Kennametal Inc. (KMT)

F4Q10 (Qtr End 06/30/10) Earnings Call

July 29, 2010 10:00 am ET


Quynh McGuire, Director of IR

Carlos Cardoso - Chairman, President and Chief Executive Officer,

Frank Simpkins - Vice President and Chief Financial Officer

Marty Bailey - Vice President, Finance and Corporate Controller,


Ann Duignan - JPMorgan

Eli Lustgarten - Longbow Securities

Andy Casey - Wells Fargo Securities

Henry Kirn - UBS

Adam Uhlman - Cleveland Research

Chuck Murphy - Sidoti & Company

Holden Lewis - BB&T Capital Markets

Steve Barger - KeyBanc Capital Markets

Joel Tiss of Buckingham Research Group



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 Fourth Quarter and Fiscal Year 2010 Earnings 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)

At this time I would like to turn the call over to Quynh McGuire, Director of Investor Relations. Ms. McGuire, you may begin.

Quynh McGuire

Thank you, Regina. Welcome everyone. Thank you for joining us to review Kennametal’s fourth quarter fiscal 2010 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 August 29, 2010.

I’m 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, Marty 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. 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. As we had expected, the microenvironment was more challenging in the first half of fiscal 2010 and showed strong growth during the second half of the year. During this time, we continue to execute our strategy and as a result, Kennametal has been delivering strong operating results. Many of our industrial end markets are benefiting from higher volume. The developing market continues to lead the recovery, with improving conditions in North America, as well as Europe. From a year-over-year perspective, we had organic sales growth of 39% in the June quarter.

In addition, we again experienced sequential revenue growth from the March quarter, the fourth consecutive quarter of sequential growth. Our customers continue to cautiously replenish their inventories. This activity is now overstocking but instead represents customers buying for their near-term needs. In addition, Kennametal will continue to focus on our value sell approach, which has always been a key competitive advantage for our products. Currently, raw material costs are trending relatively flat. However, if those costs increase substantially due to demand growth, then of course this would benefit the overall economic environment and in that case, higher volumes would provide a partial offset to improve manufacturing absorption. In addition, we are confident in our ability to pass through necessary pricing and maintain the margin discipline.

During the quarter, we also continued to execute our strategy to resize the company and lower our fixed costs. We continue to implement our restructuring initiatives and we remain firmly on track to realize 155 million to 160 million of permanent annual savings. Those represent permanent savings and they are increasing in momentum. For fiscal year 2010, our restructuring savings were approximately $137 million. Our adjusted earnings per share of $0.61 for the June quarter reflect sequential improvement of 20% or 56% from the March quarter. The sequential improvement in EPS was driven by higher sales volume, as well as continued strong operating leverage. As demonstrated by the June quarter, we are realizing continuing sales growth, as well as higher incremental margins due to our much lower cost structure.

I'd like to thank our employees for all their hard work. Those accomplishments are driven by the dedication and efforts of our global work force. While the economic climate continues to be somewhat volatile, we also continue to gradually improve and overall macro trends were in the positive territory. During the quarter, US industrial productions continued to grow and manufacturing activities around the world steadily increase. The environment in Euro Zone continues to be uncertain, with some risks from government debt crisis.

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