Thomas O'Brien - CFO Bill Rainville - Chairman & CEO

Tyler Old - J.P. Morgan Securities Walter Liptak - Barrington Research Associates, Inc. Paul Mammola - Sidoti & Company

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Kadant, Inc., First Quarter 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. I would now turn the call over to Chief Financial Officer, Thomas O'Brien. Please go ahead sir. Thomas O'Brien: Thank you, Chris and good morning everyone and welcome to Kadant's first quarter 2009 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 annual report on Form 10-K for the fiscal year ended January 3, 2009 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 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 Recent News. 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?

Thanks Tom. Good morning everyone. Thank you for joining us as we review Kadant's 2009 first quarter results and comment on our outlook for the rest of the year. For those of you who closely follow the pulp and paper industry, you’re well aware that the global economic climate has resulted in a significant drag on paper demand and paper machine operating rates. In every major industrial region across the globe, reports of temporary and permanently idle machines are commonly cited and reflect the dismal nature of the current economy. This in turn has impacted our first quarter results across all areas of our business. There are, however, some early indications that business levels may be stabilizing as our customers work diligently to reduce inventory levels to reflect market demand. We believe that unusually lower machine utilization rates are highly abnormal and are non-indicative of the longer-term business environment. Following our review of our financial performance in Q1, I’ll provide an overview of the state of the pulp and paper industry and highlight several developments that lead us to believe that condition should improve towards the end of 2009. I will start with our financial performance. Revenues for Q1 were $65 million, or 16% lower in Q1 2008, excluding the effect of foreign currency. This revenue decrease was across all our business units except the fiber based products business which was up 14% compared to a year ago. Our bookings for the quarter were $48 million, a sharp decline from $90 million in Q1 '08 which was a relatively strong bookings quarter. We believe that the lower operating rates of paper machines around the globe reflecting a depressed paper and paper board demand is a primary driver resulting in weak bookings for the quarter in all of our major product lines in all regions of the world. Our spares and consumables bookings were substantially lower than we had forecasted. And we have not seen any recovery so far in the second quarter. In addition, over the past few months, numerous capital projects including several, where we have signed contracts but have not recorded as bookings, have been postponed due to market conditions or lack of financing. Backlog at the end of Q1 '09 stood at $46 million, a 61% decrease from our record level set in Q1 '08. Adjusted diluted EPS for Q1 was $0.02, excluding restructuring costs and incremental tax provision. Although we met our diluted EPS guidance on an adjusted basis, our first quarter 2009 results currently reflect the tough economic environment facing our customers. On a more positive note, another solid quarter of cash flow from operations which generated nearly $14 million in the first quarter more than double our cash flow from the same period of last year. Our net debt position at the end of the first quarter was $7.3 million compared to more than $15 million at the end of the fourth quarter of 2008. Before I talk about Kadant, I thought it would be helpful to review the current condition of the paper industry. Recent industry news, market conditions and operating statistics clearly show the pulp and paper industry responding to serious reductions in market demand and in some cases downward pressure on prices. A positive factor impacting mill operations and supporting mill profitability despite the pricing pressure has been the declining input cost and energy; recycled fiber, wood fiber and chemicals. The drop in energy and fiber cost has improved the cost competitiveness of recycled containerboard mills and Virgin furnish mills in US are now being additionally helped albeit temporarily by the alternative fuel tax credit by burning black liquor. While the 41 machines permanently idled in US in 2008 is nearly the same as the number in 2007, there is a significant decline in operating rates compared to one year ago. For example, the operating rates of US containerboard segment throughout the 79% in Q1 '09. The operating rate for the same period of 2008 was 96.4%. Slightly higher than the 95.7% operating rate from 2003 through 2007 in this segment. The operating rates are similar for other paper grades and the large deviation from historical rate suggests that the current operating rates are not the new standard. Rather this is an unusual period, for paper companies are reacting to sluggish market demand and downward price pressure through aggressive supply side management. However, expensive and widespread downtime has struggled to keep pace with the reduction in demand resulting in increases in mill inventories and newsprint Kraft paper while containerboard and printing and writing range inventories decreased in March. Coated paper producers are facing the surface decline in demand of all paper groups. Their permanent capacity shuts have been slow to happen in 2009. We believe that this phenomenon is due to producers' believing that some of the downturn in demand is cyclical and will eventually recover from the levels of the past few months. On a more positive note, demand for our tissue continues to be relatively resilient and operating rates in the first quarter of this year were at 91% down slightly from 93% during the same period last year. Although abnormally lower current operating rates have been reported in every region of the world, we believe that the depressed operating rates are a temporary occurrence. And the market will eventually return to more traditional levels of 92% to 96%. Medium to long-term trends in the paper industry are still positive particularly in emerging markets where low per capita consumption and urbanization will stimulate demand in the coming years. As a result of the lower operating rates and the desire of our customers to conserve cash, our replacement parts and consumable business as well as capital equipment shipments side bookings have experienced significant headwinds in Q1. As I noted in the beginning of my remarks, our bookings in Q1 were well below what we anticipated. Our spare parts to consumables were off due to lower operating rates and many capital projects were postponed due to market conditions for lack of financing. We have not seen a turnaround on the first part of Q2 and do not expect bookings to improve until the second half of the year. However while the prognosis of the economy in general and the paper industry in particular is uncertain, we are beginning to see some moderately encouraging signs in the marketplace. In particular, our businesses have noted increased coat activity during the second half of March and into April. And we are seeing increased optimism from our selling teams. Supporting this point, Packaging Corporation of America in its first quarter conference call a few weeks ago, noted that bookings for the first 10 days of April were up almost 15% over March and above equal with April 2008 A similar report of increased demand is also made by Temple-Inland. Our large install base continues to service well, offering a less volatile flow business that provides healthy cash flow within our operating units. For example, in early April, we booked an order for more than 500 spare rotary joints from one of China's largest steel producing companies. A typically steel production run lasts up to 18 months after which time the machine segments are rebuilt and consumable equipment such as rotary joints are replaced. At this particular mill, there are nine continues casting machines with more than 2000 Kadant rotary joints in operation. A recent order we received of 500 rotary joins is for a routine rebuild of two of the nine steel producing machines. On a similar note, we have recently begun shipping doctor blades to a major printing and writing grade producer in China as a result of the annual contract we were awarded earlier this year. This accomplishment as well as the successful expansion of our water management accessory product lines in China is allowing us to capture increased share in this critical market at a faster pace than originally planned. Another positive development with respect to our accessories product line is our market share growth in various regions of the world. For example in the first quarter we won two new significant doctor blade accounts in North America and Europe and we were told that the customers chose Kadant because of our application expertise and the customers confidence in our long term viability. And finally, recent reports issued by the European organization for packaging and the environment and The American Forest & Paper Association have indicated increased use of recycled paper in Europe and North America. Not only is this increased use of recycled content good for the environment as well as paper and packaging products are just started in landfills, we believe this is also good for Kadant because of our process knowledge and application expertise in recycled stock preparation and the type of paper machine that is required for the more demanded, cleaning, filtering and doctoring process involved with recycled fibers. We believe that increased use of recovered paper products will lead to increased demand for Kadant products and technologies. Capitalizing on its increased use and the current demand for recycled paper, Kimberly-Clark recently launched its green tissue paper product called Scott Naturals. This toilet tissue is made from a blend of materials that is 40% recycled fiber. Scott Naturals paper towels include 60% recycled material and napkins contain an 80% natural recycled fibers. We believe this presents yet another opportunity for Kadant as Kimberly-Clark is one of our better customers. As these examples demonstrate, we continue to leverage our deep application expertise process knowledge and global presence to capitalize on revenue opportunities. Although we do not know when market demand for paper machine and [operative] rates will return to trend upward, we do believe that we are very well positioned for growth when global capital equipment markets recover. In the meantime Kadant enjoys a position of relative strengths with respect to our healthy cash flow, large installed base and experienced management team, operating with the world tested business models. Our business strategy is particularly appropriate for difficult times. We are continuing our focus on our after-market and consumer books business and on delivering products and technical solutions that provide our customers a compelling return on their investments. Specific initiatives include expanding our market share stock prep parts in China, growing our global market share of screen baskets, and further penetrating markets with our accessories and water management products in Germany and China. In addition we continue to emphasize energy saving opportunities available with our food handling products marketed to paper and non-paper industries. Looking ahead to the coming months, we expect to see a moderate increase in business activity in all of our business units late in 2009. The increased code activity we are currently experiencing coupled with the restrained consumable spending lead us to believe their spending will improve later this year with consumables leading the recovery. What's more, we believe that weakness in paper and board shipment is unsustainable. These conditions further reinforce our belief that buying patterns of our customers will begin to return to more normal levels as work through these tough times. As outlined during our March earnings call, we have taken aggressive steps to streamline our operations and reduce costs in response to the market we are facing. We have made considerable progress on these initiatives with most of the restructuring efforts now completed or well underway. One of the major initiatives, integration of our US water management, accessories and food handling sales forces was completed in February. This action should eliminate territory overlap, decrease our mill presence and reduce selling expenses. The integration has been well received by the market and we believe we are able to better serve our customers with this new lower cost structure. In early March, we began the process of consolidating US manufacturing operations of our water management product line to our manufacturing plants in Massachusetts and Mexico. Once the transition is completed later this year, we expect to achieve economies of scale, greater operating efficiencies and reduced overhead costs. Also in March, our food handling division in the US reduced its workforce by approximately 16%, while our operations in Europe and China implemented a reduction in force along with reduced working hours. Cost savings resulting from these and other actions are contributing to projected reduction in our manufacturing overhead spending and operating expenses of nearly $29 million in 2009 compared to 2008, including an estimated $9 million favorable effect from currency translation. We expect these actions as well as other internal performance improvement initiatives to provide even greater contributions once demand from paper consumers and machine utilization rates return to traditional operating levels. Based on a substantially lowered and forecasted first quarter bookings, unusually low operating rates in the paper industry and the delay of numerous large capital projects, we have adjusted our 2009 guidance accordingly. For the second quarter 2009, we expect to report a GAAP diluted loss per share of $0.24 to $0.26 from continuing operations in the second quarter of 2009 on revenues of $50 million to $52 million. For the full year, we expect to report a gap diluted loss per share of $0.55 to $0.65 from continuing operations on revenues of $220 million to $230 million. Both the second quarter and the full year EPS guidance include an incremental tax provision as well as estimated restructuring cost that Tom will cover in his financial review. Tom? Thomas O'Brien: Thank you, Bill. I will begin with our revenue performance. Consolidated revenues were $65 million in the first quarter of 2009, 24% lower than last year, including an 8% unfavorable translation effect from foreign exchange resulting from the stronger US dollar in the first quarter of 2009 compared to the first quarter of 2008. The revenue results were at the upper end of our guidance for the quarter which was $62 million to $65 million. In general, revenues were lower in all of our major product lines with the exception of our fiber-based products business which was up 14% compared to a year ago. The world wide paper industry continues to be [displeased] with the extended production curtailments and slowdowns. Our customers have temporarily reduced their spending to absolute minimums, candidly to levels that we had not anticipated given a few months ago. Consequently this has significantly affected our bookings, revenues and outlook, both in our after-market and our capital businesses. Let's now turn to each of our product lines for a few more details. Stock prep revenues were $29.2 million in the first quarter of 2009, down 20% from last year, including an 8% unfavorable effect from foreign exchange. Our stock prep revenues in China where our capital business remains particularly weak were $1.3 million a decrease of 90% from the first quarter of 2008, including a 1% favorable effect from foreign exchange. Revenues in North America, which are less dependent on the capital business, were down 44% from last year. In our European business on the other hand stock prep revenues of $20.6 million increased 87% from the first quarter of 2008 and more than doubled if we exclude an favorable effect from foreign currency. Revenues here included approximately $11.7 million from a large recycling system which was manufactured in Europe and will be installed in Vietnam. You may recall that we may have mentioned of this order in previous earnings calls. Despite the slack system order, a portion of which will be shipped later in the year, we expect weaker sales of our stock prep products for the next several quarters, not only in our European business but also in China and North America, as they appear to be few major system projects on the Horizon. Revenues in our water management product line were $5.1 million, a decrease of 36% from last year, including a 6% unfavorable effect from foreign exchange. Revenues in Europe were down 66% versus the first quarter of last year, including 10% from the unfavorable effects foreign currency largely due to lower demand for capital products. Revenues in North America decreased 23% compared to the first quarter of 2008, including a 4% unfavorable impact from foreign currency. Turning now to our accessories product line; Revenues were $11.5 million in the first quarter of 2009, down 27% from last year and included a 10% unfavorable effect from foreign currency. Revenues declined in North America by 28% including 4% from the unfavorable effect of foreign exchange and by 26% in Europe including a 23% unfavorable effect from foreign exchange. Our operations continue to be severely effected by unprecedented levels of production curtailments, machine shutdowns as our customers react to lower demand to their products and adjust their operating rates accordingly. In addition, many mills are using blades and other consumable much longer than they would in normal times. Revenues in our fluid handling product line were $15.7 million in the first quarter of 2009, down 30% compared to last year including an 8% unfavorable effect from foreign exchange. As with the case last quarter, all the major geographic areas in which we market these products experienced significantly lower demand due to the worldwide recession. China for example was down 54%, including a 4% favorable effect from foreign exchange. The shortfall here was predominantly from the paper industry as sales to customers and other industries were relatively flat compared to last year. Revenues in the US were down 18% and Europe declined 40% including a 12% unfavorable impact from foreign currency. In addition to reductions in the parts business, all of these operations are experiencing lack of new project orders, but especially sharp declines in small capital projects. And finally in a more positive thing albeit on a smaller scale, revenues in our fiber based product business were $3 million, up 14% from last year. This business is also benefiting from markedly lower natural gas prices, which will contribute to improve operating income results in 2009 compared to last year. Turning now to our product gross margins, consolidated product gross margins were 37.9% in the first quarter of 2009, down 180 basis points compared to last year. Most of this decline was attributable to our Papermaking Systems segment, where gross margins of 38.1% were 160 basis points lower than last year. Margins were slightly lower in our stock-preparation and fluid-handling product lines and slightly higher in our accessories product line, but declined significantly in water management due primarily to under absorption of overhead due to the reduced volumes. As Bill mentioned, we are currently in the process of consolidating the US water management manufacturing facility and we expect continued pressure on these margins until that combination is completed early in the fourth quarter of 2009. Also, approximately 30 basis points of the gross margin decline in the Papermaking Systems segment was due to an unfavorable mix as higher margin fluid handling revenues accounted for a smaller proportion of total segment revenues. Gross margins were lower than last year in our other category and adversely affected our consolidated gross margins by 20 basis points. The impact of the lower natural gas cost will began to have a more pronounced effect in our next few quarters and as a result we expect higher gross margins for this business in 2009 compared to last year. Now let's look at our SG&A expenses for a moment. SG&A expenses were $22.2 million in the first quarter of 2009, down $3.2 million or 12% from last year. This decrease includes $1.7 million or 7% from the favorable effect of foreign exchange, offset partly by increases of 300,000 in legal expenses associated with a customer dispute and 400,000 in bad debt expense associated with a customer bankruptcy. Due to lower revenues in the 2009 period, SG&A as a percentage of revenues increased from 29.5% in the first quarter of 2008, to 34.2% in the first quarter of 2009. As we noted in our March 2009 earnings call, we have undertaken a number of initiatives beginning in the fourth quarter of last year to reduce our SG&A expenses. As a result of these actions, we expect SG&A for the full year 2009 to be approximately $86 million, down $14 million or 14% from last year. Now let me turn to our EPS results in the first quarter, before explaining those results, I first want to address our tax provision, which had the effect of magnifying our loss more than what the operating results would narrowly suggest. Throughout 2009, we expect to incur tax expense even in quarters where we may have pre-tax losses because for accounting purposes we are not able to benefit the book losses which we are currently incurring in our US subsidiaries. Briefly, the reason for this relates back to the impairment charge we took in fourth quarter of 2008 and the allowance we established at that time for our US deferred tax assets. Of course not benefiting the US losses has the effect of increasing the net loss compared to what it otherwise would have been. In addition to this negative impact in the first quarter we incurred $1.2 million of non-recurring discrete tax expense associated with establishing evaluation allowance for our Kadant Inc. subsidiaries deferred tax assets. As well as certain foreign tax assets which we generated and normally would have tax benefited in the US. Importantly, none of these items will affect our cash flows in 2009 and moreover we believe that we will ultimately realize the economic benefits of our deferred tax assets and the foreign tax credits, once our profitability returns to historical levels. Also these tax effects have no impact whatsoever, on our compliance with the debt covenants under our bank borrowing facilities. In total, these extraordinary tax items served to reduce our first quarter diluted EPS results by $0.21. It will also affect our total year results and I will discuss that fully in a moment when I add some details on our guidance for the full year. So with that as background let me now analyze the change in our EPS results from the first quarter of 2008 to the first quarter of 2009. We reported GAAP diluted loss per share from continuing operations of $0.23 in the first quarter of 2009 compared to the income from diluted share of $0.36 in the first quarter of 2008. Included in this result is a restructuring charge of $0.04 in the 2009 period and a net gain of $0.02 in the 2008 period. Also as I just noted, the 2009 period includes $0.21 in extraordinary tax expense. So, excluding the restructuring charge, the gain, and the tax expense in the appropriate periods, adjusted EPS was $0.02 per diluted share in the first quarter of 2009 compared to $0.34 in the first quarter of 2008 or a decrease of $0.32. You can see the calculation of adjusted EPS in tabular form in the earnings press release which we issued yesterday. This decrease of $0.32 includes the following items each of which decreased diluted EPS in the first quarter of 2009 compared to first quarter of 2008. $0.04 from the unfavorable effects of foreign currency translations, $0.03 from the impact of lower shares which increased the loss per share, $0.03 from higher net interest expense, $0.02 from a customer bankruptcy and the remainder or $0.20 due to lower operating results. Now turning to our balance sheet, we ended 2008 with a solid balance sheet. And I am pleased to report that it improved further in the first quarter of 2009. As an overview we ended the first quarter with $7.3 million in net debt which is a decrease of $8 million from the fourth quarter of 2008. Any amounts borrowed under our revolving credit agreement are not due until February 2013. The weighted average costs for outstanding debt at the end of the first quarter was 3.4%. We are in compliance with all our debt covenants and we ended the first quarter with $46.9 million in cash. Our liquidity position in these turbulent times remain solid with an addition to the cash approximately $33.5 million available under our committed revolving line of credit. We also have an additional $75 million which could be available in uncommitted lines under our multi-bank five year credit agreement, and another $100 million in uncommitted lines under our three year through shelf agreement. I should note that we are restricted to a consolidated debt level no more than 3.5 times, or last 12 months EBITDA under these committed and uncommitted lines. Due to the forecasted reduction in our EBITDA, we may need to pay down some debt with our cash balances in 2009 in order to remain compliant with this covenant. Assuming that our financial performance does not deteriorate significantly from our guidance for 2009, we expect to remain in compliance with the bank covenants throughout the year. Let me also note that the maximum cost of borrowing under the revolver is 120 basis points over LIBOR which is well below market. And that fortunately, particularly in this credit environment we have approximately four years remaining under our revolving debt agreement. We had one of the best quarters for cash flows in the history of the Company. Cash flow from operations more than doubled from $6.3 million in the first quarter of 2008 to $13.8 million in the first quarter of 2009. We have provided more details on the balance sheet in our press release and you can see that we had significant reductions in accounts receivable and inventories offset partly by reductions in payables and other liabilities. Our working capital is defined as current assets plus current liabilities excluding cash, debt and the discontinued operation was 15.3% of our last 12 months revenues down from 19.2% at the end of 2008 and from 16.9% in the first quarter of 2008. As we noted during our March earnings call, we still expect strong cash flows in 2009. Also, we purchased $2.9 million of our common stock in the first quarter of 2009 which represented approximately 290,000 shares at an average price of $9.98 per share. Before concluding our remarks I would like to give you some additional details on our earnings guidance for 2009 particularly in light of the situation with our tax provision which I described a moment ago. In an effort to be as clear as we can in providing guidance given the economic uncertainty caused by the recession, we plan to supplement our earnings guidance by also providing forecasted operating income results keeping in mind that the EPS guidance will be somewhat more difficult to forecast, given the situation with our tax attributes. So with that as background, we expect the GAAP operating loss in the second quarter of 2009 to be between $1.8 million and $2.8 million including approximately $1.1 million of restructuring costs and an additional $400,000 of non-recurring expenses associated to closing the US water management manufacturing facility. We estimate that our GAAP diluted loss per share for the second quarter of 2009 will be in the range of $0.24 to $0.26 per diluted share. This includes the negative impacts and the tax issues I previously explained of $0.08 per diluted share and restructuring cost of $0.06 per diluted share. In the second half of the year, we are assuming a gradual improvement in our bookings and operating income results. For the full year, we expect GAAP operating loss to be between breakeven to a loss of $2.2 million. Including $2.5 million of restructuring costs and another $0.8 million of non-recurring expenses associated with combining the US manufacturing facilities. We estimate that our GAAP diluted loss per share for 2009 will be in the range of $0.55 to $0.65 per diluted share. This includes the negative impact of $0.39 per diluted share from not benefiting US losses and the discrete tax items already incurred in 2009. Also included is $0.14 of restructuring costs for the year. I want to add here that this is an extremely challenging forecasting environment and that there may be more variability than usual between our guided and actual results. Finally, we have revised our CapEx spending down which is $3 million to $4 million for 2009. Most of these investments will be to support the consolidation of our manufacturing facilities in the US and to enhance our ability to manufacture after-market products in China. That concludes my review of the financials and I will now turn the conference back to the operator for our Q&A session. Chris?

(Operator Instructions) Your first question comes from the line of Tyler Old with J.P. Morgan Securities. Tyler Old - J.P. Morgan Securities: Good morning.

Good morning, Tyler. Tyler Old - J.P. Morgan Securities: It sounds like you are seeing some encouraging signs of activity in Asia. Right now, it will be helpful if you could talk maybe about recent trends since quarter-end in North America and Europe?

Okay. I’ll hit Asia first. I think what's encouraging for us in Asia at this point although we are not benefiting from it is that the GDP in China continues to be fairly active. Most of it is, China is doing fairly well with their stimulus package I guess. And which is going to drive some consumer needs mostly in all grades of paper. We do see potential perhaps especially in white grades of paper where they really do not have the capacity to handle any increase. So that’s an encouraging sign for us. The other offsetting that, however is that on the running of the linerboard mills has been curtailed and a lot of these -- the newer machines have not been put online yet and that impacts us on -- some of the parts are for the stock prep. But we are making, we’re ahead of expectations on accessories and water management and penetrating the market. We’re very encouraged by that market penetration at this point. Now concerning North America, we see certainly, I've been in business long time, Tyler, I've never seen such a rapid drop off in the capacity in the US for example. And we see the linerboard was really cut down and pricing the manufacturing in the US, I guess that has been somewhat expected but not to the extent that it had it running, running into 70% range on operating rates and plus, and that includes the number of the mills that had shut down machines. So, that really has impacted us very negatively and as you know we got a large installed base in the US and that’s impacted our accessories, a lot of our parts business has been impacted by that. I do not think that’s sustainable. And what is encouraging is the fact that writing and putting grades and as well as linerboard have relatively low inventories in the chain. And I think that when there is any pickup at all within the economy into US, I think that should be leading indictor at least it has in the past. I guess the lack of visibility right now for us that we see and again looking at [rece] and all indicators out there, no one really calls us big rapid drop. So, I guess, we are just lacking a lot of visibility looking forward. So, based on all the information we have at this point, this is best guidance that we could give. Tyler Old - J.P. Morgan Securities: Okay, I mean just assuming that you were sort of at the low point here for operating rates, we do see some gradual improvement. What's the typical lag between when operating rates began to improve and when mills resume ordering blades, clothing, and the other consumer…?

I think that would be very rapid Tyler, especially now because what they have done is really depleted their inventories of parts and blades. So I would expect that to be a very rapid pick up for us. When they started improving at all, I think that because again, they are running the products longer than they should, and they can not do that forever even at the lower operating rate. So I would expect a very rapid pick up for us. Tyler Old - J.P. Morgan Securities: Okay, great. And then just looking at the guidance for the second quarter with sales down, roughly 20%, is there any reason that as revenues come in that we should not expect to see working capital come down as well?

Yes, I think we would. Yes, that should also come down. Thomas O'Brien: We had a good quarter for cash, and most of that was obviously from reductions in working capital. So it actually is a little bit better than we thought on working capital on the first quarter and there is still some room to go. Tyler Old - J.P. Morgan Securities: Okay, and then just two last quick ones. Give us the share count at the end of the quarter? Thomas O'Brien: It's around 12.5 million. Tyler Old - J.P. Morgan Securities: Great, and then just how much natural gas do you buy each year? Thomas O'Brien: I don’t know in terms of the decatherms, but obviously the prices are down from $10, $12 to $3 a decatherms, but I don’t actually recall how many…

No, I don’t either, but I do know that the lower cost is certainly helping our income stream coming out of our composite business and [Grandtec] because that’s a big operating cost component in the production there. But I will try to that, that’s the only one that really impacted on. Tyler Old - J.P. Morgan Securities: Okay. Thanks very much.

Alright.

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

Good morning Walt. Walter Liptak - Barrington Research Associates, Inc.: Hi thanks good morning guys, tough to be up beat with some of the market [as space] they are but good cash flow generation. I guess, the first question is on, on the working capital, looks like receivables came down quite a bit, is that because of the Vietnam order or was there some other large receivable that was broad end? Thomas O'Brien: We collected a piece of that Vietnam order, we already had progress payments on it, so we did get $5 million to $6 million of cash from that order in the quarter, but we generally had very good collection across the business. Walter Liptak - Barrington Research Associates, Inc.: Okay. And when you talked about working capital, again for the next quarter and or two, is it inventories that you worked down, how much more cash can you take out of the business on working capital? Thomas O'Brien: Well, that’s a tough question, I mean, it’s difficult to forecast that. But we, I think main opportunities are in inventory, somewhat also on receivables I would say mainly in inventory and I would say, they should be even [certainly] another $5 million of cash that we can squeeze out of our working capital of this year. Walter Liptak - Barrington Research Associates, Inc.: Okay. Alright, and then with the cost reduction, you talked about 29 million in total and I thought I heard you say nine of that is just from the FX assumption? Thomas O'Brien: Yeah Walter Liptak - Barrington Research Associates, Inc.: Okay. So 20 million, where does 20 million of hard cost come out, is it out of overhead or is it out of manufacturing cost? Thomas O'Brien: Well roughly half out of our operating expenses and the other half out of our what I would call, our manufacturing spend. Our indirect spending in cost of sales. Walter Liptak - Barrington Research Associates, Inc.: Okay, and I mean you gave us the SG&A number which is helpful and I guess I could back into it, but I wondered if you could talk about the gross margin and maybe the puts and takes that would go in there, product pricing, the cost take out, what kind of level of gross margin are you thinking about for the rest of the year. Thomas O'Brien: Well, in terms of our guidance just to calibrate it’s a little bit -- last year our margins were about 40% product gross margin across the business, and we expect and that is backed into our guidance about the same level this year, so about 40%. So, on the plus side of that obviously, we are doing things like continuing to outsource our product from our Mexican operations from China. So there are some good things happening there. On the other side of that coin, obviously we have got some under absorption issues some of it in the US which we’ve talked about consolidating this plant in the US and also some under absorption in our Chinese facility at this time because of the reduced volume. So there is lots of different cross comments going on in this, some mix as well, but overall we expect about the same level of gross margins in '09 and '08, about 40%. Walter Liptak - Barrington Research Associates, Inc.: Okay, when steel costs and things were going up, were those surcharges or past alongs, or were those price increases?

Those are primarily surcharges that we passed along as well. Walter Liptak - Barrington Research Associates, Inc.: Okay. And if I could just switch topics again a little bit in, in the US over the last 10 years, a lot of capacity has come out, and I wondered with bankruptcies or potential bankruptcies, if you see the capacity continuing to come out or accelerating. And how that might impact what kind of recovery again in the US? Thomas O'Brien: That’s a good question, I would expect that most of the capacity that has been taken out of North America, especially in the US, I don’t see much more capacity being taken out, in fact on a pick up, I would expect, and I think we are going to get the gain on immediately is on the operating rates, monthly start getting up into the 90s again, getting out of the 70s would be a big help to us, I don’t see much more capacity being taking off, because there has been a lot taken out in the last few years. So I think it’s going to be pretty much, and in fact some of these grades like tissue and toweling and some of those we see, is having some increases. So, I will also say that when there is any recovery, the income stream that we are going to generate out of that should be much stronger as well because of all the expense we are taking out this year. Walter Liptak - Barrington Research Associates, Inc.: Okay, good that sounds positive for the long term. Okay. Thanks very much guys. Thomas O'Brien: Thank you, Walt.

(Operator Instructions) your next question comes from the line of Paul Mammola with Sidoti & Company. Paul Mammola - Sidoti & Company: Hi good morning everyone. Thomas O'Brien: Good morning Paul. Paul Mammola - Sidoti & Company: Bill, you talked a little bit about utilization rates domestically, what do you think utilization is in China and do you expect china to recover before the US?

That’s good question, Paul, one of the things that’s more difficult to get out is current information on utilization rates in China, I can tell you that there is a number of machines that are not running right now. And my guess would be somewhere probably operating around 75% to 80%, and that’s just a guess on my part, can we get some current information. And as far as their response and coming up base I do think that they may come on perhaps quicker than we do in the US, simply because their GDP is stronger now and they are getting some internal consumption. And as the US starts to improve, we are going to start buying more products from them and we are still, we are their number one customer. So and again the long term outlook for China by the way is still very, very positive. They hit a big bump in a road here that could set back some of that capacity expansion again may be in two years one or two years yet, but when they are going to get back on track again. So I would expect that they could probably start up quick, get some pick up quicker than we could. Paul Mammola - Sidoti & Company: Okay, that's helpful. Has Black Clawson specifically seen increased inquiries for black liquor technology given the tax credit, is that fair to say?

Yes they have not really seen that to my extent yet, because what they are doing right now, is the mills are just getting a tax credit for using it as a fuel source. And we haven't seen anything yet. On the other hand the reason pulping operations start to make more money. There could be some opportunities for us as they start to upgrade some of the evaporators and so forth that they have. Paul Mammola - Sidoti & Company: Okay that's fair. What has been the overall headcount reduction so far on a head or a percentage basis?

It's about 300, 300 in headcount reduction so far. And besides that we also have some, I'd call rolling layoffs in China and in France. So that also contributes to that, but we had about 300, total reduction in the headcount so far. Paul Mammola - Sidoti & Company: Okay and then finally, what percentage of sales do you think right now are coming from non-paper customers?

Probably. Thomas O'Brien: I don't know if that's changed that much, maybe it can expand up a little bit well, but I think we said before.

It's gone up a little bit as a percentage maybe but not that much, I think it’s still around overall $25 million or $25 to $30 million. Paul Mammola - Sidoti & Company: Okay that's fair. And then finally last one for me, you guys are still obviously very well capitalized, with respect to that prudential shelf agreement, are you evaluating opportunities in the paper industry versus non paper more or how are you viewing the markets right now?

You are referring about… Paul Mammola - Sidoti & Company: In terms of acquisitions.

Yeah, acquisitions, actually we still see some good opportunities within the paper industry. And right now we are exploring all avenues right now, because in the past we've done well and looking at acquisitions during down times and in fact any down cycle, because we never faced one like this before. But any down cycles we've been in and we've always come out little bit stronger. So we are keeping all options open at this point. Paul Mammola - Sidoti & Company: Okay thanks for your time.

Thank you Paul.

There are no further questions at this time. I will now turn the call back over to management for closing remarks.

All right, thank you Chris, 2009 certainly as you can see is a challenging year. One that requires discipline and we are trying to balance the short-term challenges, we are sizing our company to reflect the current marketing conditions with a longer term goal and maintain the resources we need to capitalize on opportunities when the market recovers. And I think so far all the steps we've taken I think we are accomplishing that. As we have outlined in this call, we have taken a number of steps to reduce operating costs both in manufacturing and SG&A. We believe these actions will pay dividends when markets recover. We also believe that our installed base, large parts of consumable business, the healthy balance sheet will continue to serve us well through these times of economic uncertainty. I look forward to reporting on our progress as we work towards meeting our operational and financial goals. Thank you for joining us today and for supporting Kadant.

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