Kennametal's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Kennametal (KMT)

Q3 2012 Earnings Call

April 26, 2012 10:00 am ET

Executives

Quynh McGuire - Director of Investor Relations

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

Frank P. Simpkins - Chief Financial Officer and Vice President

Analysts

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

Adam William Uhlman - Cleveland Research Company

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

Julian Mitchell - Crédit Suisse AG, Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

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

Joel G. Tiss - The Buckingham Research Group Incorporated

Brian Michael Rayle - Northcoast Research

Daniel Khoshaba

Eli S. Lustgarten - Longbow Research LLC

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

Henry Kirn - UBS Investment Bank, Research Division

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

Holden Lewis - BB&T Capital Markets, Research Division

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 Third Quarter Fiscal Year 2012 Earnings Call. [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 today to review Kennametal's third quarter of fiscal 2012 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 in on 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 May 25, 2012.

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, 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 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, Quynh. Good morning, everyone. Thank you for joining us today. I'm pleased to report that for the March quarter of fiscal 2012, Kennametal, again, delivered strong performance. For the period, organic sales grew by 8% year-over-year. This growth rate reflects ongoing customer demand on top of the strong comparisons of 25% from the prior year quarter. We believe that our results were due to our global team's successful implementation of our proven strategies to continue outperforming industrial productions and gain market share.

For the March quarter, global investor production increased by 2.7%, indicating that expansion is still occurring in all end markets. In addition to favorable economic environment, Kennametal benefited from our own growth strategies, management discipline and execution capabilities.

For the 9-month period ending March 31, industrial production growth was 2.2%, while Kennametal realized 13% organic sales growth for the same time frame.

Kennametal's served geographies continue to reflect increased demand year-over-year. In our industrial segment, both the Americas and Europe show strong growths. In our Infrastructure segment, all major regions demonstrated high demand, with Asia reporting the strongest growth. Currently, Kennametal's rest of the world markets represented 25% of sales in the March quarter. Customer demand in the industrial markets remain strong, particularly in aerospace and general engineering.

Infrastructure markets continue to show growth in both our Earthworks and Energy business. However, we expect that some sectors may be impacted in the near term by lower production activities. Overall, Kennametal's diverse and market mix lessens our exposure to any single market. As a result, we have reduced cyclicality in our business. Therefore, we believe that we can continue to grow throughout the entire economic cycle.

During the March quarter, we continue to implement our channel strategy through the WIDIA brands. We continue to gain market share. For the first 9 months of fiscal 2012, WIDIA product sales increased 20% year-over-year, indicating the success of our strategy and the momentum of this brand.

Let's now discuss end market trends. In aerospace, Airbus and Boeing, together, received more than 2,200 net orders in calendar year 2011, which was twice the prior year level and significantly higher than 1,011 sets that were delivered. Currently, the 2 companies have combined backlogs that are equivalent to approximately 7 years of outputs. Production increases are under way for both Airbus and Boeing, and the growth cycle is expected to continue.

In transportation, global demand is forecasted to continue, with some unevenness in Western Europe due to the ongoing recession in the eurozone. In the Americas, annual North America light vehicle production increased to 13.5 million units in February, representing the highest level in 3 years, with further production increases expected. In China, while there was a weak start for auto sales in January and February, passenger car sales increased 4.5% in March. According to the China Association of Automobile Manufacturers, deliveries of passenger automobiles, combined, climbed to 1.4 million units last month. In Latin America, Brazilian automakers are reporting that export demand and growth had been strong.

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