Kennametal (KMT)

Q1 2012 Earnings Call

October 27, 2011 10:00 am ET


Quynh McGuire - Director of Investor Relations

Frank P. Simpkins - Chief Financial Officer and Vice President

Carlos M. Cardoso - Chairman, Chief Executive Officer and President


Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Henry Kirn - UBS Investment Bank, Research Division

Walter S. Liptak - Barrington Research Associates, Inc., Research Division

Joel G. Tiss - Buckingham Research Group, Inc.

Eli S. Lustgarten - Longbow Research LLC

Sheila Kahyaoglu - Crédit Suisse AG, Research Division

Adam William Uhlman - Cleveland Research Company

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Brian Michael Rayle - Northcoast Research

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division



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Good morning, my name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Kennametal's First Quarter Fiscal Year 2012 Earnings Call. [Operator Instructions] I would now like to turn the call over to Quynh McGuire, Director of Investor Relations. Please go ahead.

Quynh McGuire

Thank you, Regina. Welcome, everyone. Thank you for joining us to review Kennametal's first quarter of fiscal year 2012 results. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at

Consistent with our practice in prior quarterly conference calls, we've invited various members of the media to listen to this call. It's also being broadcast live on our website, and a recording of this call will be available on our site for replay through November 28, 2011.

I'm Quynh McGuire, Director of Investor Relations for Kennametal. Joining me today for our call today are Chairman, President and Chief Executive Officer, Carlos Cardoso; and Vice President and Chief Financial Officer, Frank Simpkins. Carlos and Frank will provide further explanation on the quarter's financial performance. After their remarks, we'll be happy to answer your questions.

At this time, I'd like to direct your attention to our forward-looking disclosure statement. The discussion we'll have today contains comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements. Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission.

In addition, Kennametal has provided the SEC with a Form 8-K, a copy of which is currently available on our website. This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G. This 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures, and it also provides a reconciliation of those measures as well.

I'll now turn the call over to Carlos.

Carlos M. Cardoso

Thank you, Quynh. Good morning, everyone. Thank you for joining us today. I'm pleased to report that Kennametal again delivered strong results for the September quarter for fiscal year 2012.

During the period, we had organic sales growth of 17% year-over-year. This increase is on top of 34% organic growth in the prior-year periods. In addition to a positive economic environment, we continue to successfully execute our strategies to realize additional sources of growth. Those initiatives include enterprise selling, new product introductions, emerging market expansion, pricing actions and our indirect channel strategy, which includes the WIDIA brand deployment.

With global industrial production at 3.9% for the September quarter, we are demonstrating that Kennametal's specific strategies drove our revenue growth at a pace that significantly outperforms the industrial production index.

During the quarter, we continue to experience growth in customer demand across our served end markets and geographies. This supports our continued expectations of a manufacturing live recovery at least in the United States. Our expectations are in line with recent data showing that U.S. manufacturers grew faster than expected in September as production and hire increase. Additionally, there continues to be growth in emerging markets such as China, India and Brazil. At September 30, our rest of the world markets represented 26% of our total sales. We are continuing to leverage our indirect channel strategy to the launch of our WIDIA brand. We are increasing our presence in distribution channels and showcasing our market-leading technology capabilities.

WIDIA product sales increased 22% year-over-year reflecting continued strong growth. Clearly, we are increasing our addressable market, moving into more of the white space and gaining share.

Regarding other key performance metrics for the September quarter, Kennametal's operating margin reached 15.4% with earnings per share of $0.88. Both of those represents all-time first quarter company records. In addition, adjusted return on invested capital was 16.2%, which is an all-time company high.

While the macro environment reflected ongoing growth, our business also continue to benefit from proven strategies as well as aggressive measures to control costs and build a more efficient, streamlined enterprise. Our initiatives have strengthened our foundation and further increased our focus on operational excellence, providing Kennametal with the ability to achieve higher levels of profitability, earnings and returns.

From a macro perspective, a weaker growth outlook is forecasted, but a recession is not expected, according to the IHS Global Insight. In the eurozone, the GDP forecast for 2012 has been revised lower to 0.9%. In U.S., many manufacturers are thriving, and the past 2 months gains in the industrial production index are not consistent with an imminent recession. In China, inflation is showing early signs of easing but the Chinese government is expected to maintain stance on monetary tightening for now. Growth in the region is forecasted to slow from 10.3% in 2010 to 9.2% in 2011 and 8.3% in 2012. At those projected growth levels, China remained an attractive market for Kennametal.

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