Kennametal (KMT)

Q3 2011 Earnings Call

April 28, 2011 10:00 am ET

Executives

Frank Simpkins - Chief Financial Officer and Vice President

Quynh McGuire - Director of Investor Relations

Carlos Cardoso - Chairman, Chief Executive Officer and President

Analysts

Ann Duignan - JP Morgan Chase & Co

Walter Liptak - Barrington Research Associates, Inc.

Henry Kirn - UBS Investment Bank

Andrew Casey - Wells Fargo Securities, LLC

Eli Lustgarten - Longbow Research LLC

Adam Uhlman - Cleveland Research Company

Adam Uhlman - Cleveland Research

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Presentation

Operator

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Good morning. I would like to welcome everyone to Kennametal's Third Quarter Fiscal Year 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Quynh McGuire, Director of Investor Relations. Please go ahead.

Quynh McGuire

Thank you, Tiffany. Welcome, everyone. Thank you for joining us to review Kennametal's Third Quarter Fiscal 2011 Results. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.kennametal.com. Consistent with our prior practice in prior quarterly conference calls, we've invited various members of the media to listen to this call. It is also being broadcast live on our website, and a recording of this call will be available on our site for replay through May 27, 2011.

I am Quynh McGuire, Director of Investor Relations for Kennametal. 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 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. Ad this 8-K represents 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 will now turn the call over to Carlos.

Carlos Cardoso

Thank you, Quynh. Good morning, everyone. Thank you for joining us today. We are hosting this call from São Paulo Brazil. Our Board of Directors and some members of our senior management team recently visited our manufacturing facility located near -- in the Atuba. Kennametal's established operations in Brazil in 1999 and we have continue to grow our presence in this region.

I'm pleased to report that March quarter results continue to demonstrate that Kennametal's global team is successively executing our ongoing strategies. During the quarter, we realized organic sales growth of 25% on a year-over-year basis. Notes that, that is against a strong topline comparisons from the same period in the prior year. In addition, we achieve the all-time records with operating margin of slightly over 15%, a return on invested capital of approximately 13% for the March quarter. Even with sales that are lower than our prior peak. The macroeconomic environment has been better than our expectations. Global business conditions remain positive throughout the quarter. Industrial production continues to show strength around the world and emerging markets such as China, India, and Brazil remain growth leaders. Specific to Kennametal, for the year-to-date period, we saw 39% of sales increased year-over-year in our rest of the world markets. Again, this growth is on top of strong comparatives from prior year. Regarding our served end markets, general engineering and transportation continue to expand. Our strong sales growth reflect that higher customer demand involved our Serbian markets, as well as our geographic regions.

From a macro-perspective, growth remains strong in most areas. China and India continue to be very strong with China taking some measures in the near-term to control growth while India is well insulated from external events. In Brazil, the industrial production rate is expected to remain high. U.S. manufacturing production is forecasted to grow and the extra output is likely to show up in exports or added inventory.

In the aero zone, growth mainly comes from strong momentum in Germany. The events in Japan are expected to shrink GDP for the first half of calendar year 2011. However, during the second half of calendar 2011, we expect, reconstruction effort should ultimately boost growth. While there will be an impact on the global supply chains, it may represent an increase in demand for alternate sources. For Kennametal, we are getting a number of requests from customers across all geographies including Asia, so there could be an increase in near-term demand, as well as participation in longer-term rebuilding projects. Moving to the outlook for end markets.

In transportation, the Japan disaster is impacting global automotive supply environments. Kennametal does not have a significant penetration of Japanese OEMs and that limits are direct exposure. However, we are beginning to see an impact to European and North American OEMs and suppliers. Currently this is limited to the electronics and paint colors, which affects model contents rather than production of foreign train and drag line components. Also, it there maybe a higher impact to the tier suppliers that have rely more on Japanese high-technology inputs, which may affect production in this area. However, this shortage from Japanese suppliers can be offset by Western sources such as Kennametal.

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