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.

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?

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…

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…

(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?

Hey, operator.

Yes sir.

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.

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?

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?

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?

It's kind of spread throughout the rest of the year. Paul Mammola - Sidoti & Company, LLC.: Okay, perfect.

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.

Good morning.

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.

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?

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.

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.

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.

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...

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.

Right.

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.

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?

Hey, operator we lost the caller.

Operator.

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

Okay. Thank you. That was Mark.

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?

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.

So our fluid handling business in China it could add another $15 to $16 million to those numbers.

And in both years.

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?

It's about 12.7, 12.8 million.

12.7, 12.8 at year end?

Yes.

Okay. And then I missed the D&A and the CapEx estimates for '09?

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?

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?

Yes.

Okay, great. Thanks very much.

Hey, thank you, Mike.

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.

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.

Hey guys.

Hi Walter.

Hi Walter.

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.

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.

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.