Kennametal Inc. ( KMT)

F2Q2011 (12/31/10) Earnings Conference Call

January 27, 2011 9:00 AM ET

Executives

Quynh McGuire – Director, IR

Carlos Cardoso – Chairman, President, and CEO

Frank Simpkins – VP and CFO

Analysts

Eli Lustgarten – Longbow

Chase Baker – Credit Suisse

Ann Duignan – JPMorgan

Adam Uhlman – Cleveland Research

Henry Kirn – UBS

Chuck Murphy – Sidoti & Company

Walt Liptak – Barrington Research

Presentation

Operator

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 Second Quarter Fiscal Year 2011 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)

Thank you. 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 second 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 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 February 28, 2010.

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, 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 would 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 and 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. I am pleased to report that the second quarter of fiscal 2011 was yet another period of strong performance for Kennametal. We continued to deliver top line growth and realized strong operating leverage. We remained focused on executing our strategies effectively and improving our operating efficiencies.

The considered efforts of our global team resulted in our organic sales growth of 31% compared with prior year quarter. Our adjusted earnings per share were $0.57 compared to $0.14 in the prior year period. The year-over-year improvement in EPS was driven by increased sales volume and higher incremental margin. It’s worth noting that we realized 11.8% adjusted operating margin for this past quarter. This is another historical high for any first or second quarter. In fact the December quarter represents the third consecutive quarter that Kennametal has achieved record levels of adjusted operating margin performance.

In addition, our adjusted return on invested capital was 10.9% as of December 31, 2010. Overall, the December quarter represents an all-time-record performance for Kennametal.

Our second quarter results benefited from a strengthening global economy which reflected growth in many of our geographies and end market serves. Industrial production continued to increase and Kennametal experienced higher customer demands. Emerging markets such as, China, India and Brazil remained strong.

Our geographic profile continues to be more balanced. For the December quarter we generated 56% of sales outside of North America with 28% coming from the rest of the world regions. And indicator of ongoing favorable customer sentiments was reflected as (inaudible) which I attended last month and industry page show held in Japan, representing Asian manufacturers. At this event Kennametal generated two to three times the number of leads than that of the prior trade show. This favorable trend is consistent with what we experienced in September at IMPS or International Manufacturing Technology Show.

Also certain end markets such as general engineering and transportation again showed the most sprints. Current forecast shows that global manufacturing activity is expected to continue to grow. In general engineering, production activities continued to grow and represents ongoing rebound in the manufacturing sector.

As the economic recovery continues increased demand to replace older equipment and a growing need to upgrade productive capacity and increase resource suppliers will produce the next buying cycle.

The transportation production volumes for North America remained strong. This trend is expected to persist in 2011, and Kennametal will continue to benefit from increased sold rate.

In Europe, the majority of the demand is driven by exports. The outwork is for slight growth in light vehicles. However, we expect and expansion in heavy truck market. We are continued to see growth in the mass transit market with new opportunities from all regions, as aided new, railroad infrastructure is built or expanded maintenance.

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