Kennametal Inc (KMT) 2007 Q1 法說會逐字稿

Good morning.

My name is Latisha and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Kennametal first quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you.

Ms. McGuire, you may begin your conference.

Thank you, Operator.

Welcome, everyone, and thank you for joining us this morning to review Kennametal's first quarter fiscal 2007 results and our outlook for the remainder of the fiscal year.

We issued our quarterly earnings press release this morning.

You may access this announcement via our Web site at www.kennametal.com.

Consistent with our practice in prior quarterly teleconferences, we have invited members of the media to listen to this call.

Also, it is being broadcast live on our website and will be archived for ten business days for your convenience.

I am Quynh McGuire, Director of Investor Relations for Kennametal.

Joining me for our call today are President and Chief Executive Officer Carlos Cardoso, Vice President Finance and Corporate Controller and interim Chief Financial Officer Frank Simpkins, and Vice President and Treasurer Larry Lanza.

Carlos and Frank will provide details on the first quarter's operating and financial performance as well as our outlook for the remainder of the fiscal year.

After their remarks, we'll welcome your questions.

At this time I would like to direct your attention to our forward-looking disclosure statement.

The discussions we will have today contain comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

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

Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission.

In addition, Kennametal's provided the SEC with a Form 8-K, a copy of which is currently available on our Web site.

This enables us to discuss non-GAAP financial measures, during the call, in accordance with SEC regulation Growth, the 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures and provides a reconciliation of those measures as well.

I'll now turn the call over to Carlos.

Thank you, Quynh, and good morning.

First I would like to warmly welcome Frank Simpkins, our interim CFO.

As we announced in mid September, former CFO Cathy Smith has left Kennametal to join a US-based Fortune 500 Company in Dallas.

Internal talent development is essential to the Kennametal business system and we consider Frank to be a strong candidate for this position.

We are currently evaluating potential candidates and you can be assured that we will select the most qualified person available.

We expect that the transition will be smooth and seamless.

Just a few months ago, we conducted one of the best [technical difficulty] in our company's history, from operational and financial perspectives.

Our momentum continued into the first quarter.

By confirming our proven strategy, we are delivering our commitments and steadily moving toward our goals.

Both earnings per share and return on the invested capital all showed continued improvement, as we expected.

In addition, we continue to generate cash flow.

We are consistently lowering our cost structure in a steady and disciplined way.

Operating expenses, or SG&A, reflect a trend of continued cost reduction on a year-over-year basis as well as sequentially.

Those achievements have resulted in the 12th consecutive quarter of year-over-year earnings growth, an excellent track record by any measure.

Our success is due to our ability to focus on, implement and execute our [technical difficulty] strategy.

Among other things, this strategy calls for us to drive continuous performance in our core Metal Working and Advanced Materials business.

At the same time we are transforming Kennametal into an enterprise that is well diversified in overall business mix, global footprint and customer base.

We expect to achieve a balance that will help sustain our long-term growth by lowering our dependence on a single business sector, geography or customer, reducing the impact of economic cycle on our business, enabling us to tap into new opportunities in rapidly growing economies and serving the needs of our global, expanding customers.

As we drive performance in our core business, one of our long-term goals is to generate that performance equally from MSSG and AMSG.

MSSG, our Metal Working business, continues to report solid results.

As we leverage our leadership position in this arena, we also seek to capitalize on opportunities in AMSG, our Advanced Materials business.

As we diversify our business mix, we are also diversifying geographically, with the goal to one day generate total annual sales in equal thirds in North America, Western Europe and developing economies.

Finally, we are expanding our customer base, increasing our market share in sectors where we perceive the greatest opportunity for growth.

Those actions will enable us to realize higher margins and lessen our exposure to changing economic times.

Over the last several years, we have made significant progress toward achieving our objectives, with a fluid transition into a more balanced organization with a solid foundation for future growth.

This progress continued the first quarter of fiscal 2007 with virtually every move oriented toward implementing our strategy and advancing our progress.

During the quarter we continued to shape our portfolio by completing the sale of our Consumer Products Group.

We grew our market position in established economies through an ownership position that was previously increased for affiliates in Spain and Italy.

We complemented our expertise in non-metal cutting ceramics by adding Sintec, our Advanced Materials business, which will enable us to penetrate the adjacent technological and geographical markets and will leverage our global infrastructure.

We completed our acquisition of Camco, which enhances our product offerings in our AMSG portfolio for the forestry industry.

We assessed new opportunities in newly]developing economies.

For example, we opened our new facility, manufacturing facility in Tianjin, China, which reflects our commitment to geographically balance our business, serve global and major China customers and build on our growing platform in Asia-Pacific.

The grand opening event enjoyed strong attendance from our customers worldwide, as well as local government officials.

I am pleased to report that the Tianjin facility is right on track in terms of meeting production targets.

We also participated in the biannual International Manufacturing Technology Show, otherwise known as IMTS, in Chicago, where we featured complete solutions that included finishing technology from [Extone].

Customer feedback from this event reinforced our expectations for continued growth in North American markets.

We continued to build the relationships with our distributors.

MSC Industrial Supply, one of our key North America distributors, also participated in IMTS and our branded products were featured in MSC's most recent catalog issue in September.

We expanded the reach of our brands through worldwide distribution networks.

We celebrated the 80th year anniversary of our Widia brand in Essen, Germany, which provided an excellent opportunity to reinforce our channel strategy with numerous key distributors in Europe.

Finally, we fortified our management expertise and expanded our IT capabilities through the addition of an important new team member, Raj Datt, our new Vice President and Chief Information Technology Officer.

Briefly review the quarter, Kennametal's business units performed according to plan, with ongoing growth in North America, a modest recovery in Europe and accelerating expansion in the developing Middle East.

Looking ahead we see that business conditions are moderate in certain sectors.

However, we continue to experience year-over-year growth.

This is because Kennametal helps customers to increase productivity and maintain their competitive edge.

We deliver on this commitment through working closely with our customers across the globe, a key aspect of our value proposition.

We are proud of our operating and financial achievements during the first quarter of 2007.

We are making progress on many fronts.

Sales continued to show solid organic growth.

We continued to focus on reduced operating expenses.

In addition, we are making appropriate structural changes and process improvements.

I often say that at Kennametal we have multiple levers to achieve our goals.

A good example is an investment we made last year to implement our Pan-European business model and related [technical difficulty] structure.

It is now paying off, as Kennametal benefits from being even more competitive in an improving market environment.

Using our resources effectively, we can provide sustainable year-over-year earnings growth and continued strong cash flow generation.

What's more, we are on track to achieve our goal of 12% EBIT margin and 11 to 12% return on invested capital by the end of this fiscal year.

As we move forward we will continue to execute our strategy and make progress in Kennametal's transformation.

We are confident that we can achieve our goals.

Our Board of Directors shares that confidence, as evidenced by the recent approval of a 3.3 million share repurchase program.

The Board also declared a quarterly dividend of $0.20 per share, which represents an increase of 11% or $0.02 per share.

Those actions along with our growth initiative and our relentless focus on cost control clearly demonstrate a strong commitment to driving long-term value for Kennametal shareholders.

At this time, I'll turn the discussion over to Frank.

Frank?

Thank you Carlos, good morning everyone.

I'll provide comments on our performance for the September quarter and then I'll move on to the outlook for the remainder of fiscal 2007.

As Carlos mentioned, our first quarter came in as we expected.

Going forward, my comments will exclude the impact of the special items in the September quarter, which relate solely to divestiture activity.

Additionally, there were no special items in the prior year quarter and please refer to the reconciliation schedules provided in our earnings announcement and related 8-K.

Turning to the quarter, our reported diluted earnings per share for the first quarter of fiscal 2007 were $0.78.

This represents a record quarter for the September quarter.

Our adjusted EPS was $0.82 and this represents a 14% increase over last year.

My discussion, now, will focus on the results of the continuing operations of the company, excluding the special items, so now let me walk you through the key items on the income statement.

For the September quarter, our sales came in $543 million, basically comparable to the same quarter last year.

Our sales grew 6% on an organic basis, offset by the net impact of acquisitions, investitures and primarily the divestiture of J&L.

J&L site sales were $65 million in the September quarter a year ago.

The organic sales growth rate of 6% is consistent with our prior guidance and represents the 35th consecutive month of growth.

Our gross profit margin in the quarter was 34.5% compared with 36.2% in the prior year.

The decline in the gross margin was primarily attributable to higher raw material costs in the current quarter.

As discussed in last year's September quarter, the prior year gross margin benefited from higher than expected price realization and lower than planned raw material costs.

The prior year quarter reflects pricing increases occurring in advance of the full effect of raw material costs in our results.

This benefit was primarily driven by inventory on hand at lower than market costs.

Going forward, the year-over-year major raw material cost is expected to be more comparable as long as market conditions are relatively stable.

This will provide Kennametal with the opportunity for margin improvement in future quarters.

In addition, in the current quarter, we also have some minor effects from the Kennametal plant start up, as Carlos previously mentioned, and minor effects from recent acquisitions.

Our operating expense decreased 7%, or 10 million, to 135 million, due primarily to the net effect of acquisitions and divestitures, lower professional fees partly offset by unfavorable foreign currency exchange rate fluctuations.

Operating expenses as a percent of sales are down 170 basis points at 24.9% in the current quarter from 26.6 in the prior year quarter.

The September quarter also represents the [technical difficulty] consecutive quarter of year-over-year improvement.

Our amortization interest increased from 600,000 in the quarter to 1.9 million, and that's due primarily to the acquisitions we recently completed.

Our [technical difficulty] EBIT was 52 million, flat compared to the prior year quarter.

The corresponding EBIT margin of 9.7 was slightly better than the prior year margin and, as I pointed out, the shortfall in operating income of 7 million from the J&L divestiture was more than offset by changes in other income.

Other income, net, increased 2 million from the prior year as a result of lower accounts receivable securitization fees and higher interest income.

We also benefited from lower minority interest for the quarter as a result of ownership increases made in the last quarter.

These initiatives reflect our effective use of cash and are consistent with our previously communicated strategies.

Interest expense came in at 7 million.

That's down 5% from last year's quarter.

Interest rate on our domestic borrowings of 7% were up from 5.2 last year and our average domestic borrowings were lowered by 191 million.

As reported, the effective tax rate for the quarter was approximately 32% compared to 35 in the prior year, in addition to the strong fundamental drivers of our business strategy that benefited from the implementation of a Pan-European business role that resulted in a 300 basis point reduction in our effective tax rate.

Lastly, income from discontinued operations reflects the results of MSSG's Consumer Products-related business including saws and the Advanced Materials Solution Group electronics business.

I'm also pleased to note that our adjusted return on invested capital grew 160 basis points to 11.5, from 9.9 in the prior year.

Our balance sheet and cash flows continued to be strong, as Carlos mentioned.

Our primary working capital was a little over 600 million, an increase of 12 million from 597 at June 30.

This increase is attributable to lower accounts receivable, lower payables, offset by slightly higher inventory.

And in terms of cash flow, our cash flow from operations in the current quarter was an outflow of 19 million, compared with an inflow of 21 in the prior year.

Income tax payments were 86 million for the current September quarter, and that's primarily due to the gain on the sale of J&L and cash flow we [recreated] last year on the American Jobs Creation Act, and that compares with a refund of [technical difficulty] in the prior year quarter.

Our adjusted free operating cash flow for September, excluding the effects of income tax payments and refunds, was $[49] million, versus 6 million in the prior year quarter, a very strong cash generation.

Also during the quarter, we invested $74 million for two acquisitions in AMSG, Sintec and Camco, and received proceeds of $20 million from the MSSG divestiture of CPG.

And capital spending during the quarter was 23 million compared to 15 in the prior year quarter.

Also, during the quarter, we repurchased approximately 179,000 shares of our stock at a total cost of approximately $9 million.

And as Carlos mentioned today, the Board of Directors authorized an additional repurchase program of up to 3.3 million shares of our outstanding common stock.

These purchases will be, from time to time, on the open market or in private transactions, with consideration given to the market price of the stock, the nature of other investment opportunities, catalysts from operations and general economic conditions.

Kennametal declared a quarterly dividend of $0.21, which is up 11% or $0.02 per share.

Turning to the business units, and my comparisons of sales will be in constant currency and adjusted for the impact of acquisitions and divestitures.

Looking at MSSG, MSSG continues to deliver top-line growth led by year-over-year growth in the aerospace, distribution and energy markets.

The North American market remains stable, Europe has begun to show a modest recovery and Asia-Pac/India delivered strong double-digit growth.

In the September quarter MSSG sales were up 3% on an organic basis.

North American sales were up 1.

Asia-Pac and India grew 12 and 15 respectively.

And Europe sales increased 2%.

MSSG operating income was unchanged at 46 million and the operating margin of [30%] was lower than the same period last year, and that's due primarily to higher realized raw material costs in the current quarter, partly offset by ongoing cost containment, price realization, with particular emphasis in Europe and Asia.

AMSG delivered significant top-line growth in the September quarter, driven by favorable market conditions and the effect of acquisitions.

Strong growth in energy and mining markets continue to contribute to AMSG's results.

AMSG sales were up 11% on an organic basis, energies were strong at 35%.

Mining and construction were up 8 with strength coming out of the mining side and a little bit of softness on construction, and engineered products were up 2%.

AMSG operating income grew 15% over last year while the operating margin of 15% was lower, also primarily due to the higher raw material costs realized in the current quarter and a slightly less favorable business mix.

Turning to the outlook, worldwide market conditions [defer] expectations of continued top-line growth during the balance of the fiscal year.

Based on global economic indicators we believe that North America will remain stable.

We also believe that the market will improve and grow modestly in Europe and will continue to be strong in developing economies.

While there remain some uncertainty risks related to macroeconomic environment, fundamental drivers for global [technical difficulty] to be stable.

We expect Kennametal's organic revenue growth will remain in the 7 to 10% for the fiscal year, which would extend our track record of outpacing worldwide industrial production rates by 2 to 3 times.

We anticipate the majority of our in-markets to continue operating at favorable levels throughout the year with moderating growth rates for some sectors.

For the second quarter of Fiscal 2007, ongoing expansion around the globe [fits] our projection of 6 to 9% organic sales growth, on top of strong performance in the prior year quarter.

We have increased our reported earnings per share guidance for the year to 430 to 450, due to the sustainable benefits associated with our Pan-European business model strategy, which will drive a better than originally forecasted tax rate for fiscal 2007, despite some dilution from recent acquisitions of non-core businesses.

We believe this revised earnings outlook reflects our confidence in our ability to maintain the strength of our performance.

The forecasted range includes costs related to ongoing operating expense initiatives that will result in increased long-term profitability.

And on a comparable basis, the fiscal 2007 guidance midpoint represents a 29% growth rate, a substantial increase over the prior year adjusted EPS from continuing operations of 341.

We expect the second quarter of fiscal 2007 earnings per share to be $0.70 to $0.75 per share.

As previously announced, the second quarter of 2007 guidance includes $0.10 related to manufacturing streamline initiatives initiated last quarter, of which we expect the charges to occur in this quarter.

And we also anticipate that this will have a payback within the fiscal year.

We expect to achieve our goal of 12% EBIT margin and return on invested capital is on track for the projected 11 to 12% range for the full year.

We will maintain a strong focus on our balance sheet [technical difficulty].

We anticipate a reported cash flow from operations of approximately $190 million to $200 million for fiscal 2007.

Included in this amount are the income tax payments of $86 million.

Adjusted cash from operations is expected to be approximately $275 to $280 million.

Based on anticipated capital expenditures of $90 million, we expect to generate between $185 million to [$190] million of adjusted free operating cash flow for fiscal 2007.

At this time I'd like to turn it back to Carlos for closing comments.

Thank you, Frank.

Kennametal is coming off a strong performance in fiscal year 2006, with significant accomplishments on a number of fronts.

Our basically strong continued performance in the first quarter of Fiscal 2007, supports confidence for the remaining year, as well as for the future.

As mentioned earlier, we are on track to achieve our goal of 12% EBIT margin and 11 to 12% on invested capital by the end of this fiscal year.

We are looking forward to continuing on the path to reach the next milestone of 15% EBIT margin and 15% return on invested capital by fiscal year 2009.

We expect to achieve this steady progress in two ways.

First, we'll continue to drive organic growth in our core business as we gain additional market share.

Second, we will drive external growth through carefully planned strategic acquisitions, primarily in the advancement segment.

We will continue to seek acquisition candidates that offer a good strategic fit and the pipeline is active and strong.

With strong cash flow generation, we have the necessary financial flexibility to continually enhance our portfolio.

We will also maintain a disciplined approach to evaluating the priority of use of cash in order to further build shareholder value.

In addition, a fully approved 3.3 million share repurchase program will help us fulfill that goal.

While there are some challenges ahead, particularly in terms of macroeconomic issues, we are well positioned to continue executing our growth plan.

We have a strong foundation as a manufacturer with multiple markets to market and a strong emerging profile in Advanced Materials business.

We expect to build on this foundation by implementing our [technical difficulty] strategy and working to transform our enterprise to an even more balanced, diversified organization in the future.

At this time we'll be happy to take your questions.

[OPERATOR INSTRUCTIONS] The first question comes from Joel Tiss with Lehman Brothers.

How are you guys doing?

Hi, Joel.

I wonder if you can just sort of-- you know, I guess you gave us a sense of what you're thinking about the share repurchase.

But I just wondered if you can drill down into the timing or at least maybe you can give us a sense of how things are looking over the next 12 to 18 months in terms of balancing acquisitions and share repurchase-- you know what's on the plate or how did it look in terms of volume?

So as we said, we have the flexibility and are going to take an opportunity, based on the market condition.

And the 3.3 million share repurchase really would not, and will not interfere with our ability to do acquisitions.

Even if we were to do all 3.3 million in one year, we would still have the capacity to continue in our strategy of acquisitions.

So I remind you that Kennametal was an active purchaser of its stock in FY '06 and early FY '07.

You know, $9 million of shares purchased in ['07].

So we'll continue again to be prudent on our view of that acquisition.

Okay.

And actually, can you help as a little bit, just to drill down into some of the end markets, even if you give us the highlights with some numbers attached to some of the strong segments and some of the weaker segments -- you know, how much growth came out of say mining and construction and what happened with automotive and some of the other more significant markets?

Thank you.

Yes.

Clearly-- let me start with the automotive, in North America the automotive was-- of course as we look at, was slightly down for us.

However, as we look at the total global vehicle market, we actually had some areas where we grew double-digits.

For instance, in Latin America, we grew double-digits in the automotive market, which is consistent with the message that we've been giving everyone is that we have diversified considerably and we are in the low double-digits as the total sales to the automotive market.

However, a very small percentage of that goes into the Big Three, as we [technical difficulty].

The strong markets-- globally again, aerospace continues to be strong, 5%, and we have had markets like mining 20% growth.

So we have a spectrum slightly down in the automotive to very, very good growth in the mining sector of 20%.

Okay, thanks very much.

Next question, please?

Operator?

Your next question comes from Walt Liptak with Barrington.

Hi.

Thanks and good morning.

Hi, Walt.

How are you doing, Walt?

Good morning.

Good, thank you.

Frank, maybe I missed this, but the tax rate for the full year, what number should we be using?

I think it'll be lower by 100 basis points.

We provided originally 33 to 34.

We think we should be in the 32 to 33 range at this point.

Okay.

And I want to make sure I understand.

The EPS guidance increase for 2007-- is that primarily from the changed tax rate?

And I guess what I'm trying to get to is the transformation of Europe, the structure that you use, I know you moved the headquarters but is that all related to the tax rate improving, or are there operational efficiencies that have been going there?

I mean, are margins improving in Europe basically?

Yes.

So let me answer the multiple questions that you asked.

The increase for the yearly guidance of $0.10 is directly correlated to our tax rate improvements.

But again I continue to emphasize that that tax rate improvement is directly correlated to our structural changes in Europe.

So this is a sustainable rate, it's not a one-time we got lucky rate, and it's a direct result of that.

The margins in Europe will also improve, but as you realize, those were already contemplated in our plan.

And even our tax rate plan for this year included some of those benefits.

However, we are realizing higher benefits than we planned from the tax rate.

But we are having both a tax rate and a margin improvement as a result of the structural change in rate.

Yes.

So while we're getting the operational efficiencies we had planned from both [technical difficulty] services function, the manufacturing structure we put in, which is also benefiting us, both from an operational perspective as well as a side benefit here of the sustainable tax benefit for the fiscal year.

And again, I remind everyone, this was our challenge in the first quarter a year ago that we have to account for these charges that we said we'll pay within 12 months, so here we are.

They're paying.

Okay.

The growth rate, what's your assumption for growth?

It was up 2% in the quarter, are you expecting to keep accelerating through year?

Yes.

Yes.

Can you give us a number?

Or are we in the 7 to 10% range?

I think, on an organic basis you're right, you'll have the organic range that we provided in the second quarter and for the rest of the year.

Okay.

And I have just one more question, your second half is going to be back-half loaded, maybe more so than in normal years.

And I guess the question I have is, in North America you've got some issues with automotive, maybe, being slow, especially with the diesel engine off road equipment maybe being lower.

How exactly are you going to offset?

I understand that energy and advanced materials are going to be strong, but does North America grow in that 7 to 10% range?

Yes, I think the way that the back end loaded, I don't know if that's out of line.

You know when we were in New York we talked about the 65/35.

I think we'll be much in line with that with our guidance in the first half.

Obviously we're a little bit cautious towards the second half, but some of the actions that we've taken in the first part of the fiscal year-- we talked about the manufacturing rationalization that will have to happen in this quarter, but we will get those benefits in the second half of the fiscal year.

As Carlos said, the markets that we're looking at both energy, distribution, aerospace and within the general engineering continues to be strong, we call them the mini-verticals, and that's a combination of medical, railroad, some machining, so they'll also provide continuous as we go forward.

And then what we're also trying to do is make sure that we leverage both AMSG and MSSG from an enterprise-selling approach so if AMSG has a strong [metal working] customer, we want to make sure that we're bringing the MSSG team in there to deeper penetrate on the metal working side, given the closeness to the application.

So I think that'll also be a catalyst as we go into the second half.

And the penetrating is market share gains, obviously.

Well the other element is our distribution, we as you know MSC has just started to sell off trucks this quarter, so they've begun this quarter so we anticipate a very good growth rate with MSC.

We also introduced this quarter the Widia distribution in North America that will start to take hold as the year goes on.

So, we do have a number of initiatives.

And, as Frank said, we do have this -- in addition to the seasonality that we experience every year, we do have actions that were put in place at the end of last year and this quarter that gives a confidence again of our 7 to 10% and have North America perform at a reasonable 2 to 3 times the industrial growth.

Okay, thanks.

If I have any more questions, I'll get back in.

Thank you.

Your next question comes from Steve Barger with KeyBanc Capital Markets.

Good morning.

Good morning.

Good morning.

How are you doing?

I'm good.

I just wanted to talk about the gross margin pressure a little bit.

Can you, maybe, tell us where that came from and when you should be able to offset some of that, whether it's by pricing or [efficiency]?

Are you referring to the first quarter gross margin?

Yes.

Okay, let me just start back last year, I think the corporation did an outstanding job in basically two aspects and it relates to the raw material costs.

Last year in the fourth quarter we had the unprecedented rise of the raw material costs.

But that's caused us to go out and obviously get a lot more pricing.

If you think about the accelerated price that we had to achieve, we did, actually, a little bit better than we had anticipated, we thought that we'd get 70 to 90% of that price in the first of last year, we got towards the higher end of that at 90%.

That, coupled with the cost being postponed or delayed to the quarter, we actually ended up with lower raw material costs, given the timing of the increase of the raw materials.

So the first quarter of last year was an extremely favorable quarter, given everything breaking the right way for us.

So when you take that out of the equation, the raw material situation is somewhat stable.

We continue to realize price.

We have some actions that we're going to be doing through the second half, both from the European and Asia-Pacific's point that should give us a better catalyst.

And then as the new products continue to come in, that should also help us sustain margins going forward.

So the first quarter is somewhat of a tough comparison on a year-over-year basis.

And you probably know that in the second quarter last year, where it came back down given the actions that we did.

Given all the actions I mentioned, I think the margin is sustainable as we go forward.

Yes the other way to look at it, this is strictly a timing thing.

Last year in the first quarter we realized higher price and the cost actually hit us later than we anticipated.

And as you all recall, we had to preannounce because our quarter was essentially better, quarterly results, because of the timing issue.

But if you want to look at it from a year perspective, our raw material costs have stayed pretty much flat and our price increases we gained last year and the additional price that we are getting this year will basically get our margins up to our plan or our guidance for the year.

So we don't have to really do any additional actions at this point to achieve our margin that supports our current guidance.

It's a timing issue.

And we'll also see some of the benefits, as Carlos said earlier, from the actions that we took last year with some of the plant closings as well as getting the acquisitions up and running once you get behind the purchase accounting adjustments.

So we expect that to continue in the second quarter and the second half.

Okay, thanks.

And so as I think about segment operating margins going forward, as you go, even through your goal in 2009, of 15% total operating margin, how do you see the segment operating margin on a percentage basis in a sustainable way?

Could you clarify a little bit for me?

Yes, I guess what I'm looking for is what's the right to think about a run rate operating margin for AMSG, as you take SG&A out of the system, as your gross margin gets to a sustainable place?

I mean, is it high teens?

Is it low 20%?

Where will AMSG margin, kind of, end up?

Well, I think this is, from a seasonality standpoint, a low point, both from a construction, but we'll see the energy continue to go strong.

Mining is still in a very [volatile] situation.

We'll expect, in the second half, maybe a little bit of benefit on the construction side.

But given the volume of absorption that will continue to add; pricing we'll continue to watch, and overall, I would say that they're the primary drivers.

But can you say where you kind of see that playing out on a percentage basis?

Yes, we're getting into too much competitive information.

I think we'll start seeing some additional increases going forward.

Okay, and one final question.

Capacity utilization across the system-- about where are you running?

And is there an update on the union manufacturing facility?

Yes, I think we're still a little bit over the 80% on a global basis and obviously that doesn't apply to the China plant, but that's just starting up.

But Europe's going stronger and North America is still at pretty decent levels.

Okay, thanks.

Thank you.

Your next question comes from Colin Grant with Dresdner.

Yes, good morning.

It's Colin Grant from Dresdner in London.

Good morning, Colin.

Yes good morning.

I've just got a question on your top line.

I just want to try and flesh out the guide that you're giving a little bit further if possible.

The first quarter you've reported 6% on an organic top-line growth, which I think was the bottom end of the range regarding the end of the last fourth quarter.

And the growth rate seems to be slowing, based on what you've reported in your previous quarters, I think it was 8% in the fourth quarter and 12 in the third quarter, and your latest September order data would suggest things are continuing to slow down.

So can you just flesh out as to why it is you think, on a full year basis, you're going to be able to 7 to 10%, which would imply essentially a reacceleration in top-line growth rate?

Yes, just in the first quarter-- let me start there and then I'll talk about the comps.

As you point out, 6% on an organic basis and what we really saw was a slower July than we had anticipated.

We had a very good August, we had a very good month of September and that trend appears to be continuing here in October.

Now remember, the comps that we had in the periods that we're talking here, we had very strong year-over-year growth for the past two years.

Now, they're continuing to be tougher as we go forward, but overall we just started off a little bit slow in the first quarter and that continues to accelerate pretty much where we think.

The 6 to 9%, we're actually getting strong growth in the emerging markets, as we have said.

We expect Europe to accelerate from its low level right now.

And as we said earlier, we don't expect much in the second quarter in North America, given the automotive issues.

And Frank is talking to the market.

And as I said earlier, we launched two major distribution strategies in the US, one with MSC, which is the largest distributor in North America, and number two is the Widia brand introduction into the US.

We also have launched a number of initiatives in Europe, particularly for the Widia brand for distribution, and as always we have a number of new products, as we did last year.

We had about 46% of our growth come from new products, we anticipate too stay above 40% for this year.

And again those are things that are hitting the market now that we anticipate are going to give us growth in the second half of the year.

Okay.

Can I just counter then?

You mentioned that September was a strengthening period for the quarter, just in terms of the monthly order data that you publish on your website, basically suggesting that your order growth rates at least-- which may differ from your revenues-- but your order growth rates were up I think 6% for the three months to the end of September, which was the slowest rate for three individual months within the first quarter.

So in the case that your orders are slowing, which your data that you publish on the website would suggest, but you're saying that your revenues are actually accelerating?

Yes.

Again, as Frank said, what we publish on the site is a rolling three months.

But we did have an unusually slow July and we've had a strong two months, actually, in a row, not only September but August as well.

In terms of your revenues, yes?

No, in terms of our books.

Okay, but I just want to clarify this.

In terms of your website, your three-month order growth rate in July was up 9% year-on-year and then in August is was up 8% and then in September it was up 6%.

So your growth rates that you publish in terms of your orders for the rolling three-month period has been slowing progressively through the first quarter.

Well, again, as Carlos said, it's a three-month rolling average, so you get the full quarter effect in the first quarter.

And we started off a little bit slow in July, with seasonality, you know given some of the plant shutdowns that have since come back, we've been a little bit stronger in August and in September.

Let me put it this way.

If you were to take the bookings of July out, then our August and September bookings are in line with our 7 to 10%, and supports our 7 to 10% guidance for the year.

Okay, thanks very much.

Okay?

Just in a-- sort of, a different way to put it.

Your next question comes from Eli Lustgarten with Longbow Securities.

Good morning.

Good morning, Eli, how are you?

Fine.

A couple of tech questions: in the guidance what's the share count that's being assumed?

You were 39, should we just assume 39 million for the rest of the year?

Yes you should assume flat.

Okay.

Now, in the first quarter we had $0.02 from discontinued operations, which was a remnant of the consumer stuff that goes away after this quarter?

There's nothing left for the rest of the year?

Yes, Eli, to your point we said that we were going to have this wrapped up in September so that $0.02 goes away going forward.

The only thing that will be left from discontinued operations will be the effects from the Electronics business and that's not a major [technical difficulty].

So we can forget about the $0.02 from now on.

Interest charges begin to go down for the rest of the year from the first quarter, or stay flat in the second quarter and then go down?

Is that how it works?

This is Larry Lanza.

I think our answer is the rate will stay about [technical difficulty] paid off all of the debt and what we're left with is our notes that, as you know, are 7.2%.

So would you basically say that the core interest charges stay flat for the rest of the year?

Yes.

What's going on pricing wise in the various businesses?

Pricing, as we spoke earlier, most of our price increases came in the previous year, in our fiscal year 2006, so in the areas where we went first earlier on, we are now fully at a run rate that is going to stay.

Now, we have had price increases throughout the year, so we did have some price increases in Q4 and Q3, and those price increases will continue to-- don't reach the run rate until, obviously, the fourth quarter of this year.

So we'll continue to have some moderate benefits from price increases that we have implemented.

We don't have any major price increases planned for this year.

Do you have a feel for what the pricing benefit for this year would look like by [technical difficulty], or how much of the gain you would expect from pricing?

Is it a couple of percent in each one?

About 1%, roughly.

Across-the-board or a little bit less in MSSG and a little bit more in AMSG?

It's about the same, Eli.

About the same?

Yes.

And the second improvement that we're going to be getting for the rest of the year, as we look through it, should be coming pretty balanced in both sectors?

Or are we going to see a little bit more in this material because of the favorable product mix and a little less in the MSSG because of slowness in North America?

Eli, I would say it is about the same because they both use the same raw materials.

And although, against the material content-- the material content is heavier-- but I mean, the timing issues are exactly the same.

Yes.

And then one clarification, I mean a 1% tax rate is worth about $0.07, so the $0.10 is the tax rate plus a little bit better performance in the operations, is that the way to look at it?

Pretty much.

Okay, thank you very much.

Thank you, Eli.

[OPERATOR INSTRUCTIONS] Your next question comes from Mark Koznarek with Cleveland Research.

Hi guys, this is [Joe Calvello] in for Mark.

I'm just wondering if you could dig a little bit more into the North American auto impact in the quarter and also, kind of, what you see coming down the way for the fourth quarter?

Hi Joe.

We don't see a change in the Big Three.

I want to continue to remind people, for the rest of our year, I want to remind people that we don't have any one customer that represents more than 3% of our sales.

So it really is really not a big concern for us.

If anything, they have, I think, the lowest volume at this point.

But there's not a lot of new packages going into place and what we're trying to do is substitute, if we can't get turning business, we try to go to crank shaft machining or milling products.

So we try to go into this deeper penetration with our product portfolio packages aren't there.

And as Carlos said, we're looking at automotive both on a global perspective and both the India and Latin America parts are doing extremely well.

And it's a different type of automotive because we obviously have tool oiler business that we sell that we classify into the automotive.

So again, when you think about capital investment, different products, we're not seeing much difference.

So about the same as in the third quarter here?

Yes.

All right, great.

And I think everything else has been answered, so thank you very much.

Thank you.

Your next question comes from Andrew Casey with Wachovia Securities Markets.

Good morning.

Good morning.

How are you?

I'm doing fine.

How are you doing?

Good.

Good.

Good.

Just a clarification.

I mean, most of the questions have been answered.

I'm trying to understand the go-forward working capital impact on cash flow.

And it looks like your days receivable have increased substantially on a year-over-year basis in the last couple quarters, meaning Q4 '06 and Q1 '07.

Is that a result of your M&A or geography mix or something else?

I would say its two fold.

It's predominantly the retainment of the accounts receivable securitization program that we had last year.

And then you know we had a little bit stronger growth in the international markets.

And the international markets typically have longer terms as opposed to the less.

What Frank means is the number one driver is the change in the securitizations program that we discontinued.

Okay, great.

Thank you very much.

Your next question is a follow-up from Walt Liptak with Barrington.

Hi, thanks.

How are you doing, Walt, again?

Good.

The China start-up costs-- I wonder if can quantify those for us?

They're insignificant, I would say it's 10 to 20 basis points at max that we experienced, and then some promotional stuff that we had.

And that will continue to run out as we go forward.

And what's the annual run rate for that operation?

Have you provided that at all?

No, we have not.

Okay.

And then another question, I know, in the second quarter. the restructuring costs will be about a dime.

I wonder if you could tell us what you expect for the third and fourth quarter?

We don't anticipate doing it in the third or fourth quarter.

I mean this again was started in the first quarter, so we started, basically, at the beginning of the quarter.

And we had anticipated that the charges would come in the first quarter, and when we realized the charges were going to come in the second quarter then we made the change when we presented, and you can just move the charges from the first quarter to the second quarter.

But the benefits are again the payback is one year and we don't anticipate any other charges at this point.

Okay. then as we, in New York, talked about continued restructuring-- so I guess this is the restructuring for the year; next year we'll have some kind of a similar restructuring and then kind of continuing that out for the next couple years?

Yes.

We already have in our guidance contemplated some SG&A sort of projects restructuring, but it is within guidance.

Okay, thanks.

And at this time there are no further questions.

Yes, we're concluding the call.

And if you have future follow-up questions, please contact me at (724) 539-6559.

And Operator, you can go ahead with replay information.

Thank you for participating in today's Kennametal first quarter earnings conference call.

This call will be available for replay beginning at 11:00 a.m.

Eastern Time to 11:59 p.m.

Eastern on Wednesday, November 8, 2006.

The conference ID for the replay is 8050917.

Again, the conference ID number for the replay is 8050917.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you.

You may all disconnect.