to $0.43, and was one of the best quarterly earnings per share performances in our history. Our EBITDA for the first quarter was a record $12.6 million or 15% of sales, and up 24% from the same period last year, and finally, our net cash position at the end of the quarter was $31 million. Taking a closer look at our revenue performance in the first quarter, we had a 17% revenue increase over Q1 of last year. This increase was due in large part due to strong performance in our stock-prep and water-management product lines. Stock-prep revenues increased in all geographic regions and our water-management revenues benefited from Kadant M-Clean, which was not included in Q1 of 2011 as we acquired that business in Q2 of last year. Turning to bookings, we generated $78 million on bookings, which is down 8% compared to Q1 of last year. The decline in first quarter bookings was due primarily to a large drop in capital orders in China, particularly for our stock-prep and fluid-handling product lines. The general economic slowdown in China, combined with…

Thank you, John. I’ll start with a review of our gross margin performance. Consolidated product gross margins were 45.6% in the first quarter of 2012, declining 200 basis points from last year’s first quarter record level but up 700 basis points from the fourth quarter of 2011. As you can see in the chart, despite the decreases in last year, this is one of the best quarterly gross margin performances we have ever recorded. Margins were higher than last year in both our fiber-based products and doctoring product lines, the latter of which recorded one of its best performances ever. Despite these increases, consolidated margins were lower in large part due to an unfavorable product mix compared to last year; that is, higher margin parts and consumables products comprised 56% of total revenues in the first quarter of 2012 compared to 66% in the first quarter of 2011. With respect to our guidance, gross margins were higher than we expected in all our major products lines, largely due to significantly higher margins in our capital businesses. Looking ahead, we estimate the consolidated gross margins will be between 42% and 44% for the full year 2012, which suggests lower quarterly levels going forward. As we have noted before, there may be considerable variability in the 2012 quarterly margins, and therefore our quarterly EPS results, due in large part to product mix. Now, let’s turn to slide 19 in our SG&A expenses. SG&A expenses were $26.1 million in the first quarter of 2012, up $1.6 million or 7% from last year and included $1.1 million or 4% from Kadant M-Clean which was acquired in the second quarter of 2011. Operating leverage improved 300 basis points in the quarter with SG&A expenses as a percentage of revenues declining from 34.1% a year ago…

[Operator Instructions] Your first question comes from the line of Walt Liptak with Barrington.

Hi. Thanks. Good morning, guys.

Hi, Walt.

Hey, Walt.

First one I want to ask is, Tom, on the gross margin you went through some of the detail with Doctoring having a really nice margin in Fibers. We see that number, but it sounded like you mix of parts was lower, is that right?

Compared to the first quarter of last year, that’s right.

Okay, which I guess it implies that some of the systems that you shipped had a better gross margin.

Yeah. I would say if you try to do the analysis versus, let’s say our guidance, there was really no affect from mix there. All the margin increase was due to other factors, whether it be pricing or better utilization of our overhead, maybe some mix within the mix, if you will, in a sense that we had better, maybe more unit capital projects in our capital businesses as opposed to larger systems.

And I would say, even with systems, in the first quarter we had system -- that the systems that we shipped in the first quarter had higher than average margins, than other systems even in our backlogs. So it was just a good -- it was just kind of a good confluence of events where the-- even the mix,as Tom says, within capital, both systems versus unit capital, and even just looking at systems themselves was quite favorable and really more favorable than we expect it to be.

Okay. And so the question to follow on would be, is this -- was this a one-time thing where you got better pricing in utilization productivity on certain systems because-- I guess, we’ve typically talked about systems having lower margins than parts in other products.

Yeah. I would not say this is kind of the new normal.

Okay.

I think we kind of gave -- you got the guidance for our margins. And I would say normalized kind of at a 42 kind of range. This year they will be a little higher because of the good start we had in Q1. We are having-- as I said in earlier calls, we are seeing improved pricing as compared to few years ago, but I don’t think that there is anything unique going on in the first quarter, other than the nature of the systems that we shipped.

Okay. Okay. Got it. And, if we could just walk through China a little bit more. I guess one way to look at it might be to look at the backlog. How much China-related product is in the backlog?

It's probably $20 million. So we still have a good backlog in China. The other thing I would say is that in China in particular, we still have good project activity. You compare this to the kind of slowdown you had in kind of ‘08, ‘09, we didn’t have very good bookings, so we didn’t have very good project activity. That’s not the case this time. We do still have a number of active projects in China that we expect to book during the year.

Okay. Does it -- you mentioned that there might be some shipment delays in the coming quarter?

Well, I mean it’s more, and we have seen this in other kind of slowdowns in China before. The Chinese customer really has no reluctance to ask you to postpone a shipment, even if they’ve already paid for the shipment in some cases. And with the way we recognize revenue in China, we don’t recognize it until we ship it. So that makes it hard to predict and also we have got, when we were looking at a project and working, quoting that kind of stuff, we have estimates of when that order will be let in this environment. We have seen for the last several quarters, I expect we will see for a few quarters coming forward, that those times are delayed. As the customer is looking at the market and looking at hey, how much capacity is there, how much has been absorbed, what’s the economy like. They are going through the same kind of thinking that you are going through.

Right. And the government seems like it acted to reduce bank reserves, they're trying to improve their own consumer economy. Some of those early actions sort of happened over the last month or so. Is that why we are seeing more project activity now?

I would say, good point about the actions of the government, and until recently the government was actually trying to slow down growth in China. And we did see the effect of increasing bank lend -- tightening on bank lending affecting projects. Now, we have definitely been reading about them loosening, trying to loosen credit for the banks and that kind of stuff and I think that will have a favorable effect going forward as the year progresses. The Chinese government actually, I think in my experience, has a pretty good ability to control their economy both up and down.

Right. Okay. Okay and then just to switch to Europe and the bookings and activity there. Just kind of counter to what we have been dealing within the markets with the bookings up 5%. Is this retrofit replacement, efficiency, what does the visibility look like in Europe?

We were also -- I would say somewhat surprised and pleased about our bookings in Europe, and as I mentioned, particularly for fluid-handling. Despite the kind of concerns in the market there is still projects, a healthy list of projects, but again more for fluid handing probably than from our stock-prep business, but it’s a bit of puzzle to us. It runs counter to what we would have expected, reading in the paper and so forth.

Okay. Okay. And the expectation is that should continue into -- through the second quarter.

Yeah. I would say we’ve got a pretty good visibility on reasonable bookings. I mean they are not at the level they were at in the middle of last year, sort of prior to the slowdown with the sovereign debt thing in August, right. But they're still not bad and the way it looks is that yeah, we see it -- we see things kind of continuing decently well along there.

Okay. Good. And then I guess the last one, you mentioned pricing is one of the things that has helped out. Did you take prices up this year, or is it last year price increase that you are benefiting from?

So we kind of look at pricing in a couple of ways. So one element is pricing for parts and consumables. And we take those up continually. We’re -- and I would say we are actually, in the last year, we’ve really done detailed studies in pricing and our competitive position for parts in particular. And I think we gotten a lot smarter about pricing for parts. And I think that’s showing some benefits in our overall margins. Pricing for capital, particularly big systems, is different. I mean every capital job, you look at what your strength is, has the customer had one of your systems before, what’s your strength in that market, who are your competitors. So that’s really a case-by-case basis. And it’s not like you are saying, okay, we are going to raise capital pricing on systems 5% this year. It’s more of a feel for what your competitive position is in the market.

Okay. Got it. Okay. Thanks very much, guys. Good quarter.

All right. Thanks a lot, Wal.

And your next question comes from the line of T.R. Dimechkie with Sidoti & Company. Please proceed.

Hey, guys. Congratulations, on what I think was a record quarter for you. Few questions, I apologize if I missed anything, as I was just kind of bouncing around calls.

Okay. No problem.

Just first on China. I guess with the 8.2 million tones of capacity being taken off-line in 2011. I mean, how long does that kind of capacity take to get absorbed by your customers, and what kind of purchases are we looking at here?

Well, as I understand it. And I don’t know that anyone has perfect visibility what’s going on there, is that $8.2 million is pretty much off at the end of the year.

Okay.

That timing was coincident with a lot of capacity being added. And part of the reason that capacity is being added of course is that, they know, they conceded that smaller, those smaller mills are going off-line.

Shut it down.

I will say that the 5-year plan calls for more shutdowns. I think it’s like 10 million or 11 million of capacity shutdowns through 2015, and a lot of analysts say that they expect that in fact, the government will close more than that amount. So I don’t think we’re done with -- we’re done with capacity shutdowns in China, but smaller mills, then again, aren’t really our customers.

Right. And then just sort of near-term is that-- we’re still seeing just the Chinese market is suffering due to reduced exports to Europe and as a new capacity comes on-line, is that what we’re seeing?

That’s exactly right. I mean, they have a bigger -- they have a substantial export business to China. No question that affects their main paper rate, which is linerboard. As you know, they’re trying to increase their consumer spending, but at the same time, they’re trying to slow down their housing market. Their housing market actually generates a lot of linerboard demand. So, it’s running a little bit across purposes. The good news is that China still is a growing economy, and it’s just question of time, but they will absorb this capacity that they put on-line.

Great. And then can you touch on a little bit on input prices for you guys, I guess, anything, I guess, that’s relevant, metals, whether it’s steel, brass, bronze, energy, or airfreight, and sort of how that affects margins?

Well, our main input price is steel. And that’s -- the bigger equipment, like our stock-prep equipments, steel is reasonably big piece, maybe 20% to 25% of our cost of goods in that range. Steel actually had been trending up, then trended down, it isn’t really doing anything dramatic right now. I think the general slowdown in the world economy has taken some pressure off of steel. The other one that I think we pay a little bit of attention to is just shipping costs. When we’re shipping things out of China and not -- nothing really dramatic in there, either, I would say, T.R.

Great. But just on the competitive landscape position, if is there anything changing as far as pricing or competitors winning or losing the business, or anything that’s kind of interesting there, any product line or any geography really?

I would say that our fluid-handling business in my impression and of course, when you are looking at competitive landscapes it’s just your sense of it. But my senses are fluid-handing business is becoming stronger and an even bigger player, and they were already a big player. And that’s particularly the case in North America, but also in Europe, and they continued to be quite strong in China. I would say the other one worth noting is our largest stock-prep competitor, a company called Voice in Germany, is becoming a bigger player in China. They were somewhat slower to the China market. They make the paper machines, as you may know, but their stock-prep has been a little bit of late entry to the market and they are trying very hard to get a foothold in China and having some success. They are a good competitor worldwide.

Absolutely. And then you said fluid-handling, so is that, I mean, kind of doing well against Dublin or others possibly?

Yeah. Doing well against, really everybody, but may be even Dublin in particular. And then another, I want to say our Doctoring business in North America, they had a very, very good quarter for Blade, whether that’s a market change or just a little excess demand, I couldn’t tell you, but things are going very well in North America for our Doctoring business.

Great. And then are you guys, just on the second quarter, are we still sort of expecting that to be the strongest of the year based on sort of large systems and backlog, or has there anything changed, I guess, there in second quarter?

I’d say that has changed. I know we said that last quarter. But again, getting back to some of the issues that we already talked about with China, timing of shipments, et cetera. I would say probably like third quarter there will be -- it looks like the strongest at this point. Again, that could change too, depending upon when some of these systems actually ship. So, as you can see from our revenue guidance in the second quarter, it’s basically equal for the first quarter, maybe slightly over.

You were 90 anywhere, went from 83 to 85, is that right?

We never really gave second quarter revenue guidance. But I’m saying the second quarter revenue guidance we are giving now, is just kind of basically equal to the first quarter. So that suggests-- and the way we look at it, looking at the backlog, looking at the potential orders to be shipped, it looks like the third quarter will probably be the strongest quarter this year right now.

I would say, we actually -- we kind of had a bizarre situation in Q1 where we -- and reflecting Q2. In Q1, we had some orders that we actually expected to ship in Q2 that – it turned out being shipped in Q1, and those were nice high margin orders. We also have orders that we expect to ship in Q2 that looks like they are going to slip to Q3. So, we kind of had it going at both ends.

Okay. It makes sense. And then just on margins and like second quarter, I think you mentioned that margins will be lower because there will be a larger proportion of capital in the quarter, is that -- am I okay on that or is that different?

Yeah. Probably a slightly unfavorable mix versus the first. So, you know a point or two in margins makes a pretty significant impact on our EPS these days.

Yeah.

So that’s why we are at the say $84 million range in revenue and say 51 to pick the middle number in the EPS range. And all that difference, I would say would be attributable to slightly lower margins. Again, a point or two makes a big difference.

Right. Right. Great. And then just on the CapEx front, still $6 to $7 million in 2012 as for upgrading manufacturing capabilities in China. Is that right or is that achieved?

As you can see, it was a little light in the first quarter, but we are still estimating the $ 6 to $7 million number.

And then 2013, more normalized, kind of $5 million range thus far?

Exactly. Yeah.

Okay.

I -- we will also say I think we have done a fair amount of investment in our manufacturing facility in China, both of them, and I think that is also showing in our margins to some extent.

Great. Yeah. That’s it from me. I will probably follow up offline. Thanks guys.

Great. Thanks, T.R.

[indiscernible], T.R.

And your next question comes from the line of Mark Tobin with Roth Capital Partners. Please proceed.

Hi. Good morning. Thanks for taking my questions.

Hi, Mark.

A lot of my questions have been addressed. I think the one on the cash flow side. You have given a lot of commentary as far as your outlook for ‘12. Can you comment on your expectations for cash flow, and then along those lines, you did continue the buyback during the quarter. Maybe some commentary on potential M&A and uses of cash?

Okay. Well, on the cash flow front obviously, we are not overly concerned in the first quarter. This is pretty typical that our cash flow in the first quarter will be low. The -- if I at look at kind of the year, if I wanted to talk about a free cash flow analysis, I think we might have done this during the February earnings call. If I kind of take the middle point of the guidance for net incomes, say that’s $25 million. Add $8 million of D&A and subtract $6 million of CapEx, so I’m kind of around $27 million or so for fee cash flow. And I think that’s maybe a little bit higher than what we had thought back in February. But-- and that compares to, say $34 million in 2011, which was an outstanding year for cash flow as well. So I would say around $27 million or so in free cash, give or take.

Okay.

And the stock purchases, I think over the last 12 months, the last running 12 months here ending March 31, 2012, we bought back over $17 million in stock, of course a lot of that was last year. So, I wouldn’t read too much into, only a $1 million or something in the first quarter. We’ve got three more quarters to go. And as we’ve said before, we try to be opportunistic in terms of the repurchases and we’ll continue to do that during the year.

Okay. That’s helpful and any commentary or updates on what you’re seeing on the M&A front?

Sure, we’re looking at things. Again, nothing that sort of has tempted us to pull the trigger yet and a lot of the problem often is things like pricing. I certainly think that we can have a healthy M&A activity and do buybacks with the strong shape for our balance sheet and our pretty good cash flows. So, I don’t see it as one or the other unless the acquisition ,of course, is very large. But no, other to say that we’re -- we continue to look and I would say inside paper is our primary area, but we’re also looking at some of kind of adjacent industries that would be kind of natural fits for us.

Okay. That’s helpful. Thanks for taking my questions.

All right. Thanks Mark.

Thank you.

[Operator Instructions] And with no further questions in queue, I’d like to hand back to our CEO, Jonathan Painter, for closing remarks.

Okay. Thanks everybody for listening in. I guess I’d like to close with really 3 takeaways, in my opinion. First, of course we had a very strong start to the year, record EBITDA and very strong gross margins. We have a very healthy backlog at $103 million and really now as we look to 2012, I think it will continue to be challenging year. But at the rate we’re going, we do expect to beat the record adjusted earnings per share that we had in last year. And I look forward to updating you on our progress on that. Thanks very much. Bye.

Ladies and gentlemen, that concludes the conference. You may now disconnect. Have a wonderful day.