Kennametal Inc (KMT) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Kennametal's Third Quarter Fiscal Year 2008 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)

I would now like to turn the conference over to Ms.

Quynh McGuire, Director of Investor Relations.

Ms.

McGuire, you may now begin your conference.

Thank you, Regina.

Welcome, everyone.

Thank you for joining us today to review Kennametal's Third Quarter Fiscal 2008 Results.

We issued our quarterly earnings press release earlier today.

You may access this announcement via our website at Kennametal.com.

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

It is also being broadcast live on our website, and a recording of this call will be available on our site for replay through May 23, 2008.

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

Joining me for our call today are Chairman, President, and Chief Executive Officer Carlos Cardoso; Vice President and Chief Financial Officer Frank Simpkins; and Vice President - Finance and Corporate Controller Wayne Moser.

Carlos and Frank will provide details on our fiscal third quarter financial performance, as well as on our outlook for the remainder of fiscal 2008.

After their remarks, we will be happy to answer your questions.

And at this time, I'd like to direct your attention to our forward-looking disclosure statement.

The discussions we'll 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 provided the SEC with a Form 8-K, a copy of which is currently available on our website.

This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G.

This 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures, and it provides a reconciliation of those measures, as well.

I will now turn the call over to Carlos.

Thank you, Quynh.

Good morning, everyone.

Thank you for joining us.

Let's review our performance for the fiscal 2008 March quarter.

Kennametal continued to deliver solid results on an adjusted basis, particularly in light of a challenging economic environment in North America.

Due to our strategy of having a global business that is well balanced in products, markets, and geographies, we achieved 4% organic sales growth for the March quarter on a year-over-year basis, which was up sequential from 2% growth in the December 2007 quarter.

This also represented the 17th consecutive quarter of year-over-year organic sales growth.

Adjusted earnings per share, or EPS, of $0.75 were at a high end of our guidance and reflect a year-over-year increase of 14%.

Adjusted return on our invested capital, or ROIC, was 12.3%, up 130 basis points from prior-year quarter.

We achieved March quarter records for sales, adjusted EPS, and adjusted return on invested capital.

At the same time, we continue to improve our operational efficiency.

Due to focused efforts to slower -- to lower SG&A costs, we decreased operating expenses [at](sic) a percentage of sales by 40 basis points from the prior-year period and 100 basis points sequentially.

Rising raw material costs continued to present challenges during the fiscal third quarter.

Still, costs have been increasing primarily due to continued strong demand globally, as well as higher energy prices.

Regarding cobalt, we believe that it may be -- it may continue to be volatile for the next six to 12 months.

However, there are indications that prices have already [picked](sic) and could decline as supply increases due to additional mines coming into production.

Tungsten ore and APT prices have been relatively stable for the past 12 to 24 months, as supply and recycling activities have grown.

Due to Kennametal's market leadership position and ability to provide value-added products and services, we continue to address the raw material cost increases by implementing strategic pricing actions and maintaining margin discipline.

Another significant factor in achieving price realization is our focus on introducing innovative new products and shaping our portfolio of business, which will also increase future profitability at both the product level, as well as at the customer level.

As part of our proven strategy to diversify the portfolio of served end markets, we experienced growth in certain industries, such as aerospace, machine tools, underground coal mining, road construction, and general engineering.

The strength in these markets more than offset the continued lower demands in other market sectors, such as auto, oil and gas, and capital equipment.

The North American economic environment remains challenging, as shown by the Fed Chairman's recent comments stating that the domestic economy could be heading to a recession due to credit, housing, if an actual crisis.

Meanwhile, international markets continue to hold up well, and this has enabled Kennametal to realize continuous sales growth and increased earnings.

Over the past several years, our business has become increasingly more balanced geographically, which has enabled us to serve our customers better.

Our senior management team recently completed a European trip that included an in-depth review of our operations in Germany, Spain, and Italy.

Our team visited five Kennametal manufacturing plants, met with a number of customers, and launched our Italy Knowledge Center, another Kennametal training and education facility, for our manufacturing customers and prospects.

As a result of those meetings and discussions, we believe that the economic environment in Europe remains favorable and offers further growth opportunities for Kennametal.

We also expect to continue to capitalize on our Pan-European business strategy, which includes a tax benefit that contributes to our lower overall effective tax rate that is sustainable for future years.

Regarding segment performance, I'm pleased to report that our metalworking business continued to show increased profitability over the prior year despite economic weaknesses in North America.

MSSG benefited from our focus on cost-containment initiatives, such as the streamlining of these manufacturing footprints and the reduction of product SKUs.

In addition, our ongoing channel and branding efforts have allowed customers the choice to buying directly from us or through distributors offering Kennametal products.

This channel strategy is a key driver of organic growth globally and facilitates a more efficient cost structure.

In our Advanced Materials business, we are currently challenged primarily due to continued slower conditions in certain end markets, higher raw material costs, sales mix issues, and lower performance in our Extrude Hone, surface finished machines, and services business.

Due to a weaker capital equipment environment for the North American automotive market and the lower performance of Extrude Hone, we recorded a non-cash goodwill impairment charge of $35 million in the March quarter related to this business.

The market sector served by Extrude Hone is currently in a down cycle, but it should benefit long-term from a pending introduction of new emission standards.

We continue to believe that Extrude Hone is strategic to our global business and can be leveraged enterprise-wide.

We are confident that we can restore the performance of this business, and we are taking this opportunity to address necessary changes to its business model to prepare for future opportunities.

Overall, our AMSG segment is working on additional operational improvements to achieve its full potential.

We are beginning to see signs of improvement in very key mark -- in various key markets and some relief in certain raw material input costs.

In addition, a plant outage that had affected our performance for much of the fiscal year was restored to full operation at the beginning of March.

From a long-term perspective, we are fully committed to growing AMSG revenues to equal the size of our MSSG business, and we'll refine that strategy as appropriate.

As I have discussed before at various times, we are continually evaluating the multiple levers available to help us remain on track to achieve our goals of margin expansion and earnings growth.

One of those levers relates to streamlining our manufacturing footprint.

In a modest-growth sales environment, we are able to rationalize more of our facilities without disrupting customers.

We plan to accelerate those actions, and in doing so, we plan to reduce the number of manufacturing facilities in North America and in Europe over the next 12 to 18 months.

As a result, we expect to record related charges in the range of 40 to $50 million during this timeframe.

We expect to achieve 20 to $25 million in savings, annual, from those actions, which represents a payback period of approximately two years.

We are sensitive to the fact that those actions would impact our employees even though less than 3% of the workforce will be affected.

Our team is important -- is an important competitive advantage, and we remain committed to treating each of those affected with respect and consideration.

For some time, Kennametal has been taking steps to realign and further improve the business.

Due to current economic environment, we find it necessary to take those actions in a shorter timeframe.

In addition, we may have more opportunities to streamline our manufacturing footprint through additional portfolio management.

We continually assess our product offerings and will take actions to rationalize as appropriate.

It is important to take a methodical approach so that we can prioritize our best to deploy our resources.

We'll provide further details on those initiatives as we are able to do so.

However, it's difficult to predict the timing.

As we move forward, we are steadily executing our growth strategy and continuing to further balancing our geographic mix.

For the March quarter, our international markets represent 54% of sales, including 18% of sales for developing economies, or what we refer to as the rest of the world markets.

Five years ago, we had sales in international markets of 44%, including 13% of sales from the rest of the world markets, a clear demonstration of an increased global balance in our business.

As always, the Kennametal Value Business System remains an important tool in executing our strategy.

KVBS is an ongoing guide for the decisions we make related to strategic planning, product development, sales growth, [talent involvement], portfolio management, and lean initiatives.

As evidence of our accomplishments in product development, a key process of KVBS, Kennametal has recently been named the patent -- by the Patent Board as one of the top innovative companies within the industrial components and fixtures industry.

Kennametal ranked 24 out of 160 companies in this industry in the ranking which was published on April 22 in The Wall Street Journal.

The Patent Board tracks and analyzes innovation, movement, and the business's impact of patent assets across 17 industries on a global basis.

I'm proud to report that we have made much progress, and we credit this success to the strength and talent of our global team.

The Kennametal team is collectively executing our strategy and at the same time maintaining a sharp focus on improving operational excellence.

We'll continue to invest in our business by allocating capital expenditures for productivity improvements, enhanced manufacturing capabilities, and new product introductions.

We remain committed to building stronger customer relationships and leveraging our value proposition to further drive sales growth while moving forward with additional initiatives to maximize our profitability.

I will now turn the call over to Frank as he can discuss our financial results in greater detail.

Frank?

Thank you, Carlos.

I'll provide some further insights on our performance for the March quarter.

Then I'll move on to the outlook for the remainder of the fiscal year.

Some of my comments will exclude the effect of the goodwill impairment charge recorded in the current-year quarter.

To summarize, we delivered a solid quarter in terms of our overall financial results.

During the March quarter, we faced challenges related to certain North America markets and higher raw material costs, as Carlos alluded to.

But despite these headwinds, we delivered a record March quarter for sales, adjusted EPS, and ROIC.

Our reported fiscal 2008 third quarter diluted earnings per share were $0.30, compared to $0.66 in the prior-year quarter.

In the March quarter, we did record a goodwill impairment charge of $0.45 per share related to our surface finishing machines and services business.

Absent this charge, adjusted EPS of $0.75 were at the high end of our guidance and increased 14% compared with the prior-year-quarter-reported EPS.

Now, I'll walk you through the key items of our continuing operations on the income statement.

I'll start with sales.

Sales for the quarter came in at $690 million, compared with $616 million in the same quarter last year.

Our sales grew 12% year over year, and that included 4% organic growth, 4% from acquisitions, and 6% from FX.

The March quarter actually had fewer workdays than the prior-year quarter, and that reduced the overall sales growth by 2.

Our organic growth was driven by strong sales in certain geographies, such as Europe and Asia Pacific, and continued strength in certain market sectors, such as mining.

Organic sales growth was slightly higher than our guidance of 2 to 3% despite the continued softness in North America and lower demand in certain market sectors, such as energy.

As Carlos said, this growth reflects the strength and diversity of our global business.

March quarter sales also benefited from improved realization of price increases implemented throughout fiscal 2008.

We're also pleased to note that the March quarter, more than 50% of our revenue came from outside the United States.

In contrast, only 46% of the current quarter sales came from North America, as compared to 51% for all of fiscal 2007.

These results were evidence of our ability to execute our strategy and further geographically diversify our operations.

Our gross profit margin of 34.5% was 140 basis points lower as compared to the prior-year quarter.

The decline in the gross margin year over year was primarily driven by higher raw material costs and, to a lesser extent, an unfavorable mix due to lower sales of energy and related products and the lower performance in our surface finishing machines and services business.

In regards to raw materials, we are seeing a positive development in terms of our price recovery.

The pricing actions that we initiated during the fiscal year have led to our price recovery doubling from the levels that we had at the first half of our fiscal year.

While we're still experiencing some cost increases, we believe that prices for certain of our raw -- key raw materials may have peaked during the quarter.

Therefore, even though the raw material costs will likely remain relatively high in the short term, we expect the costs for certain of our raw materials to begin to retract in the not-too-distant future.

In terms of mix, the softness in energy and related products unfavorably impacted our margin.

However, we're seeing improvement in these areas, and we expect this trend to continue into our fourth quarter.

And as Carlos mentioned, the previously discussed plant outage has been resolved, and the facility was fully operational at the beginning of March.

And, lastly, our new management team at Extrude Hone is fully engaged in implementing an aggressive and comprehensive plan to restore the performance of that business.

Our operating expenses during the quarter increased year over year by 10%, or $14 million, to $150 million.

The increase is two-fold.

It's mainly attributable to unfavorable foreign exchange and the impact of acquisitions.

Our operating expense as a percent of sales decreased 40 basis points to 21.8% from 22.2% in the prior year.

And the March quarter represents the ninth consecutive quarter in which we had made a year-over-year reduction in operating expenses as a percent of sales.

As Carlos touched on earlier, we performed an impairment test of goodwill and other intangible assets associated with our Extrude Hone business.

This test resulted in a non-cash goodwill impairment charge of 35 million, or $0.45 per share.

The primary factors that contributed to this item were a recent decline in operating performance, coupled with further weakness in North America and the automotive sector.

The new management team at Extrude Hone is highly engaged and fully understands the issues involved and is executing a wide-range plan to address and resolve these items.

We remain confident that we will restore the performance of this business over the medium to long-term levels more in line with this potential.

Amortization expense for the March quarter was up $2 million year over year to 4 million, and that was due to the acquisitions we made in the prior fiscal year.

Turning to operating income, that came in at 49 million for the quarter.

This represents a decrease of 27 million, or 38%, from the 76 million in the prior-year quarter.

Absent the impact of the goodwill impairment charge, operating income increased $8 million to $84 million from the prior-year quarter.

The current-year quarter operating margin was essentially flat with the prior-year quarter on an adjusted-year basis.

Our interest expense was $8 million in the current quarter, up 16% from the last comparable quarter.

This was the result of an increase in average domestic borrowings of $150 million, mostly offset by lower average interest rates on domestic borrowings of 6%, compared to 7% in the prior year.

Other expense decreased $2 million -- Other Expense Income decreased $2 million from the [prior-year] quarter due primarily to higher foreign exchange transaction losses, and that was due to the rapid increase in the euro, partly offset by higher interest income.

The effective tax rate for the quarter on a reported basis was 41%, compared to 26.1 in the prior-year quarter.

Adjusted for the impact of goodwill, for which there was no tax benefit, the current quarter effective tax rate was 22%.

The adjusted rate for the quarter was lower than the prior rate due to increased earnings under our Pan-European business strategy and the tax benefit associated with the dividend reinvestment plan in China.

Turning to our balance sheet, that remains strong and continues to generate healthy cash flow from operations.

This affords us the ongoing flexibility and opportunity to invest in and reposition our business, make acquisitions, and repurchase shares.

Our adjusted return on invested capital was 12.3%.

That's up 130 basis points from 11% in the prior-year quarter.

And our cash and cash equivalents came in at 66 million at quarter-end.

That's up 16 million from June of last year.

Our primary working capital ended the quarter at [800 million 808], an increase of 127 million from 681 million last year.

More than half of the increase in primary working capital is due to the effect of stronger foreign currencies.

The remaining increase is primarily attributable to inventory due to increased raw material prices and strategic raw material purchases, as well as initiatives to increase or enhance our service levels.

Our current inventory level strengthens our ability to provide superior service to our customers and will enable us to initiate restructuring actions with limited customer impact.

We will continue to focus on initiatives to improve our inventory turns going forward.

Cash flow from operating activities was 159 million for the first nine months, compared with 113 million in the prior-year period.

Adjusted free operating cash flow for the current period was $35 million.

This compares to 134 million in the prior-year period.

The year-over-year change in adjusted free operating cash flow was driven by a $63 million increase in capital expenditures for enhanced manufacturing capabilities, such as improved productivity, cost reductions, and growth in new products, together with our geographic expansion.

As noted in the earnings release, and as Carlos stated, we tend to implement restructuring actions over the next 12 to 18 months to reduce costs and otherwise improve efficiency in our operations.

These initiatives are expected to include the rationalization of certain manufacturing and service facilities, as well as other employment and cost-reduction programs.

As a result, we expect to recognize charges in the range of 40 to $50 million over this timeframe.

Approximately 90% of these charges are expected to be cash expenditures, and the annual ongoing benefits from these actions, once fully implemented, are expected to be in the range of 20 to 25 million.

During the March quarter, we repurchased an additional 309,000 shares of Kennametal stock at a total cost of 9.3 million under our 6.6 million share repurchase program.

This brings our year-to-date repurchases to 1.7 million shares at a total cost of $65 million.

We have 4 million shares remaining to be repurchased under this program, and we will continue to enhance shareholder value by buying back our stock on an opportunistic basis.

Additionally, as announced today, our Board of Directors also declared a regular quarterly cash dividend of $0.12 per share.

Now, I'll turn to our business units and provide some color on the operations.

Our metal -- our MSSG delivered further top-line growth in the quarter, and that was driven by organic sales gains, as well as favorable foreign currency effects and the impact of acquisitions.

Areas of strength included aerospace and the machine tool sectors, while weakness continued in the automotive and energy markets.

The European, Asia-Pacific, and Latin America markets remained strong, and the North America and India markets declined compared with the prior-year quarter.

MSSG grew by 11% in the quarter as a result of 2% organic growth, 8% favorable foreign exchange, and 3% acquisitions, less 2% from fewer workdays.

Europe and Asia-Pacific organic sales increased 8 and 16%, respectively.

Latin America sales increased 15%.

So Europe, Asia-Pacific, and Latin America organic growth rates all improved sequentially from the December quarter.

North America organic sales declined 7%, and India was lower by 2%.

In North America, we saw some sales impact from distributors further reducing inventory levels due to softness in market conditions.

In addition to this, our distributors and other customers further adjusted their tooling inventory by taking advantage of our improved fill rates resulting from the capital investments that we have made.

And the strike in the automotive industry in the United States had a minor impact during the quarter.

MSSG's operating income increased 25%, and the operating margin increased approximately 150 basis points from the same quarter last year.

The current quarter results benefited from organic growth, continued cost containment, FX, and acquisitions.

And in addition, the prior-year quarter included a non-cash impairment charge of $6 million related to our [Widia] brand.

AMSG sales actually increased 15% in the March quarter, and that was driven by 6% organic growth, 5 from FX and 6% from acquisitions, also offset by 2% from fewer workdays.

Organic sales increased on stronger construction and mining, while more -- and offset the lower energy, energy-related, and engineered product sales.

And we also experienced sequential improvement in our energy and related businesses.

AMSG reported an operating loss for the quarter due to the $35 million goodwill impairment charge.

Absent this charge, AMSG operating income was down 10%, and the operating margin was down over 300 basis points in the prior year due to the higher raw material costs, sales mix, and the lower performance in the surface finishing machines and surfaces business.

Corporate operating loss actually increased to 21 million from 17 in the prior quarter due to higher employment costs, partly offset by lower pension and post-retirement benefits and lower shared services expense.

Now, I'd like to review the outlook for the remainder of the fiscal year.

Our global market indicators support our expectations for continued top-line growth during the remainder of our fiscal 2008.

We believe that North America will continue to be challenging in the near term.

We also believe that the European market will remain favorable and that business conditions in the rest of the world markets or developing economies will continue to be strong.

While there are some inherent and challenging uncertainties and risk with the current macro environment -- environments, it appears that fundamental drivers will continue to provide a platform for ongoing growth and global demand.

For the fourth quarter of 2008, we expect total sales of 13 to 14%, and that includes organic growth rate of 2 to 3%.

That would result in total sales growth of approximately 13% and organic sales growth of approximately 3% for the full fiscal year.

We expect the fourth quarter 2008 EPS to be in the range of $0.81 to $0.84 absent any charges that may result from restructuring actions.

We narrowed our range for adjusted EPS guidance for fiscal 2008 to a range of 2.72 to 2.75 per share.

This guidance represents 19 to 20% EPS growth compared with the prior fiscal year.

We anticipate cash flow from operating activities to be 250 million to 260 million for fiscal 2008.

Based on anticipated capital expenditures of 150 to 155 million, we expect to generate between 100 and 105 million of free operating cash flow for the fiscal year.

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

Thank you, Frank.

As we move forward, we'll continue to apply our disciplined growth strategy to create new opportunities.

Our performance during the March 2008 quarter demonstrated that we are a resilient business.

We delivered solid results, even in a relatively tough environment of higher raw material costs, moderating demand, and generally weaker business conditions.

We can stay ahead of the current challenges by continually deploying the Kennametal Value Business System.

KVBS provides us with a strong foundation on which to build our enterprise and execute our strategy.

We are optimistic about the future.

Our core business continues to have strong operating leverage and effective cost-control initiatives that enable us to deliver on our long-term commitments.

We also have a strong balance sheet.

We have -- and we do expect to continue to generate steady cash flow.

We'll utilize cash, as always, on a priority basis to increase our shareholder value.

Those priorities include making acquisitions, allocating capital investments, and buying back our shares on an opportunistic basis.

Our acquisition pipeline remains active, and we continue to follow a disciplined approach.

Meanwhile, we'll further reduce our costs by restructuring our manufacturing footprints, continue to lower SG&A expenses, and realizing additional savings through the implementation of our lean practices.

We continue to firmly believe that we have the ability to deliver margin expansion, earnings growth, and strong cash flow over both the short and long term.

As we strive to achieve our goals, we remain focused on our strategy to grow and balance our business.

Kennametal has a solid business portfolio, a broad geographic presence, and numerous platforms for growth, and we will work hard to execute our strategy to achieve our goals.

Thank you for listening to this call today, and we'll be happy to take your questions now.

(OPERATOR INSTRUCTIONS)

Your first question will be from the line of Andy Casey with Wachovia Securities.

Thanks.

Good morning, everybody.

Hi.

Hi, Andy.

Got a few questions.

The first -- I apologize if you already indicated -- it's kind of clarification.

Did currency benefit the bottom line, and if so, by how much?

Yes, Andy, the currency that we -- we had a benefit on the translation.

We actually had a transaction loss in other income, but the bottom line, it was approximately $0.04 in the quarter.

Okay.

Thanks, Frank.

And then did you include any currency?

It looks like you did in the top-line forecast for Q4, but did you include any in the bottom line?

Yes, I mean I would say it's very consistent with the current quarter.

Okay.

Now, on the more detailed questions.

On the MSSG customer inventory reduction, you mentioned it's hard to see any balance sheet impact since inventory kind of grew in line with sales on a sequential basis from the second quarter.

What do you think the earnings impact was, if any, in the quarter of that?

I don't think there was much of an impact in there, Andy, to be honest with you.

I mean we did have a higher sales growth, as you know, sequentially from the December quarter, where we went from total 2 to 4%, and MSSG continues to be somewhat impacted in the North America market.

But, overall, the puts and takes, I wouldn't think there's a big impact one way or the other in there.

Okay.

And then the last question.

It's on the growth strategy, specifically the EBIT margin.

Year to date, you're running around 11.1 on EBIT margin, excluding the goodwill stuff, and the implied Q4 guidance, it appears you're anticipating a fiscal '08 margin of somewhere between 10.5 to 11.

That would be down marginally year over year.

In comparing that to the 15 margin goal, it's a pretty big jump.

Do you still anticipate, ex restructuring charges, you can achieve that in fiscal '09?

And if so, what has to really happen given the full restructuring action benefit?

Really isn't expected -- at least I perceive it's not expected until 12 to 18 months into the future.

Yes.

I'll start, Andy, on those.

I think you're -- we can deal with this offline, but I think your implied EBIT margin's a little bit low based upon the guidance we have in the fourth quarter, and we can go offline on those.

So that's the first part.

Then as we go forward, you really have to break it into three buckets.

Obviously, the cost of serve initiatives or the restructuring actions, which will be a driver, first, and we've announced that, and you can figure out, based upon the EBIT benefit what the margin impact will be going forward.

Secondarily, we have a number of things we're looking at, vis--vis portfolio management, which is tough to time, which we cannot comment on right now, which will also have a favorable impact going forward if we're able to execute those.

And then some of the performance on the operations, both on the Advanced Materials side, recovering the raw material costs.

We did see some nice improvement.

We were chasing the cost on the raw material side, particularly on cobalt.

That appears to have somewhat subsided, talking to some of our suppliers, and really getting Extrude Hone and a couple of their markets turned in the right direction.

So I think those three items at a top level, from my perspective, will help be the catalyst going forward.

Yes, Andy, in addition to that, when I look at where we are today and what we know going forward, it doesn't look like it's possible for us to achieve the 15% by '09, and we kind of talked about that the last quarterly earnings meeting.

However, we still are looking at the actions that we need to take and what the economic environment is going to look like, and 15% is still, I believe, achievable for this business as the next milestone, and we believe that we can get that [shortly] after the 2009 fiscal year.

Okay.

Thank you very much.

Your next question will be from the line of Eli Lustgarten of Longbow Securities.

Good morning.

How're you doing, Eli?

Not too bad.

One, can we talk a little bit about this restructuring program and shrinking the footprint?

I mean we've always expected when things slowed down that you would accelerate it, yet this thing should be more of an extended program.

Can we expect -- you hope to get 20, 25 million a year.

Can we expect much of it in fiscal 2009 because it's going to have a big bearing on how we estimate next year, so whether we can expect any of this benefit to really show up, or is it going to take the year to get most of it under the belt?

Well, Eli, this is Frank, and I'll start off.

It would almost be like a tale of two halves.

A lot of these are proposals.

You have to go through a lot of negotiations, as you know, so we expect to initiate some items Q4, and then we would expect to also try to do them on an accelerated basis, so by -- most of the bigger items, we would like to have done in the first half of fiscal '09 and then start exiting the second half of fiscal '09 on a kind of a run rate that you would expect to get to the 20 to 25 million from a benefit perspective.

So we anticipate -- again, it's hard to calculate the timing, Eli, but we anticipate [debt] to be close to neutral for the year.

Okay.

And as you know, these things have to be done carefully and very precise, but the faster we do them, the better off the organization is.

So the management team is committed to do it right to begin with, but to be -- to be fast because -- and, again, we understand the faster we do it, the better off we are as a company and the better off it is for our employees.

Okay.

Now one [inaudible].

The 22% tax rate we're seeing, is that sustainable for fourth quarter in 2009?

From an organic basis, that's -- you know, that 22 to 22.5, depending on the mix of the business, that's what I would assume for the fourth quarter.

And as we start getting into the plan, it's a little premature, but I would expect us to be in the low 20s in 2009, but then again, that will depend on kind of the mix of the business as we see it.

And as we get a little bit into the planning process in fiscal '09, we'll provide that guidance in the near future.

Okay.

Now, how far behind are we in pricing?

I mean the back of the envelope says that you're probably no more than halfway caught up in the pricing from the raw material side, particularly in Advanced Materials.

Is that about fair?

And can we get back there by early 2009, or how long does it take to get even if things stabilize?

Yes, I think you're on point.

You know, at the beginning of the year, I think the question was asked, the realization.

We thought we'd get 70% this year.

We continue to get surprises a little bit on the cobalt side throughout the fiscal year, and obviously, steel.

Everybody's dealing with it.

But that one, I mean it is what it is.

But we did see some better improvement Q3 over Q2 last year, or the sequential basis.

So the price increases are continuing to accelerate, and hopefully, some of the raw materials will top out.

But from an overall realization, [inaudible] from last quarter and to your point right around the midpoint and moving forward towards recovering a little bit more into Q4.

Yes.

And, Eli, as you know, we've had [a history] of -- fully recover the raw material cost increases in a period of 12 months.

I mean we've done that time after time.

We believe we can do that as a result of our position in the marketplace.

In addition to that, we have started this year a program of looking at profitability by customers, and we have been very, very diligent about looking at -- looking into customers that are not profitable and how do we deal with them and how do we improve the profitability with the customers, and that's going really well, I mean surprisingly well for us.

So we see that being a benefit, again, going into this quarter and into 2009.

And when you look at the operating profit margins by segment, I assume you're assuming that the metalworking improvement that we're seeing is sustainable.

But we're seeing very lagging profitability in Advanced Materials.

Is that -- you know, should we -- I expect the fourth quarter to be very much like the third.

Should we expect that the big leverage next year is Advanced Materials finally getting its act together and getting back to almost a more normal level of profitability, probably not where you want it to be but more normal?

Yes, I think, Eli, I think you are right on, but we're not depending for going forward strictly on the improvement of AMSG.

I think that our metalworking business has a lot of run rate, a lot of, again, potential, and we can -- will continue to leverage the metalworking.

But, certainly, what we see this year, half of the margin degradation in AMSG is related to a raw material price increase.

And, again, if we talk about the fact that we see that being at peak, specifically cobalt, and having had APT pretty much flat, we should be able to recover it through the price increase actions that we have -- that have close to half of the margin degradation.

And then we have -- the balance of that is split equally between our operational challenges and mix.

We also see the mix -- as we said earlier in the call, we see energy coming back, and that should help us going back into next year, as well as the operational performance improvements.

Yes.

One final question.

We should talk about having an equal mix between the two operations.

Obviously, we still consider -- basically continuing, it's a two-thirds/one-third kind of scenario.

Is there -- should we expect anything to accelerate that change, or is it -- because we've talked about it, but we're really not seeing much material change in the mix between the two businesses.

I think there are a number of levers that we're looking at, one of -- is portfolio management.

The other is the continued acquisition.

And those are very difficult to predict.

And as you can see in this last quarter, and we anticipate that to continue, Advanced Materials' business has grown at a decent rate.

So I think all of them will participate or drive our view of continuing the path of AMSG getting to be 50% of our total portfolio.

So it seems like we need a big acquisition at some point to get there.

I mean --

Well, I mean we don't -- I mean just to give you a point of reference, in 2003, we were less than $300 million.

We're going to end up the year close to $1 billion in that business, and we did not make any major acquisitions.

We went from -- we more than tripled the business in the last five years, so we do not -- I mean a big acquisition would be nice, but we do not need the big acquisitions.

I guess what I'm looking at is basically 460 and 230, which is two-thirds/one-third, and I'm just wondering how we -- can we close that gap without an acquisition.

Anyway, we'll talk offline.

Thank you.

Okay.

Thank you.

Your next question will be from the line of Stephen Volkmann of JPMorgan.

Hi.

Good morning, guys.

How're you doing, Stephen?

Just a couple of kind of follow-ups, I guess, here.

On the outlook for the fourth quarter, I guess, if I'm reading this right, we actually did a little better than I expected in the current quarter, 4% organic, I think, and maybe you can even add the 2% from sales days and think of it as kind of a 6% run rate in the quarter.

And then you said a number of things about various end markets that seem to be turning up a little bit, and yet, we're looking at 2 to 3% in the fourth quarter.

Can you just help me square that?

Yes, I think, Steve, we're just trying to figure out what's happening in North America and especially from the distribution side, so nothing unusual.

Last year, the fourth quarter from a comp was 6% organic growth.

We expect Europe to soften a little bit.

But what happens, though, in June that's always tough is you've got some of the automotive shutdowns, and it's always try to -- tough to gauge in the summer months what's going to happen.

So we're being a little bit cautious here.

And if the order rates come out a little bit better, you'll see it on a monthly basis, but that's kind of where we think we're at right now.

And by the way, Stephen, I'd just like to make an additional point.

This quarter, we grew 4% in spite of a pretty tough comp.

Last year was a 7% growth in this quarter, so 7% last year.

Still did 4%.

And, again, as Frank said, we're looking cautiously at the -- what's happening in the North American market, and again, we published the rates -- the order rates every month.

If things get better, then we'll obviously take advantage of them.

Okay, thank you.

And just with respect to the raw materials, I guess I kind of get the cobalt side of this, but your commentary makes it seem like this is the worst of it, it's now kind of behind us, and yet, obviously, steel continues to be a big issue for everybody.

Is that just -- at this point, has that just become less important to you now at this -- or how should I think about that?

Well, I mean I think we need to keep those separately, Stephen.

I think the steel is going to continue to be a gamble.

God knows what's going to happen with that.

But the main cost driver for us is the -- is tungsten and cobalt when you look at the total cost.

So one of the major drivers for us, with the steel, everybody gets surcharges, and we -- you recover a lot faster, where the cobalt, I mean, is -- it takes us a little longer to get that because our customers don't necessarily understand cobalt is a [tin-traded] commodity.

They don't always understand exactly how things there work, so it requires a lot more effort in our part.

So we were referring specifically to the cobalt.

We've seen and talked to a lot of people in the marketplace, and they seem to think that that has peaked at this point.

Okay, I got it.

Thanks.

And then just the final thing.

Can you just talk a little bit about pricing?

I assume it's probably better outside the U.S.

than the inside the U.S., and any comments you might be able to make there?

And then with respect to what you're seeing broadly amongst your sort of competitors, as well?

Thank you.

Yes, I mean price is not more difficult in the space versus outside.

I mean I think pricing is always a difficult proposition.

I think that this company is well positioned from the point of view that we have a good value proposition.

In addition to that, when you -- when we have an average of 40% of our sales coming from new products with the higher value proposition, it makes it a little less challenging for us to raise the prices.

Relative to our competition, as you know, we have a number of -- we have two major competitors, but then we have thousands of small competitors, and we're seeing what exactly happens when things get tight.

I mean I think that one of our competitors is very disciplined and is very responsible in the marketplace, so you probably don't see a lot of difference between us and them.

I think that the other major competitor is probably middle of the road.

I think the challenge is with the small competitors, that -- niche players in each of the different markets, and they go for price immediately when things get tight.

So it doesn't present a really big challenge for us at this point.

Okay, thanks.

And, I'm sorry, Carlos, did you say pricing is not more difficult in the U.S.

than abroad?

Yes, is not.

Great.

Thanks.

Your next question will be from the line of Terry Darling of Goldman Sachs.

Thanks.

Frank, wondering if you can put some color behind the -- some of the commentary around price by breaking out for us the volume versus price components of the 4% organic growth this quarter versus whatever that breakout was in the first and second quarters?

Yes, if I had a -- this will be rough, but I'd have to say 1% was price in the current quarter and volume on the organic would be 3, and then last quarter, I don't think it rounded to 1, to be honest with you, Andy -- or Terry.

So we've been chasing those two in the first half, but up to about 1% price this last quarter.

Okay, but maybe you were half a percent or something like that?

Exactly.

And that's what you mean when you say you doubled --

Right.

-- the price 3Q versus -- got it.

Okay.

Okay.

And then I'm wondering if you can get in a little more detail as to why you think cobalt prices have peaked in terms of inventories or additional supplies coming on, as you had referenced earlier?

Take us into what the fundamentals are there that makes you feel that other than just the basic sense you get from your suppliers.

Yes, we've [talked] to supply.

We have very good contacts in the industry, and we know what's going on there.

And then from a cobalt perspective, there's -- number one, there's some [inaudible] and softness in the U.S., so that plays in a little bit from some purchases, but the bigger issue is copper and nickel mines coming on online that have been in place, and this is kind of the [Big East], the [Rio Tentos], and cobalt is a byproduct of both copper, as well as nickel.

And then in the Congo, the prices, while they're volatile, there's more concentrates or more supply coming online given some of the stability in the marketplace there.

So people that we have on the ground there with those items, given the volatility on the raw materials side, feel that it is at its peak at this point, and it may be volatile for the next six to nine months, but it should eventually start trending down in the near future.

But the big drivers are the supply coming [online] and some softness in certain markets.

And the timing of those new supply start-ups is imminent or at some point over the next six to nine months, which is why you expect it to continue to be volatile in that -- over that period?

Terry, it's an ongoing thing.

I mean there's some mines already online, and --

Yes, and then we'll -- anywhere from between one and three years as we go forward.

Okay, but you've not engaged any purchases where the contract price is lower than what you had a month ago?

We're not at that point yet?

No, that's correct.

But it's -- again, this is -- like the first -- you guys tracked the cobalt.

You saw how it's been consistently going up.

At this level, it's been somewhat stable.

Yes.

And now, you'll start seeing versus the 50 -- $51 you see some bids as the high 40s, so you're starting to see some volatility as we go forward.

Okay.

And lastly, Carlos, I just want to make sure I understand what you mean by portfolio management, use of that phrase.

Is it discontinuation of some product lines?

Is it sale of businesses that you own that are underperforming?

Is it a combination of both, or is there something else I'm missing?

It's a combination of both.

Okay.

Thanks very much.

Your next question will be from the line of Mark Koznarek of Cleveland Research.

Hi.

Thank you.

Mark.

How're you doing, Mark?

Good morning.

First question here has to do with the restructuring actions, the footprint reduction.

First of all, can you give us a better sense of the number of facilities you might be talking about because I think in the past, you've said that you typically sort of -- embedded within your operations, you're shutting down a handful, somewhat less than five, a year.

So is this an acceleration, a significant acceleration, of this shutdown, that we're going to wipe the slate clean for the next couple years, or how can you help us define what -- more specifically what this is all about?

Yes, Mark, we cannot tell you the number of facilities or talk specific about the facilities, as you may guess.

I mean that's very critical for us to do that.

But what I can tell you is that this will be an acceleration of what we have been doing, and this is -- this is not going to wipe the slate clean.

In other words, we're going to -- you're going to be left with more opportunities after this one.

This is basically what we can do with the resources that we have in an accelerated basis as a result of obviously the moderation in the top line.

As always said, we were closing based on the top-line growth, and we did -- I did share with everyone that we do have a long-term plan that has us reduce the number of facilities by half in the long term and that we would accelerate that based on the top line.

So our top line has moderated a little bit, and this is a good opportunity for us to accelerate that plan, and that's what we're doing.

And the segment that you're focusing on?

Of -- well, I mean we're really looking at -- our manufacturing -- the back end of our business is becoming more and more integrated.

As we talked before, when we build major plants like the [Tenjen] plant, it's a manufacturing plant is [inaudible], and those plants typically serve all businesses.

And we now do have a number of those plants around, so we will continue to look at manufacturing from a manufacturing point of view, not necessarily by business.

Okay.

And, now, this is separate from the portfolio management actions, so there are two parallel strategies unfolding here, is that right?

Absolutely, Mark.

I'm glad you brought that up because I want to make sure that we're very clear that this is what's on the table is the restructuring, that portfolio management is a separate action.

As I always said, we have multiple levers.

We're going to continue to use the multiple levers.

We're just not in a position at this point to talk in more detail about the portfolio management.

Yes, Mark, I think I answered that when -- as well, when Andy asked that question.

You know, looking at three pieces, right?

You have the restructuring actions, which will yield a benefit; we have the portfolio management; and then the performance of the business.

Okay.

We're hearing from some of your channel partners that there's a notable product category that you're exiting via a sale.

Is that something that is considered a portfolio management action, or is that really what we're hearing is actually these shutdowns in the restructuring?

Mark, we can't comment on that at this point.

Okay.

Then let me move on to my next question, which is the Extrude Hone breakdown.

Some of that goodwill and intangibles were being amortized, so what's -- is there an expected savings from that impairment?

Now, you've got to bifurcate intangibles basically into two pieces, goodwill, and I'll call it other intangibles, which would be customer lists, trademarks, patents, etcetera.

What we wrote down was goodwill which was not being amortized, so there is no benefit associated.

We will continue to amortize the definite [lived] assets, as we've been doing throughout -- since the ownership, but the goodwill is basically not like the old rules where you used to amortize it.

It's permanent, and that's what the test focused on in this case, so we actually wrote down the goodwill, the entire piece of it, and there's no benefit going forward.

Okay.

And then final clarification.

When you were answering a question -- I think it might've been for Eli -- about the case of the restructuring actions, there was a comment about close to neutral for the year.

What did you mean by that?

Now, when we look at it, obviously, it depends on timing, negotiations, when you can get things done.

Most of the costs we would like to have incurred relatively in the first three to six months, and then as we exit the fiscal year, we'll be on a pretty good run rate.

But when -- there will be some slight negative impact on the numbers in fiscal '09; it's just tough to put a number out there because we don't know how the timing's going to go.

Could be moved to the left, or it could move to the right.

So there'll be a slight impact, if I had to guess today, in fiscal '09, but it's tough to quantify at this point.

Maybe I'm overlooking something then, Frank, but if your cost is going to be 40 or 50 and your benefit is half of that, how is that close to neutral?

Well, we're going to obviously initiate some actions, hopefully, in the fourth quarter of this fiscal year and in the first half of next year.

Okay, so you're going to absorb some this year and then so --

Yes, this isn't just the fiscal '09.

We're not -- we're starting on a number of different fronts.

Okay.

All right.

Thank you.

Your next question will be from the line of Marty Pollack of NWQ Investment Management.

I was kind of between two calls, so perhaps you might've answered this.

On the 40 million charge, the breakdown in terms of the advance versus that [MSG], did you say or did you describe what the breakdown is on that --

Marty --

-- [inaudible] cost savings?

No, we did not break down the break -- by business unit or by project or facility.

At this level, we're still -- a lot of these are proposals.

We're in negotiations, so at this point, we really can't comment on too many specifics.

Just sort of taking a bigger perspective going back when you had a 3, 400-basis-point gap on margins, much better [inaudible] Advanced Materials side, and if you could, just describe again -- you know, you've got better organic growth there.

You've got what you describe as a weaker energy market.

But, overall, it seems that that's where you're clearly heading longer term, you know, a better balance with that.

There's more higher value-added proprietary type element to that business.

So where are -- in terms of longer term to get to that 50% EBIT, which I think is your target, it seems at this point you've exceeded that on the metal solutions side by quite a bit, and you're at this point under-performing significantly in the other.

When do we get to that balance?

And sort of is the problem the cost side more, or is it essentially the revenue side is part of the problem, or a combination of both?

If you could just provide a bit more clarity?

Yes, Marty, it's a little bit of both.

The pressure clearly -- you know, if we were to look at just this quarter, the degradation in the margin, over half of that was raw material related.

And like I said earlier, we're gaining some momentum there on that front, so that's something that we think we can fix relatively going forward.

And then the rest is really -- the remaining 50% split equally is a combination of mix of the industries we're serving, as well as kind of some of the performance, i.e., Extrude Hone, now.

Extrude Hone and a couple of the other smaller businesses, we will fix those going forward, so that will add to it.

And then some of the other markets, we're still very, at times, North America-centric, so as we exploit the international opportunities and some of the end markets that we serve improve, that will help drive the catalysts back to where the rates were not too long ago.

And, basically, if you -- in terms of breaking down advanced [value], again, North America and the rest of the world versus MSG and the metal solutions, what's the breakdown on the metals solution side, North America versus the rest?

We don't have that handy here, but if you want to call Quynh after the call, we can provide more color on that.

Okay.

And just, last, on the surface machine write-down -- on the goodwill write-down, can you just describe what is the revenue base that has contributed and its EBITDA or EBIT contribution at this point?

I don't mean negative contribution.

Yes, we -- for competitive purpose, we haven't provided sales or profitability by individual business units, so we're not at liberty to disclose that.

We don't feel that would be appropriate for competitive reasons.

I see.

Thank you.

Your next question will be from the line of [Jack Kane] of Barrington Research.

Thanks.

Good morning.

Good morning, Jack.

I have a couple quick questions.

Firstly, Frank, you mentioned earlier that you're seeing inventory reduction at your North American distributors.

It's not necessarily surprising given the environment.

But as we enter into the back half of the calendar year, are you seeing any early indications of that trend slowing and/or reversing?

Again, it's -- we're only -- we're in April.

I wouldn't say it's further declining.

I think some of the distributors were burning inventory through December, as well as March, but we'll have a meeting with some of our key distributors, vis--vis the Distributor Advisory Council meetings, in early May to get a better indication.

But we don't expect any further declines as much as they were in potentially the prior quarter.

So we'll watch it, but it's just a little bit too early to comment on that.

And the other point, the distributors typically don't stockpile a lot of inventory, so they'll burn some existing.

They call these rainy-day strategies, and they try to minimize how much you actually hold.

So they're not going to all of a sudden order a lot of inventory and put it back on the shelves because that's not how they operate from most of our distributors' models.

Just like they don't take it down that quickly, right?

It's not --

Okay.

And then the second question regarding geographic outlook.

You're seeing very strong organic growth, particularly in Latin America and the Asia-Pacific region.

Do you feel that that's sustainable at current levels, or do you think that will taper off sometime in the next couple quarters?

Well, I don't think we'll change in the next couple quarters, but the economic indicators indicate that the growth in China will still be good growth but not -- will be decelerating slightly.

But at this point, we feel that in the next couple quarters, it's going to be sustainable.

Okay.

The rest of my questions were answered.

Thank you.

Thank you, Jeff.

Your next question will be from the line of Ana Recinos of UBS.

Hi.

Good morning.

Ana.

Just was wondering about what you're seeing in Europe as far as market activity.

Are you seeing -- are you starting to see any of the same distributor reductions that you were talking about in the U.S.

or any changes in any end markets that you hadn't seen before for the better or worse?

Ana, we just came from a trip in Europe, as we said -- as I said earlier, and did a lot of -- a lot of kicking around to see what's going on, and we feel that Europe is still strong.

We haven't seen any changes in any markets, and I think that for this quarter, we feel very confident that the markets there are going to stay at the level that they have been.

And do you have any thoughts kind of over the next two to three quarters what your -- any expectations of what you're going to see out there?

I mean I think that probably -- again, the economic indicators indicate that they will be slightly slower growth but still positive growth.

And so we continue to be optimistic.

And based on the economic indicators that we see, we're still optimistic about the economy overall in Europe.

Great.

Thank you so much.

Your next question will be from the line of [Mike Meek] of Atlantic Investments.

Yes, good morning.

Hi, Mike.

Good morning, Mike.

Just a quick follow-up question, and I apologize if you guys have commented on this.

I think, Frank, you made a reference to a plant issue in AMSG?

Yes.

I don't -- was that material in the quarter, or is there any way to quantify that?

No, it wasn't material.

I think -- last quarter, I think I said it was about a 40-basis-point impact.

Now, we did -- we did lose two months out of the quarter, January and February.

But the facilities are essentially back on line in the month of March, so if anything, it would basically be insignificant.

Okay, great.

Thank you.

That's it.

Your next question will be from the line of Steve Barger of KeyBanc Capital Markets.

Hi.

Good morning.

How're you doing, Steve?

Good.

I wanted to see if we could approach the plant closure from another angle.

Can you talk about the square footage that will be taken out and -- or either in total or as a percentage of your complete footprint?

Yes, Steve, I don't have those numbers.

One of the things that I'll emphasize, though, typically, when we're looking at facilities [don't] have a high square footage.

I mean they have -- basically, a facility has a certain structure and cost associated with a facility.

So we're -- I would look at it from a cost perspective.

We're -- typically are going to reduce, as I said earlier and throughout the last couple of years, is that we want to cut the number of facilities in half in the long term, but that didn't mean that we're going to cut the square footage in half.

You know, the square footage impact would be slightly -- much smaller relative to the number of facilities.

So we're going after the facilities that have the higher cost and obviously have the highest benefit of not having it.

Right.

Okay.

And I know this is a tough question to answer, but Carlos, you said 15% is something that you can achieve beyond FY '09.

Is there any way to put any timing around that?

Is that an FY '10 kind of initiative now, or could it even stretch beyond that?

You know, I think that we'll be in a much better position to answer that when we finish our budget for 2009 and obviously release the guidance for 2009 because we're still working through the 2009 planning right now.

Like I said, we still have a bunch of levers that we'll look at to see what levers we pull, and we're still --- still, 15% EBIT margin is still our next milestone, still driving for that, still believe that that's achievable, and I believe that is achievable in the not-too-far future.

Okay.

Very good.

Thanks.

Your last question will be from the line of Mark Koznarek of Cleveland Research.

Yes, thanks.

Just a follow-up on the facility shutdown.

Is there going to be a revenue impact?

De minimus.

Okay, thanks.

Thank you, Mark.

At this time, there are no further questions.

Ms.

McGuire, are there any closing remarks?

Yes, I just want to say this concludes our discussion for today on the third quarter earnings results.

Please contact me, Quynh McGuire, at 724-539-6559 for any follow-up questions, and thank you for joining us.

Thank you for participating in today's Kennametal Third Quarter Fiscal Year 2008 Earnings Conference Call.

This call will be available for replay beginning at 1:00 PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on May 23, 2008.

The conference ID number for the replay is 39013045.

Again, the conference ID number for the replay is 39013045.

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

This concludes today's conference.

Thank you again for participating.

You may now disconnect.