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.

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…

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…

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

Good morning.

Good morning, Tyler.

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.

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.

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.

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.

Okay, and then just two last quick ones. Give us the share count at the end of the quarter?

It's around 12.5 million.

Great, and then just how much natural gas do you buy each year?

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.

Okay. Thanks very much.

Alright.

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

Good morning Walt.

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?

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.

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?

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.

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?

Yeah

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?

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.

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.

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%.

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.

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?

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.

Okay, good that sounds positive for the long term. Okay. Thanks very much guys.

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.

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.

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.