Kennametal Inc (KMT) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Kennametal first quarter earnings conference call.

At this time, all participants are in a listen-only mode.

We will have a question and answer session later; instructions will be given at that time.

If you require assistance during the call, press zero then star.

This conference is being recorded.

Now I turn it over to your host, Ms. Beth Riley, Director of Investor Relations, go ahead.

Thank you, Shelly.

Thanks for joining us this morning to review our first quarter and expectations for the full year.

Members of the media have been invited to listen to this call.

In addition, this conference call is being broadcast live on our website at www.kennametal.com.

I'm Beth Riley, Director of Investor Relations for Kennametal.

Our Chairman, President and CEO is here, Markos Tambakeras, and Vice President and Chief Financial Officer, Nick Grasberger, is joining me for the call.

We will ask for questions at the end of the discussion.

Before I turn it over to Markos, I would like read our forward-looking disclosure.

It is a bit more concise.

There may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Such statements involve a number of assumptions, risks and uncertainties that could cause actual results and achievements of the company 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 our Securities and Exchange Commission filings.

With that, I turn it over to Markos.

Thank you, Beth and good morning, everyone.

I hope you all had an opportunity read our press release this morning.

I was pleased with the 32 cents of EPS, before special charges, for the quarter.

This was in the middle of our guidance for the quarter and two pennies above analysis consensus despite our microeconomic environment that was slower than we anticipated for the quarter.

As has been our practice in the quarter, I will review the microenvironment and results of our strategy, and Nick will conclude with specifics on financials in the quarter and our outlook for the year.

Kennametal's major end markets continue to perform in a sluggish activity pattern.

Light and heavy engineering, machine, tool, energy, tool and die, aerospace, distribution and markets continued to be relatively weak.

We did have improvement during the quarter, primarily North American automotive and heavy truck, and continuing good growth in Asia.

But overall demand levels remain stagnant.

While automotive and trucks are nearly 20% of our pre-Vidia acquisition sales, our exposure to the still-robust North American market is only about 5% of our global sales, not enough to offset the impact of the other segments.

I was again encouraged by the organization's performance in light of the continued economic uncertainty.

Aggressive marketing and sales campaigns continued to exploit pockets of opportunity, with our mailing application initiatives, for example, building particularly strong momentum.

Cost control was unrelenting as demonstrated in declining apples-for-apples operating expense versus last year.

The accelerating benefits from the enterprise are not only evident in the operating expense comparison, but more importantly in the year-over-year improvement in the gross margin.

Yet another strong quarter of cash flow really speaks to the underlying strength and value of the company in any economic environment.

The quarter also included the closing of our strategic acquisition of Vidia.

I know you want to hear a progress report about that, so, here it is: you will recall that we closed the transaction at the end of August, which was two months later than we had originaly anticipated.

The integration is moving forward at a rapid pace.

Our acquisition assumptions have been confirmed.

The reaction by the Vidia employees in Europe and India have been, by and large, very positive.

I have personally visited both locations.

IT systems have been merged; purchasing and supply benefits are in process.

Branding and product rationalization actions are also in process.

Employee and union communications have begun.

Because we are in the midst of these negotiations, we have limited ability to share specifics on the restructuring.

Nevertheless, we have validated that we will be able to complete the integration within the originally-anticipated 12 months, and we are targeting to do it sooner.

We have also validated our accretion estimates.

Now, moving on to our outlook for the remainder of Fiscal 2003, we continue to feel that we will not see any material strengthening in the December quarter of this year in our end markets.

This is consistent with our assumptions communicated previously for this second quarter.

However, current data no longer supports our original expectations of robust growth in our end markets in the first half of calendar 2003.

We do not believe the economy is weakening from this point on, but the recovery is clearly taking longer, particularly with potential additional risks from events like the possible war with Iraq.

This conclusion is supported by a context with many customers and a string of relevant indicators which have clearly either turned negative or less positive.

These indicators that we use and that you may be familiar with are the ISM index in North America, the IFO index in Europe, industrial production forecast capacity utilization, capital expenditure outlook, et cetera.

So, we continue to see the markets being impacted in investor and consumer confidence eroded by many different issues in economics, financial markets and geopolitical funds.

So, in the context of this current environment, we decided to take prudent and measured actions.

Our original second half growth assumptions of approximately 8% volume growth in sales were believe are now too aggressive.

Consequently, we are lowering our outlook for the remainder of Fiscal 2003 as included in the release.

I believe that our new forecast will present very credible performance, about 3 to 5% growth in sales volume now for the second half of our fiscal '03 which translates to about 1 to 3% total year volume and a 15 to 25% growth in EPS -- all in the context of our assessment of economic outlook in our end markets.

Nick will give you more insight into the changes in the underlying assumptions.

One last comment: we, like many other companies, are dealing with the impact of the dramatically lower equity market performance and the impact that has had upon U.S. qualified pension plan assets.

We have been and remain overfunded, but we expect the continuation of the roughly 4 to 5 cents unfavorable non-cash quarterly impact through the remainder of 2003 for a total of 20 cents full year negative impact.

Let me restate that we do not expect any cash contribution or cash impact in 2003.

Let me also clarify again that our earnings guidance, incidentally, includes the impact of the reduced pension income.

So, I close by reiterating that we continue to proactively combat the economic challenge we face in the industrial sector.

We continue to face up to these challenges with a cost and focus on managing our strategy and our operations better.

Thank you, and I will now turn it over to Nick for the detailing of the numbers.

Thank you, Markos and good morning.

I will discuss our financial performance during the September quarter and then move on to an update of Vidia and the outlook for the full fiscal year.

For the first quarter of FY 2003, excluding special items, Kennametal earned net income of $11.2 million or 32 cents per share compared to $13.5 million or 43 cents last year, a 26% decline in EPS.

Adjusting for the Vidia dilution and lower pension income, EPS was 39 cents, a decline of 9%.

Consolidated sales decreased 1% to $404 million.

We continue to realize modest sequential daily sales improvement across geographies over the quarter despite continued year-over-year declines.

Vehicles continue to be an area of strength in North America.

Other industrial markets maintained modest sequential improvement while largely remaining below prior year levels.

In Europe, heavy engineering was the only area of relative strength.

Notably, the gross profit margin for the quarter was 32.4%, up from last year.

In addition to the factors identified in the release, pricing was modestly negative with pressure in the energy and high speed steel units.

Consolidated operating expenses for the quarter declined 4% from last year on a like basis, excluding one month of Vidia expenses and unfavorable shifts and foreign exchange and pension income.

EBIT, excluding special charges, was $25 million, down 16% from last year on the lower sales.

The EBIT margin was 6.3%, down from 7.4% last year.

Interest expense declined 9% during the quarter, including one month of the post-Vidia debt level.

Average U.S. interest rates of 5.6% were down 20 basis points from last year.

Consistent with previous guidance, the effective tax rate was 32%, the same as last year.

The first quarter was another strong quarter for cash flow with $28 million versus $22 million last year.

Reductions in inventory and receivables continue to drive cash flow performance.

As of September 30, 2002, total debt was $617 million, including $184 million from the closing of the Vidia acquisition.

Year-over-year debt-to-capital declined 70 basis points to 45.5%.

I will now move on to a discussion of our individual business units and their top line EBIT results.

I'll start with the metalworking group.

Sales before Vidia were flat compared to prior year.

In constant currency, Europe declined 50%;

Asia delivered strong double-digit growth of 13%; and North America declined 8%.

EBIT margin for metalworking declined against the prior year at 10.3% versus 11.3% last year, excluding special charges, due to lower sales in the highly profitable North American markets, offset in part by lien initiatives and ongoing cost controls.

Turning to the advanced materials group, sales were down 8%.

Mining and construction was flat with construction offsetting the weakness in mining.

Engineered sales were down 2%, and energy declined by 25% as U.S. rig counts remain more than 20% below last year's levels.

Electronics were down 2% from last year's very depressed levels.

Before special charges, the EMSB EBIT margin was 13.3% versus 12.5% last year.

Aggressive cost cutting, including improved manufacturing efficiencies due to lien, upset pressure on the margin from lower sales.

J&L sales, excluding the strong tool divestiture, was down 5% over the same period last year.

The four special charges gain of EBIT margin, excluding strong tool, was 4.5% against 4.7% a year ago.

Full service supply sales decreased 25% in the current quarter versus last year as we exited unprofitable relationships.

Before special charges, full service supplies EBIT margin was 3/10 of 1% compared to about 2% last year.

Let's move forward to the outlook for the remainder of Fiscal Year 2003, but first, an update on Vidia.

Since the August 30 closing, we've validated the assumptions in our aquisition model, and our integration efforts are on track with some potential upside identified.

The estimated financial benefit of Vidia is as follows: sales for Fiscal 2003 are expected to be between 200 and $210 million with EBIT of 8 to $10 million.

Planned synergies in Fiscal 2003 are 3 to $5 million; 20 to $25 million in Fiscal 2004; and $30 million or more in each succeeding year.

Associated restructuring charges to be largely spent in Fiscal 2003 are 50 to $60 million in cash on a pretax basis and 75 to 85 of charges in total.

The EPS impact is expected to be 15 cents of dilution in FY '03, becoming 10 to 15 cents accretive in FY '04, and 20 to 30 cents accretive thereafter.

As previously discussed, the portion of the Vidia accretion will be delivered through tax benefits.

Accordingly, we will reduce our FY '03 consolidated tax rate from 32% to 30%.

As Markos discussed, a host of global economic indicators point to a significantly delayed recovery.

One example that is particularly relevant to our end markets is industrial production, which was forecast to grow 3 to 4% in the second half of FY '03 when we developed our original FY '03 outlook, but is now forecast to be only a 1% increase.

The strong second half we expected is no longer consistent with global outlooks and we've adjusted our forecast accordingly.

These figures below reflect the impact of the workforce reductions that Markos mentioned and are detailed in today's press release.

So, turning to sales growth for the year, the guidance is now plus 1 to 3% excluding Vidia and 14 to 16% including Vidia.

In terms of market growth, where we had assumed market growth of 3% for the year, we're now looking for market growth to be down 1 to 2%.

Sequentially, we expect market growth to be down 4% in the first half of our fiscal year and up just 2% in the second half of the year.

In terms of EPS, on a reported basis, we now expect EPS to be down 3% to up 8%; excluding the Vidia dilution, EPS growth of plus 5 to plus 15%; and then, also adding back the lower pension income, EPS growth on -- on sales growth of 1 to 3% would be 15 to 25%.

Free operating cash flow guidance remains unchanged at 100 to $125 million including the cash spending on the Vidia integration.

As reported in this morning's release, we expect sales for the second quarter to grow mid double-digits year-over-year and EPS before special charges to range between 31 cents and 36 cents.

That would be down 3% to up 13% versus last year, and these numbers exclude approximately 7 cents of dilution from Vidia.

Additional guidance for the full year is as follows, and all these figures include Vidia: as I mentioned, the tax rate of 30%;

Cap Ex spending of 60 to $70 million; depreciation of 80 to $85 million; the working capital margins to sales of 26%; debt-to-capital 40 to 42%;

ROIC 7 to 8%; and interest expense up slightly versus fiscal year 2002.

Included in our current targeted are the following assumptions regarding outlook by end market for the next three months.

We expect high single-digit growth in automotive, low single-digit growth in tool and dye, heavy engineering is expected to be flat for the quarter.

Single-digit declines are anticipated in light and general engineering and oil and gas.

Aerospace is expected decline 20 to 25% against last year's levels.

Over the next three months, we expect year-over-year geographic performance as follows: end markets in North America flat to up 1%;

Europe to be down 3 to 5%; and Asia to grow at 3 to 5%.

I will now open the line for any questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, press the one on your touch-tone phone.

You will hear a tone indicating that you have been placed in queue.

You may remove yourself at any time by pressing the pound key.

If you're on a speaker phone, pick up your handset first.

We have a question from Joel Tiss with Lehman Brothers.

Go ahead.

Hi, guys, how you doing?

Good morning.

Can you give us a little bit more -- more color on how the automotive and the truck outlook breaks down for the year?

Joel, this is Markos, yeah, we -- suddenly the truck -- the truck market benefited from the -- in the last quarter and the previous, even, by the environmental legislation.

We will see that slowing down significantly now over the next few quarters.

We also see automotive adjusting for seasonality.

It won't be the kind of level we saw in the last quarter.

Now, the general outlook of total production still remains around 16 to 6.5 million autos in the U.S. and about the same size in Europe, as I understand it.

But suddenly we see moderating the automotive and sharp decline in the heavy truck.

Okay.

And -- and can you also talk about the full service supply, if you were weeding out your unprofitable customers, how come the operating profit dropped considerably there?

Well, we have -- as you know we've taken the restructuring, we're seeing some of the benefits year-over-year; however, there are fixed costs in the business and volume has declined.

So, that's -- that's would be the reason for the roughly 150-basis point decline in the margin year-over-year.

This is -- this is an encore operation for us and it is a small part of the business -- of the company.

I'm quite relaxed about it.

I'm more interested in streamlining, as Nick said, and getting the cost structure out and being good business, you know, as we go forward.

That's going to be the game plan for that particular part of the company.

Yeah, I know, it definitely makes sense.

I wanted to be clear on what was some of the moving parts in there.

Right.

And last question, just to clean up, on accounts receivable and inventories, both up considerably, that's all from the acquisition?

I'm sorry, on a like-for-like basis, they're down.

Inventories were down about 10 million in the quarter, receivables about 15.

We did add about $75 million of working capital with the Vidia acquisition.

If I said they were up, I meant to say they were down on a cash flow basis for the quarter.

No, I heard you say they were down, but if you look at the numbers, they were up 100 million or so.

Yeah.

All right.

Thank you.

We have a question from Joanna Shatney with Goldman Sachs.

Please go ahead.

Good morning.

Good morning.

Can you just talk about what's going on with some of the investments.

On the last conference call you talked about some additional spending on training, which was going to be about 15 cents in the year and some marketing initiatives that are expected to cost about 15 cents for the year.

Are those still largely in touch, even though volumes are running weaker than we thought?

Yes.

And can you just help us with when we should see the cost savings in the incremental layoffs?

Second half it sound like, but is it mostly fourth quarter?

Actually, no.

They will be largely in this quarter, current quarter and end of next quarter.

Cost, not the savings.

Yeah.

So, the costs are mostly the second quarter and we get the savings in the second half.

That's right.

Okay.

And I know you can't break out fully what you're getting, you know, from every single spot on Vidia, but if you could take the $30 million we will get for an ultimate run rate and try to make us comfortable with what types of initiatives -- 2/3 from people reductions or something like that for us?

It is roughly 1/3 in people reductions.

One-third would be in manufacturing efficiencies and the other third would be in other G&A efficiencies like purchasing and supply management and IT and so forth.

And in terms of which ones are easier to get, which ones are faster to get, can you help us with which of the three pieces gets us to the 20 to 25 for '04?

Certainly, the people portion will come first.

The rationalization of the G&A functions will come first, following that will be the manufacturing rationalization, and, of course, we are already working on receiving benefits from purchasing and supply management and so forth.

Okay.

And last question is I know you don't want to put any sales synergies into the operations assumptions, which I'm glad, but can you talk about what types of synergies you've been able to think about getting maybe in Europe or globally?

Joanna, I will answer that.

In Europe, without a question, synergies, in terms of taking more of the Kennametal products into the automotive accounts were Vidia has strained through the milling and the reverse being true in Kennametal accounts, that's one.

In India, we see significant synergy.

We've already begun to look at Vidia-India product going into the Asia Pacific region, but also Vidia-India has a lot of potential for more Kennametal turning products.

We had not realized how much stronger their milling was and, therefore, relatively weaker their turning, which is our strength.

So, we will take turning much more aggressively than we anticipated into India.

Also, we found a very good product range in the mining business: mining tools, which we are now in the process of trying to understand how we can leverage that faster, not just within India, but actually both in the energy sector and in the mining sector of the rest of the business, the advanced materials business, globally.

So, seem to be growth opportunities all around.

Do you want to quantify any of that?

Nope.

Okay, great, thanks.

We have a question from the line of Mark Koznarek with Midwest Research.

Go ahead.

Yeah, good morning.

Good morning, Mark.

Can you clarify the pension comments, this 5 cents per share per quarter is incremental over and above the 2002 level.

Yeah, we have pension income, right?

And we are recognizing lower pension income this year than we did last year.

It is about $10 million lower, roughly 20 cents for the year and it's, let's say, straightlined about 5 cents a quarter.

Okay.

And where does that appear?

It's actually kind of split between cost of sales and operating expense.

And Mark, in this quarter's earnings release, the split is in the release if you look at the discussion on Op Ex on gross margin, so that will give you a sense for the split.

Okay.

Well, then, as you look at the segment detail, the corporate in elimination expense was rather high.

Is that the impact of the pension lowered income or is there something else in there?

And how should we think about that number for the remainder of the year?

Well, much of is it in that corporate number.

Okay.

All right, so we're looking at something more like this 11 for a run rate on that expense line?

On the corporate?

Yeah.

Yeah.

Okay.

It is lower with the cost reduction activities in place, but, yes.

Okay.

Then just another clarification, this $9 million expense that we're going to absorb to reduce staff, you are not going to take a charge, that's going to be eaten into the P&L?

Well, it will be through the P&L, but we -- yeah, we will take a charge.

All right.

This is recoverable this year by the end of the year, Mark.

It pays for itself this year.

So, you are going to absorb $9 million of extra expense early in the year and then get caught up later in the year.

Yes, with some -- with some plus for this year.

Yeah.

A touch -- okay.

And then on our annualized basis it is significantly higher.

Mark, to be clear, in the forecast we discussed EPS basis that $9 million charge is not in those numbers.

$9 million expense is not in there?

No.

Okay, you're not absorbing that into the operations?

No.

We're assuming that is a special charge.

Okay.

All right.

That's important clarification.

And then, finally, full-service supply, if we're exiting core accounts at this dramatic level, I mean what can you say about the future of that business, ultimately might you just shut it down or is there ultimately some future for it?

No, I don't expect to shut it down, Mark, at all.

We are starting to replace some of the lower quality business with -- with better quality and better margin business, it is not a question of exiting, it is a question of really focusing more on profitability.

Now, as we've said, at some point down the road, it -- I mean for this business to be part of our portfolio to have to get to our type of margin expectations.

And we -- we're trying to improve those margins as much as we can.

And those margin expectations are what, ultimately, here?

In this business we want to get to about 5%.

Okay.

And then a final question forp you: I had a chance to go out to the IMTS show where you rolled out a variety of new products and marketing initiatives.

Can you comment on any -- whether any of those have material amounts of traction yet to offset some of the economic weakness we're seeing, or is it just very incremental stuff likely to be achieved by the initiatives?

Well, I think -- although it is a early to tell, Mark, it was only just a month ago, there is clearly traction in terms of what we're seeing in the activity; and if you look at the forecast we give for the top line for the second half, in the face of about, you know, 1% or so market and/or industrial production, you know, the range of 3 to 5% or 4 o 5% we talked about is still significantly ahead of the market forecast.

So, yeah, we do expect to get traction, but it is just a little too soon.

Okay, thanks very much.

We have a question from Walt Liptak with McDonald Investments, go ahead.

Hi, good morning.

Good morning, Walt.

My question is with regard to the new guidance that's out there.

I mean we've seen manufacturing pause in the last two or three months, but I want to understand why you're getting the caution.

Seems like in the first half of the year we were running a trajectory for recovery; now things have paused.

Is it like a three-month trend you're looking at and extrapolating that out into the rest of the year?

As Markos noted, we're really adjusting the second half of our fiscal year.

The first half has been, largely, as we expected when we put our initial forecast together.

What we're looking at are a few things.

The industrial production forecast, as I noted, have come down significantly for the March and June quarters.

We've seen the ISM index dip below 50.

So, many of the indicators that are somewhat highly correlated with our business have been softening.

So, where we had 8% volume growth assumption in our original guidance, we've taken that down to 4 to 5%.

And that's still, we believe, is twice what the market will grow at, which, as you know, is our ambition.

But 8% was just no longer realistic.

Okay.

When we look at just the short-term, like the trend in the last -- you know, you essentially closed your quarter, is there any signs of improving, you know, business?

Consistent with the way we looked -- we predicted the second quarter.

Okay.

And the restructuring -- the new round of layoffs you're doing; it across-the-board throughout the businesses?

It is throughout the board, it is global, but it's primarily support functions.

Okay.

Does that 5% include the Vidia restructuring?

No that, will be separate.

Okay.

Okay.

And you talked about the incremental benefits you're seeing since you had a chance to look at Vidia.

Can you clarify: is it in the synergies that you see the incremental benefits or on the potential profitability side.

It is really both.

With synergies, we've found upside in terms of expense reduction.

The efficiency of the Vidia on a cost basis is not nearly where we are in our European business.

We've seen additional synergy opportunity, but also in the core business, as Markos was eluding to, as we've traveled to India and to Europe and looked at the operations more from a let's say a sales perspective, we've seen some upside.

Okay.

Thank you.

We have a follow-up question from Joanna Shatney with Goldman Sachs.

Please go ahead.

Joanna, your line is open.

Sorry about that.

Can you guys just talk about where -- where we should see the incremental sides, $10 million -- I guess it is $10 million of cost savings, is it in the incorporated expense line?

You will see that throughout, again, as Markos noted, across the business.

Across the businesses.

Okay.

And the other question I wanted to ask is I know Pat's come back in to run the metalworking business, but where are we in terms of finding a successor for Derwin, and when should we be looking to hear an announcement on that front?

I'm hoping we will make an announcement by the end of the quarter, Joanna.

We are looking at this diligently.

Pat and I are very closely managing the metalworking business.

What types of background are you looking for?

What you're looking for this person to bring to the party that you didn't have before?

I think a good base operational capability but with strong bias on growth and obviously a global perspective and industrial -- comfort with industrial perspective.

As always, the ability to energize the organization, excite the organization, continue the cultural transformation we have begun and be able to do that and manage the dimensions involved in a large, complex global business, that now includes the Vidia acquisition.

Thanks.

We have a follow-up question from Mark Koznarek with Midwest Research.

Go ahead.

Hi, this focus is on the Vidia restructuring and synergies.

Now that you've owned it for this period of time, 45 days or so, can you give us at least some metrics with regard to a comparison of Vidia versus hurdle in terms of say sales per employee.

You know, gross margin, differentials, you know, some kinds of tangible things to help us get better confidence on the, you know, the benefits that you expect to achieve here.

Yeah, was I say overall in terms of metrics, the -- the gross margin is -- is a few hundred basis points lower than ours.

In terms of operating expenses as a percent of sales, they are a good bit higher -- closer to 27, 28% versus 20% in our business, again, in Europe.

Yeah.

I don't have the sales per employee metrics.

But I know that, again, that the Kennametal business is on that basis, you know, somewhat more efficient.

Okay.

Good.

That's helpful.

Thank you.

We have a question from Gary McManus with JP Morgan.

Please go ahead.

Good morning, everybody.

Good morning.

Hi, Gary.

Just looking at your full year forecast, and let's do it including Vidia, you see $2 and you did 30 cents or so in the first quarter and you expect somewhere around 27 or so in the second quarter.

So, that's like a number of about 57 cents.

Are you expecting like a $1.45 type of number in the second half?

I want to be sure that's assuming no improvement industry volume growth.

Very little.

Very little.

So it's all seasonal and cost reduction?

That's right.

And we talked about on a volume growth basis the 4 to 5% in the second half of the year, off of the industrial production, let's say in the U.S. forecast of 1 to 2%.

Okay, so you're not really -- your're expecting no real improvement -- a bit, but not that much.

A bit, yes.

Okay, and I think you heard you say your full year tax rate is now 30%.

It will be effective in the second quarter, yes.

We did not reduce it in the first quarter.

I think as we discussed previously, we -- we realized tax benefits from the Vidia acquisition, and the manifestation of those tax benefits is -- is in the effective tax rate.

So, we are going to, effective in the second quarter, take it down to 30%.

So, I want to be sure you have a full year tax rate assumption of 30%.

Now, if you adjust the second quarter down to 28, so you get a first half tax rate assumption.

Yes, it will be.

So, included in the second quarter guidance is maybe a high 20% tax rate?

Right.

Okay, that's it.

Thank you.

Thank you.

If there are any additional questions, please press the one at this time.

And we have a question from Stephen Volkman with Morgan Stanley.

Please go ahead.

Hi, good morning.

Good morning, Steve.

Kind of a real big picture question.

It seems like obviously a number of your end markets are very depressed right now, but there is some others that could arguably be above trend, I'm obviously thinking auto, specifically, maybe construction-related stuff.

I'm wondering if you look, for Markos, as you look across the world, where are you now with respect to volume versus what you would consider normal?

Are we at 80% of normal volume or 90?

Is that -- can you take a shot at that?

When you say volume, what do you mean?

End market volume versus sort of a normal year.

Oh, that's hard to say.

On balance, you mean?

Yeah.

I would -- I would just get 80 to 90.

Okay.

In general, yeah.

Where I'm going with this, I think Nick said something about 7 to 8% ROIC this year.

I guess that's against some cost-to-capital around 10 or something?

That's right.

So.

We're -- you know, we're getting close, but not quite earning the cost-to-capital yet, and where I'm going with this is do we need that, whatever it is, 10 to 20% volume, does that get us, you know, into the low teens return on capital; or is there more that you need to be doing at the corporate level, you know, another round of asset reduction as it were, invested capital reduction, to kind of get you to these target levels that get you positive EPA.

Yeah, Steve our model assumes that let's say the next three years annual average volume growth of kind of 4 to 6%.

That, coupled with the Vidia integration synergies and benefits and so forth, at the end of that three-year period, you know, we will be in the ballpark of 12% ROIC and so what of that fills this 80 to 90% volume GAAP, I don't know, but that's the volume assumption.

And there is no assumption implicit in that that we take out significant additional costs.

This is really driven more by that volume growth, relatively modest annual volume growth, and the benefits of Vidia.

So, as we look at ROIC, I guess I'm hearing that the "R" is going to go up and the "IC" is where you want it?

I wouldn't say it's where we want it.

I think there are still benefits we can realize from lower working capital, certainly in Vidia but even in the core Kennametal business.

We're very focused on that.

We now have $500 million of working capital, including Vidia, we had 425.

It's been coming down, as you know, but we're certainly not finnished, and I don't even believe we're reaching diminishing returns at this point.

Great, so the 26% in the three-year plan, that's significantly lower than that?

As a percent of sales.

Right.

Yes.

Good.

Great, that's helpful.

This is Markos, just a clarification, the first half is turning out of our fiscal year -- turning out about the way we expected from a market point of view, somewhat a little more bearish, but it is really the second half where expected the more robust recovery, together with everybody else, that we are changing.

It is the pace and strength of the recovery that we've moderated for our second half.

When you combine that, you know, the forecast with what we expect to deliver, it is still in our opinion very credible performance, in terms of top line growth as a multiple of the market growth.

Then we're obviously leveraging, you know, the volume, which you see the impact happening in the bottom line, together with the additional actions and so on.

Thanks a lot.

We have a follow-up question from Mark Koznarek with Midwest Research.

Go ahead.

I just would like to know what the 5% staff reduction in the salaried workforce equates to in numbers.

Between 300 and 340.

Okay.

Thank you.

If there are any additional questions, please press the one at this time.

And we have no further questions at this time.

Please continue.

All right.

Thanks, everybody.

Again, this is Beth Riley, Director of Investor Relations.

Please give me a call with any follow-up questions, I look forward to speaking with you soon.

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