Kennametal (KMT)

Q2 2012 Earnings Call

January 26, 2012 9:00 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

Unknown Analyst

Joel G. Tiss - Buckingham Research Group, Inc.

Eli S. Lustgarten - Longbow Research LLC

Julian Mitchell - Crédit Suisse AG, Research Division

Holden Lewis - BB&T Capital Markets, Research Division

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Adam William Uhlman - Cleveland Research Company

Brian Michael Rayle - Northcoast Research

Gregory M. Macosko - Lord, Abbett & Co. LLC



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Good morning. I would like to welcome everyone to Kennametal's Second Quarter and Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Quynh McGuire, Director of Investor Relations. Ma'am, you may begin your conference.

Quynh McGuire

Thank you, Nicole. Welcome, everyone. I'm Quynh McGuire, Director of Investor Relations for Kennametal. Thank you for joining us to review Kennametal's second quarter of fiscal 2012 results. We issued a 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 in 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 February 26, 2012.

Joining me for our call today are Chairman, President and Chief Executive Officer, Carlos Cardoso; Vice President and Chief Financial Officer, Frank Simpkins; and Vice President, Finance and Corporate Controller, Martha Bailey. 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 achievement 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 provides a reconciliation of those measures as well.

I'll now turn the call over to Carlos.

Carlos M. Cardoso

Thank you, Quyhn. Good morning, everyone. Thank you for joining us today. I am pleased to report that for the December quarter of fiscal 2012, Kennametal, once again, delivered strong results. For the period, organic sales grew by 14% year-over-year. This growth rate reflects strong customer demands and it is impressive, giving strong comparisons of 31% from the prior year quarter. In other key performance metrics for the December quarter, Kennametal's operating margin reached 14.7% with earnings per share of $0.91. Both of those represented December quarter records for the company. Due to continued focus on operational excellence, our profitability reflected strong year-over-year incremental margin of 36%. In addition, adjusted return on the invested capital was 17.3%, which is an all-time company record.

Our top line growth for this fiscal year has been as we expected, and it is trending consistently with the fiscal 2012 guidance of 10% to 12% organic growth on a year-over-year basis. We continue to believe that manufacturing is leading the economic recovery currently underway. In addition, our results were attributable to our global team's successful execution of our proven strategies to outperform industrial production and improve our market position.

For the December quarter, global industrial production increased by 2.1%, indicating that expansion is still occurring in a number of end markets. Along with the positive macroeconomic Kennametal -- environment, Kennametal clearly benefited from our own growth strategies and initiatives, which resulted in 14% of organic sales growth for the quarter. For the 6-month period ending December 31, industrial production growth was 1.1% while Kennametal realized 16% organic sales growth for the first half of our fiscal year 2012.

Customer demand in industrial markets continue to show strength, particularly in general engineering, aerospace and transportation. Infrastructure markets, such as energy and mining, also reported steady growth, and we expect them to extend further as we move through the economic cycle. We also saw increased activity across many of our served geographies, with the emerging markets continue to show the fastest growth. Currently, our rest of the world markets represent 27% of total sales during the December quarter. During the period, we continued to implement our channel brand strategy. For the first half of fiscal 2012, WIDIA product sales increased 27% year-over-year, reflecting ongoing strength. We'll continue to maximize opportunities to expand our presence in distribution channels and gain market share.

Let's now discuss end market trends. In general engineering, customers continue to increase efficiencies in order to lower labor costs. This should allow capital expenditure programs to grow even through -- even though there are some uncertainties related to U.S. tax and regulatory policy. Overall, the metalworking machinery industry has performed well due to general rise in industrial activity globally, particularly in the U.S. We expect this trend to continue for the next several quarters.

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