Thomas M. O'Brien - Executive Vice President and Chief Financial Officer William A. Rainville - Chairman, President, and Chief Executive Officer

Paul Mammola - Sidoti & Company, LLC. Walter Liptak - Barrington Research Associates, Inc.

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Kadant Fourth Quarter 2008 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). Thank you. Mr. O'Brien, you may begin your conference. Thomas M. O'Brien: Thank you, Jennifer. Good morning everyone and welcome to Kadant's fourth quarter and full year 2008 earnings call. With me on the call today is Bill Rainville, our Chairman 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 quarter ended September 27, 2008 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 obligations 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 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 most directly comparable GAAP measures is contained in our fourth quarter and full year 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 Bill Rainville, who will give you an update on Kadant's business and future prospects. Following Bill's remark I will give an overview of our financial results for the quarter and we'll then have a Q&A session. Bill? William A. Rainville: Thank you, Tom. Good morning everyone. Thanks for joining us today as we review Kadant's 2008 fourth quarter results, summarize our highlights for the past year, and look ahead to 2009. As you know, the economic crisis that began in Q3 accelerated rapidly throughout the world in Q4. Our customers responded by taking unprecedented downtime to reduce inventory levels and bring production inline with reduced demand. In addition, many capital projects were delayed or canceled due to an inability to obtain financing or to desire the conserved cash. These events have adversely impacted our bookings for both capital and parts in Q4, and have tampered our outlook for 2009. That said, paper and board our staple products that are consumed to some degree in all economic cycles. We remain confident that the long-term fundamentals of our industry are intact. I will talk in more detail about our outlook for '09 and the paper industry in general. First, I'll review our results for the quarter. I will start with the financial highlights of our continuing operations. Our revenues for Q4 were 67.2 million or 25% lower than Q4 of '07, excluding the effect of foreign currency. Revenue was particularly weak in our stock prep capital equipment product line. Gross margins were 43% in the fourth quarter, an increase of 500 basis points over the same period last year. This was due to an improved product mix as aftermarket businesses made up a higher percentage of our revenues as well as our ongoing efforts to optimize our manufacturing processes and progress that we made on several global sourcing initiatives. Our bookings for the quarter were 50.5 million, a short decline from Q4 of '07 which was one of our strongest booking quarters in our history, especially effected the stock preparation bookings from Asia, where the linerboard market is experiencing over capacity. Stock-prep bookings in other parts of the world were also impacted in response to consumers about the global economy as well as the tight credit markets. Even our historically stable parts and consumable bookings were affected by the high level of downtime Papermaking casing in response to the economic crisis. Backlog at the end of Q4 '08, stood at $65 million, a 41% decrease from Q4, '07. The reduced order volume was evident across all Kadant business units during the quarter. Particularly in December and the slower order intake resulted in the reduction of backlog levels. Adjusted diluted EPS for Q4 was $0.24. This compares to our guidance of $0.18 to $0.20 for the quarter. Now let's look at our past year performance. We founded that the economic uncertainty and global recession has adversely affected our customers' outlook and buying activity, especially during the second half of '08. A number of capital projects that were scheduled for '08 were postponed and others were canceled. In the first half of '08, we benefited from a relatively stable economic environment. In the second half, all of our business units were impacted by the decline in global business activity. As a result, we finished '08 with revenues of $329 million, a decrease of 10% compared to the prior year. As noted in our earnings release issued yesterday, the impairment charge and other non-recurring items resulted in an operating loss of $13 million in '08, while our adjusted diluted EPS for the year was down 10% to $1.62. Finally, we generated $19.4 million of cash flow from operations in '08, compared to $33.5 million in '07. Based on current and expected business activity in a weak economic outlook, we have taken a number of actions to adjust our cost structure and streamline our operations. We took a $3.1 million charge in Q4, related to a reduction of approximately 300 employees or 15% of our workforce. Majority of these reductions took place in Q4 and the remainder will take place in '09. The cost savings from these measures will be faced in during '09 and the annualized savings is estimated to be nearly $5 million funds fully implemented. We also have implemented a number of other programs in response to the current economic environment, such as reduced work hours and salary freezes. These steps are never easy, but it is the right thing to do for our company both in response to the reduced business levels we expect in '09 and to further strengthen the position of the company. We have successfully employed similar measures in the past, such as when we integrated multiple operations in a region or in order the sales teams to provide better market coverage and reduce cost. We will continue to optimize our business structure to best serve our customers needs and maximize internal efficiencies. Through these efforts, we are confident that we will strengthen our leading position within paper industry and reinforce a strong cash position, despite the tough economic environment. Now looking ahead to 2009. Our performance over the past few years has been exceptionally positive, but the global economy has clearly weakened and is far more uncertain than it was this time last year. That said, our business fundamentals are strong, our balance sheet is healthy and we continue to take deliberate actions to remain well positioned to weather the economic downturn during the coming months. In past earnings calls, I have noted several initiatives that we were undertaking to improve our results that are less dependent on an expanding economy. These included increasing our market penetration of water management and accessory products in China and Germany, increasing our market share of stock prep parts in China, drawing our global market share of screen baskets, and shifting manufacturing for lower cost countries such as Mexico and China. I am pleased to report continued progress in these efforts. For example, at beginning of '09 Kadant was awarded an annual blade contract from one of the largest printing and writing blade producers in China. Based on the customers 2008 usage rate, we estimate this contract to be valued at approximately $1 million. In addition, we have been awarded an annual screen basket contract from one of the largest linerboard producers in China. This contract also has the potential to generate $1 million of revenue. Also these contracts are evidence of our growing presence in the Chinese aftermarket and further reinforce our belief that Kadant model will work in emerging markets as it has in developed regions of the world. On a related note our sales team joined the globe has been reported increased success in converting competitive blade installations to Kadant suited the demand from mills to application expertise and process knowledge. A key value distinctive position... proposition offered by Kadant to the pulp and paper industry worldwide. On the stock prep equipment side of the business I am pleased to report that we originally made a partial shipment of the Vietnam order mentioned in our Q3 '08 earnings call. And that's going to pay for 80% of the contract. We're currently working with the customers to complete the remainder of this contract. In addition, just a few weeks ago we were awarded a contract to provide key components for an pulping system (ph) valued at approximately $1.8 million for linerboard producer in China. That order was followed by a pending order of similar size from another linerboard producer in China for our stock-prep system. These examples demonstrate the opportunities that we are capitalizing on despite the challenging economic environment. And markets outside of the pulp and paper industry we continue to seek new market growth opportunities as shown by a strong quarter activity for a high efficiency steam jet thermal compressors in cognizant handling systems. Like many of our product offerings to the pulp and paper industry, these products offer our customers a compelling return on investment to improve energy utilization and reduced energy consumption. Before concluding my comments I want to take a moment to reiterate the major factors that we believe benefit us in slower times. For those of you who have been following Kadant over the years, you are well aware of these attributes and how they contribute to our stability to the ups and downs of economic cycle. But first is our substantial consumables and parts business that is generated from a large install base. Consumables and parts make up about one-half of our sales and provide relatively a stable base, even during a slowdown. We also generated higher gross margins in capital projects. Second many of our products offer energy and fiber savings benefits resulting in compelling returns on investment. Even though in difficult times each product offers attractive solutions to reduce operating cost and improve energy utilization. Third, our global manufacturing and sourcing capabilities provide increased flexibility to manage our cost as currencies and other factors change the relative manufacturing cost from region to region. Fourth, we have consistently maintained a healthy balance sheet. In addition, we've accessed the capital at very attractive rates through our established credit facilities that will allow us to take advantage of opportunities, such as stock repurchases and complementary acquisitions. We will continue to seek out opportunities and add value to our portfolio and believe that patience is a value to attribute in the current environment. Our business strategy for '09 remains consistent with previous actions we have taken to deliver value for our customers and shareholders. In '09, we will focus on increasing our aftermarket and consumables business, deliver products and technical solutions that provide our customers a good return and on their investment through energy savings and fiber yield improvements and further penetrate existing markets where we see opportunity. In addition, we will continue to drive efficiencies through our global manufacturing organization to capture cost savings and operating margins that support future growth initiatives. Our business model has been well tested during several business cycles and has weathered tough economic environments. In addition, our management team is very seasoned and has navigated through numerous slowdowns and recessions during the past three decades. Taking a broader perspective on the current situation, we believe that the paper industries reduction in capital standing and replacement parts is a short-term response to the current economic environment. At some point, the pent up demand for consumables, parts and capital equipment will break loose in the return to more traditional levels. We know that the long-term outlook for grades such as tissue, packaging and printing and writing, are all fundamentally positive. Global picture consumption continues at a relatively stable growth rate of approximately 4% for a year in industrialized economies and higher in emerging markets where consumption is relatively low for capital. While targeting grade producers are more affected by economic cycles, there is no meaningful threat to replace the box, as the packaging of choice. The need for boxes and containerboard will grow as trade increases as the consumers in developing countries require packaging for their products. And finally, printing and writing grades also hold promise as emerging economies become more organized and develop serviced economies. Based on recent analysis provided by RISI, we expect that China will be both the largest Asian producer and the largest exporter of printing and writing grades in '09 and beyond. Now on to our guidance. As I outlined earlier, we have taken a number of actions to align our cost structure with the anticipated business levels in '09 and to strengthen the position of the company. That said, the global recession and economic uncertainty have adversely affected our customers and their buying patterns. As a result, we expect to report a GAAP diluted loss per share of $0.03 to $0.05 from continuing operations in the first quarter of '09, including $0.07 of restructuring cost on revenues of $62 million to $65 million. For the full year, we expect to achieve GAAP diluted EPS of $0.43 to $0.53 from continuing operations, including $0.17 of estimated restructuring cost on revenues of $260 million to $270 million. Now I'll turn the call over to Tom for more detail review of the financials. Tom? Thomas M. O'Brien: Thank you, Bill. Although, I usually start with our revenue performance, let me first make a few comments on our balance sheet and our liquidity position since both those areas are even more important in the current economic climate. From an overall perspective, our balance sheet is healthy. We had 50 million in net debt at the end of 2008. We have no significant debt maturities in 2009, the weighted average cost of all our outstanding debt at the end of the fourth quarter was under 4.3%. We are well in compliance with our debt covenants and we ended the fourth quarter with $40.1 million in cash. In terms of our liquidity, in addition to the $40 million in cash, we have approximately 33 million available in committed lines of credits. We also have an additional 75 million in uncommitted lines under our multi-bank five year credit agreement, which we entered into in February 2008. Likewise, we have 100 million in uncommitted lines under our three year through shelf agreement which we entered into in May 2008. We were fortunate to have entered into these agreements early last year before the financial crisis had expanded and the collapse of the global credit markets. Since we negotiated these facilities when was credit still readily available under attractive terms, a marginal volume cost under the bank group facility is quite low ranging from 50 to 120 basis points over LIBOR. Currently we are borrowing at 70 basis points over LIBOR. As I mentioned, at the end of the quarter our net debt position that is debtless cash was 15.3 million compared to a net cash position of 20.9 million at the end of 2007. Our net debt to EBITDA for 2008 was 0.4. Net debt to equity was 7.9% and net debt to total capital was 7.3%. Although, we purchased $47.6 million of our common stock in 2008 of which $10.3 million was purchased in the fourth quarter. Cash flows from continuing operations were 2.2 million in the fourth quarter of 2008, compared to last year's record quarterly results of $25.8 million. For all of 2008, cash flows from continuing operations were $19.4 million compared to last year's record performance of $33.5 million. Encouragingly, we've had solid cash collection so far in the first two months of 2009. Well that is just on reducing our levels of the working capital, we expect our net debt position to decrease over the next several quarters and depending on the amount of stock repurchases we make during the year, we could be in a net cash position by the end of 2009. Turning now to our revenue performance; consolidated revenues were $67.2 million in the fourth quarter of 2008, 30% lower than last year including a 5% unfavorable effect of foreign exchange due to the strengthening of the U.S. dollar in the fourth quarter particularly as compared to the euro, the British pound and the Canadian dollar. Revenues were below our guidance for the quarter which was $75 million to $77 million, likely due to this unfavorable effect from foreign exchange which is $4.7 million as well as lower than anticipated sales in our stock prep product line. In general, revenues were lower in all our major product lines, as compared to last year, although water management revenue did increased 6% if we exclude the 8% unfavorable effects from foreign exchange. Let's now turn briefly to the revenue performances in each of our major product lines. Stock prep revenues were $24.4 million in the fourth quarter of 2008, down 44% from last year, including a 2% unfavorable effect from foreign exchange. Revenues in China were $4.1 million, a decrease of 69% from the fourth quarter of 2007, and included a 1% favorable effect from foreign exchange. We noted during our last earnings call that our capital business in China was very weak and that continues to be the case, although as Bill mentioned, we were pleased to secure some large contracts there in the past few weeks. Revenues in North America were also quite weak, again most notably in the capital business and were down 60% from last year. In Europe stock prep revenues increased 7% from the fourth quarter of 2007, including a 10% unfavorable effect from foreign currency. The increase here was largely due to higher capital sales originating from several large projects. We do expect weaker sales from stock prep products in Europe in 2009 due to the economic environment. Revenues in our water management product line decreased 2% from last year, including an 8% unfavorable effect from foreign exchange. In North America, revenues decreased 4% compared to the fourth quarter of 2007, including a 3% unfavorable impact from currency. Year end base revenues were flat with last year, about 26% excluding foreign exchange largely due to higher sales to OEMs. Turning now to our accessories product line; revenues were $12.9 million in the fourth quarter of 2008, down 14% from last year and included an 8% unfavorable effect from currency. Revenues declined in North America by 14% including 4% from the unfavorable effect of foreign exchange and by 20% in Europe including a 19% unfavorable effect from foreign exchange. This and other product lines were affected by both tightening on part of our customers, and this behavior generally increase as the economic news worsened throughout the quarter. Overall, it was the quarter characterized by mill closures, machine shutdowns and extended production curtailments even by some customers who were really taking extended bad times in the past. Revenues in our fluid-handling product line were $20.8 million in the fourth quarter of 2008, down 24% compared to last year including a 6% unfavorable effect from foreign exchange. Also, the major geographic areas in which we market these products experienced lower demand in response to the worldwide recession. For example, our European revenues were negatively affected by delayed capital project for a large rebuild at a Russian paper mill. Lack of available financing hurt revenues in Latin America. China was tracking was well against our forecast in November and then experienced an unusual sharp drop in orders in December. In the U.S., revenues were down 6% compared to fourth quarter of 2007, primarily due to reduced activity for paper mill equipment upgrades and some softening of the ethanol and machine tool markets. Turning to our product gross margins; consolidated product gross margins were 43.1% in the fourth quarter of 2008, up 500 basis points over last year and we reached their highest levels since the first quarter of 2000. This improvement occurred entirely in our Papermaking System segment, where gross margins of 43.5% were 530 basis points higher in the fourth quarter of 2007. The gross margins in our Papermaking Systems segment continued at a favorable trend that you've seen that for the several quarters. The higher margins in this segment reflects both the product mix that is a larger proportion of higher margin aftermarket revenues as well as efforts we have had underway to shift our production and sourcing to lower cost countries, particularly to China and Mexico. Encouragingly we saw higher margins in all our major product lines in the fourth quarter of 2008, compared to the fourth quarter of 2007; especially in water management and stock-prep. The increase in these two product lines were specially noteworthy in the order of magnitude of 500 to 600 basis points. Gross margins were lower than last year in our other categories, however adversely affected our consolidated gross margins by 30 basis points; largely due to lower sales and higher prices of natural gas in our fiber-based products business. Natural gas prices have since dropped significantly and we expect improved results for this business in 2009. Now let's look at our SG&A expenses for a moment. SG&A expenses were $23.6 million in the fourth quarter of 2008, down $1.5 million or 6% from last year. This decrease includes $1.2 million or 5% from the favorable effects of foreign exchange that is as the local currency amount was translated into few U.S. dollars, offset partly by an increase of 600,000 in bad debt expense associated with a customer bankruptcy. Due to lower revenues in the 2008 period, SG&A as a percentage of revenues increased from 25.9% in the fourth quarter of 2007, to 35.1% in the fourth quarter of 2008. Bill noted in his remarks some of the restructuring efforts we have underway and these will turn to reduce our SG&A run rates in 2009. Now before explaining our EPS results for the fourth quarter, I first need to address three unusual and large items which reduced our net income in the fourth quarter. The first of these is the goodwill impairment charge we reported in our stock-prep business. As required under Financial Accounting Standard No. 142, we completed an evaluation of goodwill at end of the year for all our reporting units and determine that we had an impairment of goodwill in our stock prep reporting unit. On a pre-tax basis, the impairment was $40.3 million and that beginning effect to a $13.6 million tax benefit; it reduced net income by $26.7 million or $2.10 per diluted EPS in the fourth quarter of 2008. This impairment largely results from lower revenue and operating income projections for this business over the next several years, compared to our earlier projections. Importantly, this impairment charge has no impact on our operating cash, no other in any effect our compliance with the debt covenants under our borrowing facilities both committed and uncommitted. The second unusual non-recurring charge we recorded was related to the goodwill impairment charge. It involved establishing valuation allowances on certain of our deferred tax assets. These valuation allowances reduced net income by $15.4 million or $1.21 of diluted EPS in the fourth quarter of 2008. Again, this was the non-cash charge which had no effect on our debt covenants, since a compliance formula is based on pre-tax measurement. The third unusual non-recurring charge we reported was for various restructuring initiatives which we have either already completed or which have been approved by management in our various stages of implementation. Since Bill covered these in his remarks, I won't repeat them here, other than some note that the pre-tax charge we incurred in the fourth quarter of 2008 was approximately $3.1 million, which had a negative effect on diluted EPS during the quarter of $0.18. So that said, we reported a GAAP diluted loss per share including the impairment charge, the tax valuation allowances, the restructuring charge and the discontinued operation of $3.25 in the fourth quarter of 2008, compared to income per diluted share of $0.53 in the fourth quarter of 2007. The discontinued operation reported breakeven results in the 2008 period, compared to a loss of $0.01 in the 2007 period. Also, as I just explained the fourth quarter of 2008 includes losses per diluted share of $3.31 associated with the goodwill impairment in stock prep and the tax valuation reserve and a loss of approximately $0.18 per diluted share from restructuring. So, excluding the discontinued results, the impairment charge, the tax valuation reserve and the restructuring charge were applicable in both periods. Adjusted diluted EPS was $0.24 in the fourth quarter of 2008, compared to $0.54 in the fourth quarter of 2007, or decrease of $0.30 per diluted share. You can see the calculation of adjusted diluted EPS in tabular form in the earnings press release which we issued yesterday. This decrease of $0.30 which I should note compares to a very strong quarter last year includes the following of effects; an increase of $0.04 from our lower effective tax rate in 2008 before giving effect of the impairment and valuation items, offset by decreases of $0.06 from the unfavorable effects of foreign currency translation and $0.01 from higher net interest expense. As I just explained a net decrease of $0.03, it leaves us with the decrease of approximately $0.27 attributable to lower operating results in the fourth quarter of 2008, compared to the fourth quarter of 2007. Now before concluding my remarks, I would like to give you some additional details on our earnings guidance for 2009. Looking at our quarterly EPS performance in 2009, we expect some sequential improvement in the second quarter and a stronger second half of the year, assuming operating rates, following an increase in the paper industry and market conditions stabilize and gradually improve. We do believe that the paper industries product usage of parts and consumables is well below normal, even at the current operating rates. We expect our bookings rates of these products will return to more traditional levels, later in the year when our customers have fully adjusted their inventories and operating rates to demand. Also the benefits from our restructuring efforts will be higher than the second half of the year, as the various efficiency plans and improvements we have noted will by then have been fully implemented. With respect to those restructuring plans, we expect to incur an additional restructuring charge of approximately 3.1 million or $0.17 per diluted share. And this is included in our annual GAAP guidance. We expect that the tax rate excluding any discrete items will be approximately 33 to 34% in 2009, continue to 29% for current rate in 2008. The reported rate in 2008 for us included a number discrete non-recurring items including the tax valuation allowance. We anticipate our CapEx spending in 2009 will be $4 to $5 million with approximately half of that amount associated with continued investments in our manufacturing capabilities in China and Mexico. Included in our 2009 guidance is approximately $0.14 per diluted share associated with our estimated non-cash employee equity compensation expense compared to a similar amount in 2008. And finally we expect depreciation and amortization to be approximately $8 million in 2009. That concludes our review of the financials and I will now turn the conference back to the operator for our Q&A session. Jennifer?

(Operator Instructions). Your first question comes from Tyler Alrik (ph) with J.P. Morgan.

Good morning.

Good morning, Tyler.

Just looking at your top line guidance for 2009, if you had to break it up into recurring revenue and new equipment orders, how much of that $260 to $270 million is true recurring revenue and what portion do you expect to be driven more by new capital equipment orders? And then if you could just give a little bit more detail on your expectations for demand by geography that would be helpful.

Yes, its safe to say Tyler I think that the basket consumable business that we have which makes up about half of our business I would expect that if anything that may grow a little bit I mean as a percentage in response there, I would think that would get up to may be 60% of our revenues in this down cycle. The remainder be in capital equipment and the capital equipment that we've been looking at it is not necessarily the huge orders and major systems but more replacement of a lot of the machinery and equipments that we have. We will still have some opportunities just as we announced like both for screening and some of the smaller stock-prep systems, but in general I would say that the consumables and parts should take up a bigger piece of our revenue in response cycle. And what was the second part of your question that you?

Just a little bit more detail on demand expectation by geography?

By geography, I think that certainly in North America we see softness that's mean directly to the economy and that impacts more of the liner of growth; also by the way our newsprint. Newsprint is making up a much smaller piece of our revenue and we breaking its expectations that that's going to continue to decline in North America. Latin America, it has somewhat of a similar profile. I must say that in Mexico, we've seen which is a smaller market we've seen some strength in the Mexican market. If I take a look in Europe, I'd say Western Europe is going to be somewhat similar to what we see in North America. In Eastern Europe there is need for some projects and it's really dependent upon when they we may see capital available to fund those projects because they have been impacted and postponed until the economy changes and until they have access into capital. China is one that's very mild for a period to time and by the way it's peaking of Asia and China particular. I think the outlook for China certainly hasn't changed, I think what has change is we're gong to see a shift over what was expected over the next five years to may be right over next seven years, and we're going to see stalling of projects, certainly in the next year or two, probably a couple of years, because they just have anticipated continues growth in that marketplace and that has been on the packaging grades and that has certainly going to be stalled out for a couple years. But we -- the expectations over the next five to seven years is still as strong as we ever anticipated and this is clearly endorsed by we see. We do see some opportunities in the light grades of paper there and certainly in the tissue grades and all of light grades non-coated tree sheets, light weight coated grades and to a smaller extent even some newsprint activity there. And as I said, look at rest of the world, there will be some pockets of opportunity, they are very difficult to forecast into these smaller projects and could be in regions like India and other parts of the world. But the U.S. economy certainly in my opinion has impacted -- it has global impact that we see. Does that answer your question Tyler? Hello? He is off line, operator? Jennifer? You there?

Yes.

Okay. Next question...

Okay. Okay, your next question comes from Paul Mammola with Sidoti & Company.

Good morning, Paul. Hello? Thomas O'Brien: Hey, operator.

Yes sir. Thomas O'Brien: We are not hearing the question here.

Okay. One moment.

Hello.

Paul your line is open. Paul Mammola - Sidoti & Company, LLC.: Hey, good morning guys.

Hey good morning, Paul. Thomas O'Brien: Hey Paul. Paul Mammola - Sidoti & Company, LLC.: There we go.

I said like Houston, we have a problem. Paul Mammola - Sidoti & Company, LLC.: Good thing we're back in, all right. Well first of thanks for the guidance and all the good color you have given so far. Can you comment on what the breakdown is for gross margin in terms of how it helped, was it mix versus your performance enhancement initiatives? What was the percentage breakdown there would you say generally? Thomas O'Brien: I mean it was roughly split half and half, I mean half from product mix and half from all the initiatives we've take in lower cost sourcing Mexico, China, etcetera. So it was roughly half of the improvement was due to mix. Paul Mammola - Sidoti & Company, LLC.: Okay that's fair. And then can you comment on customer financing and what do you think it's gotten materially worse or better in one or two Q versus the fourth quarter? Thomas O'Brien: Well like we said we've certainly seen difficulties in some regions like Russia for example we did a lot of business with Russia last year, particularly out in our European operations and there has been some difficulty there in securing financing and some in China as well. So I think that it's occurring in some region then with some of the largest systems, I think. Paul Mammola - Sidoti & Company, LLC.: Okay. And to my knowledge, I don't there was any serious price improvement last year, I guess so I would... is it right assume there are no price give backs, I mean potentially for improvement, is that fair to say?

You mean with our pricing? Paul Mammola - Sidoti & Company, LLC.: Correct.

Well, we constantly look at that pricing, especially on our aftermarket products and so forth. And the conditions are tougher certainly under these economic times it's much tougher and I think we are going to get more benefit out of the manufacturing efficiencies in the shift to lower cost, manufacturing lower cost areas that are going to be certainly -- we had expectations for margin improvements, with those sources. Paul Mammola - Sidoti & Company, LLC.: Okay. And is it fair to say that you still see China at somewhat depressed levels through the first couple of quarters of, excuse me... the first couple of months, for the first quarter here?

Yes in fact we're probably going to see basic softness Paul to probably through most of this year in terms of big major systems. On the other hand, we have been very encouraged by our successor going in after the aftermarket products, both in the stock-prep area as well as penetrating that market closely with accessories and water management. So we still see some opportunities, although I don't expect to see the large major recycling systems in '09. Paul Mammola - Sidoti & Company, LLC.: Okay. And on the restructuring number, I think it was $0.17, $0.07 in the first quarter. Is the other $0.10 in the second quarter, is that right? Thomas O'Brien: It's kind of spread throughout the rest of the year. Paul Mammola - Sidoti & Company, LLC.: Okay, perfect. Thomas O'Brien: But it's not going to be done like first quarter look. Paul Mammola - Sidoti & Company, LLC.: Okay, perfect. Thanks for your time.

Thank you, Paul.

Your next question comes from Walter Liptak with Barrington.

Good morning Walter. Thomas O'Brien: Good morning. Walter Liptak - Barrington Research Associates, Inc.: Thanks, hi good morning guys. Let me start with the big picture. You sort of addressed this already, but I just want to ask what's upturn in your business is going to look like, is it mostly financing of equipment related or as you alluded to in some regions or is it utilization rates and what's it going to look like when the equipment sales start coming back into the market?

It's a good question. In some of the regions we see it's impacted by financing, such as Eastern Europe is a key example. And in other parts of the world like North America, Western Europe is really on consumption of paper. And because right now many of the mills are running, some of them running as low as 65% and most of them are probably around 75%. The good news and the good news probably we do see is that inventory rates are relatively low in paper which to tell mean that if there is any type of pick up, we should start, we'd see the gain quicker. I think that what we would see is that plenty of things that I look, I have been in this business a long time and certainly on the parts and consumables base, we have seen a slow down of that activity in North American and Western Europe and in my opinion that's certainly not sustainable, because they really need to replace components. They run 24/7 and they need to replace and more on a normal level. And I think that if not, they're going to start straining their ability to have good operation on your paper machines. And also they could cross and damage the things like rolls which they need to protect, because they're not going to need our equipment for vulnerability but also to protect their equipment. So actually that is not sustainable and I think we would expect the pick up in that level of business throughout the year. And again that's the products in aftermarket business, and we also generate higher margins in that piece. Walter Liptak - Barrington Research Associates, Inc.: Okay. What, on the $50 million in bookings that you got in the quarter, can you break that out what was, how much was equipment and how much was parts?

On equipment side, you got it Tom, it is small? Thomas O'Brien: Yeah, that was small, that's probably weighted 65% maybe in the parts and consumables, so it's 60% to 65%, higher than the average. Walter Liptak - Barrington Research Associates, Inc.: Okay. And what's the China capacity utilization running at in the stock prep?

Well, in the stock prep side I don't know, well it's a big... big systems are all in the linerboard grades. They have smaller impacts on the light grades of paper, the light grades of paper are doing fairly well at this time. And the linerboard, they've had shutdown on some capacity and they've I think that their utilization rates, it's bit more difficult to get precise information to utilization rates, but I would give you and what I would probably guess that it's probably below 80% at this point. Walter Liptak - Barrington Research Associates, Inc.: Okay. So now that is there in the U.S., I guess...

Yes, because the real impact was a shutdown from operations and they also stalled off installing some of the new systems that they had anticipated putting in. Walter Liptak - Barrington Research Associates, Inc.: Okay. And I just had a couple of -- I wonder if we can get guidance on R&D spending for '09 and corporate expenses?

Yes, our R&D spending is going to be around at 2% level. Pretty close to what we have historically have been doing. And on the... Thomas O'Brien: We don't give the guidance on that. But I would say that included in that other category really two things. One is the corporate expenses and the other is our GranTek operations. And as I mentioned in my comments, that the GranTek operations which is our fiber-based products business. Walter Liptak - Barrington Research Associates, Inc.: Right. Thomas O'Brien: Will have a better year in 2009, significantly better, probably to the tune of $0.06 or $0.07 improvement due to lower gas prices and a little bit better revenues. Walter Liptak - Barrington Research Associates, Inc.: Okay. Thanks very much.

Thank you, Walter.

Your next question comes from Mark McGrath with Kimmeyer (ph).

Good morning, Mark.

Good morning. I just wanted to clarify one thing. You said the $329 million in sales last year, you guessed about 50% came from aftermarket parts and services and then it looks like the mid-point of your guidance is about 265 and you are guessing 60% of that would be in the same category?

You are right. Last year Mark we followed close to around 55%.

55.

Right.

Okay. Well then that changes the math little bit, so that, if it was 50 imply that the prep businesses only be down 3% or 4% this year, so you would be down a little bit more than that?

Right. That's our expectation at this point I can tell you this is really one of the toughest years we look at and then fortunately we got a -- we have base that we can build the business from and but on the other hand it is very difficult to call. We're looking at moving targets off.

Right, right, but if it is was 55...

Hello? Thomas O'Brien: Hey, operator we lost the caller.

Operator.

Yes I am trying to... he'll hop back.

Okay. Thank you. That was Mark. Thomas O'Brien: Mark McGrath.

Okay. Mark, your line is open.

Can you hear me?

Yes, we can hear you now Mark.

Okay. So, by the number it was 55% is products and service for last year that means you are now about 12% in that business... is that right?

At this point that's about the best as where we have at this point.

Okay. And can you give us a little bit of an idea how much sales you have in China last year versus how much you expect in 265 of sales this year? Thomas O'Brien: In 2008 Mark, we had this is stock-prep now, about 45 million in revenues. And in 2009, I think we're expecting somewhere in the range of about 25 million. Again that's just stock-prep.

Yes. Thomas O'Brien: So our fluid handling business in China it could add another $15 to $16 million to those numbers.

And in both years. Thomas O'Brien: Yes, in both years and then just... right, both years.

Okay. And then, it just looks like you did more share repurchase in Q4, what's the year end share outstanding? Thomas O'Brien: It's about 12.7, 12.8 million.

12.7, 12.8 at year end? Thomas O'Brien: Yes.

Okay. And then I missed the D&A and the CapEx estimates for '09? Thomas O'Brien: D&A is about $8 million and CapEx is say between near $4 and $5 million.

Four or five okay. And then you mentioned that you expected the squeeze on cash and the working capital next couple of quarters. If the sales estimates are roughly right how much we would you expect to come out of working capital with the whole year? Thomas O'Brien: That's a very good question. And I would say, again this is one of the difficult to forecast, but I would say it could be in the range of $10 million.

10 million? Thomas O'Brien: Yes.

Okay, great. Thanks very much.

Hey, thank you, Mike. Thomas O'Brien: Thank you Mike.

Your next question comes from Tyler Olk (ph) with J.P. Morgan.

Hi Tyler welcome back.

I am just touching briefly on the restructuring again. Is most of that expense that you guided to in 2009 is that mostly severance or is there some more significant rightsizing of whole business lines?

That's mostly severance. Thomas O'Brien: Right.

Its predominantly severance on it Tyler.

Okay. And then aside from share repurchase that you've been pretty aggressive on, it looks like what are just the other priorities for cash flows at this point in cycle, are there opportunities out there?

That's a great question. In fact in past down cycles we were taken out through the quarter businesses. And this type of cycle, this is something else that could be a nice opportunity just to expand our product offering for example.

Are you seeing some distressed assets out there that could be attractive?

We keep an eye upon it and yes, we have some that we've been watching and probably looking at for a number of years that may become much more reasonable and attractive in this period.

Great. And that's it for me. Thank you.

Thank you Tyler.

Your next question comes from Walter Liptak with Barrington Research. Walter Liptak - Barrington Research Associates, Inc.: Hey guys.

Hi Walter. Thomas O'Brien: Hi Walter. Walter Liptak - Barrington Research Associates, Inc.: One follow-up on the parts business in China. How will you characterize the opportunities, is it from your install base of equipment or is it are you getting them to other machinery? And I wonder if you could quantify for us what the opportunity is?

Well, I think on the parts business and stock preparation is predominantly off of our install base. And I can tell that it's going to be relatively close to what we've been looking as that opportunity comes in once all the machines are up and running first the opportunity we have in the U.S., because they actually have more capacity in linerboards, even in the next couple of years than U.S. has and that has been a nice business for us. We also see additional opportunity, and that's in the basket business, steam basket business that we look at in the stock prep area. And the other parts of the business and accessories fluid handling and water management. Some of that is, some of the original equipment on our new machines, the majority of that is out replacing the equipment. We are going in with a much higher technology and advanced equipment than we had experience of along with I think what has been a real tool for us to penetrate that market is our application knowledge and service capability which really there is no one that comes close to that assuming those product lines anywhere in the world. Walter Liptak - Barrington Research Associates, Inc.: Okay. And my understanding in especially stock prep, you're early in your China parts business. How long is it going to take do you think to get the maximum market opportunity?

Well, I think we are going continue to see gains on that because while our systems have been up and running couple of years, just in the entry stages now requiring parts and services as well as the screen basket business that we've had, and that our latest design screen basket, our web (ph) basket. We have seen quarter-to-quarter for example, in the fourth quarter they were up to 100% over the previous year and over year-to-year, we have seen gain of 55%. So, we're making good penetration in those markets. Walter Liptak - Barrington Research Associates, Inc.: Okay. All right great, thank you.

All right. Thank you, Walt.

At this time there are no further questions.

Okay. Well in that case I just have a couple of closing comments. Thank you, operator. In closing, I would just like to say that we believe Kadant is well positioned to capitalize on opportunities and that's even during the times of economic uncertainty. And more importantly, our parts and consumable business, energy saving products and healthy balance sheet provides stability during challenging times, and flexibility to achieve our goals. I look forward to reporting on our progress as we work to on implementing our strategies and meeting our operational and financial goals for 2009. Thank you for joining us today.

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