Kennametal Management Discusses Q4 2012 Results - Earnings Call Transcript

Kennametal (KMT)

Q4 2012 Earnings Call

July 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

Eli S. Lustgarten - Longbow Research LLC

Michael Shlisky - JP Morgan Chase & Co, Research Division

Adam William Uhlman - Cleveland Research Company

Charles Clarke

Stephen Stone - Sidoti & Company, LLC

Brian Michael Rayle - Northcoast Research

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Justin Ward - Wells Fargo Securities, LLC, Research Division

Doug Thomas

Henry Kirn - UBS Investment Bank, 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 Fourth 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 to review Kennametal's fourth quarter and fiscal year 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 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 27, 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 the 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 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 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 the reconciliation of those measures as well.

I will now turn the call over to Carlos.

Carlos M. Cardoso

Thank you, Quynh. Hello, everyone. Thanks for joining us today to hear about Kennametal's fourth quarter and fiscal year 2012 results.

I'm pleased to report that in fiscal 2012, Kennametal again made excellent progress in further implementing our strategies. We outperformed our markets and set new performance records. We established clear goals, realized further improvements in operational efficiencies while successfully managing multiple headwinds. As a result, we more than delivered on our financial target exceeding 15% EBIT margin and 15% return on invested capital. We achieved those measures a full year earlier than planned. This performance represents the second year of all-time records for profitability and return levels.

For fiscal 2012, global industrial production increased by 2.9%, demonstrating that a number of end markets continue to grow. Yet by comparison, Kennametal realized 9% organic sales growth over the prior year, clearly outperforming the industrial markets. In addition, our company-specific initiatives such as geographic expansion, new product development and complementary acquisitions continue to position Kennametal to achieve significant margin and earnings expansion.

In particular, I want to thank Kennametal employees worldwide for their dedication and engagement at all levels to drive the performance of our company. Our team demonstrated their commitment to continuing to deliver value to our customers, shareholders and colleagues around the world.

We have made outstanding progress on priorities that contributed positively to our results. This includes improved safety and productivity, as well as utilizing standardized SAP to streamline our processes and maximize efficiency. Thanks to those efforts and steps taking over the past several years to restructure and reduce our costs, we realized $170 million in permanent savings on an annualized basis. We continue to be diligent about cost reduction actions. As always, we are actively pursuing measures to continuously improve our operating excellence and further strengthen our foundation.

We finished the year on a positive note as well, posting our 10th consecutive quarter of organic sales growth. This reflects successful execution of our strategies across a balanced and diverse mix of served end markets and geographies. We further increased sales and strengthened our business portfolio with the recent Stellite acquisition.

During the June quarter, we did see some moderation in demand. However, the manufacturing sector continued to outgrow the overall economy. We realized ongoing growth in industrial markets, such as transportation and latest cycle, aerospace.

For the Industrial segment, on a regional basis, both Europe and the Americas reported year-over-year sales growth, while Asia declined versus a stronger comparison to prior year.

For infrastructure market, sales are flat overall despite lower production activity in North America due to relatively high storage levels in mining and energy. We view those as near-term challenges and expect to see growth return in the next 1 to 2 quarters. Regionally, for our Infrastructure segment, sales were lower in the Americas but were strong in Asia and modestly positive in Europe. Keep in mind that Kennametal's diverse mix of served end markets and geographies should help reduce volatility across economic cycles, as demonstrated by this year's results.

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