Kennametal Inc (KMT) 2006 Q4 法說會逐字稿

Good morning.

My name is Tiffany, and I will be your conference operator.

At this time, I would like to welcome everyone to the Kennametal fourth quarter and full year 2006 earnings conference 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, Miss McGuire.

You may begin your conference.

Thank you, operator.

Welcome and thank you for joining us this morning to review Kennametal’s’ fourth quarter and full year results for fiscal 2006 and outlook for the 2007 fiscal year.

Consistent with prior calls, members of the media have been invited to listen to this call, and it is bring broadcast live on our Website at www.Kennametal.com.

I’m Quynh McGuire, Director of Investor Relations for Kennametal, and I’m pleased to have joining me for the call the President and Chief Executive Officer Carlos Cardoso, Executive Vice President and Chief Financial Officer Cathy Smith, and Vice President of Finance and Corporate Controller, Frank Simpkins.

Carlos and Cathy will provide additional details on the quarter’s operational and financial performance, as well as our outlook for the 2007 fiscal year.

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

At this time, I’d like to direct your attention to 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 actual results, performance or 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 the company’s Securities and Exchange Commission filing.

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

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

With that, I’ll turn the call over to Carlos.

Thank you, Quynh, and good morning.

We are very pleased with the fourth quarter and fiscal year 2006 results.

This quarter represents the tenth consecutive quarter of year-over-year growth.

Our team successfully executed a strategic initiative in a disciplined manner.

Our 13,000 dedicated employees stayed highly focused on our goal of increasing value to our customers and shareholders.

We delivered on all our commitments while making further progress on our company’s transformation.

Our accomplishments for this past fiscal year include portfolio shaping to divest in non-core business and streamlining our manufacturing footprint, redeploying the cash effectively to acquiring business to have niche technologies, and increasing our ownership of business to have minority interest.

And spreading the balance sheet to our focus on working capital, additional debt reduction, and pension contribution.

In addition to strong organic sales growth and EPS, I’m happy to report that on the adjusted basis, we reached a record return on investor capital of 11.4% this quarter.

Our strong sales, EPS, and ROIC validate our market leadership position as well as the continued global opportunity for our company.

We are excited to be officially done with the divestiture of non-core business.

We now have created a stronger foundation which positions our company to long-term growth and profitability.

By continuing enhancing our portfolio to ensure the appropriate mix of business, we are focused on serving customers’ needs through innovative technology and solutions.

We will maintain our market leadership position in metalworking business while growing our advanced material segment.

We expect to grow advanced materials both organically and through acquisitions.

We’ll maintain our discipline in our evaluation of our potential acquisition candidates.

We have an opportunity to increase our profitability by creating new markets with niche technology in this arena.

Our core business segments are consistently showing strong performance.

With metalworking, we continue to see strong orders in North America and ongoing recovery in Europe and considerable growth in developing economies Advanced materials, again, reports robust results across its business in energy, mining and construction, and engineered products.

In summary, we are optimistic about the outlook of our end markets.

The global manufacturing forecast is in line with our belief that the industrial sector will continue to show strength.

We will continue to balance and diversify our end markets and world geographic mix.

We again expect to outperform the market by effectively delivering volume growth, gaining market share, and realizing price through innovative customer solutions that provide value and performance.

At this time, I’ll turn the discussion over to Cathy.

Thank you, Carlos, and good morning, everyone.

We have been very busy, have had a very busy quarter on many fronts.

As a result of the portfolio shaving we’ve accomplished, we have several special items to call out during our discussion today.

In addition, two of the businesses we are divesting are being treated as discontinued operations for GAAP reporting purposes.

Therefore, there are reconciling items between our GAAP report figures and the results we will discuss below.

Please refer to the reconciliation schedules provided in our earnings announcement and related 8K.

We had four divestitures that resulted in a net gain of $2.87 per share in the fourth quarter, all of which were previously announced.

The sale of the UK-based high-speed steel business, the sale of our Kemmer Praezision Electronics business, the expected sale of our consumer retail products line, South Deerfield, and the sale of the J&L Industrial.

The disposition of these non-core businesses is expected to be accreted to our future EBITDA margin, and the divestiture of J&L is in line with Kennametal strategy to focus on our core manufacturing businesses.

This transaction completes our planned exit from owner distribution, and Kennametal will continue building new distributor relationships while growing existing ones.

In addition to the impact of these transactions, certain past events affected our tax rate for the quarter.

As previously anticipated, we finalized our plans on the repatriation of earnings from foreign subsidiaries under the newly enacted tax revisions of the American Jobs Creation Act.

In Q4, the company repatriated $89 million of cash, which resulted in a net tax cost of $11 million.

In addition, the company reached a resolution with the IRS on a research and development tax credit claim for fiscal years ’99 through 2004.

As a result of this favorable resolution, the company recorded a tax benefit of approximately $11 million.

The impact of each of the above items is summarized on the EPS reconciliation for the quarter in our press release.

Reported earnings per share for the fourth quarter of fiscal 2006 were $4.11.

Excluding the impact of special items, adjusted earnings per share were $1.25, a 28% increase over last year.

The balance of my discussion will focus on the continuing operations of the company after these transactions.

These results exclude the special items and discontinued operations and reflect our ongoing focus on profitability and operational excellence.

For the June quarter, consolidated sales increased 3% to $612 million.

The sales increase was driven by organic growth of 8%, offset by a 5% reduction due to a prior year divestiture.

Sales in the quarter included two months of J&L activity prior to its divestiture.

Adjusted for special items, operating expense decreased $11 million, or 7%, to $142 million, with the decline due primarily to divestitures, lower employee-related costs, and lower professional fees.

Adjusted EBITDA was $79 million, up 19%.

The corresponding EBITDA margins increased 170 basis points to 12.8% from the prior year margin of 11.1%.

Interest expense at $7.5 million is essentially unchanged from last year’s comparable quarter.

Interest rates on domestic borrowings of 6% are up from 4.8% last year, and average domestic borrowings were lower by $118 million.

As reported, the effective tax rate for the June quarter was 41.2%, compared to the 37.4% in the prior year.

The current quarter effective rate was higher than our normal operating effective tax rate, primarily due to the impact of the AJCA repatriation and a higher tax rate on the gains from the J&L divestiture.

These adjustments were offset by the favorable settlement of the R&D claim.

Adjusting for these items, our normalized tax rate for the quarter was 32% versus the forecast of 34%, or about a $0.04 benefit.

The normalized rate was lower primarily due to the reporting of the R&D tax benefit for fiscal year ’06.

Now turning to the balance sheet.

Primary working capital as a percent of sales was 26%, compared to 24% last year.

The increase is primarily attributable to the retainment of our accounts securitization program and lower accounts payable.

Inventory turn improved slightly, to approximately four turns.

Total debt to capital declined to 23.9% versus 30.6% last year.

Adjusted return on invested capital, or ROIC, was up 180 basis points to 11.4%, a new high for our company.

In terms of capital for fiscal 2006, capital from operations for the year was $19 million.

That included $110 million for the retainment of our accounts receivable securitization program and $73 million in pension funding.

Capital spending totaled $80 million, adjusted for operating capital of $125 million, was unchanged from last year.

During the year repurchased 101.6 million shares at a total cost of $93 million in addition.

Now turning to our business units.

MSSG growth continues to outpace the growth in its major market, demonstrating the effects of our further market penetration through our channel saturation and branding strategy, as well as price realization.

North American sales growth was leveraged with the divestiture of J&L that spurred opportunities with new distributors.

General engineering distribution and energy market segments each exhibited strong year-over-year growth.

The divestiture of our UK-based high-speed steel business and planned divestiture of our consumer products business support Kennametal’s long-term strategy of continuing to focus on our core businesses.

In the June quarter, MSSG adjusted sales were up 6% on volume and price.

North American cemented carbide and high-speed steel grew 10% and 8%, respectively.

Europe sales were increased 4%, and the rest of the world grew 3%.

MSSG operating income was up 18% on reported sales growth of 6%, and the operating margin of 16% was up approximately 200 basis points over the same period last year due to ongoing cost containment and price realization.

Some of the other MSSG accomplishments worth mentioning were our Brazil and China plants opening, ownership increases in Spain and Italy, continued progress in our new product sales, up to 43% in MSSG.

AMSG again delivered significant top-line growth in the current quarter.

The underlying markets in mining and energy remained strong for Kennametal.

Despite the divestiture of our electronics business, the overall AMSG segment continued to report considerable growth.

Overall market conditions, price realization, and market share penetration are primary factors for favorable results.

AMSG adjusted sales grew 14% on volume and price.

By segment, energy was up 37%, Conforma Clad sales increased 24%, engineered products grew 12%, and mining and construction sales increased 9%.

AMSG operating income grew 11% versus last year, on 18% reported sales growth.

Operating margin of 18% was down 100 basis points over the same period last year, due primarily to increases in raw material costs, particularly tungsten.

And a couple other AMSG accomplishments in the quarter were, we did complete the Sintec acquisition effective July 1, and our new product sales for AMSG were up 58%.

Now let me give you the highlights of our fiscal 2006.

Sales were $2.3 billion, up 6% versus the prior year, including 9% organic growth, partially offset by a 2% net impact of acquisitions and divestitures and a 1% unfavorable foreign exchange.

Sales for the year included 11 months of J&L activity prior to its divestiture.

Income from continuing operations was $272 million compared to the prior year of $114 million.

Income from continuing operations, excluding special items, was $154 million versus the prior year of $118 million, an increase of 30%.

Fiscal 2006 reported EPS was $6.48, including special items of $2.53, compared to the prior year reported EPS of $3.13, including special charges of $0.12 per share, an increase of 107%.

Fiscal 2006 adjusted EPS was $3.95 compared to prior year adjusted EPS of $3.25, an increase of 22%.

Now let me give you guidance for our first quarter in our fiscal year 2007.

Worldwide market conditions support our expectations of continued top-line growth in fiscal year 2007.

Global economic indicators show that North America is expected to remain strong, Europe is believed to be improving with modest growth, and emerging markets are forecasted to be robust.

While there remain some uncertainties and risks related to the macroeconomic environment, fundamental drivers for the global demand appear to be stable.

Kennametal expects organic revenue growth in the 7 to 10% range for the fiscal year 2007, continuing a trend of consistently outpacing worldwide investor production rates by two to three times.

We anticipate the majority of our end markets to continue operating at high levels throughout the year, with moderating growth rates in some sectors.

The expectation of ongoing expansion around the globe supports Kennametal’s projection of 6 to 9% organic sales growth in the first quarter of fiscal 2007 relative to very strong performance from the prior year quarter.

Reported EPS are expected to be in the $4.20 to $4.40 range for the fiscal year 2007, despite some dilution from recent divestitures of non-core businesses, reflecting confidence in our ability to maintain the strength of our performance.

This forecasted range also includes costs related to ongoing SG&A initiative that will result in increased profitability for the long term.

The fiscal year 2007 guidance midpoint represents a 9% year-over-year growth.

On a comparable basis, though, fiscal year 2007 guidance midpoint represents approximately a 25% growth, which is a substantial increase over the prior year.

Approximately 55% of our forecasted EPS will be realized in the second half of fiscal 2007, consistent with our historical seasonal patterns.

Third quarter 2007 EPS are expected to be $0.60 to $0.70, in line with the same quarter for past years.

Also third quarter 2007 guidance reflects about $0.10 per share of cost from manufacturing streamlining, which is expected to have a payback of approximately one year.

Improvements in operating margins are expected to continue, and return on invested capital is solidly on track with a projected 11 to 12% range for fiscal 2007.

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

We anticipate cash from operations of approximately $275 million to $285 million for fiscal 2007.

Based on anticipated capital expenditures of $90 million, Kennametal expects to generate between $185 and $195 million of pre-operating capital for fiscal 2007.

However, $100 million to $110 million will be used for tax payments in the first quarter of 2007 due to the our recent divestitures and cash repatriation related the American Jobs Creation Act.

So, in summary, we have an aggressive but achievable plan.

In absolute terms, our fiscal 2007 guidance representing 9% EPS growth, but on a comparable basis, it represents a 25% EPS growth.

As a reminder, this guidance does not include any upside from acquisitions that we may do this year.

As you can see, Kennametal is becoming a dramatically different company.

We are delivering more profitable sales to greatly diversified end markets.

We have a solid foundation to build upon, and we’ll achieve another year of strong performance.

At this time, I would like to turn the call back to Carlos for our closing comments.

Thank you, Cathy.

In closing, we are very pleased with our fourth quarter and full fiscal year 2006 performance.

Our accomplishments for this past fiscal year include active portfolio shaping, effectively redeploying our cash and continued stressing of our balance sheet.

All the while, we delivered on all our commitments to our shareholders.

As shown in our outlook discussion, we feel confident of continuing this momentum into fiscal year 2007.

We have closely stated our intention to up the earnings dilution related to the J&L sale within 12 to 24 months.

We are making very good progress in replacing those earnings and expect to do so through building on our core business.

We will stay focused and disciplined.

Our Kennametal Value Business System, or KVBS, provides us with a unique set of processes to achieve our vision.

We will continue with our goals of bringing innovative technology and solutions to the marketplace to provide customers with a competitive edge.

The ongoing trend of our service in first end markets allows Kennametal to consistently execute our strategy by focus on further penetration of profitable sectors, extending in our global presence, and reducing our overall cost structure in order to better weather any future economic downturns.

By managing our strength and opportunities, we will continue to demonstrate that we can deliver value to our shareholders.

At this time, we will be happy to take your questions.

Operator, we are ready to take the questions now.

[Operator instructions].

We will pause for just a moment to compile the q-and-a roster.

Your first question comes from Walt Liptak.

Thanks, good morning.

The first question I have is on the first quarter guidance.

The organic sales growth that you’re looking for is 6 to 9%, which is below your full year guidance for organic growth, and I wonder, you mentioned that some end markets might be slowing down.

Why do you expect your business to accelerate throughout the year?

Carlos Cardoso;

Walt, that’s in line with our seasonality.

We typically have, the first quarter is typically slower in sales than the rest of the year.

And we really don’t see any of our end markets, at this point, [inaudible].

Okay.

And then, Cathy, I think you mentioned that there’s going to be $0.10 of above-the-line charges, I guess, in the first quarter.

Could you go into a little bit more detail about those?

Consistent with what we’ve done in the past, we will continue to do, enter costs early in our year to have a very near term payback.

So we’ve done that in the past, same thing this year going into the first quarter, we’ll be taking about $0.10 for some manufacturing streamlining.

They do have a pretty near-term payback.

Again, I want to emphasize--

I have a question on the revenue base.

Given the divestiture of Presto and Kemmer and the others, for 2006, what’s the base we’re starting from to get to the 7 to 10% organic revenue growth?

The continuing operations, so that would be the $2.3 billion sales.

Okay, so we should start with $2.3 billion and then layer in organic growth from there?

Correct.

Right.

Okay.

Walt, I just want to emphasize that the manufacturing restructuring that we’re talking about is a project that pays back in 12 months.

Okay.

All right.

Thank you.

The next question comes from Eli Lustgarten.

Hi.

Let me just, I got confused at something.

Your $2.3 billion reported included J&L, you’re not doing to intend on that, so your ongoing operations are 207.8, I think it is, something like that?

It’s a continued op.

This is a continued op.

J&L is not a discontinued op.

So the 7% is off the $2.3 billion sales.

You’re saying that you’re going to be up as much as $2.5 billion in sales this year?

Oh, no, I’m sorry, Eli.

I’m sorry.

As an organic basis.

You’re right.

You are absolutely right.

You have to take out J&L, there’s really little on the $2.1 billion base.

Correct.

Okay, I wanted to make sure that’s correct.

And the $0.10 charge in the first quarter is in the $4.20 to $4.40 guidance.

Correct.

So it would be $4.30 to $4.50, if we X that out.

It’s included in our guidance.

Okay.

What’s your tax rate assumption, and what’s your share count assumption? 1.3 million shares in the quarter, because when the share count at the end of the quarter was, or [inaudible] was it tax rated for?

Yes, the tax rate is 33 to 34 for the year, and we bought one three and a quarter, 1.6 million shares in the year, and we’re right now just at 39 million shares.

At 39 million of that.

So is your assumption based on 39 million shares?

Cathy Smith.

Yes.

Our assumption is based on a stable share count.

Is there any reason why you wouldn’t use some of the $234 million that you have in cash, and you’d have another 80 and over $300 million before you put your acquisitions and some wouldn’t go to share buyback?

We have a little bit in our authorization level, we have a couple hundred thousand shares still in our authorization—remember, we had 1.8 authorized from the Board.

But you also have to remember, as I gave you in our guidance, in the first quarter we will be seeing a significant outflow of cash because of the tax payments for the J&L transaction as well as the repatriation of cash.

But our priorities continue to be of, to use the cash for acquisitions.

I understand that, but $300 million in cash is what you’re sitting with, and if you go over the year, that’s after the tax payment, the 234 and the eleven net, positive cash flow of $80 million plus, and if you have 300, the cash flow is not to be used as some, you have to have some sort of cash share repurchase program as part of it.

In reconciling the fourth quarter, I understand the $1.25, but mathematically it doesn’t work if you had $79 million of operating income, unless the tax rate was much lower or the tax benefits to get to $1.25.

It’s $1.20, mathematically.

You’re absolutely right, and I did say that in the call this morning.

You may have missed it.

There’s about a $4.10, 32 was the effective tax rate versus the 34 that we guided.

Yes, but I understand that.

You’re right. $1.25, and then another $0.04 got you down to about $1.21.

And so $1.21 would be the regular number and the $0.04 is because of the lower tax rate?

Correct.

But I ended up with $0.32 in there, I still get as much as 11 to 12 on the side to figure to do it.

Now, you have $40 million of acquisitions that you’ve made so far that’s reported in the advanced material business, I believe, the one that you announced last month.

Approximately in sales is what you’re saying for Sintec?

Yes.

Yes.

Sintec, that’s about what you’re saying.

Are you still expecting the advanced materials to be able to do double digit without the 4%, without the gain from Sintec?

Yes.

Because that’s, on that business, the report of that business would be 6% of sales by itself, but you’re talking about a mid-teens gain reported number for that division?

A little lower than mid-teens.

Without Sintec.

Okay.

And the operating profitability that you have for the year on that business is sustainable and would expect to improve in ’07?

It is absolutely sustainable, and we continue to work to improve that.

Okay, which is exactly where I’m going.

You look at metalworking, the last couple of quarters were almost 16%, the year was 14%.

What do you expect for ’07 in that division?

If your stated number was 14% for the metalworking business, yet the fourth quarter was 15.9, almost 16%.

Right.

So we normally don’t give you that guidance by business segment, but for the overall company, we will maintain continued improved operating margins.

We cumulated the year at 10.9 or so in EBITDA margin, and so our goal was thoroughly passed for our goal of twelve by twelve by ’07.

But, I guess, I’m just trying to figure out, was the fourth quarter that much better than the year, or can we expect, could we quote this for the fourth quarter level as we look at metalwork? [inaudible]

Eli, the second half is always better due to seasonality of the business, as we’ve discussed, so the same thing will be true for this year.

Operating margins, or EBITDA margins, always improve in our fourth quarter.

And you’re expecting a mid-single-digit gain in metalworking?

Is that the best way to describe the core acquisitions?

Yes.

Yes.

Okay.

Thank you.

Thanks, Eli.

[Operator instructions].

The next question comes from Joel Tiss.

Hi guys, how you doing?

Good morning, Joel.

Good morning, Joel.

I’m wondering, just a couple of cleanup things.

What’s, can you give us an idea as to the run rate on the corporate expense after all these divestitures?

Is it going to be different than what you reported in 2006?

You know, for all of the SG&A efforts, you know we have a significant effort underway there, it’s going to be about neutral this next year because of continuing to put effort into and investing into those reductions.

So, as a run rate, so we will still maintain, even with that investing in SG&A and net reduction in this year, we will still maintain our goal, which is not to grow it anymore than [inaudible].

Okay.

Are you allowed to give us the actual tax amount that you paid on the J&L sale?

Oh, yes, it’s been disclosed.

We’ll end up paying $94 to $95 million dollars in taxes there.

Okay, just so I can separate it out to try to get to the right answer on the earnings.

And then, can you just talk a little bit about the pricing outlook for 2007 and some of the trends on the cost side, as well?

Yes, Gary.

We have 1 to 2% growth on our price from price, and as you know from our strategic pricing, we still have some prices that went into effect late in the year.

So they will continue to grow through the fiscal year.

So we’re now going to see the same level of pricing that we saw in ’06, and we feel good about the fact that we’re going to be able to sustain the pricing that we had throughout the FY ’06 that we established.

And you asked another question.

Can you ask me again, Joel?

Yes, just the trends on some of the bigger cost pieces.

We expect raw materials to be stable through potentially being able to come down slightly, but we don’t expect a big change at this point.

Okay.

And last, can you just talk a little bit, Carlos, about the acquisition pipeline and what you’re seeing out there, and any sort of sense?

Are you close on things, or are there some sizable pieces out there, or just a little bit of color on what you’re seeing?

Thank you.

Yes.

Our pipeline is very active.

I feel very good about where we are with our pipeline.

As you know, it’s very difficult to forecast when things will happen, but we have a couple of sizable properties out there, and a number of mixed properties as we’ve been doing all along.

So, I feel very, very good about our acquisition pipeline at this point.

But, as you know, things change in that arena from day to day.

All right.

Thank you very much.

Thank you.

The next question comes from Gary McManus.

This is Gary McManus.

Hello?

Is this for me?

Hi, Gary.

Okay, sorry.

Didn’t know if it was another person.

Getting back to the $0.10 you call manufacturing streamlining, is that separate, when you talked about the full year growth, you talked about ongoing SG&A initiatives.

Are we talking the same thing, or is that separate?

No, that’s included.

We included our SG&A and manufacturing streamlining together.

Yes, it’s hard to separate, but we actually are addressing manufacturing as well as SG&A.

The two things go together.

Okay, so those, when you talk about those two things, they’re basically the same thing.

And $0.10 for the first quarter, what would you expect for the full year?

On balance, it’s going to be neutral in the year, because we’ll have to spend a little money to get the savings.

Okay, so, right, so it’s $0.10 hit in the first quarter, and then a net $0.10 positive for the remaining three quarters.

Yes.

Well, actually, we’ll be slightly neutral or a little bit of a net cost.

Gary McManus.

Okay, okay.

But, because I thought you were talking about one reason why the growth is only going to be up 9% in these ongoing FT&A initiatives, so they’re not really going to have much of a full year impact?

No, the growth are not impacted by the top-line growth.

This is positioning us to have a better cost structure going forward.

Okay.

One thing, I forgot to mention this before, but I think it would be helpful if you could send out the restated quarterly income statement for ’06, because the numbers have changed, right?

Slightly.

Certainly the revenues have, and I think the earnings per share, so I think it would be worthwhile, because what would be the first quarter ’06 comparison?

You say you’re doing $0.60 to $0.70 in the first quarter of ’07.

What’s the comparable ’06 number?

I assume it could change from what was actually reported.

Yes, Gary, good request.

I’ll try to follow up with you guys on that.

We can help with helping pull out the core divestitures.

Okay, but you don’t have the, you don’t have what that number, or the year ago comparison is in the first quarter?

The earnings per share number?

Not off my head right now.

Okay.

Looking at the fourth quarter, you said advanced material had 18% sales growth, 11% operating profit growth.

You talk about high raw material costs, especially tungsten.

If I look at the spot price of tungsten, the average for the fourth quarter of ’05, was pretty much unchanged.

So I don’t know if there’s any kind of delays on your costs, maybe that’s a factor, but normally, when you get 18% revenue for all of this, and you talked about strong in energy up 37%, and Conforma Clad, which I think that’s a pretty high margin, you said 24% growth, normally you would get margin improvement.

So could you talk a little bit more on why we saw margin deterioration in advanced material?

Yes.

It’s exactly what you said, Gary, and it’s just really the timing.

You look at the spot price, and we have a lag.

By the time you see the spot price, sales have cut into our inventories.

But I thought, Carlos, you had put in a pricing mechanism that gets pretty quickly a price increase to offset higher raw material costs.

Because there was a lot of concern, I’m sure you remember a year or two ago, when tungsten spiked up, that you would get a hit with the higher raw material costs, that the pricing was able to offset it pretty quickly.

Yes, we did that.

But we have to do, take different actions in different markets.

Our objective was that overall of the company, that we were going to offset the total costs very quickly.

But within the business, we have to make sure that we did the pricing reasonably, pricing is very substantial, in a way we would not lose market share.

So we purposely designed that in certain areas we went first, and in other areas we took a hit for a while so that we would not lose market share.

So that’s the balance that we have to do because, as you recall, those price increases were substantial.

And would you expect, in the first quarter, would you expect in the advanced material, pricing net raw material costs, is it a positive, a push, or a negative?

It’s a little bit, it’s probably an aggregate, a little bit of a negative or neutral.

And the reason why I say that is, in one of our businesses that has a fairly large tungsten content, came out really bold last year first quarter, so they came out with price ahead of costs.

And so, in the year-over-year comparison, you’re going to see a little bit of that offset.

It will be better relative to the quarter.

And the last question I have is, I’m curious on just accounting treatment.

So many of the small divestitures, you treated them as discontinued, but you didn’t do it for J&L, you didn’t do it for the FSS business.

Why didn’t you treat J&L as a discontinued business, as you did for some of the other divestitures?

Well, the primary reason, we have a continuing, ongoing relationship with them.

So we have a significant involvement in the cash stream and from an accounting perspective mandates that we have to look at it separately.

In the discontinued operations, we’re done with those businesses.

In the case of J&L, we continue to sell them, so we have a significant operation, so we don’t treat it as discontinued operations.

And that’s per the accounting rules.

Okay, great.

That’s helpful.

Thank you.

[Operator instructions].

Our next question comes from [Carlo Noriyan].

I just wanted to double-check my understanding of what the basis for the organic growth estimate that you have for both the first quarter and the year on revenue.

Can you just tell me what the base that this organic growth is supposed to be coming off of for each of those periods?

Yes, and I think we put it out in all of our reconciling statements.

You can pull out for discontinued ops, the two pieces CPG and Electronics to go into discontinued ops, you can see those pieces.

J&L for the whole year, net-net, will be a couple of hundred million dollars from FY ’06 to ’07 down.

If you could see that, and the other, we do have a small UK-based high-speed steel business is very small, $10 to $12 million over the whole year of a net loss.

Okay, so I should be taking kind of what you guys are calling continuing for this year, and I’m taking the J&L out?

Yes, you’ve got it.

Okay, and I would just reiterate, I think it’s very helpful to investors if there kind of was a filing and 8K that kind of restated all of the quarters or ’06 that would help us estimate how to compare when you guys started reporting this year.

Yes, that’s a good request.

We’ll look at it and see what we can do there.

Thank you.

The next question comes from [Glen Timec].

Again, from the last couple of comments, if you can put an 8K out there, just put some on the Website, just the core businesses, so we can compare apples to apples, that would be helpful.

Going back to Eli’s questions as to the revenue by group, if I kind of mull through that exercise, I’m closer to the high end than the low end.

What needs to happen, I guess, for that to be more like five to seven versus seven to ten?

Well, our range is seven to ten, so by, for any lack of anything else, you guys could take a mid-range, I would expect.

But our range is seven to ten.

But it’s hard to get to that seven if AMSG is growing like it is, and you’d have to have MSSG really not do much of anything.

Yes, and again, the range is appropriate for a full year because of the full economic impact.

We have assumptions based on North America’s performance, we have assumptions based on Europe and the rest of the world, and if all of those pan out, we’ll do very, very well at three times industrial production, we’ll be at the high end.

And if we do two times industrial production, we wouldn’t be.

So—

Okay.

Of course, we want to get close to the top.

All right.

We’re going to work really hard all year to do that, to do so.

It’s just the comparisons out there would be helpful, because it seemed like the numbers are pretty good, but you’ve got to go through all the other stuff.

Yes, the numbers are very good, but we will do that, Glen.

Okay, thanks.

Thank you, Glen.

[Operator instructions].

And at this time there are no further questions.

I would like to now turn the conference call back over to the CEO for closing remarks.

Thank you.

Thank you for participating in our call today.

As you can see, we had a great 2006.

We met all our expectations while we positioned ourselves to have a great foundation to continue to grow this business at 7 to 10%.

I want to remind you that in spite of the fact that we grew 11% in ’04, 17% in ’05, and 9% in ’06, we again continue in our stated strategy of growing 7 to 10%.

And most importantly, when we look at in the equal basis, our earnings per share will go up 25% year over year after the divestiture of J&L.

I also want to remind everyone that our financial plan, and therefore our guidance, does not reflect any acquisitions that we’ll make during the fiscal year, because those things are very difficult to forecast.

So we feel very good about not only ’06, we feel very good about and excited about our plans for ’07.

And thank you again.

This will conclude our discussion, and please contact me, Quynh McGuire, at 724-539-6559 if you have any follow-up questions.

Thank you.

Thank you for participating in today’s Kennametal fourth quarter and full year 2006 conference call. [Operator instructions].

This concludes today’s conference call.

You may now disconnect.