Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Kadant Incorporated Earnings Conference Call. My name is Lisa and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Thomas O’Brien, Chief Financial Officer. Please proceed, sir.

Thank you, Lisa, and good morning, everyone, and welcome to Kadant’s fourth quarter and full year 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-in to the teleconference. The dial-in number is available in our press release issued yesterday and 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 quarterly report on Form 10-Q for the fiscal quarter ended September 29, 2012. Our Form 10-Q 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 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 these non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release issued yesterday, which is available in the Investors section of our website at www.kadant.com under the heading Investor News. So 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. Hello, everyone. It's my pleasure to brief you on our fourth quarter and full year results as well as our outlook for 2013. Overall, we had a solid quarter and an outstanding year which included record performance in a number of areas. We also made progress on a number of strategic initiatives intended to further strengthen our company. I will begin today’s review with the financial highlights of the quarter. We finished the fourth quarter with revenues of $78 million, which was within our guidance of $77 million to $79 million, although it was down 20% compared to the record revenues in the fourth quarter of 2011. Despite the lower revenue, we generated GAAP diluted earnings per share of $0.84 in the fourth quarter of 2012 and $0.44 per share on an adjusted basis which exceeded our guidance of $0.35 to $0.37. As you can see on Slide 6, our adjusted diluted earnings per share was down 25% primarily due to lower sales volume. Gross margins have returned to more typical levels of 43%, Q4 ’11 included revenue from a large number of stock prep systems which resulted in lower gross margins for that quarter. Cash flows in the fourth quarter of 2012 were $12.7 million allowing us to end the quarter with a net cash position of nearly $48 million despite repurchasing approximately 195,000 shares to our stock for around $5 million. Turning to 2012 full year, we had a fantastic 2012 and we set new records in a number of categories. Our gross margins of 43.9% were a record, our adjusted EBITDA for 2012 was $44.8 million and this was also a record both in dollar term and as a percentage of sales at 13.5%. Most importantly, our adjusted earnings per share increased 9% to $2.29…

Thank you, John. I’ll start with a review of our gross margin performance. Consolidated product gross margins were 43% the fourth quarter of 2012, an increase of 440 basis points compared to 38.6% in the fourth quarter of 2011. Compared to last year, margins in the fourth quarter of 2012 were up in all our major product lines but particularly strong performances in stock-prep and fluid handling. Stock-prep margins were up significantly in North America largely due to higher after market margins and favorable product mix. Fluid handling margins increased over the fourth quarter of 2011 in all our major geographic regions including Europe, North America and China. On a consolidated basis, a favorable product mix accounted for approximately 1/2 of the margin improvement over last year with higher margin parts and consumable revenues representing 64% of total revenues up considerably from 48% in the fourth quarter of 2011. In addition and encouragingly, capital margins were notably higher than last year. For the full year 2012, product gross margins of 43.9% equaled the record levels set in 2010 and were 60 basis points higher than in 2011. This is now the third consecutive year that product gross margins have exceeded 43%. Looking ahead we expect that 2013 consolidated product gross margin will be approximately equal to or even slightly higher than 2012, although as is normally the case there is likely to be some variability by quarter due in part to product mix as well as the timing and profitability of larger system orders. Now let's turn to Slide 23 on our SG&A expense, SG&A expenses were $25.3 million in the fourth quarter of 2012 down $1 million or 4% from last year including a $300,000 reduction due to the favorable effect of foreign exchange. Although the dollar amount of…

[Operator Instruction] This is coming from Lawrence Stavitski from Sidoti.

Could you just kind of give the outlook for I guess China and Europe in terms of what the paper components are going to be, what the outlook is for like tissue versus paperboard in Europe and China I guess?

Sure. So, I guess let's start with China and maybe we can start with our general comment on the world as you kind of get from our comments. There's a distinction. The printing and writing grades aren’t doing well really in anywhere in the world including China, including Europe, including the U.S. So printing, writing and newsprint are doing less well. Tissue and container board are much stronger. I would say that in Europe, container board is strengthening. So is tissue. While printing and writing grades are continuing to shut down mills and so forth. In China, we're seeing more project activity. I would say both in China and in Europe. So we had pretty sequential bookings increase in Europe. We have activity, I would say, it's more in the sort of Russia, Eastern Europe, part of Europe but we did have that big project in France. So that’s pretty encouraging. That said, Europe still is, I would say, a relatively weak economy and China, again we had, we certainly got off to the year pretty well. For our products, it tends to be that the first product that sort of sees an uptick and sees a downtick is our stock-prep product line. So that’s where we're seeing sort of a lot, lot of that project activity is more directed around our stock-prep product line which is very typical when things start to turn.

Okay. So did you said the bookings are going to be up for ‘13 and the revenues down, so is the variability in the stock-prep is that accounting for it?

Sure, there's a couple of things. You might remember in 2012, we actually we entered the year with a pretty big backlog, so the bookings in 2012, were coming down as the world economy came down, but we really softened that blow by having a great deal of backlog coming into 2012. Now turning over to 2013, our backlog is not as high as it was in 2012. But we do anticipate higher bookings, so we had a little bit of an uptick in Q4, we see a little bit of uptick in Q3 I am not going to say this is going to be steady every quarter better than the one before, but I do think that we're going to have a stronger booking year in 2013 versus 2012.

Okay. I guess switching gears a little bit, the dividend first ever you guys initiated can you just kind of go over your uses of cash and what your priorities are there, do you have any more buyback scheduled or programs on the horizon?

So I mean, our uses of cash kind of remain the same and I am glad you asked that question, because I guess I want to be clear about it. I think the dividend is a -- it's part of our general thinking of returning cash to shareholders, you heard Tom’s comment that we returned 1/2 our cash to shareholders, 1/2 our net income to our shareholders in last couple of years. So this is really part of that program, that general idea. The other uses of cash, our acquisitions and just investing in our own business, no one should read this as there's some shift in strategy that we're going to do less on acquisitions or anything like that, I mean our feeling is, is that we have good cash flows that we can easily support the dividend, continue to do buybacks but also continue to do acquisitions really at the kind of same pace that we did before and we are continuing to look at acquisitions.

Okay, I'm sorry I think I missed it, your CapEx guidance for ‘13, did you guys comment on that?

We said $4 million to $5 million, Larry.

$4 million to $5 million?

Yes.

You might remember, we had a few, we expected a bigger year last year, and we had a couple of projects that is just sort of plopped over into this year, so.

The next question comes from Stuart Benway from S&P Capital IQ.

I was just looking at the sequential revenues in your other category which were down significantly December versus September, is there -- where was that, and what was going on there?

So our other -- that is our fiber based granule business and that is a highly seasonal business. So it’s tied to the agriculture and people putting the things on their lawn, so their first and second quarter are real strong and then it sort of, the third quarter's weaker and so forth. That, I would put that more in the seasonal department. That business is doing extremely well.

But it was also down year-over-year by percentage wise a fair amount, 1/3 I guess.

What happens in the fourth quarter with that business, their customers need to be ready for spring.

Last year was warm too, wasn't it?

Well, it has a lot to do with the inventory in the chain and the distribution chain. It has to end up in Wal-Mart somewhere. So sometime Wal-Mart says, "I am low on inventory," and they talk to their customers who talks to us and they put the order in the fourth quarter, sometimes they put it in the first quarter. So it’s as much to do with that as anything else.

And how about South America which actually was strong really both year-over-year and quarter-over-quarter, or quarter-to-quarter and you had mentioned I guess, is that mostly because of the tissue business or what's going on there?

In South America it’s a developing country with all those characteristics. So I would say as a backdrop we see as projecting that overall paper consumption is going to grow about 4% in South America and sort of the good grades, tissue and container board are growing 6% and 5% respectively. That said, you do have some variability with capital orders that kind of make it kind of choppy. You'll have a big tissue job that comes in one quarter and spreads out so it’s a little bit harder to see a trend, because the revenues overall are relatively low and let’s say a recycled tissue job can end up slowing things up. I don't know if you guys have anything else to add to that.

Okay, and can you remind me, I think generally your margins on your parts business are typically higher than on large systems right, is that generally true or?

Generally. That's a fair assumption.

But I mean is there a difference between like large systems and smaller systems as far as margins go or it seems like last year you were saying that there's a lot of large systems which were…

Two things are happening over the long run, yes as a general matter large systems often have lower margins than smaller unit capital for example. I would say we are and Tom referenced it in his comments we are doing better in our margins in our capital. That's a whole combination of things; mixed within capital, pricing, be doing a good job with manufacturing efficiencies and so forth.

Okay, in the tax rate I mean it seems like you are talking about kind of a semi permanent thing here. So should we expect a higher tax rate in 2014 and beyond?

I would say the rate will be in and around this level going forward. It’s hard to pick how further out it goes of course but yes it will be in that range.

You mean the level of 2013?

Yes.

And one last quick one on the dividend, was broadening the investor base I guess to institutions that require a dividend part of the thinking there at all?

Yes, it’s part of the thinking. I wouldn't say it’s a major factor but sure. I know fully well that there are investors who are not allowed to invest in us. So if we didn't do a dividend. I also we talked to our investors all the time and many of them are saying, "Hey we like the fact that you are buying back stock, but dividends are a stronger commitment to your pledges if you will of returning cash to stockholders." So we're trying to be responsive to that as well.

That’s a pretty good size dividend to start out with it seems to me. It’s a pretty strong statement.

What I didn’t want to do is have a token dividend, sort of a dividend in name only. I mean we wanted to be a real and meaningful dividend.

There are no further questions at this time. [Operator Instructions]

Is there no more questions Operator?

There are no further questions.

Thanks very much, Lisa. Let me kind of conclude the call with what I view is kind of 3 key takeaways from our quarter and the year. First, it was an excellent year. We had new records for earnings per share, adjusted EBIT and gross margin. Second, as we just talked about, we initiated this dividend of $0.125 per share or $0.50 on an annualized basis and that’s consistent with our overall strategy to return cash to shareholders, and third, although in 2013, we are expecting a decline in revenues and earnings per share, we do see an encouraging signs of booking activity. We expect another sequential bookings increase in Q1 and higher bookings for the full year of 2013 compared to 2012. With that, I look forward to updating you on progress on our next call. Thanks very much.

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.