Kennametal Inc (KMT) 2008 Q4 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 Kennametal's Fourth Quarter Fiscal Year 2008 Earnings Conference Call.

Our lines have been placed on mute to prevent any background noise.

After the speaker remarks there will be a question and answer session.

(Operator Instructions)

I would now like to turn the call over to Quynh McGuire, Director of Investor Relations.

Ms.

McGuire, you may begin your conference.

Thank you, Regina.

Welcome, everyone and thank you for joining us to review Kennametal's fourth quarter and fiscal 2008 year-end results.

We issued our quarterly earnings press release earlier today.

You may access this announcement via our website at www.Kennametal.Com.

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

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

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

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

Carlos and Frank will provide details on the fiscal 2008 fourth quarter and full year financial performance as well as our outlook for fiscal 2009.

After the remarks, we'll be happy to answer your questions.

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

The discussion we'll have today contains 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 has 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 matters during this call in accordance with SEC Regulation G.

This 8K 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, and good morning everyone.

Thank you for joining us.

During the June quarter, we continued to execute our strategies which led us to another record performance for the quarter as well as for the 2008 fiscal year.

Our financial results demonstrate that our strategies are working well even in the challenging environment.

Rising raw material costs, higher transportation costs, record steel prices and the soft economy in North America provided considerably head winds for both Kennametal and some of our Serbian markets.

Kennametal delivered strong financial performance for the June quarter on an adjusted basis despite those challenges.

We achieved 4% organic growth on a year-over-year basis and set a new sales record.

This represents our 10th consecutive quarter of year-over-year organic growth.

SG&A as a percentage of sales, one measure of the success of our cost-saving initiatives, declined 10 basis points from the prior year.

In addition, on an adjusted basis, we set new records for earnings per share and return on investment capital.

Those results serve as validation of our vision for our business as well as evidence of the continued dedication of our global team in successfully implementing our strategies using the Kennametal Value Business System or KVBS.

As always, KVBS is our guide in making decisions related to strategic planning, product development, sales growth, talent development, portfolio management and lead initiatives.

At Kennametal, we have always believed that the best time to prepare for a downturn is during the upturn.

When all geographies were growing, we prepared ourselves by making the appropriate investments in our business.

For the past five years, we have built an increasingly balanced enterprise which is clearly reflected in the diversity of our business portfolio, the geographic regions we serve and our numerous end markets.

This balance has provided Kennametal with the resilience necessary for us to deliver strong performance even in tough market conditions.

As a score card of our progress, 53% of Kennametal's revenues in fiscal 2008 were generated outside of North America, including 35% in Western Europe and 18% in the rest of the world markets.

This is a considerable shift towards more global balance and 5 years ago when we generated 44% of our revenues outside of North American including 31% in Western Europe and 13% in the rest of the world.

We believe that this serves as a clear demonstration of the success of our strategy to achieve a better balance of our business across the global marketplace.

Our goal is to establish an evenly balanced geographic presence across all three regions and we are well on our way towards achieving that.

During fiscal year 2008, we also continued to balance our business segments between the metal working business which represents 66% of sales and our advanced materials business which represents 34% of sales.

This is a significant shift in balance compared with five years ago when AMSG generated 17% of our revenues.

Our long term goal is to have each business represent 50% of sales.

Another key component of our strategy is to continue diversifying our portfolio in certain markets.

This greater balance will serve to lessen the impact of economic downturns in any one specific geographic region or industry sector.

During the fiscal fourth quarter, we experienced growth in many key industries in various parts of the world such as aerospace and defense, durable goods, mining and road construction, machine tools and general engineering.

Another important part of our success is that we continue to introduce innovative new products at a market leading pace.

New products provide opportunities for further margin expansion.

In fiscal 2008, 47% of our sales came from new product introductions.

In addition our channel branding strategy of selling Kennametal products to both direct and distribution provides the key driver of organic growth globally and facilitates a more efficient cost structure.

In fiscal 2008, 48% of metal working sales were through indirect channels compared to approximately 30% of metal working sales 5 years ago.

As you can see, our balanced business has evolved through a disciplined focus on diversifying Kennametal in a way that enables our company to grow and expand whatever the opportunities exist across the globe and the many market sectors that we serve.

I'll now turn the call over to Frank so we can discuss our financial results in greater detail.

Frank.

Thank you, Carlos.

I'll provide further insight on our performance for the June quarter and then, I'll move onto our outlook for fiscal 2009.

We continue to face challenges related to certain North American markets and higher raw material costs during the June quarter.

However, we delivered a record June quarter for sales, adjusted EPS, adjusted ROIC despite these headwinds.

These results come on top of the record quarter we reported in March.

We also, once again, generated strong cash flow for the quarter and for the fiscal year supported by the initiatives in the June quarter to reduce our inventory levels.

At the same time, we continued to invest in our business at robust levels while we also further strengthened our balance sheet.

As previously announced, we began implementing certain restructuring actions to reduce cost, improve efficiencies in our operations.

During the June quarter, we recognized pre-tax charges related to those initiatives of $8 million or about $0.08 per share.

Including these charges, we still expect to recognize a total of $40 million to $50 million of pre-tax charges associated with the restructuring actions.

The remaining charges are expected to be incurred over the next 9 to 15 months and approximately 90% of those charges are expected to be cash expenditures.

Annual ongoing benefits of these actions, once fully implemented, are expected to be in the range of $20 million to $25 million.

We are on track with the initiative plans.

As part of our continuing efforts to shape our portfolio, during the June quarter we also divested two non-core businesses with our metal working segment and recognized a combined pre-tax loss on divestitures of $600,000.

Cash proceeds received were $20 million and these two businesses had combined annual sales of $26 million and an annual operating loss of $900,000.

And, we also reduced our inventory in the quarter by $34 million of which $10 million related to the divestitures.

Now I'll walk you through the key items in the income statement and some of the comments I'll make will exclude the effects of the restructuring actions taken in the June quarter.

As you saw today, sales for the quarter were $753 million.

This compares with $657 million in the same quarter last year.

Sales grew 15% year-over-year and included 4% organic growth, 1% from acquisitions and 7% from foreign exchange effects.

And the current quarter had more work days than the prior year quarter which increased the overall sales growth by 3%.

Our organic growth was driven by strong sales in certain geographies such as Europe, Asia Pacific and India.

We experienced continued growth in many industry market sectors on a global basis.

Organic sales growth was slightly higher than our guidance of 2% to 3% despite the continued softness in North American.

This growth reflects strength and diversity of our business.

June quarter sales also benefit from somewhat improved realization of price increases implemented throughout fiscal 2008.

The June quarter represents the second consecutive quarter in which more than half of our revenue came from outside of North America.

Our higher growth in international markets as well as our improving global balance in our business is further demonstrated by the fact that 55% of our June quarter sales came from markets outside of North America as compared to 49% for all of fiscal 2007.

This is additional evidence of our ability to execute our strategy to further geographically diversify our operations.

Gross profit margin of 33.5% was 230 basis points lower as compared to the prior year quarter.

Absent the restructuring and related charges of $1.4 million, gross profit margin was 33.7% or 210 basis points lower than for the prior quarter.

The decline in gross margin year-over-year was primarily driven by higher raw material costs and lower manufacturing volumes related to the actions we took during the quarter to reduce inventory levels and to a lesser extent, lower performance in our extrude hung surface finishing machines business also contributed to the year-over-year decline in gross profit.

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

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

However, this is one area where we believe we could have done a better job.

Actions are being initiated to do just that.

Furthermore, we are all still experiencing some cost increases.

While I would believe that the prices for certain of our key raw materials may have peaked last quarter and our performance on Extrude Hung did improve from the levels achieved in the previous quarters of the fiscal year.

Our new management team at Extrude Hung is aggressively implementing a comprehensive plan to further restore the performance of this business.

We're also encouraged by an improvement in our energy and related products business during the quarter which provided a more favorable mix effect in our gross profit margin as compared to the previous quarters of the fiscal year.

Our operating expenses increased year-over-year by 14% or $19 million to $162 million.

Absent the restructuring charges of $2 million, operating expenses of $160 million increased 12% compared to the prior year quarter.

The increase is mainly attributable to unfavorable foreign currency, exchange rate fluctuations and employment costs.

We also incurred approximately $1 million of divestiture related costs that were recorded on operating expenses in the current quarter.

On an adjusted basis, operating expense as a percentage of sales decreased 20 basis points to 21.4 and 21.6 in the prior year's quarter.

The June quarter represents the 10th consecutive quarter in which we had made year-over-year reduction in operating expenses as a percent of sales.

We also recognized restructuring charges of $5 million related to the actions mentioned earlier and as previously mentioned, we also recognized a pre-tax loss of $600, 000 on the divestitures of two non-core businesses.

Our amortization expense for the June quarter was consistent with the prior year quarter at $3.8 million.

Operating income of $81 million for the quarter.

This represents a decrease of 8 million or 9% from $89 million in the prior year quarter.

Absent the impact of the restructuring related charges, operating income increased $1 million to $90 million from the prior year.

Our operating margin decreased 160 basis points as compared to the prior year on an adjusted basis.

Interest expense of $7 million was flat compared to last year's comparable quarter.

The impact of an increase in average domestic bonds of $98 million was mostly offset by lower average interest rates on domestic bonds of 5.6% compared to 6.9% last year.

Our total debt at June 30, 2008 of $328 million was down $39 million or 11% from a year ago.

Other income decreased $3 million from the prior year primarily due to higher foreign currency transaction losses due to the rapid rise in the Euro and this was partly offset by higher interest income.

Our effective tax rate for the current quarter was 20.1% compared to 27% in the prior year quarter.

The prior year quarter rate included a provision for a tax uncertainty.

In addition, the current quarter rate benefitted from the effect of divestitures and the tax benefit associated with the dividend reinvestment plan in China.

And, lastly, reported fiscal 2008 fourth quarter diluted earnings per share were $0.77 compared to $0.79 in the prior year quarter and absent the restructuring and related charges of $0.08 per share, adjusted EPS of $0.85 exceeded the high end of our guidance and increased 8% compared with the prior year quarter adjusted or reported EPS.

As I mentioned at the outset of my comments our balance sheet remains strong and we continue to generate strong cash flows from operations.

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

Adjusted return on invested capital was 12.3%, that was up 100 basis points from 11.3% in the prior year quarter.

Our cash and cash equivalents were $68 million at quarter end and that was up $18 million from June 30, 2007.

And as I said earlier, in the June quarter, we reduced our inventory by $34 million or 7% of which, $10 million related to divestitures as compared to the March quarter.

Our primary working capital ended the quarter at $785 million.

That's an increase of $104 million from $681 million at the end of last year.

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

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

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

Our debt to Cap ratio decreased 330 basis points to 16.3% as compared to 19.6% in the prior year.

And cash flow from operating activities was $280 million in the full fiscal year compared with $199 million in the prior year.

Adjusted free operating cash flow for the current year was $124 million compared to $197 million in the prior year.

The change in adjusted free operating cash flow was primarily driven by a $71 million increase in capital expenditures for enhanced manufacturing capabilities and geographic expansion as well as some changes in working capital.

We purchased 1.7 million shares during 2008 at a total cost of $65 million.

We have 4 million shares remaining to be repurchased under this program.

And additionally, as announced today, our Board of Directors declared a regular quarterly dividend of $0.12 per share.

Now I'm going to turn to our business units.

MSSG delivered top line growth in the June quarter driven primarily by organic sales gains as well as favorable foreign currency effects.

Industrial activity remained positive in most industry and market sectors on a global basis.

Areas of particular strength included aerospace, machine tools and general engineering.

And on a regional basis, continued growth in Europe as well as ongoing strength in developing economies particularly Asia Pac and India more than offset continued weakness in the North America market.

MSSG sales grew 13% as a result of 2% organic growth, 8% favorable foreign currency effects, 1% from acquisitions and 2% from days.

Asia Pac and India organic sales increased 13% and 18% respectively.

In Europe and Latin America, organic sales increased 4% and 6% respectively.

North America organic sales declined 5%.

MSSG's operating income decreased 3% and the operating margin decreased 230 basis points from the same period last year.

During the June quarter, MSSG recognized restructuring and related charges of $5 million.

Absent these charges, MSSG operating income increased 4% and operating margin decreased 130 basis points.

The primary driver is a decline in the operating margin with lower manufacturing production to reduce inventory and divestiture related charges offset somewhat by current quarter benefits for organic growth and FX.

AMSG sales increased 17% and that was driven by 8% organic growth, 5% from FX, 2% from acquisitions and 2% from days.

Organic sales increased on stronger construction and mining sales and higher energy related sales offset somewhat by lower engineer product sales.

For the second sequential quarter, we experienced improvement in our energy and related businesses.

AMSG's operating income was down 13% and the operating margin was down 430 basis points in the prior year quarter.

AMSG recognized restructuring and related charges of $3 million.

Absent these charges, the operating margin income decreased 6% and the operating margin decreased 320 basis points.

The decline in operating margin is due to higher raw material cost and lower performance on the surface refinishing machines and services business.

And corporate operating loss of $19 million was flat compared to the prior year quarter.

Now I'll review our outlook for 2009.

The global market indicators support our expectation for continued but more moderate top line growth during fiscal 2009.

We believe the North American economy will remain challenging for at least the next 6 to 9 months.

We also believe that the European market will continue to grow but at a slower pace.

Growth in India is expected to also moderate while other developing economies should continue to show resilience.

While there are some inherent and changing uncertainties in risk with the current macro-economic environment, it appears that the fundamental drivers will continue to provide a platform for moderate growth on a global demand.

We expect total sales growth of 5% to 7% for fiscal 2009.

Of that 2% to 4% will come from organic growth with the remainder form the effect of stronger foreign currencies offset by 1% reduction in sales related to our recent divestitures.

We expect fiscal 2009 EPS to be in the range $3.00 to $3.15 excluding charges that occur relating to the previously announced restructuring actions.

And consistent with our historical patterns, we expect approximately 65% of the forecast of EPS to be realized in our second half of our fiscal year.

And in the first quarter, we expect sales growth to be in the range of 7% to 8%.

Of that, 2% to 3% will come from organic growth with the remainder from foreign currencies offset by 1% reduction related to divestitures.

We look for EPS to be in the range $.0.50 to $0.55 excluding charges that occur relative to the previously announced restructuring actions.

And we anticipate cash flow from operating activities to be $310 to $330 million for fiscal 2009.

And based on anticipated CapEx of $155 million, we expect to generate between $155 million and $175 million of free operating cash flow for fiscal 2009.

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

Thank you, Frank.

As we head into fiscal 2009, we continue to expect challenges related to higher raw materials costs.

Our market leadership position and our ability to provide value added products and service allows us to continue to address raw materials cost increases by implementing strategic pricing actions and maintaining margin differences.

From my perspective, Kennametal has a solid business model and a strong balance sheet that provides us with financial flexibility.

With those tools, our management team has the ability to face challenges and to overcome them.

We have demonstrated repeatedly that we are capable of managing through tough times while continue to deliver value to shareholders.

The strategies that got us here today are the same ones that will take us to our next milestone of 15% EBITDA margins.

We are convinced that by staying on course and continuing to execute our strategies will enable us to overcome today's challenges and those in the future.

In summary, we have tremendous opportunities ahead and will seek to maximize them in a number of ways.

We'll continue to allocate capital to achieve higher returns by investing in our business for portfolio management, capital expenditures and restructuring actions.

And we'll continue to diversify our business, increase our globalization, reduce our costs and grow our profitability.

We have confidence that we'll be successful for three reasons.

First, we have a well understood and proven strategy.

Second, we have the knowledge and the experience to stay the course.

Finally, we have the right team in place to help us to reach our goals.

It's that simple.

Thank you for joining us on this call today and we'll be happy to take your questions now.

(Operator instructions) Your first question will come from the line of Andy Casey of Wachovia Securities.

Thank you.

Good morning, everybody.

Hi, Andy.

How are you?

I'm doing fine.

How you doing?

Good.

Good.

A few questions here.

What on the inventory reduction excluding the $10 million related to divestiture, at $24 million, what drove that?

Was that market or was that distribution channel change or can you explain that a little bit?

Andy, our strategy at the beginning of the year was to actually increase our inventory to drive service levels higher and to then once you achieve those services levels to start working on inventory reduction to win and efficiencies in the factory floor.

So the reduction during this quarter is for our strategy of once we achieve the services levels that we then go back and continue to work on efficiencies in the shop floor and our equipment is in place, the new equipment.

The investment that we made that was actually titled towards the first half of the year is beginning to pay off now in the fourth quarter and will continue through 2009.

Okay.

Thanks, Carlos.

And then on the MSSG margin in the quarter, it went down sequentially from Q3 if I x out the divestiture charge, it was about 150 basis point sequential decline.

Is it correct to assume that the $34 million had an impact of about 50 basis points on that margin sequentially?

Yeah, Andy, this is Frank.

The combinations as you point out, the divestiture charge of $600,000 and we have another $1 million in OpEx related to some systems work to get it ready and then, overall I'd say it's -- on the $24 million probably had about a 75 basis point impact on the Corporation.

Okay.

And then the rest of it, I guess would be around 75 basis points, would that --

It's 75 basis points for the entire corporation which would have a bigger effect --

Oh, I see.

Okay.

-- on an SSG.

That's the primary drivers there.

Okay.

On the tax rate for the year, you had a very successful result for the Pan European Asian strategy.

Is there more to come there or are we at a steady state?

Yeah, I would say we're anticipating the tax rate to be about 23% at this point because we did have a couple one-time items.

I guided 22% to 22.5% in the fourth quarter.

We were actually able to get the China dividend reinvestment and we have actually a slight tax benefit associated with the divestitures.

They actually offset the expenses -- operating expenses in the other lines.

But I think we're comfortable at this low level here as we continue to incur some charges.

That's why we think the below 23% range would be okay but I think longer term we still have some room but it's just a little premature at this time.

Okay.

Thanks.

And then, lastly, on Europe.

A lot of conversation about what's going on over there from different areas of what you would supply into.

Can you talk about what areas you're seeing are continuing to see strong growth and then, any that are sequentially dropping of a little bit more than you would have thought?

Yeah, Andy, this is Carlos.

We continue to see Germany as being strong at this point.

The two areas that we have seen some weakness, one is in Spain and the other one is in Italy.

Spain is a relatively small market for us.

Again, I remind everyone, the biggest market is Germany.

And the Germany -- we have an advantage because we play primarily or largely into their export market.

So their export market continues to be strong.

And Italy, although the economic environment is challenging, we in the last -- in the last year have been gaining some market share so we've been able to curb some of the economic effect on the European -- in the Italian market.

So those are really the areas.

Okay.

Thank you very much.

Thank you, Andy.

Your next question will come from the line of Joel Tiss of Buckingham Research.

How are you doing guys?

How are you doing, Joel?

All right.

I wondered if you could just remind us a little bit of the focus of the restructuring actions for 2009?

What areas do you think you can really make some changes in?

Again, one of the things, Joel, we talked about was obviously the manufacturing footprints which we think we can make some pretty good headwinds there.

And it's balanced between both MSSG and AMSG but the primary driver is a combination of footprint reduction and some back office functions that we're looking on on a global basis.

So we still expect to do the $40 to $50 million that we talked about of which $8 million occurred in the fourth quarter.

So we have the remaining $43 million "ish" to be incurred for the remaining fiscal or 9 to 12 months.

So that'll be wrapping up right there and then we'll have some divestiture related impacts that'll dovetail in there as well.

So when we take a step back, it's a combination of plant rationalizations, geographic footprint moves that we need to make going forth.

And were those non-core businesses that were divested?

Were they profitable?

No, as I said on the call, we had about $26 million in revenues and on a combined basis the loss was $900,000.

Oh, okay

And we continue to look at the commodity type business and really kind of prune the portfolio on it.

We think this kind of steps in the right was as opposed to incurring in some cases some restructuring, we could sell the business and in that case we actually did get $20 million of cash for both combined businesses.

Okay.

And then can you give us any characterization about what you're hearing about the inventory levels at the distributors?

Yeah.

No change, Joel.

I mean our distributors don't carry that much inventory from Kennametal.

I mean we ship all the standard products within 24 hours of order.

So they take advantage of our performance.

And there's still more penetration to be made on switching from the direct sales model into distribution?

Absolutely.

Absolutely.

And we made a lot of progress as you heard me in the call earlier on and we're focusing right now on Europe and the rest of the world.

All right.

Thank you very much.

Thank you, Joel.

The next question will come from the line of Eli Lustgarten of Longbow Securities.

Good morning.

How you doing Eli?

Okay.

A couple of questions.

One clarification.

I think that you said that the inventory reduction pushed you 75 bases points in the quarter of profitability?

Right.

Because that's -- that's something in the vicinity of $0.05 -$0.06 a share, is that fair?

That's correct.

And are you taking inventory down in the first quarter or the first half?

Yeah, a little bit.

Nothing -- nothing significant.

Similar magnitude or is it less than this?

It's less.

Ely, we're going to pay throughout the year more inventory out.

But the first quarter is less than the fourth quarter.

There'll be a few pennies impacts from that.

Secondly, I guess you made the commentary in the conference call that your pricing recovery is twice the first half.

Well, the first half is only 20% and that puts the pricing recovery by the end of the year at about mid 40% which is not much different from the third quarter.

Can you tell us what's happening and what kind of pricing you're going to do and the recovery you expect in 2009 from that?

Yeah, we'll break down each one and it did accelerate as you pointed out there, Eli, and simply not from magnitude and that's where we said we're somewhat not pleased with what we did.

We did do some additional actions in the fourth quarter.

As you know, we don't realize it immediately.

And as we go into fiscal 2009, we have much more aggressive pricing actions in our plan.

So we expect to get like a net 2% in our price in our fiscal 2009 guidance where we got less than 1% in 2008.

So, we're stepping that up quite significantly.

But to answer your question, we plan to recover the raw material price increase --

More than 100%.

-- more than 100% in 2009.

And you expect to do that by mid-year or something like that?

Yes.

Yeah.

I think as we -- in the first half, we'll be at that run rate.

Okay.

And was that just steel or what else went crazy in the fourth quarter that basically throws your price recovery?

I mean steel, we know, went crazy in the last quarter but is that the biggest one that killed you or did anything else happen?

It would be more so on steel and as you know some of our contracts lag, so even though when prices come down, immediately we don't' get that benefit.

So we knew we had to deal with that in the fourth quarter so we used that as a catalyst to get additional price.

Okay.

And your guidance when we look at it, 2009.

I mean I understand the relatively flattish first quarter versus last year's report.

But, you had a 5% to 7% sales gain in which 2% to 4% is organic.

And that organic probably includes a couple percent of pricing.

Correct.

So are we talking that you're basically hoping sales to be flat, decidedly up in 2009, is that sort of the --?

No, what I want you -- again, on an organic basis, you're correct.

Obviously price is in there.

But, we also anticipate to do some customer and some product rationalizations that will probably lose some top line volume.

And that's why I said that.

And number 2, to your point on the "flattish" in the first quarter, the reason that it's flat is as we implement the restructuring, particularly on a facility, we're going to have some disruption.

So we anticipate $4 million to $6 million of disruption that's in our guidance.

That's why it's flat.

Had we not had the disruption, we would have been up double digits in the first quarter.

But you're counting that in continuing operations, right?

It's in operations.

That's what we anticipate.

But it's really tough sometimes to quantify the exact disruption effect.

Once -- if we know that at the end of the quarter, obviously we'll report that.

Are you taking, the nickel that you're implying impact in the first quarter in part of the 3 to 3.15.

You wouldn't X that out?

Correct.

Obviously we're going to do everything we can and we have a really good history of minimizing the disruption.

At this point we need to plan on it and we're going to try to manage that.

But, the reality --

And then from an acquisition standpoint in the balance sheet is squeaky clean if you were on 15% debt.

I mean is there anything on the horizon?

You have very minimal impact in acquisitions this year and actually there is more divestiture than acquisition at this point.

Are we looking at any potential acquisitions in the first part of the year or is something coming?

Is the pipeline active or what's going on?

Yeah, Eli, we are very active and as I always say, the acquisitions are really hard to forecast when they come.

The year before we had a very good year.

This year we had a lousy year from an acquisition perspective.

But right now we're probably -- we'll be able to make a couple acquisitions in the first half if things work out the way we see it at this point.

And one final question with the stock sort of getting beaten up and the balance sheet.

Is there any thought of accelerating the share repurchase or at least doing -- you've got 4 million to buy and probably get some more.

I mean this looks like a bargain price.

The question is, why don't you sit there and take a little more advantage of it?

The answer is yes.

And I think that yes and yes and yes to the comments that you made.

And the reason we didn't is because we were in a black out -- didn't do it in the fourth quarter we're in the black out period so.

All right.

Thank you very much.

Thank you.

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

Thanks.

A couple follow ups.

First, I guess I'm struggling to understand why you're confident that the price recovery in fiscal '09 is going to be stronger.

I wonder if you can step through strategies that are going to change or put some more color around why we should believe that that's a likely case scenario given the continued weakness in that market?

Well, Terry, first of all the strength of the -- part of the strength of 2009 recovery is because we took the actions in 2008 because the price increase in -- we had numerous price increases during 2009 and if you think that it -- 2008.

If you think that it takes us about a year to recover and we have multiple price increases throughout the year, we are going to benefit in 2009 by the price increases that we made in 2008, number 1.

And we believe that the raw materials that we use are going to be flat so that will give us an advantage.

And the inflationary environment, economic environment, is obviously more right now than it's ever been to get price increases, I mean.

So we have a good profit.

I'll remind everyone on the call that a few years ago when our -- tungsten went up by 300%.

Well, we were able to recover 100% of that tungsten at the time as well.

So we have proven that we have the discipline.

Our challenge is timing.

Our challenge is if we have one price increase, we know that 12 months, by the end of 12 months we'll recover it.

The challenge is that if we have a raw material price increase per quarter like we did in 2008, it is going to spill into 2009 before we recover it.

Any other thoughts, Frank?

Yeah.

What out there, Terry, is again, obviously the first half, we didn't have these type of levels on raw material costs.

So in the 3rd and 4th quarter, we know our costs -- what they did.

And the two biggest, tungsten and cobalt are they're flatter trending now.

So that we feel pretty good about that coupled with what Carlos said about the price increases, we have the headwinds in the first half and then, we'll have some tailwinds, we think, in the second half of our fiscal year, so that's kind of how we're looking at it from our perspective.

Frank, you had mentioned customer rationalizations.

Is there a strategy to walk away from certain business where you're -- we're not able to get that price at this point that's different going forward than what we had in '08?

It is.

I mean it's not that we're just going to walk away from all the customers.

Obviously, a lot goes into that.

If the customer is a customer that typically buys more commodity products that is not going to change.

It's going to continue to be that way.

Is a customer of a non-core business, we obviously have been and will continue to walk away from that business.

And the pressures in '09, at least as it looks today, more so on the steel side than the cobalt and tungsten side.

At least I think that's what your outlook commentary there just implied.

Is there something about the customer's receptivity to steel price related -- steel inflation related price increases versus tungsten and cobalt that should give us reason to believe that that's more likely or is it all kind of the same to them?

Well I think that it's more likely because most of our customers are feeling the same thing that we are with steel.

So when we talk about steel price increases, they obviously understand that better.

But at the end of the day we have been very successful.

We have good processes and practices.

And it comes from the fact that we're the Number 1 or Number 2 in our market and we provide value added products and services.

So we've been very, very effective and we have a high level of confidence that we can recover the raw material price increase.

Okay.

Question on your North America oil field related business in AMSG, would you characterize that business which was hit hard kind of late in calendar '07 on North America and that gas weakness and related rig count weakness which is -- at least the rig counts responded here.

Gas price is still volatile.

But I'm wondering, would you characterize that business as sort of back on trend or are we still over the next 6 to 9 months or what-have-you likely to see a further uptick in that part of the business way which is a very profitable segment for you?

I wouldn't say that it's back on trend.

I would say that it is improving in a monthly basis.

So I think that we still have a good potential upside in that business as we go further into our fiscal year, 2009.

And we've seen moderate improvement on a month to month basis in the last quarter.

Yeah.

I think, Terry, to your point, both on the underground coal mine and similar situations in natural gas that we have a totally different environment than we did a year ago at this time when we were talking.

I mean storage levels were in the high double digits where now they're negative to your point on the rig count.

And then, prices, you can say what you want on the natural gas and also on the underground coal, they're also quite heavy levels compared to where they were a year ago.

And then, lastly just on -- make sure I'm square with your assumptions for steel, cobalt, tungsten in your FY '09 guidance.

I guess I'm discerning from your various comments that you're assuming steel is kind of flattish from here.

Cobalt, I think you said you think it backs off in the back part of your fiscal year.

Could you just square us up on steel, cobalt, and tungsten assumptions in the guidance, please?

Yeah.

We said overall our raw material cost is going to be stable.

We assume -- we see tungsten and cobalt coming down slightly and we continue to see steel going up.

Thanks very much.

Okay.

Thank you.

Thank you, Terry.

The next question will come from the line of Walt Liptak of Barrington.

Good morning.

Good morning, Walt.

How are you?

Great.

You talked about the organic price versus volume, 4% organic growth for the year and so that you said less than 1% is priced.

I wonder if you could break it out for the quarter what your price versus volume was?

Let me make sure I understood it because I think we broke up there.

In '08 price was less than 1%.

That's a correct statement.

And as we said in Fiscal '09 we expect to be at around 2 % price realization and that is going to overcome all the raw material cost increases.

So, again, I didn't hear the question.

The question is if you could break it out during the quarter.

I want to see if the pricing trend is significantly better than it was for the full year.

In the quarter, what was your price versus volume breakout?

Well, the organic was 4% and I would say there's less than 1% of price in there.

I mean now that's -- as Eli pointed out in the call, it was anemic in the first two quarters and we got maybe 0.5 % in the third and fourth quarter and with some of the additional actions we've been doing, as Carlos said, throughout the year plus fourth quarter actions, plus some stuff we have going on, we expect this to start accelerating.

Okay.

Great.

And the -- I wonder if we could talk about the AMSG, the 8% organic.

How much was price?

How much was volume?

I don't want to get into individual segment but let say there was more price in AMSG.

Or actually, it was about -- it was pretty much the same believe it or not but what I would call AMSG accelerating.

Okay.

And those markets continue to improve.

Would you say that it's on the coal side, the underground coal or is it the natural gas that's picking up faster?

Yes and yes.

I mean I think they are both are improving.

Okay.

And then with regard to the charges, you mentioned that you're going to be doing some plant rationalization.

My understanding was that was going to be North American based.

Is that the case?

No that would be both (inaudible) and North America.

Okay.

And when you break out charges during the year, do you think they're going to be -- are we going to see charges every quarter through 2009?

Yeah.

I would say they're going to be heavier in the first half and then they'll start to decline and that's why when we talked early we will have higher disruption in the first half and that will decline.

Then, we'll have some of the benefits or I'll call it the savings from the actions we initiated in the first half start kicking in the second half.

So when you think about the second half versus the first, you've got the raw materials and we discussed what we're doing with the price.

You're going to have less disruption in the second half and then you're going to have on top of the less disruption you're going to have the benefits that we talked in the $20 million to $25 million kicking in pretty substantially by the end of the fourth quarter.

So that's why the -- it's probably a little skewed more toward the second half.

But these are pretty much kind of known projects from a restructuring standpoint and what we feel we can do on the price.

Okay.

Great.

Okay.

Thank you.

Thank you, Walt.

The next question will come from the line of Mark Koznarek of Cleveland Research.

Hi.

Good morning.

Good morning, Mark.

How are you?

I'm pretty good.

Hey, I apologize.

I got on the call a little bit late and I have a question about these disruption related costs associated with the restructuring that we're talking about.

In the answer to a prior question I thought I heard that it was $5 million to $6 million expected in the first quarter.

Could you comment or could you comment on what full year disruption related expense is likely to be that's' going to be embedded in the P&L?

Mark, what I said, in the first quarter which is -- this is already in the guidance of 50 to 55.

I said $4 million to $6 million dollars of disruption.

Okay.

And then for the full year, it could be anywhere from $10 million to $13 million dollars roughly.

Mark, that's all we have in the plan and we're going to try to manage that, obviously.

We've been very successful in managing this core plant closing that we've done relatively well to the costs.

Okay.

All right.

Good.

Then the question I had, also -- I'm not sure if you covered this so I apologize if you did, but with regard to the outlook, 2% to 4% core growth, could you separate that directionally between the two business segments and then any kind of geographic or market spin that you would care to further characterize the outlook?

Hi, this is Quynh McGuire.

We typically do not provide guidance at the segment level, only at the total company level.

Okay.

Then I will move on to my next one which is the impact of the overall guidance.

It looks like if you take approximately the midpoint, it results in about 100 basis point margin improvement that gets you overall to roughly 12.5%, so still pretty far from that 15% long term goal.

And so, what I'd like to ask about is whether there's a new timetable put on that 15% and whether you expect to be anywhere close to that on a run rate basis as we exit '09?

Yeah, Mark, looking at the current economic conditions, we think that the 15% is a more realistic target for 2011.

Although as we look at some of this portfolio management that we're talking about, if we can do some of those things that can help us move that -- improve that timeline.

I'm not sure I understand that Carlos.

There are some actions you're planning beyond the current restructuring program?

Not at restructuring-- portfolio management.

Portfolio management is not in the current guidance, yes.

Just like we just sold two -- divested two business.

I mean we -- I think that we have some opportunities there as well going forward.

So, Mark, as you think going into 2010, you've got the $20 million to $25 million coming from the cost-serve initiatives, further, portfolio management.

We've got stuff that we did this year, potentially more to come and then we expect to exit this fiscal year on a much stronger run rate from a pricing perspective.

And then, obviously we can't talk about acquisitions, what they play, but we feel pretty good about that.

Okay.

As we see it now, 2011 is very achievable but we as a management team, we still believe that 15% is the -- the 15% plus EBIT margin business and we'll continue to work hard to bring that timeline inwards.

Okay.

So just to make sure that I understand that the $20 million to $25 million benefit is solely actions under your control that have to do with these re-foot-printing actions.

And then, beyond that, there are other portfolio management actions that could happen and you obviously need a -- the counterparty to agree.

But that would be an additional positive.

Is that the right way to think about it?

You're right on.

Okay.

Great.

Thank you.

Thank you.

The next question comes from the line of Steve Barger with KeyBanc Capital.

Good morning.

Hi, Steve.

How are you doing, Steve?

Pretty good.

The question on AMSG margins, this is the second year in a row in which they're down on a year-over-year basis and the implied 1Q '09 margins are going to be down, year-over-year.

And I know there's a whole variety of reasons for that going back but can you tell me why we should not start to assume that there are structural reasons as to why there's not a lot of upside to AMSG margins?

I think the number one reason is realizing how much raw material prices have gone up.

And their content of raw materials is much, much higher than the content of metal working.

I mean, if you look at the products that they make, metal working are very small products and so if you can look at the magnitude of raw material price increases that have taken place.

And they have not taken place one time; they have been taking place on a quarter by quarter basis which makes it more challenging for us to recover it.

That's the number one reason.

Frank, do you want to add anything to it?

Yeah.

Steve, I want to add to your point.

On the structural side, I would say there was, I think, at Extrude Hone did not perform what we had anticipated so we are doing some structural changes there.

We saw the improvement from Q3 to Q4.

We have a new leadership team in there that's being very aggressive so I think we'll see some rebound there.

But that would be one that I'd point to secondarily to the raw materials.

Yeah.

But, the raw materials are really the number one driver.

The raw material is 80% or more of the driver of the business.

We like the business.

We're going to continue to invest in the business and we're going to make -- keep -- make acquisitions to add to that business and our strategy continues to be that we want that business to be 50% of our portfolio.

Okay.

And to that 50% point, you cited the progress over a five year period to today's 66/34 split.

But again, there wasn't that much progress from '07 to '08.

So what happens in '09 to get the mix moving in the right direction again?

Well, I mean, the first answer, we talked about that.

Is the fact that the energy and then the mining so the mix is actually, has started to come back.

And will come back in 2009.

And the restructuring actions that we've put in Extrude Hone are going to help.

And I mean, we have talked about the fact of the challenge that we had last year about the raw materials.

Yeah.

Steve, I would say there's probably more acquisition type stuff potentially in AMSG and potentials of portfolio management and MFSG to come into play.

Okay.

We talked a lot about restructuring on the call and I think we're all looking forward to that.

And I know it takes awhile to physically accomplish.

But thinking about your sales growth forecasts relative to the new capacity you have in India and China, how many plants could you theoretically close this year, if that were really an instant process?

I mean we really don't look at -- I mean we have a list of the facilities that we would -- that we can afford from a capacity perspective to close.

But -- again, I'm not going to tell you the number of plants because the minute I tell you that, then I have a productivity issue in this company.

I understand but is it reasonable to think that conceptually you could close more plants than you're actually going to based on the capacity you have from the new facilities?

I mean we will close all the plants that we can close during the year.

We're being very aggressive and this is the reason why we took the charge versus pay as we go as we've done in the past.

So I will tell you that we are closing all the plants.

We'll close all the plants and facilities that we could do in this year.

All right.

And then just one last one.

Regarding your commentary in the press release about the North American economy being challenging for 6 to 9 months.

Does that assume that you see a bottoming and then an upturn in your 4Q '09 or is that getting a little too granular in terms of your North American forecast?

I mean it's hard to see that far but yeah, the guidance that we gave you implies that there is some moderate uptick in the fourth quarter of fiscal year '09.

Okay.

Thanks very much.

Thank you.

Your next question will come from the line of [John Emerick] with Ironworks.

Thank you.

Just a question of clarification on the cash flow guidance.

310 to 330 in cash flow from operations and 155 is the midpoint for CapEx, is that right?

No, the 155 -- yeah, the 155 is CapEx, right.

And that doesn't include though cash payments for restructuring?

Well, as I said, 90% of the charges are going to be cash.

And what is that amount?

Well, we said $40 million to $50 million.

We had $8 million in the fourth quarter so we're going to have up to $43 million remaining, 90% of that will be cash.

And that 27 to 36 is or is not in the 155 CapEx guidance?

It's not.

It's not.

Great.

Thank you.

Your next question will come from the line of Dana Walker of [CalMar] Investments.

Question about the fiscal '09 buildup.

If we were to look at your operating profit numbers at the segment level and then at your corporate expense, should we think about corporate expense being flat?

Maybe you could talk more fluidly about how you expect to go from 276 into your range?

Dana, that is a good question.

The Corporate came in at 80ish.

We expect that to be closer to 100 and that's really, it's a couple of factors when you break it down.

It's number 1, of IT investments we're making.

Okay.

That is where IT is rolled up into.

And secondarily is given the performance of the Corporation last year, the variable component of compensation plans is basically restored in the plan so that is driving a portion as well.

So it's some IT, some RD&E and then it's some compensation plan.

So that's the increase from a buildup.

At Corporate?

At Corporate.

Which would suggest that the segment operating profit would have to grow a reasonable amount?

Correct.

Your assumptions on interest expense?

Very similar to the fourth quarter -- oh, the absolute dollar?

I presume it's around $30 million.

Yeah --

Four times the quarter level.

Yeah, that's maybe a little bit higher because I expect us to have a little bit higher interest income from the cash balances but you're in the ballpark.

And remind us one more time, you're on an adjusted basis, your tax rate for the most recent year was and you're expecting 23% in the out year?

Yes.

I said 23% in the out year.

And the adjusted number for fiscal '08 -- X charges was?

Yeah.

It was like 21%.

But that was with the charges though.

That was not the adjusted; was that the adjusted?

Dana, some of these are modeling questions.

Is it okay if I follow up with you after the call to sort of walk through those items?

It most certainly is fine.

Let me move on to a couple of other matters.

You've started an investment process in new equipment.

Can you talk about how -- to what degree that new equipment is in place and how it will affect your cost of goods sold?

Well the equipment is put in place throughout the quarter.

2008 was more tilted to the first half than the second half.

The majority of the reduction in the inventory came from being able to get that equipment in place to improve our service level so -- and we don't' have, we don't give out the breakdown but part of our improvement in the gross margin for the business this coming year is as a result of the capital equipment that we put in place in 2008.

Carlos, you mentioned earlier in the call how if you had to fault your execution in one particular way, you felt that you were not aggressive enough on price.

I'm a generalist but there are a lot of folks on this call who are specialists and they're covering companies that have perhaps taken 10%, 15%, 20% pricing action in any given year depending on what their raw inputs happen to be and we're listening to 1% and 2% as you describe which you believe you can achieve.

Help us with the disconnect between the more aggressive response to raws versus Kennametal's response.

I mean the 2% is obviously a realized price versus -- I mean our -- we go out with price increases that are higher than 2%.

And again, it's very difficult when we get multiple price increases because it takes -- we have contracts and so forth -- it takes us a number of months before we can equal that.

So what we're doing this year is we are actually going ahead of any input cost and with a higher number -- a higher increase in prices going forward.

But typically we have been very, very successful when you only have a one-time hit price increase, that we recover that within the 12 months.

Any additional color on this, Frank?

I would say MSG's probably a little bit higher in the metal working business given some of the more material heavy contents and obviously we give you a blended rate there, I suppose.

And then we try to look at profitability as well on new products as opposed to just going out with the price increase as we continually pitch additional pricing -- we try to shift it away from just a pure price play to obviously a new technology.

As your businesses gone increasingly indirect?

Does that help or hurt your ability to wage or to wield pricing power?

It helps us because it's easier to get price increase through the distribution and through direct.

We don't have contracts.

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

Hi.

Two quick follow up questions.

One, foreign currency outlook.

You talk about having currency in your guidance but the Euro is the big currency move has got an anniversary in the second half of your year.

Do you have any currency built in the second half of next year?

Do you expect that to weaken more, or how have you thought about that?

Yeah, we have and we have that kind of a pattern built in, Eli.

You have the dollar weakening some more in the second half over the next year?

No.

Sorry?

Still strengthening.

All right.

And you talked about customer rationalization as part of some of the things that will change and can you talk about whether you have -- how much impact do you have built into your either sales numbers or earnings numbers for some of those aspects?

We have the disruption which is a nickel and a quarter and probably $0.10 -$0.12 in a year.

What does -- is a customer rationalization, is there an impact that still could be a guidance from that?

There's some but it's -- I don't want to get into that level of detail, Eli.

Okay.

But we should assume that there is some impact that's measurable from those actions?

Right.

Yes.

Yes.

Okay.

All right.

Thank you.

Thank you, Eli.

Your next question will come from the line of Henry Kern of UBS.

Hello.

How are you, Henry?

Pricing has have been beaten to death.

But, question about the market response to your pricing actions.

Have you seen any degradation of demand from that or are the switching costs too high?

Well, I mean, in a lot of our business the switching cost is high and lot of -- the balance of the business is not.

Because we are a diversified business, it varies.

But all I can tell you is that it has gotten easier.

It is never easy to get a price increase.

It has gotten easier to get price increases as a result of the environment.

I mean everyone is dealing with price increases and it has become more of an easier topic of conversation.

And is there any way to break down between difficult and easy -- or easier areas to get pricing in?

I mean, I don't know how I would do that but all I can tell you is that the environment is getting better.

Okay.

And, I guess, as you look at the portfolio changes that you're considering, how do you evaluate that and find businesses which should or shouldn't be in the portfolio anymore?

I mean there are a lot of aspects that go into that.

I mean we have determined what our core business and non-core business that obviously we keep to ourselves.

And then there is -- we look at profitability of the business and we look at different contributions of the business.

We look at what is the prospectus on -- what is the future of the business?

I mean there are a number of elements.

We use a matrix to evaluate those businesses and at the end of the day we make decisions based on that and we've been very successful doing so.

Is there anyway to scope out how big those businesses are that are no longer core?

No.

I just.

That information is information that I would hate to have in the hands of our competitors.

All right.

Thanks a lot.

Thank you.

Your last question will come from the line of Andy Casey of Wachovia Securities.

Hello, again.

How are you doing, Andy?

I'm okay.

A follow up on the base business outlook.

I just wanted to understand that a little bit more for '09.

And just in preparation for that, if you look at the second half of fiscal '08, adjust for calendar days and pricing, the base looked like it decelerated from around 5% in Q3 to about 1% in Q4.

Going forward, it looks like you lose about a percent from the divestitures completed in the quarter and then if I take the response I think I heard to one of Eli's earlier questions, it looks like at the midpoint of the 3% for the year in organic growth, X out the pricing, it's around flat to 1%.

So implicit if you look at the divestitures in that Q4 base, there's a bit of acceleration going on.

And I know you said something about North American recovery.

And you've had good trends in your AMSG business.

Is there any other thing going on there that would support a modest reacceleration?

I mean, I think we covered the in markets outlook as far as we expect aerospace in the second half of the fiscal year to be a little bit picking up.

And then from some of the advanced materials business, we have some, obviously, some new products.

We're displaying some new products coming out at INPS in September.

We're not expecting anything significant but from a baseball term, a lot of singles to help us score some runs.

Okay.

But no further deceleration?

That was, if I'm right, you saw between Q3 and Q4.

Yeah.

Okay.

Thank you.

All right.

Thank you very much.

This concludes our discussion.

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

The operator will announce the details of the replay.

Thank you for participating today in Kennametal's fourth quarter fiscal year 2008 earnings conference call.

(Operator Instructions) This concludes today's conference.

Thank you, again, for participating.

You may now disconnect.