Kennametal Inc (KMT) 2009 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to Kennametal's third quarter fiscal year 2009 earnings call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

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

Please go ahead.

Thank you.

Welcome, everyone.

Thank you for joining us to review Kennametal's third quarter fiscal 2009 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 practice in prior quarterly conference call, we have 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 May 24, 2009.

I'm 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 the quarter's financial performance.

After their 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 measures during this call in accordance with SEC Regulation G.

This 8-K presents GAAP financial measures that we believe are the 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 today.

The third quarter of fiscal 2009 was exceptionally challenging for Kennametal as well as most companies in the industrial sector.

The downturn in the global markets, particularly in Europe, was more rapid and significantly steeper than anticipated.

In fact, the current downturn has been broader, faster and more pronounced than any we have witnessed in Kennametal's history.

Credit markets continue to be difficult and the recession deepened.

Capital spending and industrial production both slowed.

Customers and distributors continued destocking and are using their inventories on hand.

On a geographic basis, North America, Europe, Asia and India all experienced lower sales volumes.

The March manufacturing report from the Institute of Supply Management or ISM underscored the environment in the North America marketplace.

The reported stated -- the report stated that economic activity in manufacturing sector failed to grow for the 14th consecutive month and the overall economy contracted for the sixth consecutive month.

In Europe, industrial activity essentially fell off the cliff in the March quarter.

Germany and other major European economies are in deep recession.

Production in our served end markets in Asia and India was also down considerably year-over-year.

While certain sectors in Asia are starting to show some slightly positive signs, we do not yet see any concrete indicators of stabilization on a global basis.

Therefore, we do not know whether economic conditions have reached bottom or when the recovery will begin.

As we announced last week, the highly unfavorable economic environment had a considerably negative impact on our business for the quarter, resulting in sales decline of 32% on an organic basis, and an operating loss of $6 million before charges related to restructuring and impairment.

In response, we reacted quickly with additional measures during the March quarter as we saw the economy turn further downward.

As a result, we have already significantly reduced our costs, and will further reduce our costs going forward.

Our management team is fully engaged in navigating Kennametal through those turbulent times.

We have a specific emphasis on maximizing cash flow, maintaining financial flexibility, and focusing on our balance sheet.

During the quarter, we continued to execute our strategies and apply our disciplined approach to running the business.

At the same time, we took aggressive measures to collect accounts receivable, lower inventory levels, and reduce costs.

In addition, we are continuing with many other programs in which we have been engaged throughout the fiscal year.

Those include accelerating our restructuring plans, streamlining our manufacturing footprints, and right-sizing our business.

Now let's discuss some metrics that show progress that our global team has made as we manage through the economic downturn.

As I mentioned, we have been intensifying collection efforts for our accounts receivable.

We are closely following disciplined processes related to customer payment terms and are focusing on our accounts receivable aging balances.

As a result, we've been able to avoid any meaningful deterioration in our accounts receivable aging.

For the March quarter, we have maintained our days sales outstanding or DSO at 63 days, which is within our historical range.

Second, we have been closely managing our production schedules to manufacturing at or below demand levels.

We continue to rely on our lean principles and work proactively on demand planning.

We have reduced our inventory by $31 million over the past two quarters, while maintaining high customer service levels.

Third, we have been reducing capital spending as March 31, our year-to-date total was $93 million.

This represents a decrease in CapEx of $38 million or 29%, compared with the same period last year.

Finally, we have continued to lower our overall cost structure by streamlining our manufacturing footprint, reducing our manufacturing costs, and decreasing operating expenses.

We also took some temporary measures such as implementing unpaid employee furloughs, suspending matching Company contributions to certain defined contribution employee benefit plans and applying order related actions across our global enterprise.

As a result of those efforts we generated cash flow from operating activities for the first nine months of $164 million.

In addition, we expect our combined cost reduction programs to result in a pretax savings of $125 million annually, once fully implemented.

As we manage through the current environment, we continue to diligently work with our customers to reinforce the value proposition of Kennametal's products and services.

We are demonstrating the performance of our products and validating productivity savings realized by our customers.

For example, in tooling and production magazines, 2009 cutting tools survey, 72% of respondents named Kennametal as their tooling provider of choice, while our nearest competitor was 15% lower at 57%.

In addition, 89% of those surveyed put Kennametal at the very top of their name recognition list for tooling providers.

Clearly, this survey that was just released shows that Kennametal is first for tooling in customer mind share as well as first in business share.

By increasing touch time with customers in this difficult economy, we are able to retain or penetrate existing accounts, gain market share, and identify new long-term opportunities in certain developed industry segments.

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

Frank?

Thank you, Carlos.

I'll provide further comments on our performance for the March quarter and then I'll move on to the outlook for the remainder of fiscal 2009.

Some of my comments will exclude special items so please refer to the reconciliation schedules we provided in our earnings release and related 8-K.

As Carlos mentioned, the impact of the global economic downturn on our markets and business has been more rapid and steep than anticipated.

Those of you who closely follow our monthly published order rates have certainly observed that trend.

It's striking to think just six short months ago we reported record or organic sales for our September quarter.

Even as late as October, our organic sales were flat with the prior year.

We saw modest decline in November and then in December was considerably weaker with organic sales down 24% from the prior year.

Organic sales in January and February were down about the same as December, then in March our organic sales fell by 43% from the prior year.

The speed, descent and impact of this downturn are unprecedented in our Company's 70-year history.

This is a tremendous challenge of which we will and continue to aggressively respond.

Against this background, we considered ourselves fortunate that we started our restructuring programs about one year ago.

We are now realizing benefits from those actions and the savings will continue to accelerate.

Over the past 12 months, we added to those programs and continued to implement additional cost reduction actions including further measures this past quarter.

As one measure of the degree of favorable impact of our cost reduction actions, our year-over-year decramental EBIT margin for the March quarter was 34% on an organic sales decline of 32%.

This is an improvement in decramental EBIT margin of 700 basis points from the December quarter which had a year-over-year organic sales decline of 10%.

Maximizing cash flow and ensuring adequate liquidity remain our top focus and priority.

As business conditions deteriorated further in the quarter, we reacted with additional measures to reduce costs and support cash flow.

These steps included, one, we terminated our interest rate swap agreements and received a cash payment of $13 million.

We implemented a one week employee furlough in March and we implemented another one week furlough in April.

And we're evaluating further actions in the next two months.

Also in March, we converted our basic employer contribution to our 401(K) plans from cash to stock.

And also in March, we suspended our 401(K) employee matching contribution.

And we implemented equivalent actions in our non-US operations.

We also continued to take advantage of short time programs in non-US operations as available, whereby employees are scheduled to be off work and not paid by us for one or more days per week but receive government assistance for those off days.

And last week we announced further restructuring actions that we intend to take.

We continue to employ other specific and targeted actions to maximize cash flow and liquidity.

Tremendous attention and focused efforts continue to be placed on collecting receivables, with particular emphasis on aging and actions on past due accounts.

We have managed to avoid having any meaningful deterioration in our accounts receivable aging.

We are constantly managing our production levels and now have reduced inventory for the second consecutive quarter, despite the rapid and steep dropoff in sales volumes and at the same time we have maintained high off the shelf inventory availability for our customers.

And purchases of capital equipment are reduced to maintenance level until further notice.

As a result of our cash flow management initiatives, we generated $48 million in cash flow from operating activities and free operating cash flow of $25 million for the March quarter.

Our debt-to-cap ratio was 28.4% at March 31, 2009.

Total debt was $502 million at quarter end, down $21 million from December 31, 2008.

Another positive is that we are not experiencing asset declines in our US pension funds due to the successful implementation of our LDI strategy a few years ago.

Our US pension funds remain over 100% funded and we do not anticipate any US pension funding needs in the foreseeable future.

Now let me walk you through the income statement.

Our sales for the quarter were $441 million.

This compares with $690 million in the same quarter last year.

The 36% year to year decrease in sales was comprised of the 32% organic decline and a 5% decrease from unfavorable foreign currency effects, partially offset by the net favorable impact of acquisitions and divestitures of 1%.

Sequentially, sales for the March quarter were down 22% from the December quarter as the severe economic downturn impacted all geographies, and most of our end markets.

Turning to the business units, MSSG sales decreased by 43% from the prior year quarter, driven primarily by an organic sales decline of 35%, unfavorable foreign currency effects of 6%, and 2% from the impact of divestitures.

On a global basis, industrial production declined sequentially and in comparison to the prior year quarter.

Demand in most industry and market sectors has weakened substantially.

On a regional basis, Europe, India and North America reported organic sales declines of 40%, 38%, and 34% respectively for the March quarter.

Asia Pacific and Latin America also experienced organic sales declines of 31% and 21% respectively.

AMSG sales decreased 22% from March one year ago, driven primarily by a 24% organic decline and a 3% decrease from unfavorable foreign currency effects, partly offset by the impact of acquisitions of 5%.

The organic decline was primarily driven by lower sales in the surface finishing machines and services business, as well as the engineered products business.

Our gross profit margin was 23.5% for the quarter as compared to 34.5 in the prior year.

Restructuring and related charges of $2 million were recorded in the costs of goods sold for the quarter.

Absent these charges, gross profit margin was 24% compared to 34.5% in the prior year.

In short, the primary driver contributing to the decline in gross margin percentage was reduced absorption of manufacturing costs due to lower production levels.

To compensate for this we continue to substantially reduce our manufacturing costs in response to the steep and rapid downturn in business levels.

And our price realization exceeded the increase in raw material costs for the third consecutive quarter.

Our operating expenses decreased 28% or $42 million to $108 million from the prior year quarter.

The decrease is mainly attributable to lower employment costs, as a result of the impact of restructuring and cost management activities as well as the impact of foreign currency rate fluctuations and other cost reduction actions offset somewhat by a net increase from acquisitions and divestitures.

We also recognized restructuring charges of $33 million during the March quarter.

And we also recorded a net $1 million of restructuring related and cost of goods sold and operating expense during the quarter.

As such, total restructuring and related charges recorded in the March quarter were $34 million, which was the equivalent to $0.51 a share.

These charges relate to the previously announced restructuring plans which involve the closure of five manufacturing facilities, as well as workforce and other cost reduction actions.

Pretax charges recorded to date for these initiatives were $61 million.

Included in these charges and those associated with additional actions that we announced last week, we expect to recognize a total of $115 million of pretax charges related to all these restructuring plans.

The remaining charges are expected to be incurred over the next six to nine months and the annual ongoing benefits of these actions once fully implemented are expected to be $125 million we are on track with these initiatives.

In view of the severe downturn in the global markets during the March quarter, we made an assessment of the possible impairment of goodwill and other long-lived assets of our various reporting units.

As a result of this assessment, we determined impairment existed for our surface finishing machines and services businesses, extrude home, as well as our engineered products businesses.

These businesses are both part of our AMSG segments.

And we ended up recording a noncash pretax impairment charge of $111 million as a result of this test.

Pretax charge for extrude home was $48 million.

And no goodwill remains on the books for extrude home.

And the pretax charge for engineered products business was $63 million and goodwill of $40 million remains on the books for this business.

Our operating loss was $151 million for the quarter.

Absent the impairment and restructuring, the operating loss for the quarter was $6 million compared to operating income of $84 million in the prior year quarter.

The performance was impacted by the significant decline in sales volume and related lower manufacturing cost absorption.

As I mentioned earlier, we continued to adjust our manufacturing cost and operating expense in response to the rapid and steep downturn in business levels.

MSSG's operating loss was $40 million for the quarter, compared to operating income of $76 million in the prior year.

During March, MSSG recognized restructuring related charges of $25 million.

Absent these charges, MSSG's operating loss was $15 million compared to the prior year reported operating income of $76 million.

The primary drivers of the decline in operating income are reduced volume and related unfavorable absorption of manufacturing costs due to the lower production.

AMSG's operating loss on a reported basis was $103 million in the current quarter, compared to an operating loss of $6 million in the prior year.

As I said earlier, AMSG recognizes charges related to impairment and restructuring of $121 million.

And during the prior quarter, AMSG recognized an impairment charge of $35 million.

Absent these charges, AMSG's operating income was $18 million in the current quarter, compared to $29 million in the prior year.

The decline was primarily due to lower sales and production volumes in the engineered products business.

The corporate operating loss decreased 59% to $12 million.

The decrease was driven by lower provisions for performance based employee compensation programs as well as the impact of cost reduction actions.

And our net loss was $138 million, compared to net income of $23 million in the prior year quarter.

Absent the charges related to impairment and restructuring, net income for the quarter decreased to $0.5 million from $58 million in the prior year quarter.

Lastly, reported fiscal 2009 third quarter diluted loss per share was $1.90, compared to prior year quarter EPS of $0.30.

And adjusted EPS for the quarter was $0.01 a share compared to the prior year quarter adjusted EPS of $0.75.

I mentioned previously our positive cash flow generation for the March quarter.

For the first nine months of the current fiscal year.

Cash flow from operating activities was $164 million, compared to $159 million in the same period one year ago.

Free operating cash flow for the current nine month period was $73 million, compared to $30 million in the prior year period.

Turning to the outlook, due to the present high level of uncertainty in the global economy, visibility is very limited regarding demand in our served end markets and ultimately our sales levels, earnings and cash flow.

Based on our best judgment in this uncertain environment, we expect organic sales for the June quarter to be lower by more than 40% from last year's June quarter, in which we set all time quarterly records for sales as well as adjusted EPS.

Sequentially, we expect our June quarter sales to be down from the March quarter by at least 10%.

As I mentioned earlier, sales for the March quarter were down 22% sequentially from the December quarter.

We continue to take aggressive actions to reduce costs including streamlining our manufacturing infrastructure and further implementing these actions we expect to recognize the remaining $54 million in charges related to the previously announced restructuring initiatives over the next six to nine months.

We are positioned to respond quickly to any changes in the global markets and we will continue to sharply focus on cash flow.

At this time I would like to turn it back to Carlos for some closing comments.

Thank you, Frank.

Again, it's difficult to gauge whether this downturn has reached bottom, when an economic recovery will begin and what the pace of that recovery will be.

The North American economy continues to face challenges, including rising unemployment, tight credit markets, and lagging consumer confidence.

The slowdown in Europe has been so pronounced that we believe it will take longer for that region to recover.

Asia may be the first major economic region to rebound.

For signs of such a recovery, we will look to certain sectors as leading indicators, such as general engineering, automotive and oil and gas exploration.

An increase in industrial production, GDP, consumer confidence and employment figures will be positive signals of an improvement in the economic activity.

In the meantime, we'll continue to manage through the challenging times.

We remain committed to the Kennametal Value Business System or KVBS, the management operating system that continues to guide all of the decisions we make relative to strategic planning, product development, sales growth, portfolio management and lean enterprise processes.

KVBS provides the road map for our team as we implement the necessary restructuring programs to streamline our business and reduce our costs.

Kennametal -- at Kennametal, we are constantly building a better business.

This focus is helping to position the Company for growth once we begin to see the eventual upturn in the customer demand for our products.

We are a market leader in tooling and solutions, engineered components and advanced materials.

As such, we are a consumables business and supply tools and components that are used in everyday production.

We are also all balanced across geographic and end markets.

We are financially sound.

Those solid fundamentals give us confidence that we will be able to manage through this global economic downturn while providing customers with quality service and maintaining our competitive strength in the marketplace.

Thank you for your time and your interest in Kennametal.

We will now take your questions.

(Operator Instructions).

Your first question comes from the line of Eli Lustgarten with Longbow Securities.

Good morning.

Hello, Eli.

Hi, Eli.

The only good news today is the cash flow was pretty decent.

Can we talk a little bit about your demand outlook for the fourth quarter?

If you look at your third quarter, you had a decline in metalworking that was almost twice the decline in advanced materials.

When you're talking about a 40% organic decline and probably 45 -- north of 45%, currency, does that -- is that equally split between the two or is that still more heavily -- we're going to see over 50% metalworking and somewhat less in advanced materials?

So give me some guidance of how you're thinking about that.

Well, the metalworking is going to decline less, less this quarter, and we're going to see less than last quarter in relative numbers and we anticipate to see a bigger decline than before on the AMSG side of it.

We see the rig counts being down for the gas and the natural gas and we see the backing of the supplies.

There's plenty of supply out there for gas.

So that has been holding pretty well for us throughout the year-to-date basis.

That's sort of saying that you're looking at metalworking -- the advanced material decline almost doubling at this point?

Well, I mean, again, we still anticipate a significant decline in metalworking because, I mean, all the indicators currently, the industrial production continues to be down and so forth.

I mean, every Company that has announced so far in the industrial space has announced a lower worse scenario for the next quarter than before, than they had before so we're in the same boat.

Yes, Eli, I'll just try to directionally point you there.

For advanced material, I wouldn't say it's double the number that you talked about.

I would say it's, it's much -- it deteriorated from the second quarter, below kind of the guidance we had in the press release and I would say North America sequentially is down a little bit more, not substantially.

And that's really due to the dropoff in Europe which we have to watch closely and it's tough to gauge what's going on in April right now because of the Easter holiday.

I would say it's a little bit softer in the metalworking side because of Europe.

Number one.

And then to some of the factors that Carlos mentioned, I expect AMSG to be below where metalworking was but softer sequentially.

Now, the big thing, if you look at your incremental margin why it got to 34%, it was really made up of two different worlds.

Back of the envelope, looks like metalworking was down like 47% and advanced materials down, 22%.

So I mean, I assume the goal was to reduce the metalworking incremental -- decramental margin, how bad does advanced materials sort of match it and we get to similar numbers?

Seems like a very tough quarters to match decramental margin.

I would expect the decramental margin to improve slightly and I would expect AMSG to be in that vicinity and with further benefits from metalworking through a combination of additional restructuring benefits kicking in and some of the short time programs we have in the international, or non-US locations.

One of the wild cards we had, generated $15 million tax credit on $6 million operating loss.

I assume you're going to have a tax credit in this quarter.

Is the magnitude the same?

It's very difficult to predict mathematically given where this quarter turned out.

You're exactly right.

First of all, we will have a tax benefit in the fourth quarter, nowhere near the magnitude, because in the third quarter as you know, you have the cumulative -- basically you're trueing up your forecast and we did earn income in the first half and you're catching up in the second half.

But I would put the tax benefit in the range excluding special items anywhere from 12 to 15% in the fourth quarter, but as you know--.

The operating loss, you mean?

Yes.

And that could mean significantly one way or the other when you have such a low base as you know.

Yes.

And corporate expense, you know, dropped $10 million or so.

Can we hold the current levels or near the current levels in corporate expense?

It will be tough.

I would expect it to be up slightly but nothing substantial.

It will be up a little bit.

Cash flow was very good in the quarter despite the downward.

Are we looking at similar cash flow kinds of numbers in the fourth quarter than we saw in the third quarter?

Because of free cash flow generation?

Two factors on the cash flow, which will be, -- I'll call them temporary because we will pay more cash out the door related to some of the restructuring programs.

So as we book some of the charges.

So they're kind of one-time type cash payments out the door and then given the operating performance, being somewhat lower in the third quarter, we won't have anywhere near the performance we had in the March quarter.

Cash flow sort of half -- is half the goal or something like that of Q3, something to that effect?

Eli, this is Quynh.

Afraid we're not going to be able to comment on that but I think the drivers that Frank had outlined gives you a sense of where we're heading.

One final question.

The fiscal year is coming down.

Our biggest problem is guessing 2010 and is everything being put in place to sort of make sure that even if volume doesn't change dramatically next year, that you'll be considerably more profitable next year, that we should see much better earning leverage than we're seeing this year, from wherever we wind up this year?

Obviously, at this point we have a hard visibility for the fourth quarter, nevertheless 2010.

I mean, we are assuming -- we have to assume as a management team that 2010, worst case scenario is going to be just like 2009 or even slightly worse.

So we're looking at all of those possibilities.

So to put the Company in a better position.

So we're assuming the worst case at this point.

All right.

Thank you.

Your next question comes from the line of Jack Hain with Barrington Research.

Good morning.

Good morning, how are you?

It seems like the culprit in this quarter and going forward has really been Europe so I'm going to sort of focus my questions there and maybe this is more granular than you usually get but could you just provide some qualitative remarks about how operating margins in Europe are trending relative to North America and rest of world, is it really day and night or is it more shades of gray in terms of the impact of the impact of the cost underabsorption in Europe?

Profitability, it's very similar on the metalworking side.

They're both very profitable type businesses and Europe for the most part was hanging in there pretty well until really this last quarter.

So when you have the last shoe falling or Europe, as Carlos said, falling off the cliff, that put additional pressure on the quarter.

From an overall profitability standpoint, very much similar and that's what we experienced this last dropoff here in the March quarter.

Also Carlos in your prepared remarks you said that there's some sectors in Europe that are starting to show some positive signs of recovery.

I was wondering if you wouldn't mind being a bit more specific in terms of where you're starting to see some strength reappearing?

Actually, my comment was relative to Asia.

What we are seeing in Asia we're seeing their seamless package really starting to take hold.

We're starting to see a lot of activity for example in railroads.

We have gotten quite a few orders in that area.

And the automotive is picking up.

Again, their stimulus is giving people that are buying smaller, more gas efficient cars, they're coming to production.

Those two areas are the first areas that we see a comeback.

But my comments were relative to Asia.

And we do see Asia coming out of the chute first at this point, China in particular.

Last question, I have to believe that some of the sales drop has to be due to inventory destocking.

Just wondering how much more destocking do you feel that there is to go and, what would a trough margin impact look like?

I mean, the destocking is really hard for us to see how much more because, I mean, we don't -- we never believed there was that much stock, first of all, the distributors don't carry that much stock for us.

The destocking is about the end user and we have very little visibility to that.

But as companies like, industrial companies cut their inventories, they cut their production, obviously they don't buy the tooling so it's really hard for us to know at this point.

Yes, the only thing I would add to that is as you know, it's tough to figure out the destocking because you've got two issues there.

As everybody's watching everything they can and then we've actually improved our fill rates.

So our customer service metrics are out the door.

Customers don't have to carry as much inventory.

They're basically relying on efficient manufacturers.

This goes back to our Kennametal Value Business System by focusing on lean we're able to get our products much faster to our customers and then from a trough margin, I don't know how to answer that question but I'd tell you we're shooting for a decramental margin of 30% or less and that's kind of the goal that we have internally.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Henry Kirn with UBS.

Question about pricing discipline in the market.

Have you seen any competitors trying to undercut you and gain some share in the downturn?

Actually, the pricing discipline has been very good.

We have really -- with the major players, there's thousands of people, thousands of companies in this marketplace, but the major competitors have maintained the discipline as far as we can tell at this point and we have -- we went with a price increase as late this January and we have been able to get price at this point so the environment relative to price has been pretty favorable.

There's a lot of pressure.

There's a lot of pushback.

But so far, we are doing fine.

And without giving guidance, could you give some of the factors as to how we should think about margins in MSSG and AMSG over the next few quarters, at least relative to each other?

We generally -- Henry, we do not provide any margin information on those individual segments.

It's always on a consolidated Kennametal basis.

Okay.

That's fair.

Abnormal times so I was hoping to get something.

As far as raw material costs, could you talk a little about what you're seeing there and how they're trending?

Yes, I would say from an overall materials, when I look at it on a year-to-date basis in both periods, I would say they're actually up the same amount.

However, the trend that we're experiencing this year is they're still up slightly in this last quarter but they've come down substantially from the first quarter to the second to the third.

So we're doing good on the price recovery but the raw materials are still a little bit high year-over-year and we expect that to neutralize itself potentially in the fourth quarter as we had originally anticipated with the culprits being steel predominantly and that's coming down and on a year-over-year basis it's still year-to-date Cobalt but that has subsided in the third quarter and then we're just seeing some Tungsten or APT some slight increases there.

Thanks a lot.

That's helpful.

Your next question comes from the line of Mark Koznarek with Cleveland Research.

Hi, good morning.

Hey, Mark.

Good morning, Mark.

On the price related comment, I think last -- well, initially in the year you were shooting for 2% price realization.

I think last quarter you said you got that.

Was price contribution similar this quarter?

Actually, Mark, it was 3%.

3%.

Wow.

Okay.

We continue to do very well.

I mean, it shows that our brand has value.

It shows that the value proposition, although -- we have actually seen customers placing higher number of orders but they're just buying less.

So the order number, the dollar of those orders is less.

So it shows that the customers are watching their spends but they are going for product like our value added products and Kennametal, because they need the cost reductions that we can offer.

Wow.

That's pretty impressive.

It's consistent with -- metalworking, they had a last round, most of the competition followed there in October, and then our major competitor in Europe also increased prices in January and I think a lot of the competition followed as well.

Okay.

Given that you -- your guidance for revenue has a sequential decline in the fourth quarter, I don't imagine you're seeing any degree of stabilization so far in April.

Would that be correct?

I mean, it's hard to tell in April, especially because of the holiday.

The holiday fell in April.

So we really have not had as many working days that we can really feel -- have a good feeling one way or the other at this point.

Okay.

And this final question might be a little unfair, given the lack of visibility right now, but the question really revolves around Kennametal performance in the recovery, once the recovery gets here, whenever that is.

And one thing I observed in the last recovery is in North America, the ISM went above 50 in February of '02.

Kennametal orders began to get positive in January '03.

So there is kind of a surprising lag.

And then Kennametal core revenues didn't begin to go positive until almost the end of calendar 2003.

So there was actually kind of surprising late cycle performance of the Company's actual fundamentals, even though your consumable operation.

I'm wondering is the business structurally different now that you would expect that behavior to be much more coincident with the economic recovery?

Yes, I believe it is.

I think we have -- one, we've sold a number of businesses to the magnitude of $500 million in sales, plus, that were more commodity business.

If you recall, we had just bought Vidia, a couple years before that recovery.

So we were in the midst of during the downturn, we were in the midst of the integration of that business and through the 2001, 2002 time frame, we were really in the midst of that which today we don't have.

I mean, everything that we have has been integrated.

So there's a number of factors that I believe will put us in a better situation coming out of it.

I think we have done more in the cost structure.

We have closed more facilities.

So I think there is a number of things and everything that I mentioned includes what we have done that makes us feel that we can do a much better job coming out of this downturn.

Okay.

Whenever that is.

Yes.

All right.

We'll keep our fingers crossed.

Thank you.

Thank you.

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

Good morning.

Hey, Steve.

How you doing, Steve?

Good.

I hear what you're saying about planning for the worst case in FY '10 but presumably you're also thinking about how to run the business if volumes come back a few quarters out.

How should we thing about incremental margins should you get back to a single digit growth rate against some of these easy comps relative to your new cost structure.

What's kind of possible there, do you think?

Well, again, I don't want to get into fiscal '10 but they should be much better than the last cycle that we had where we've always shot for 35% in the past, say average, 30, 35 but when we're coming out of this, Steve, I would expect us to have a number above that given the restructuring that we've taken out, some of the divestitures we've had over the years.

Right.

Yes.

If you just--?

I'll emphasize the fact that -- I answered a question about being ready for the business to be worse case scenario.

You are absolutely right, we are also preparing to be ready when the business -- when the economy turns.

That's a challenge that we have is that we have a broad band that we have to look at.

Right.

Right.

If you just do the math on the $125 million in pretax savings, that's more than $1 in earnings.

I know some of that falls into FY '09.

But if you have flat to up sales in FY '10 would you expect to see an EPS recovery similar to that of what you saw in '04 over '03 where EPS I think pretty much doubled?

I don't remember.

I mean, I don't have that data in front of us right now but.

But directionally, I think that's where you would think.

Next year it's going to be tough being a June 30, year end, it's going to be kind of a tale of two halves.

Right.

We're going into decent comps in the first half and then the second half it really goes -- calendar '10 we think is going to be really good and it's just getting through it and on a run rating directionally I think your comments are valid.

Yes, that's helpful.

One last question, I'll get back in line.

On a dollar basis, SG&A was down $20 million sequentially on that mid-30% decline.

How should we think about SG&A on a dollar basis for the fourth quarter, given the revenue guidance that you've talked about?

I can't see it varying much.

So in line with what you put up in 3Q?

Yes.

Again, if anything, it should be maybe down a little bit.

Okay.

Directionally.

That's great.

Thanks a lot.

Thank you.

Your next question comes from the line of Andy Casey with Wachovia Securities.

Good morning everybody.

How you doing, Andy?

I'm doing okay.

Sounds like you guys are too.

With your comment about customers buying less but paying more, does that imply a mix shift up to gain tooling productivity, despite the general economic uncertainty?

Yes.

I mean, my comment was that the transactions, we have more transactions, more orders placed, but the value of those orders are lower in general and yes, the customers are -- I mean, yes, when you say the customers, it's a broad brush here, but the good companies are actually looking at our new product and our best products so they can reduce costs in their factory floors so we're definitely seeing that, which would be very, very positive to us coming out because we will have been better established with those customers.

We've been with them during the tough times, so when they are looking to increase production, we'll be right there with them.

Okay.

Thanks.

And then on the Q4 MSSG revenue guidance implied, if I look directly at North America, given some fairly large steel consumers are saying they're taking unusual shutdown periods in Q3.

How much of the Q4 might be related to destocking in advance of actions like that?

It's really hard for us to really--.

We anticipate -- we anticipated, I should say, in our forecast the further weakening in some of the automotive plants and as far as extended shutdowns and so forth, so we try to build in as realistic or pessimistic as we can related to the automotive manufacturers but it's really hard on that, Andy.

Just based on your history, Frank, would it be -- would that impact occur in your fourth fiscal quarter or would it be the first fiscal quarter of next year?

I think it would straddle.

It would probably be more in the July period, given the 4th of July.

It depends if they start earlier and how long they extend it.

But we'll see that both domestically with the Detroit three and then you have the European situation with August.

So we typically see a stronger impact in the first quarter, but it could straddle both this period.

Okay.

One last one.

Another market question.

You commented on the natural gas rigs.

Have you seen any inflection in the -- in your exposure to the coal mining area?

Well, actually, as you know, our coal mining is -- we have a good market share in the Appalachian and that area has actually kind of held up fairly good so far and so the Appalachian coal production is down 5% year-over-year for the period ending this quarter.

But the 52 week trend is still positive, so we've been doing okay.

That's been good for us at this point.

Been a bright spot.

Okay.

Thank you very much.

Your next question comes from the line of Holden Lewis with BB&T.

Thank you.

Good morning.

Good morning.

Hey, Holden, how are you?

First, can you just -- I may have missed this but the corporate expense, I think that going into this quarter you were expecting something, again, sort of in the 15 million to $20 million range, then you came up with the $8.5 million number.

Can you give a little more detail of how that number has come in as low as it is, what it might stay at and what point does it return to that $20 million level.

What do we need to see or just sort of new sort of paradigm for you?

It's a combination of additional cost reductions relative to the plans that we accelerated and then some of the compensation programs where we actually did worse than we had anticipated so we didn't need as much for the compensation programs.

So it's a combination of those two.

And the compensation part obviously is the only part that will come back up.

Going forward.

Going forward.

So the structural costs, whatever we reduce our SG&A and corporate by, we're going to keep those.

Okay.

And do you have a sense of how you -- the next question was I think you were looking at $35 million in restructuring benefit for the second half.

Can you talk about where you were in the quarter and for the half and maybe talk about how much of that benefit is coming at the corporate side versus within the segment?

Yes.

Year-to-date, little over $20 million we expect that to ramp up in the fourth quarter, almost 20% more in the fourth quarter.

But the big drivers of the benefits we're seeing will be in MSSG we will have the largest, given some of the facilities that we've closed and some of the headcount reductions.

Then AMSG and the corporate's still laggard compared to the other two just because of the sheer numbers of people involved.

You had about $20 million in savings year-to-date and you expect that to be--?

We expect anywhere from, at the end of the year, anywhere from -- I'll put a broad range out here.

40 million to $50 million.

With realized benefits?

Correct.

For the full year.

And all the incremental as we talked about falling into FY '010.

Okay.

And incremental being the 125.

So you're actually a little bit ahead of pace in terms of squeezing those into this year?

Yes.

The other wild card in corporate is kind of the FX activity, so if we have gains on some of the derivative contracts they get reflected in corporate, not the business units so that could skew a quarter one way or the other.

Thinking strategically, you've long said that your goal was obviously to reduce the number of SKUs and reduce the number of plants and long-term do so reasonably, substantially.

When you look at the environment being as poor as it is, earnings obviously kind of being a basket case here, is there any interest in maybe taking these difficult conditions and accelerating the plant closings and the -- sort of shutting off some of the SKUs?

I know you have six announced but any interest in maybe working towards your long-term goals on the plant side at an accelerated pace?

That's what we're doing right now is accelerating all of those actions and again, it's a balance between -- although things are down, the sales are down, it's a balance between cash, between capacity from how many plants we have, something like six plants in the hopper right now so -- that we're closing.

I understand you're accelerating sort of the closing of those six plants but I was just curious, you have more plants than you would like to in the long-term plan, does that 6 become 12 in the very near term as you just sort of focus internally or are the resources just not available to equate the sheer number of plants that you might shut?

We continue to look at how to accelerate that further.

We continue to look at the potential of divesting some product lines that would help with the sites and so forth.

So all of that is sort of day-to-day, the day-to-day environment here.

Okay.

We like -- we are getting more aggressive.

We like to get more aggressive.

Great.

Thank you.

In the interest of time, your last question will come from the line of Dana Walker with Kalmar Investments.

I hope that doesn't mean I have five seconds and no more.

You can have all the time you want, Dana.

In the interest of time, Carlos, thank you.

I may have missed a couple of responses so if I cover something that's been covered, just tell me to go back and read the transcript.

But when you have as many restructuring programs as you have going on presently, how complicated is it to do them right?

I mean, as you know, the restructuring programs are always challenging.

Everything has bad news and good news.

The bad news is the sales are down.

The good news is the sales are down and gives us a lot more confidence in getting these things done right and the proof is that year-to-date with all these activities we are actually ahead of our plan.

So that demonstrates that we have been able to do them and we can do them right.

Since your CapEx spiked last year after having been at a lower level for many years, is that helping or hurting your ability to take your footprint into a smaller ink blot?

Well, I mean, is actually helping because as we go through this new processes with the new equipment, we need less equipment, the equipment typically is more efficient and we typically have put that capital investment in facilities that we see those facilities being the long-term facilities that we will have.

In other words, we basically did maintenance in the plants that we felt that they're now going to be here long-term and invested in the plants that we think they're going to be here for the long-term.

So the CapEx has really not hurt us at all.

I presume that's a way of saying that you did not put a lot of money into these six locations that you are shutting down?

Yes, exactly.

Did you comment earlier, maybe I missed this, on your revenue comparisons in tooling versus consumables?

No.

No.

I mean, 80% of our business is consumables, so I mean, the -- we don't look at the growth in consumables versus non-consumables.

We look at growth by market segment and by products.

There's no interesting metric to look at, though, that might say that your tooling revenue is down more sharply than your consumable revenue?

Well, I mean, we don't -- the consumables are tooling.

I'm not sure that I understand.

You're talking about tool holders, maybe?

Yes, something that would be more of a capital item.

The capital item for us is definitely lower.

Dana, that would be the (inaudible) business as well as some of the machine building in MSSG in India.

But even the tool holders are part of that 80% consumables.

So in general, anything that we have which is a smaller percentage of our business that is in any fashion close to a machine tool is down more than the consumables.

As busy as you are focusing on your right-sizing, to what degree is there a flow of either products or small businesses that would be available on more advantageous terms now than a year or two years ago that you would be reviewing?

Well, I mean, we are -- we are always reviewing opportunities and we're staying in talks with people.

However, there's a number of elements.

I think people that saw their business at a very high value, I think are still in shock at how low the value has gotten.

So they're trying to see that they can recover some of their value on the way up.

Although I think most of them have accepted the fact that some of their businesses will never be at the ultimate value they were at one time.

But I don't feel that people are at that level yet, they're willing to give up any upturn opportunity.

But right now our focus has been around liquidity and cash.

I mean, that's going to be -- until we see the bottom, I mean, we must stay very focused on that.

Two last quickies.

When you made a strategic judgment to better favor distribution over Company controlled selling in some markets, you probably didn't conceive that this type of a weak environment would be part of your future.

How does that decision hold up in this environment?

To what degree are your distribution partners maintaining the resources so that you don't lose share?

Yes.

They are -- I mean, I think that decision was still proven to be a good decision.

I mean, we always believed that there was going to be a downturn in the economy.

We just didn't believe that it was going to be this dramatic.

So that was always part of the equation.

But as far as I can tell at this point, our distribution has performed at equal levels as our direct sales and vice versa.

Final question is this and it relates to aerospace.

You were of the mind that the new manufacturing techniques that would be evident in the Dreamliner and the comparable products at Airbus would allow your types of products and services to gain relevance.

What, if any, decisions have been taken in the meanwhile that bear that out?

From Kennametal's perspective?

Yes.

I mean, we continue to be bullish about that opportunity.

Even in the sales comps that we have, our sales to Boeing and the aerospace continue to be positive.

In other words, year-over-year growth.

So it's still the right decision.

Very well.

Thank you.

Good luck.

Thank you.

This Q&A period is complete and it concludes our discussion.

Please contact me, Quynh McGuire at 724-539-6559 for any follow-up questions.

And thank you for joining us.

Operator?

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