Kennametal Inc (KMT) 2005 Q4 法說會逐字稿

Good morning.

My name is Jocelyn and I will be your conferences locator today.

At this time I would like to welcome everyone to the Kennametal fourth-quarter full-year conference call. (OPERATOR INSTRUCTIONS) Mr. Tom Joyce, you may begin your conference.

Welcome and thank you for joining us this morning to review Kennametal's fourth-quarter and full-year results for fiscal 2005 and take a look at fiscal 2006.

Consistent with our prior calls, members of the media have been invited to listen in on the call and the call is being broadcast live on our website ay www.kennametal.com.

I'm Tom Joyce, acting Director of Investor Relations for Kennametal.

I'm pleased to have joining me for this call our Chairman, President and Chief Executive Officer, Markos Tambakeras;

Executive Vice President and Chief Financial Officer, Cathy Smith; and Corporate Controller and Chief Accounting Officer, Tim Hibbard.

Markos and Cathy will provide detail on the quarter's and fiscal year's operational and financial performance and take our first look at FY 2006.

After these remarks, we will answer some questions in the time we have remaining.

Before I turn the call over to Markos I would like to read our forward-looking disclosure statement.

This discussion contains statements that may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by such forward-looking statements.

Additionally, information regarding these risk factors and uncertainties is detailed in the Company's Securities and Exchange Commission filings.

In addition, to be able to discuss non-GAAP financial measures during the call, in accordance with SEC Regulation G, the Company has furnished a Form 8-K to the SEC which is also now available on our website at www.kennametal.com.

The 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures, as well as a reconciliation thereto.

With that I will turn the call over to Markos.

Thank you, Tom, and good morning, everyone.

We're obviously delighted with the record results for the fourth quarter and for the full-year 2005.

We take a lot of pride in the attainment of a number of major milestones for our Company, and it's all thanks to the efforts of our more than 14,000 employees around the world.

Over the last two years we have achieved above market performance by utilizing our market leverage, leading technological position, and operating efficiencies to lessen the impact of headwinds from rising raw material costs and competition.

In each of the past two years our EPS growth has topped 50% on a 12 and 17% sales growth respectively.

We also ended fiscal '05 with a very solid balance sheet.

Our debt to total capital ratio is now down to 31%, and we are now investment grade rated by all three major agencies, S&P, Fitch and Moody's.

Our transformation strategy continues on track as we have changed the fundamentals of the Company.

Our portfolio continues to evolve from mainly metalworking cutting tools to include leading positions in advanced materials and engineered components, while our distribution business, J&L, is now a top performing, $250 million plus market leader.

In '05 would also added Extrude Hone with (indiscernible) distribution business mainly serving the North America auto market.

And for the first time our Advanced Materials Solutions Group, or AMSG, topped the $500 million level in sales.

Now the distribution of our sales from our end markets now has automobiles at about 16% of worldwide sales, down from about 30% just two years ago, with North America automotive accounting for about 7% of total sales.

Incidentally, and despite the difficulties of the automotive sector, Kennametal's growth in this area in '05 was a robust 17%.

Our global expansion is ahead of plan with sales in India growing by 50% where we are now the undisputed market leader in metalworking;

China by 30%;

Latin America by 40%;

Central and Eastern Europe by more than 20%.

In 2005 the rest of the world sales grew to almost $350 million, or 15% of the total Company.

Finally, in '05 we extended our technological leadership by continuing to bring many new and winning products to the market. 44% of 2005 sales were from new products.

That is products introduced in the last five years or less.

That is up from 41% last year.

Our application of the Kennametal value business system, or KVBS, and the six processes that it encompasses has been the key to our success over the past several years and will be the key to our success going forward.

We continue to focus in particular on talent development, on customer acquisition, lean deployment throughout the Corporation, and strategic acquisitions especially in advanced materials and engineered components.

We remain confident in our future despite the unprecedented raw material run-up of recent months.

We will continue to deal with this challenge as the markets are adjusting to new pricing levels on most fronts and by leveraging our market position and our technological leadership.

Finally, as you may have seen from the press release, we intend to resume the purchase of shares issued internally while we're also raising our dividend by almost 12%, reflecting our confidence in our cash flow generation ability.

This is also consistent, by the way, with our cash deployment priorities and puts Kennametal solidly in the second quartile of peer industrial companies in terms of dividend yield.

Overall our strategy remains sound.

It is being well executed and I feel very good about where we are.

Let me turn the call over to Cathy who will review the numbers with you.

I'll provide further comments on our performance for the June quarter and the past fiscal year and then move on to the outlook for our fiscal 2006.

As noted in our press release, our fourth-quarter fiscal 2005 was our record quarter.

Kennametal earned net income of $38 million compared to 30 million last year.

Earnings per share of $0.98 per diluted share is up 21% over last year's $0.81.

These results exceeded our previous guidance of $0.90 to $0.95 per share.

There are no special items in either June quarter.

For the June quarter consolidated sales increased 14% to $619 million.

The sales increase was driven by organic growth of 11%, a 2% benefit from foreign currency, and a 4% benefit from acquisitions, offset by a 3% reduction due to the FSS divestiture.

Gross margin increased 200 basis points to 36.3%, due mainly to the record level sales, realization of increased product pricing, and the divestiture of FSS.

Operating expense increased $22 million, or 16%, to $156 million.

This increase is primarily attributable to increased professional fees related primarily to Sarbanes-Oxley compliance, the impact of current year acquisitions, and increased employee costs due to onetime discretionary employee benefit plan contributions.

Adjusted EBIT was $57 million, up 33%.

And the corresponding EBIT margin percentage was 10.9%, up 160 basis points.

Interest expense increased $1.5 million to 7.9 million in the June quarter.

Interest rates on domestic borrowings of 4.8% are up slightly from 4.4% last year.

The effective tax rate for the June quarter was 36.5% compared to our 32.2% in the prior year.

Net cash flow from operations was $53 million compared to 68 million in the prior year.

Free operating cash flow for the quarter was 21 million compared to 49 million in the prior year.

Okay, turning to our business units, all comparisons of sales will be in constant currency.

MSSG continued to deliver double-digit growth despite difficult comparisons to a strong quarter last year.

MSSG growth continues to outpace the growth in their addressed markets, demonstrating the effects of further market penetration and increased pricing.

In the June quarter MSSG sales were up 10%.

North American submitted (ph) carbide and high-speed steel (ph) each grew at 9%.

Europe grew 7%.

And the rest of the world grew 25%.

MSSG EBIT was up 25% on 10% sales growth and the EBIT margin improved by 140 basis points to 15%.

Now let's talk about advanced materials.

AMSG delivered significant top line growth in the current quarter, again despite difficult comparisons to last year's fourth quarter.

The underlying markets in lining mining and construction and energy remains strong.

Electronics is the only market reflecting year-over-year decline.

Market share penetration and price increase are also contributing to our overall results.

AMSG sales grew a very strong 42%.

Mining and construction was up 34%.

Energy sales increased 26%.

And engineered sales grew 20%.

Electronics decreased by 8%.

EBIT grew 72% versus last year on 42% sales growth with the EBIT margin increasing 300 basis points to 17.8%.

J&L Industrial Supply, our distribution business, realized a 10% increase in sales and EBIT growth of 24%.

EBIT margin of 11.5% was up 120 basis points versus the prior year.

FY '05 was truly an outstanding year for J&L.

For fiscal 2005 sales were a record level for the Company at $2.3 billion compared to the $2 billion last year.

For the full year adjusted EPS were $3.25, also a record compared to the prior-year adjusted EPS of the $2.15.

Reported EPS for the year were $3.13 and includes special items totaling $0.12 related to the FSS divestiture in the third quarter.

Prior-year reported EPS were $2.02 and includes special items totaling $0.13.

And finally, on the full-year we are very pleased with our continued ability to generate cash.

Cash flow from operations was $202 million.

So, as Markos mentioned, in the past two years we generated 12 and 17% top line growth and over 50% growth in EPS each year.

Now let's look ahead to fiscal 2006.

Economic indicators project continued growth through fiscal 2006 in North America and the rest of the world and flat to modest growth in Europe and Japan.

The majority of our end markets will continue to operate at high levels with moderating growth rates, the exceptions being aerospace and general engineering, which should continue to be robust, while automotive will remain flat.

We expect our sales to grow 7 to 10%, outpacing worldwide industrial production growth by 2 to 3 times.

As most of you know, we're experiencing unprecedented increases in key raw material, tungsten.

So given the volatility of tungsten costs, our EPS guidance is wider than usual.

Further, we expect to continue getting higher price realization on raw materials cost increases.

We project in fiscal 2006 EPS will be in the range of $3.30 to $3.80, including a negative nonoperational impact of approximately $0.25 associated with the expensing of stock options due to the new accounting regulations, SFAS 123R, and the reduction in discount rates applied to our pension plan.

So operationally our EPS range is very solid 9 to 25% over fiscal 2005.

This EPS range includes an EBIT margin percentage of 50 to 100 basis points over fiscal 2005 and 100 plus basis point improvement in ROIC, keeping us solidly on track for our next milestone of 12% EBIT, 12% ROIC by fiscal 2007.

During the year we expect our normal seasonality with 65% of our earnings coming in the second half of the year.

The first quarter will be the weakest for the year, which is also consistent with previous years.

We expect sales growth of 7 to 9% in first quarter and reported EPS in the range of $0.40 to $0.50 in the first quarter.

We will continue our strong focus on the balance sheet and cash flow generation.

We project cash flow from operations to be 200 to $220 million, free operating cash flow of 120 to 140 million, and capital expenditures to be approximately $80 million.

Moving into fiscal 2006, Kennametal will continue to transform, strengthening our balance of addressed markets, expanding our portfolio in advanced materials and engineered components, maintaining our technology and innovation leadership, increasing our value based selling by providing customers new products that provide measurable financial benefits for them and helping them improve their competitiveness, and by continuing to grow aggressively in the developing economies of the world.

Now we will be happy to take your questions.

Operator, we're ready to take some questions

(OPERATOR INSTRUCTIONS) Gary McManus, JPMorgan.

Obviously with the first quarter expectations being down, can you tell me -- a couple of things.

Both for the first quarter, I guess, in fiscal '06.

What do you expect tungsten costs to be up year-over-year both in the first quarter and fiscal year?

And what kind of pricing do you expect in the first quarter and also year-over-year?

Let me try and answer the question.

The overall comparisons for tungsten are essentially as follows.

In '05 the average price was approximately $100 per metric ton.

This has moved up to as high as $300 per metric ton.

Recently we have seen some easing or some pull back in the somewhere between 250 and $270 per metric ton.

So I'm not going to go into actual values of how much our raw materials are going to increase because it's a function of the purchase prices we pay.

But you can get the range.

So it's gone from 100 on the average to about 300.

It's easing off.

We think the biggest impact is going to be in the first quarter obviously because that's where we see that, which is why you've seen some pull back in the first quarter.

Our expectation is that our ability to recover pricing actually has improved in the last quarter.

And as we look forward we expect to continue to see pricing recovery improving.

So we ended up the year in a 65 to 70% range.

We've been picking up steam.

So I think you will see that as the year evolves we've going to get better pricing coming through.

As a follow-up, I mean if I look at your guidance, (multiple speakers) midpoint of what you expect in the first quarter and the fact you say you expect two-thirds of earnings to occur in the second half, you are basically looking at like 45 versus 61 in the first quarter, down 27%.

The second quarter would be up modestly.

Then you would have like a 20% growth in the second half.

And just give us some (technical difficulty) what's happening in the first quarter doesn't carry through beyond first quarter.

Let me make you comfortable with all of this.

First of all, if you look historically at the distribution of our earnings, a 65/35 split second half to first half is pretty much in line.

So that's what we have.

Now the first quarter of this year versus last year, our range is between -- the first half is 35%.

Our range is between 11 and 14%.

So you can take middle of the range around 13% or so.

That's what it was last year.

That's what it will be this year.

Last year it was about 19%.

So what essentially you're seeing is from about 19% of annual EPS last year in the first quarter to somewhere between 11 and 14, that's the impact of raw materials.

The reason for that is that the big chunk of the increase by definition because of when the prices went up, which was near the end of the last fiscal year, then the roll through practically speaking comes in the first quarter.

After that you settle at the price, and that's why you see most of the impact in sales in the first quarter, which is seasonally our slowest quarter anyway.

Essentially, the difference is between the 19% of last year and somewhere around 13% this year.

And then we move forward, we get back into seasonality.

The second quarter is always stronger than the first; the third and fourth quarters are always the strongest.

So this is not unusual.

Last question and then I'll drop off.

Are you assuming any change in tungsten prices for the rest of the year?

And do you need to raise prices to a greater degree than what you already have done thus far?

Let's say that we are being conservative in our approach.

If you look at our range for the year, as you look at the low end and the high end of the range, the low end of the range would represent the low end of our sales expectation, let's say a worst-case scenario in terms of raw material pricing and price recovery.

The high end of the range would be obviously the opposite of that.

We expect -- we've been able to raise price consistently throughout last year.

We continue to raise prices.

What I'm getting more comfortable with is our ability to get more traction on pricing going forward.

And so yes, absolutely.

In fact, we have already raised prices near the end of last year.

We're raising prices now.

I expect we will continue to raise prices.

Our range of price increases is very wide because it depends on the market and it depends on the product that you're selling.

But the underlying let's say message here is that given the conditioning that the market has gone through in the last two years with raw material prices going very high, given our experience last year, and given our position in the market, we feel pretty good about our ability to raise pricing and we will keep doing it going forward.

It's a question of timing.

That's what you see in the first quarter.

So don't read too much into that.

, Great, I'll get back in queue.

Next question, Operator.

Walt Liptak, KeyBank Capital Markets.

Congratulations on a nice year, Markos.

I appreciate the congratulations.

It feels good.

My question is, and I hope you can -- I'm trying to figure out what the delta might be '06 versus '05; what kind of headwind on tungsten purchases.

Can you tell us in dollars how much you spent on tungsten in 2005?

I'm reluctant to give you actually what we're paying because that can translate into what price we get and the competition listens in on these calls.

We can give you a general sense that about 38% of our raw material cost is tungsten, about 35% is steel, about 14% is cobalt, and the rest is -- about 12% is all other.

Okay.

And the first quarter, can you give us an idea with FSS out of the mix what the gross margin might look like?

Would we be looking at something similar to what we saw this quarter?

Let's see if we can get that for you.

You want to do that now or (multiple speakers)

Let's do that and we can come back to you on that.

The last question I've got is on the sales growth assumption for fiscal year '06, the 7 to 10% organic.

I assume that does not include price.

Or does that include price?

Well, the way it pans out is it's about the same for volume and about the same for price.

And then you offset that for currency and for the divestiture of FSS.

So on average we expect the volume increase to be about the same as the price increase.

You know what I'm saying?

Okay, yes.

Got it.

Okay, thank you.

The 7 to 8% volume, about the same for pricing, and then it gets offset by currency and by the divestiture of FSS.

Mark Koznarek, FTN Midwest Securities.

I'm a little bit confused about that last statement.

On the revenue outlook for next year, price you're expecting up 7 to 10%.

Is that right?

Top line or total reported 7 to 10% and of that 7% in volume in organic.

7% volume plus 7% price, and then we have the takeaways of absence of FSS and then foreign exchange.

And net of the acquisition and divestiture and the foreign exchange, correct.

That's pretty sizable price increase.

It would appear that your increase for fiscal '05 was only about 1.5% if I am doing my math correctly.

You said you had raw material penalty of 45 million at least at the end of the last conference call, and you're offsetting 70, so that's like 30 million of price.

This is based on our most recent experience as we ended up the quarter and the year and also just the general market ability to absorb prices.

We feel pretty good about our ability to do this.

Markos, have you guys implemented this average of 7% increase already, or is this anticipated?

No, we have started.

Like I said, when you think about the diversity of our product range and markets and our different positions in different markets, in some cases we have put in substantially higher than this.

We've already begun from the last quarter.

So we already have pretty good experience in terms of our ability to gain pricing, which is what gives me the relative confidence that I'm giving you about our (indiscernible) pricing.

When you have the kind of increase in the raw material that we have had, when the market has been looking at steel pricing increases and oil price increases, we're not the first ones out of the shoot here to go out with some high price increases.

We are kind of almost at the tail end.

So the markets is -- not that they like it, not that this is easy, but the market has become a lot more conditioned.

So we're not just speaking because of something theoretical.

We've had some significant experiences and we've done our homework.

So we feel -- bottom line, we feel pretty good about (indiscernible) to get these price increases we are talking about.

So you're saying you've put much of them in place already?

We've put a lot of them in place already, and there will be more coming, absolutely.

With regard to the raw material headwind that we're likely to experience in fiscal '06, you have said that last year, the year just finished, overall price increases -- just rather than drill down into tungsten or specific raw material, but overall was around 45.

On that kind of basis what's the range of expected further raw material hikes in '06?

Substantially more.

It's obviously substantially more if you do the math.

It was in total last year was, you're right, about $46 million.

And so we're looking at substantially more than that.

A three digit number?

Yes.

And that is an incremental?

That's over the increase?

Yes.

Again, understand that -- I think this gives me an opportunity -- everybody is facing those price increases.

The entire world cannot machine anything without using our products or from our competitors.

You cannot make a car, a plane, a bulldozer, a pump, anything that uses metal, or mine for oil, or mine for coal, or whatever.

So this is -- where we are is very, very pervasive.

It touches every part of manufacturing.

And everybody is facing the same price increases.

So what it comes down to is who is better at leveraging.

We think we're better leveraging and getting price increases because of, A, our purchasing ability, we think we buy the best around the world;

B, because of our market position;

C, because of our customer relationships and the things we have talked about before.

And we're very experienced at it.

So this is across the board.

Yes, it is substantial.

But let's say it is our turn, and the steel industry ended up doing pretty well in the raw material increases.

So I don't -- I'm trying to be very balanced here.

I don't think this is all bad.

But we need some time and the market needs some time to settle to a higher price level, which is what I believe is going to happen.

So we need -- all of us need to think through the short-term pickup associated with a new set -- with a new level of raw material price and look ahead at the new market price levels, which I think over time are going to be substantially higher.

This isn't all bad.

We have just got to go through the volatility of the first couple of quarters, and then we will move on through this.

So we have a pretty good understanding of all this.

And then given the experience of last year, what's roughly the lag time that you experience between an announced price increase, a list price move, and when you began realizing it, when it appeared in your P&L statement?

It's about a quarter's worth.

And I think if you track back last year's quarters you'll see that kind of pattern.

Again, which reinforces the quarterly pattern that we have forecasted for '06.

Just one other question here and I will jump back in queue.

When you look in the overall environment for sales in metal cutting products had you guys observed competitors moving price up to the extent that you have announced so far?

Yes, worldwide.

Thanks Mark.

We're going to move on to another question, Operator.

Joel Tiss, Lehman Brothers.

Can you give us of the split between the pension expensing, or the pension increase, and the option expensing for '06?

Options were about $6 million for us and pensions were the remainder.

They're about -- it's a discount rate.

The pension increase is solely due to a discount rate change for us.

They're going from a 6.5% discount rate to a 5.25 discount rate for us.

And that was about $7 million.

But in terms of the $0.25 EPS --

Yes, 12 and 13.

Its 12 and 13.

Roughly.

By the way, this discount rate thing, you're going to see that (indiscernible)

Our measurement date is the end of June, so we got the full effect of one year of the bond market.

Mark I think asked it at the end very quickly, but can you spend another couple of sentences on the competitive response on the pricing side and give us a little bit of sense of what everyone else is doing?

Obviously everybody's got their own strategies and their own position and situation.

But across the board and across the world we have seen price increases being put in by our competitors.

And there are -- let us say we think they're pretty robust.

So you guys are basically in line with where everybody else is?

We're in line.

In some cases we may actually get more pricing.

But there's no question we're not the only ones doing this.

This is not happening across the market.

Can you also just talk a little bit about -- you obviously expect to outperform the end markets quite a bit in 2006.

Can you give us a little sense of penetration, the parts of the mix that are stronger, new product introductions, etc.?

I think it's all of the above.

Clearly we lead off with the technology and we've had some just outstanding string of new products that have come out.

And so that 45% plus of revenue from new products is really the main driver.

We have -- in fact, in Europe we grew 7% last year, which for us was pretty robust, and then for the whole market.

For the first time in history actually we've had the authoritative magazine in Germany publish the Kennametal (indiscernible) in metalworking business in Germany, which is by far the biggest metalworking market in Europe and close to the biggest in the world.

So we're picking up market share because of technology.

We're picking up market share because of our business model, our customer acquisition process, because we transitioning faster to financial proposition rather than just a compete on features and benefits.

We are also moving into adjacent market segments.

We have expanded our reach through distribution across the world.

So really I think our business model is taking hold and we think overall it's a better business model.

Operator, we will move on to another question.

Craig Thomas (ph), Intrinsic Investors.

Cathy, what are you all assuming in your outlook for tungsten pricing in Q1 versus the full fiscal year 2006?

As Markos said, we're probably not going to disclose the actual amount we've assumed.

But on average tungsten prices were $100 last year.

They get up to 300.

We're seeing a little bit of softening in the last two weeks.

So I'm not going to give you specifics of what we have assumed for price competitiveness reasons.

But as you can imagine, it is higher in the first quarter then the fourth quarter.

Let me ask the question another way then.

Are you assuming lower tungsten prices in the second half of fiscal year '06 (multiple speakers) the first half?

No, our guidance range is very conservative -- or is conservative at the levels we've been seeing.

We've assumed the prices will not come down.

It will be -- we're being conservative.

If they do come down, that helps.

This is what I meant before.

If they do come down -- if they sustain the recent trends, then that helps us with the higher end of the range.

This is what I tried to say in the beginning.

That's how we have kind of ranged and why the range is a little wider than we've done before.

We're being conservative.

We've assumed the pricing at the high end.

Any kind of thoughts on where the primary metal goes, any view?

I will give you a general statement.

We don't think raw materials including this one are going to go back to previous levels anytime soon because of the entry of China and India in the markets and Latin America.

So we don't think we're going to see raw materials, us and others, back to the level they were before.

But we do think they will settle somewhere between the two.

Obviously we don't know.

It's basic economics, supply and demand.

And a lot more mines are now viable at the current price levels and actually even much lower.

It just takes them a couple of years to come online.

There may be supply coming in several years?

Yes.

And we already see that.

Two mines are starting up.

Got it.

Thank you.

Operator, we will move on to the next call.

Gary McManus, JPMorgan.

Just a couple of quick questions.

On the $0.25 of stock options and changing the discount, do I divide by 4?

Is it evenly spread throughout the four quarters of the year?

Yes it is.

And tax rate, tax rate was unusually low in the second quarter -- 20% -- and then it was 36% in the other three quarters last year.

Is that what we're assuming this year?

What are we assuming for the four quarters?

I should have said that.

We're assuming an effective tax rate of 35%.

Last year we did see -- in '05 our organic rate would have been around 36% (indiscernible) 33 and 1/3, but we had some release of some fairly large valuation allowances that we won't repeat.

So we do get the benefit of a new tax structure and legal structure that we've been working on as you guys -- Gary, you're aware of, in our European operation (indiscernible) manufacturing structure.

We will get the benefit of that this next year a little bit so you will see that's why we're going in at 35%

So 35% throughout all four quarters is the best assumption right now?

Yes.

As you know, in the new rules with tax you will have discrete items that will cause some lumpiness, but we're not forecasting that at this point.

I think you said 7 to 10% pricing this year, fiscal '06, right?

Are you getting that in the first quarter?

Yes.

Across the board.

The margin decline that is implied in your first-quarter guidance, is it more severe on the metalworking side, or advanced materials, or proportional?

Advanced materials is more severe.

I would think that that's a lot of mining and energy.

I would think the ability to get pricing is greater there.

Is it just the raw materials are a bigger portion of the cost?

That's exactly it.

Okay.

You got it.

I think that's it for me.

Thanks.

Operator, we will take another question.

Mark Koznarek, FTN Midwest Securities.

Cathy, when you spoke about the advanced materials business, you gave the overall revenue increase.

Can you split out what the organic growth was excluding Extrude Hone?

Just a second.

I can.

I think --

Do you have another question while they are looking it up?

Let me pull that out.

You mean about the fourth quarter, right?

Correct, yes.

Because we didn't have Extrude Hone before.

Yes, so just looking at underlying --

Fourth quarter advanced materials excluding Extrude Hone was -- we will get to it -- we will answer it on this call.

Do you have another question?

Yes.

The next question then has to do with the metalworking margins, which were up but at a slower rate than we've seen in the last couple of quarters.

And we just spoke a minute ago that advanced materials bears the brunt of the raw material impact, so it seems like something else is probably going on here rather than just raw material pressure.

So can you explain why the incremental margin, the leverage on the metalworking business seemed to slip here in the fourth quarter?

All of the incremental margins on a reported basis were affected by a couple of things -- our SOx compliance, our contribution to the discretionary defined benefit plan for our employees.

So we had some fairly large events that hit us in the fourth quarter which caused the incremental margin to decrease.

So those two --

The answer is they're nonoperational.

These are onetime nonoperational.

There is no underlying operational reduction in margin in metalworking (multiple speakers) expanded.

So you had Sarbanes-Oxley and then this defined benefit, and those expenses got split among MSSG, AMSG and J&L?

Yes and AMSG has the most number of people by far.

So then what's the overall dollar amount of that spending for the Company then in the quarter?

Which spending?

The stocks and the defined benefit.

The onetime.

Yes, about 10 million. $10.5 million in one-timers.

And the majority of that got shoved into MSSG.

Okay.

And to answer your question, without Extrude Hone in the (technical difficulty) growth was 27%, 25% on volume and price.

25%?

Yes.

Okay.

What was the 27%?

That was with FX.

2% of ForEx and 25 organic.

Got it.

Okay, thank you.

Operator, we have time for one more question.

Joel Tiss, Lehman Brothers.

Just a quick one guys.

Can you talk a little bit about repatriation, if you're seeing any opportunity there, if you expect to get anything?

Yes.

We're still evaluating it.

I'm watching what other companies do as well.

But for ourselves, we are evaluating it and we don't have to make our decision yet.

So we may selectively use some opportunity, but it's not in our plan.

Is there any sort of range you can give us to think about?

No, not at this time.

Thank you.

Markos, do have some final comments?

Just some final comments.

Clearly the headwind we see on the raw materials is very significant, but I want to leave you with a balanced perspective here.

We're not intimidated or panicking about this.

We think we know how to handle it.

We will wash out through the system over the next few quarters.

I think we have a very good and balanced plan.

Our top line growth, given industrial production forecasts of about 2 to 3% worldwide, is continuing to show confidence in growing our market share.

And if you look at our EPS actually you do have to understand that the $0.25 on the SFAS 123 as well as the pension is nonoperational.

So the comparison year-over-year if you go from the low end of our range to the high end of the range, that's a 9% to 25% improvement in earnings, as Cathy said.

And we think this is pretty damn good.

So on balance given what we see the markets are continuing to do well and we like what we see in most of the end markets.

That wraps it up for this morning.

Thank you very much for joining us on this conference call, and if you have any questions you can give me a call, again, Tom Joyce, J-O-Y-C-E, at -- I forgot my number.

But you know my number.

You can call me then.

Thanks.

Bye.

This concludes today's conference call.

You may now disconnect.