Kennametal Inc (KMT) 2009 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 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 Quinn McGuire, Director of Investor Relations.

Please go ahead.

Thank you Regina, welcome everyone.

Thank you for joining us to review Kennametal's fourth-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 teleconference calls, we have invited various members of the media to listen to this call.

It is also being broadcast live on our website and a recording of this call will be available on our site for replay through August 30, 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 Mosher.

Carlos and Frank will provide details on the quarter's financial performance.

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

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

The discussion we will 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 provides the SEC with a Form 8-K, a copy of which is currently available on our website.

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

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

I will now turn the call over to Carlos.

Thank you Qunyh.

Good morning everyone.

Thank you for joining us today.

Fiscal year 2009 was the most challenging time in our Company's 70 year history as we dealt with the impact of the most severe and rapid downturn in global manufacturing from North America to Western Europe and even emerging markets like India and China.

We addressed the economic crisis head-on just as Kennametal has successfully done during past down cycles.

We responded aggressively by taking a number of measures to reduce costs, maximize cash flow and liquidity and preserve our competitive strengths.

We began by implementing key strategic initiatives throughout the organization using the principles of our Kennametal value business system, RKDBS.

We identified opportunities to accelerate cost reduction initiatives and focused on aligning our portfolio with core competencies, streamlining our manufacturing footprint and making structural changes to our business.

In April 2008, even before the global economic downturn began to have a substantial impact in our business, we initiated a restructuring program to reduce costs and improve efficiencies in our operations.

As business conditions deteriorated during the past fiscal year, we quickly implemented additional actions which included reducing our global salaried workforce.

We are taking costs out of our business on a permanent basis by lowering manufacturing costs and reducing operating expenses.

We realized approximately $50 million in pretax benefits from our restructuring programs in 2009 and expect to realize approximately $75 million of additional pretax benefits in fiscal 2010.

In total, we expect to achieve approximately $125 million annually in permanent cost savings.

Also, we implemented certain temporary cost savings measures during the later part of the fiscal year such as employee furloughs.

We have continued the certain temporary cost reductions in our new fiscal year which began on July 1.

Those actions include a 15% reduction in my base salary and the base salaries of the executive officers, a 15% reduction in the cash compensation of our board of directors, a salary reduction of our salaried workforce of 10% or 5% depending on the level of the position.

Those actions will remain in effect until business conditions improve to a level that will permit partial or full restoration of the previous compensation levels.

In addition to cost reductions, we maintain a consistent focus on cash flow as demonstrated by our cash flow from operating activities of $192 million for the year.

We continue to execute our strategy of portfolio shaping to further reduce our manufacturing footprint and number of SKUs.

In June, we completed the previously announced divestiture of our high-speed field drills business.

The cash proceedings from this transaction as well as the recent amendment of our revolving credit facility and the just completed equity offering have further strengthened our financial position and liquidity.

As a result of those collective actions, we offset the considerable portion of the impact of the decline in sales volume, achieved a modest profit for fiscal year on an adjusted basis, generated strong cash flow and further enhanced our financial position.

For the June quarter, our operating results the positive impact of the increasing momentum of benefits from our restructuring and other permanent cost reductions as well as the effect of the temporary measures that were implemented.

At the same time, we continue to capitalize on our competitive strengths through working with customers to reinforce the value proposition of our products.

Kennametal has a long history of solid relationships with our customers.

We have strong and respected brands.

We have an experienced and diverse management team that is capable of leading the Company through difficult periods.

We have talented and dedicated employees worldwide, a corporate culture that builds on excellence, a reputation of innovation and proven operating disciplines that guide management's decisions.

Those values from the solid foundation as we continue to build an even better business, one that will be substantially leaner, stronger and even more competitive during this period.

As always, we'll continue to build on our core business, shape our portfolio and balance our global infrastructure.

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 will provide further comments on our performance for the June quarter and fiscal 2009 and then I'll move to the outlook for our fiscal 2010.

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

From a top line perspective, the June quarter developed pretty much as we expected.

The strong and deep grip of the global economic downturn continued unabated through the quarter and as a result, our sales were down 43% organically from the record level that we enjoyed in the June quarter just one short year ago.

In anticipation of this, we took further steps to reduce our costs both on a temporary basis with actions such as one-week employee furloughs during each month of the quarter as well as more permanent cost reduction actions including additional restructuring initiatives that we announced at the outset of the quarter.

Also helping our results during the quarter was a higher run rate of benefits from previous restructuring actions, some of which we started more than a year ago.

For our restructuring program in total, we realized approximately $50 million in pretax benefits from these actions in fiscal 2009 and we expect to realize approximately $75 million of additional pretax benefits in fiscal 2010.

This will bring the total annual ongoing pretax benefits from restructuring initiatives to approximately $125 million.

The results of our additional cost reduction initiative as well as the run rate of restructuring benefits turned out to be somewhat better than we had anticipated.

As a result, our operating results for the June quarter improved sequentially by $3 million from the March quarter despite a sequential decline in sales of $38 million.

This represents an incremental margin of 107% on a sequential basis.

The challenging business conditions over the past several quarters certainly required a sharp focus on cash flow generation and liquidity and we are relatively pleased with our results in this regard.

We have free operating cash flow of $17 million for the June quarter and $90 million for the entire fiscal year.

These results were made possible through persistent diligence with receivable collection, inventory reduction and close management of our production levels and reduced capital expenditures.

We now have reduced inventory for the third consecutive quarter despite the rapid and steep drop-off in sales volumes.

Specifically we drew down our inventory by $32 million in the June quarter and by $60 million over the last six months of fiscal 2009.

And at the same time, we have maintained high off-the-shelf inventory availability.

And capital expenditures reduced $12 million for the June quarter which is the lowest quarterly capital spending level since December 2003 quarter.

Also providing us with additional cash as well as taking another positive step in shaping our business portfolio was the completion of our divestiture of the high-speed steel drill business including the related product lines and assets on June 30, 2009.

The cash proceeds from the deal were $29 million.

We received $2 million prior to closing and another $24 million in July and we expect to receive the remaining balance in the December quarter.

For fiscal 2009, the divested business generated sales of $81 million with EBIT that was essentially at breakeven excluding special items.

In the previous fiscal year, the business had sales of $115 million and EBIT margin of slightly less than 5%.

Restating the prior fiscal year from continuing operations for discontinued operation as required by financial reporting standards yields a 30 basis point improvement in EBIT margin excluding special items.

As of June 30, our total debt was $486 million which was down $16 million from the March quarter and our US defined benefit pension plan remains over 100% funded.

Our debt to capital ratio at June 30, 2009 was 27.7 which also is improved from 28.4 in the prior quarter.

We are also pleased with the recent amendment to our revolving credit facility as well as our equity issuance, both of which transpired in July.

The amendment to our $500 million revolving credit facility provides additional flexibility with our financial covenants while maintaining the size and the maturity of the facility.

And we received net proceeds of approximately $120 million from our 8 million share equity issuance which we used to pay down revolver borrowing.

As Carlos mentioned, these actions substantially improve our financial position and liquidity as well as provide us with additional financial flexibility going forward.

Now I'm going to walk through the key items in the income statement.

From a sales perspective, we came in at $386 million.

This compares with $724 million and the record June quarter sales that we had last year.

This represents a 40% year-over-year decrease which was driven by a 43% organic decline and a 4% decrease from unfavorable foreign currency effects.

A slight net favorable impact from acquisitions and divestitures was offset by the effect of one less work day.

As I previously mentioned, sales in the June quarter were down sequentially from the March quarter by $38 million or 9%.

Turning to the business units, MSSG sales decreased by 52% from the prior year quarter and that was driven by an organic sales decline of 45%, unfavorable foreign currency effects of 5% and a 2% decrease from the combined impact of divestitures and one less work day.

Global industrial production remained extremely weaken and substantially below the prior year, continuing the further downturn in industrial activity experienced in the March quarter.

Consequently demand in most market sectors remained at very low levels.

But from a regional basis, Europe and North America reported organic sales declines of 47% and 46% respectively.

Latin America, India and Asia Pacific also experienced organic sales declines of 44%, 43% and 37% respectively.

AMSG sales decreased 37% during the June quarter.

That was driven by a 38% organic decline, 3% unfavorable impact from foreign currency effects, a 1% decrease from one less work day and that's just partly offset by the favorable impact of acquisitions of 5%.

The organic decline was probably driven by lower sales in the engineered products business as well as reduced demand for energy related products and surface finishing machines and services.

Turning to our gross margin for the company, our gross profit margin was 25.6% for the quarter compared to 34.2 in the prior year quarter.

Absent restructuring and related charges recorded in cost of sales in both periods, our gross profit margin for the current quarter was 26.6% compared to 34.4% in the same quarter last year.

Lower production levels and related reduced capacity utilization continue to be the reason for the year-to-year decline in gross profit margin.

However, the increased run rate and benefits from our restructuring initiatives and other cost reduction actions are now offsetting an increasing portion of the capacity utilization impact.

In addition, our gross profit margin in the June quarter further benefited from continued positive momentum with price realization and stabilization in our raw material costs.

This was all evidenced by a sequential improvement in our gross profit margin.

Operating expense decreased year-over-year by 34% or $55 million to $104 million.

The decrease is mainly attribute 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 by net increase from the acquisitions in the current year.

We recognized restructuring charges of $16 million in the June quarter and we also recognized a total of $5 million of restructuring related charges and cost of goods sold and operating expenses during the quarter.

As such, total restructuring and related charges recorded in the June quarter were $21 million which is equivalent to $0.08 per share.

Pretax charges recorded to date for these initiatives were $82 million.

Including these charges, we expect to recognize approximately $115 million of pretax charges.

The majority of the remaining charges are expected to be incurred by December 31, 2009 most of which are expected to be cash expenditures.

And as Carlos and I both previously mentioned, we expect to realize pretax benefits of approximately $50 billion from these actions in fiscal 2009 and we expect to realize $75 million of additional pretax benefits in fiscal 2010.

This will bring the total annual ongoing pretax benefits to approximately $125 million.

Our operating loss of $25 million for the current quarter compared to operating income of $80 million in the prior year absent the restructuring related charges recorded in both periods, our operating loss for the current quarter was $3 million compared to the operating income of $88 million in the prior year quarter.

I believe it bears repeating here that this is a sequential improvement in our adjusted operating results for the March quarter despite a sequential decline of $38 million.

MSSG's operating loss was $29 million for the quarter compared to operating income of $66 million in the same quarter last year.

Excluding restructuring and related charges in both periods, MSSG's operating loss was $16 million compared with operating income of $71 million in the prior year quarter.

The primary drivers of the decline in operating income were reduced sales volumes and the related unfavorable absorption of manufacturing costs.

This was offset in part by restructuring benefits, other cost reduction actions including employee furloughs, as well as higher price realization.

AMSG's operating income was $14 million in the current quarter compared to operating income of $33 million last year.

Absent restructuring related charges recorded in both periods, AMSG's operating income was $18 million in the current quarter compared to $36 million in the prior year.

The decline in operating income was primarily due to lower sales and production volumes in the engineered products and energy related businesses.

A considerable portion of these impacts was offset by a combination of restructuring benefits, other cost reduction actions including employee furloughs as well as higher price realizations and lower raw material cost.

As a result, AMSG achieved a double-digit operating margin in the June quarter which demonstrates the relative importance of this business segment to our strategy and overall product portfolio.

Corporate operating loss decreased by 54% or $10 million.

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

The reported effective tax rate for the quarter was 39.1%.

Excluding the impact of the restructuring and related charges, the adjusted effective tax rate was a a negative 116.4% on an adjusted basis and we recorded a provision for income taxes of $5 million despite having a pretax loss of $4 million and this was driven by the jurisdictional mix of pretax results.

Concerning the recent divestiture that I discussed earlier, the pretax loss of that sale and related charges of $26 million as well as the related tax effects were recorded in discontinued operations.

We expect to incur pretax charges related to this divestiture of $47 million over the next six months.

And as I said earlier, in accordance with the applicable financial reporting standards, this divestited business will be reflected in discontinued operations.

Our financial statements from prior quarters and fiscal years will be restated accordingly as required.

And then the net loss was $33 million for the current year quarter compared to net income of $60 million last year.

Absent the charges related to restructuring and divestiture, the net loss for the current quarter was $10 million compared to net income of $66 million.

And lastly, our reported fiscal 2009 fourth-quarter diluted loss per share was $0.45 compared to the prior year earnings per share of $0.77.

Adjusted loss per share was $0.13 compared to the prior year adjusted EPS of $0.85.

I would like to conclude my remarks about the June quarter by referring again to our cash flow performance for the fiscal year that we just completed.

Despite the huge impact on our results from the global economic downturn, our cash flow from operating activities in fiscal 2009 was $192 million compared to $280 million in the prior fiscal year and free operating cash flow was $90 million compared to $119 million a year earlier.

Turning to our outlook, again given the magnitude of the global economic downturn and the ongoing related uncertainty, visibility remains quite limited regarding global industrial activity and the corresponding demand for our products.

While recognize the difficulty at this time of looking forward with any relative degree of certainty, we presently believe that global industrial activity may be at or close to a bottom.

Assuming that is the case, we would expect global demand for our products for the first half of fiscal 2010 to remain around the levels experienced in the June quarter.

We would then expect to see the effects of an economic recovery reflected in our sales and financial results during the second half of the fiscal year.

Under these economic assumptions, we would expect earnings per share for fiscal 2010 to be in the range of $0.45 to $0.65 per share excluding restructuring and divestiture related charges.

On related sales, that would be 5% to 10% lower year to year on an organic basis.

Cash flow from operations would be expected to be in the range of 65 million to $75 million for fiscal 2010 as a considerable portion of the cash we generate is expected to be needed to fund higher working capital requirements as the business improves.

And based on capital expenditures of approximately $60 million, free operating cash flow would be in the range of $5 million to $15 million for fiscal 2010.

Should global economic conditions develop in line with our assumptions, we expect to continue to experience the adverse effects of the global recession during the first half of fiscal 2010 followed by year-over-year sales growth and positive earnings performance in the second half of the fiscal year.

As such for the first quarter of fiscal 2010, we expect organic sales to be 35% to 40% lower than the same quarter of the previous fiscal year and we expect to report a loss per diluted share excluding the restructuring and related charges that will be greater than the loss per diluted share for the June 2009 quarter excluding divestiture and related charges.

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

Thank you Frank.

As we move into a new fiscal year, we will continue to be relentless in our efforts to reduce costs, maximize cash flows and further strengthen our balance sheet.

We are well-positioned to take advantage of the eventual economic upturn.

While we are implementing appropriate measures to manage through the cycle in the near term, we will also remain focused on longer-term opportunities to increase shareholder value.

We will continue investing strategically in our core business, developing new products and expanding and growing new markets.

We will also continue to deliver innovation.

This is a Kennametal strength that has increased our competitive advantage and helped us to consistently generate sales from new products of 40% or more each year.

Kennametal was founded on innovation.

It is our legacy and we continue to set the pace in our industry.

Now more than ever, customers are as seeking knowledgeable supplier partners capable of helping them to increase their productivity.

They recognize that this is a key differentiator for Kennametal.

As evidenced, market research surveys consistently show Kennametal leading the industry in terms of most innovative, best range of services and first in customer service.

We will continue aggressively applying our strengths toward further growing our market share globally.

In summary, we are now more prepared and better positioned than ever before to perform well in the economic recovery.

We have a worldwide infrastructure, a management team that has a proven track record, our customer relationships are stronger than ever and our global team is dedicated to serving customers.

This world-class team is another one of our key competitive advantages and it continues to demonstrate its commitment to helping customers increase productivity when it's needed the most.

We also continue to adhere to our proven disciplines and principles outlined under KBBS, the management operating system that guides our enterprise and directs the decisions we make related to strategic planning, product development, sales growth, talent development, portfolio management and lean enterprise processes.

As we enter the start of fiscal 2010, we believe we are prepared to meet the challenges ahead.

Our [products are consumed] in the manufacturing processes.

So we have a business with repeatable revenues.

As we enter the upturn, we expect to realize stronger operating leverage.

As a result, we look forward to higher growth and profitability for the long-term.

Thank you for your time and your interest in Kennametal.

We will now take your questions.

(Operator Instructions) Eli Lustgarten, Longbow Securities.

You actually had a nice quarter given the circumstances.

Can't complain.

One, you know, it's (inaudible) that the tax accounting is sort of very crazy.

Do you have any suggestions for fiscal 2010 tax rates?

Eli, again as you know, when you have a loss, you have a provision, it creates screwy mathematics.

You had a tax charge on a loss, yes.

You know, where I would say the tax rate next year will be in 24 to 26% range in that area because the way we finished the year at 17%, we had a couple one-time benefits last year in the first quarter, the Spanish valuation allowance and we had the second quarter pickup.

If you take those out of the equation, it basically puts you at about the 25% range in fiscal 2010.

(inaudible) 25% because as I said, the tax stuff is very crazy.

You gave -- we have orders (multiple speakers) through June.

Can you give us any -- what we are seeing over the summer so far as far as -- the order rate was still declining for you guys.

Did that continue through the July period?

Were you seeing stabilization?

Any comment?

Because you sort of indicated you're getting close to stabilization.

Have you seen it in orders yet?

Do you feel the de-stocking is sort of coming to an end or we still going to go through this summer at least in de-stocking?

We are -- I'm not sure about the de-stocking at this point.

But we are seeing some small incremental sequential improvements from month to month.

And to date, from July, our orders are in line with our guidance.

Profitability of AMSG was very impressive, the double digit.

Given the seasonality aspect, particular the [industry] market, is that a sustainable double-digit margin or do we get some seasonality in the first half before we go back to it?

I think shorter term, we will have some pressure with the energy business given some of the natural gas levels there.

But then I think in the second half, again I think we will be pretty good.

They have done a great job on selling on value from a pricing perspective and they've done a good job on maintaining the pricing discipline.

And then we should get some tailwinds as we move forward with some of the raw material input costs.

I think given the top line with some of the industries, shorter-term but I think it will be a very good second half for them.

Metalworking will probably continue in the red for quite a while until we get some upturn in industrial production and utilization.

Yes, the first quarter I think they'll start to see some improvement with some of the automotive by the tail end here and I think they have done a good job when we're talking about the number of facilities we took out.

We took a lot of manufacturing facilities out of MSSG and just a divestiture of the high-speed steel business [was core facilities] in the south.

So we're talking double-digit facilities.

So from an overall cost reduction, I think we'll have a much stronger earnings improvement than we'll see on the top line but I think those two will go hand-in-hand and then we'll see a pickup the second half.

Walt Liptak, Barrington Research.

The first question I is on -- the issue comes up about market share and the volumes.

Your volumes were down a lot more than industrial production and the de-stocking issue.

Why is it that the revenue is down as much as it is?

Well we have to look -- we are going to industrial production [less computers] but if you want to look at market share, if you're talking about market share specifically; Sandvik, our the largest competitor, just announced last week and they are -- their sales were down by exactly the same percentage as ours.

So it really shows you that the de-stocking is taking -- really taking a hold on this consumer tools.

You know, so relative to market share, we feel very, very comfortable.

We feel very confident that we are maintaining our market share during this period of time.

Okay and then if I could ask one more.

Just the negative leverage on gross margin is really extreme.

I wondered if you could talk about if the underabsorption that you are experiencing, is it because of excess facilities or is it because this is a capital intensive business, you've got machinery and when you idle machines, you get underabsorption?

Well I think, it's all the above.

It obviously depends on kind of the market share and the [incremental] margin we had was much improved over the past two quarters.

We have gone from 44 to 34 to about 26%.

So I think we've done a pretty good job of controlling costs.

As we said in the call, the restructuring benefits continue to provide incremental benefits to the bottom line.

We had to do some temporary actions which we're going to continue to look at.

We've gone from furloughs to salary reductions and we're not done with our restructuring program.

So we expect those to continue.

But again, leverage works both ways.

When you have the volumes on the downside, [you feel that I] think we've controlled it.

And then when you get a little volume, the incremental margins will be much greater this cycle than we experienced in the past.

In the past, you were north of 40% at least initially.

Can you go above 50%?

It depends on how quick the volumes come back.

Henry Kern, UBS.

Wondering if you could chat a little bit about some of the factors that led you to do the equity issuance and how you're looking at the capital structure going forward.

I think -- I'll start off here, Henry.

I think when we looked out, we expected -- as you see with a lot of industrial companies -- some short-term pressure related to the global economics.

We felt that we were going to bump up against our covenants and then in the upcoming two quarters given the sales projections that we have.

So we felt if the economy does slip a little bit or there is a little bit delay, we want to make sure that we have the financial flexibility to weather the economic downturn and hence we went out there and basically amended the bank amendment or the revolver and issued the equity to give us the flexibility from a cash flow.

Because we do expect some -- I'll call it some of the global markets to begin to pick up in the second half of fiscal 2010 and we're going to need to focus on some working capital.

So that's also going to be a driver.

So when you take a step back, we knew we were going to have some short-term issues the way the covenants were working and this gave us the flexibility to operate the business from both a restructuring -- taking additional cost out -- and fund the working capital for growth.

Okay, and could you talk a little bit about where in your portfolio you would look too for recovery first some of the indicators outside of that that might be lead you to start to forecast a recovery in your second half of the fiscal year?

I'll address that, Henry.

First let me start by a world -- looking at it from a world perspective.

From a world perspective, we believe the first industry to come out is motor vehicles.

So when we look at the sequence, year-over-year growth, we see them coming out first.

We see the metalworking coming out second, machinery third, construction forth, aerospace fifth and energy mining six.

That's from worldwide.

From Asia-Pacific, we see again motor vehicles are going to be the number one, metalworking machinery, number two; machinery, number three; construction, number four; aerospace, fifth; and energy mining, sixth.

From Europe again, sequence is motor vehicles, metal working machinery, machinery, construction, aerospace and mining.

Although in Europe in metalworking machinery, machinery, construction and mining; we will see still negative growth through calendar year 10.

In the US, motor vehicles again are going to come out probably the strongest against sequential growth than anywhere in the world or any other industry followed by machinery and then metalworking machinery, construction, aerospace, energy mining.

In the US we see machinery, metalworking machinery, and construction still have negative growth throughout the year for calendar year 2010.

So again, we look at a number of indicators as we put this thing together and as we compare what we see relative to other companies, we feel that we are pretty consistent.

I don't know if that answers all your questions.

Yes, that's very helpful.

Thanks a lot.

Chip Miller, JPMorgan.

Thanks very much for that end market color.

If I could just chill down into auto a little bit.

Obviously things are getting better around the world.

Can you just talk about especially in US, where you think inventory levels are at given we've just been through some plant shutdowns and how quickly you think your volumes will recover versus overall auto volumes?

Well our -- this is the way that you should be looking at our business.

There's a lot of discussion around about an early cycle versus a late cycle.

But I will just give you an example that you can think through.

So if the manufacturers have completed their inventories, finished inventories, and then I think most of our customers have completed their work in process as well; they have depleted their [tool cribs].

So when the market starts turning around, before they can ship anything, they have to buy tools from us.

So that intuitively tells you that before the automotive companies start increasing their volumes, they have to be buying [sales] from us at least three months in advance of that.

So, we believe that we are starting to see right now in North America an uptick in orders for the automotive tooling, as we speak.

Okay, and if I could just ask, we are looking at first quarter versus fourth quarter just reported.

You're saying earnings in first quarter are going to be down sequentially but there's a couple of things going on in the quarter.

One being salary reductions versus furloughs and secondly you have the European plant shutdowns.

So I know it's probably tough to estimate, but excluding those two things, would we be up in Q1 versus Q4?

What I'm trying to get at is kind of like the underlying decrimentals and how much better they are actually getting.

Again, I would say decrimentals will be in our first quarter a little bit higher, around the 30% range potentially in the first quarter.

But the normal seasonality I think we will experience.

Typically the fourth to first, you have typically lower profitability because [we extend] plant shutdowns which they have been there.

And the furlough effect, the differential could be about $11 million.

So you can do the math for the first quarter on those.

That's great.

Thank you very much for the time.

Mark Koznarek, Cleveland Research.

Could you, Frank, clarify that statement you just made?

The furlough effect of $11 million, is that in the quarter or for the full year?

It's just the quarter.

Let me say it this way.

We had three months of the furlough effects in the June quarter.

So call that $18 million.

And I'm saying, the benefit of the salary reductions all in in the first quarter is about 7.

So there's a differential of about 11.

So for the full year at that run rate, you're going to get basically $28 million assuming that everything would stay in place, basically $7 million a quarter or last year we had four months because we actually took one in March which is 24.

So that's -- they kind of wash for the full year but it's just a timing issue of when one starts, when one ends.

Okay.

Great, that's really helpful.

I was like really impressed with the AMSG margins and you mentioned both price and raw materials.

Can you talk about what price realization overall was in the quarter and then the raw material benefit and then directionally how much will continue to flow into FY 10?

For the quarter we had about 2% price realization for the quarter.

And I will say raw materials, we were chasing it as a lot of other companies were -- they were up year-over-year.

I would say they were flat to down slightly.

So we didn't have that challenge in the fourth quarter.

Now we should have some tailwinds going into next year.

When you pull it all together, pricing, given this environment, we're going to say it will be about flat.

We don't expect anything significant one way or the other.

But we should get a slight benefit on some of the raw materials.

Okay and then finally, what was the operating income impact of inventory reduction on a year-to-date basis?

And when you start rebuilding inventories as you indicated later in FY 2010, you mentioned that working capital requirement is -- should we just reverse that out in sort of the expense you absorbed in this FY 09, add that back as a supplement to income in FY 10?

That's a tough one.

Let me get back to you with that.

It is a good question, so --

I'll circle back to you guys.

Thanks.

Chuck Murphy, Sidoti & Co.

I'm just wondering, if we're going to be modeling fiscal 2010 organic sales down that 5 to 10%, what should we be using as the base for fiscal 2009?

It should be in the press release.

About $2 billion.

Okay, my other question was with the organic sales being down like that, any sense on where gross margins would fall out?

Well I would expect them to be up for the full year given the restructuring benefits that we have been talking about and the divestiture activity that's obviously lower.

And by the way, just for everybody on the phone, the numbers in the press release are restated to pull out the divestiture of the high-speed steel business.

So, yes, like-for-like comparisons there.

All righty.

That's all I had.

Thanks.

Andy Casey, Wells Fargo Securities.

(multiple speakers) I'm doing all right.

It sounds like you guys are too.

Just a follow-up on I think it was Mark's question on the cash flow.

Should we think of it on a pattern basis where you are still flushing some inventory in the first half of the fiscal year before you potentially have to start the build for the recovery that you are talking about?

I would say it's both receivables and inventory and receivables obviously will probably be a bigger component in the calendar year.

And then -- and I think somebody asked this on the last call.

I can't remember who.

But if we go back to kind of the recovery in the last cycle -- and I understand the business is significantly different with divestitures and acquisitions -- the performance seemed to track the changing capacity utilization on the top line versus that.

Is that something similar or did you have to work through some inventory back then that you don't going forward?

Yes, I think we definitely had a little bit too much inventory back then and then I think with the divestitures and the reduction of the SKUs, we are taking out double-digit facilities or are in process of wrapping them up.

I think we are going to have a much stronger leverage when we get the volume.

I will add to that.

By December of this year -- from the fiscal year '08 to December of this year, we are going to have 12 facilities that will no longer be in our portfolio.

That's a 20% reduction in facilities in 18 months.

So I always -- we always talked about the fact that we had those levers and so forth and once we did not have the growth to maintain these facilities, we told everyone we would be very aggressive on that.

So I think it's pretty aggressive to reduce our number of facilities by 20% in 18 months.

Joel Tiss, Buckingham Research.

I'm going to [lose] sort of three sort of related questions together.

But I just wondered if you could give us a ballpark in the 2010 guidance the mix of the revenue and the cost savings that you have baked in there.

Because it just feels like the cost-cutting is biting.

It's going to accelerate and the sequential volume is flat but the loss in the first quarter is going to be a little bit higher.

So I'm having trouble understanding that and maybe if you explained the shape of the economic recovery that you have baked in, it might help me.

Again from the restructuring benefits, Joe, you know that this year we realized approximately $50 million and next year we're going to get an incremental 75.

So we'll hit that $125 million run rate.

And I think you need to factor in the furlough effect and some nonrecurring items that occurred in fiscal 2009 that obviously don't come into fiscal 2010, offset in part by the reduction in salaries.

The biggest challenge in the first quarter is the fact that when you have one week furlough per month, it's a 25% reduction on the salaries.

Right now, we have stopped doing that and replaced that with salary cuts.

Although by year-end, the benefits of the salary cuts will be similar to the furloughs in 2010.

It will take us the whole year to recover the quarter plus the one month that we had in the second half of this year.

That's really the difference between the first quarter and Q4.

That's the number one driver.

And then the shape of the economic recovery, you think we are going to get something closer to a V as we move into calendar 2010?

No, right now -- God knows what we're going to get.

But we're planning pretty much on a U shape.

I think that we -- our view is that the rest of this calendar year is going to be pretty flat.

I think we are going to bounce around the bottom with some small sequential growth.

And then things will start improving in Q3 and then Q4 but pretty much moderately.

And then last one.

Just on -- a little bit of a gap between -- the free cash flow generation was pretty strong.

Receivables inventories down about $300 million, but your overall debt year-over-year has gone up by more than $100 million.

Can you just square that for me a little bit?

The drivers of the increase, at the beginning of the year, we acquired Tricon for $64 million in October.

Then we did the share repurchase in the first quarter which was 127, $128 million and then the free operating cash flow.

So that was the main drivers.

Holden Lewis, BB&T.

It looks like sequentially the gross margin stepped up quite a bit.

Can you comment about specifically what drove that Companywide?

And then also just in terms of -- what role does production play in all of this?

Where is the production sort of systemwide and when would you expect to begin moving production upwards?

And I guess related to that, when you look at your guidance, if you didn't get any sort of recovery scenario, what would that guidance look like if the only thing you had was a stepup in production as you work through the inventories and you any sort of stripped out the volume recovery?

It would be good.

But again, the sequential improvement in the gross margin; again, as I said in the call, we actually reduced inventories $32 million in the quarter.

So we're not increasing inventory or building inventory of any significance.

There would be some product lines in certain parts of the business.

But again, it's the restructuring benefits and it's some of the furlough effects coming into it.

Now we expect as we get towards the end of the calendar year that we're going to need some inventory for certain items from our (inaudible) products.

And we expect to have a combination of volume and some inventory to replace that, hence, we will have some nice gross margins in the second half of our fiscal year.

Then the other driver will be that we didn't face -- this year will be some tailwinds from some raw material input costs later in fiscal year for us.

Okay and then what trajectory are you expecting in terms of your production?

Presumably you kept your production pretty low this quarter like you noted the inventories.

When do you expect the inventory to be down where you need them and to be stepping at a minimum production back up to demand levels?

I would say we're not going to increase production that much until third quarter.

The first quarter, we have the seasonal effects with Europe.

And then as Carlos said, late second quarter, third quarter is when we would start looking at it.

Right and on that, you mentioned before I think that sort of your dollar orders per month were actually ticking up slightly.

Does that include July?

Because when would you expect to see the seasonal impact of those beginning to come off?

That seems unusual seasonally.

Again, each month in the quarter starting with March was the real big trough that we had where things really fell down.

So the following months out were all up sequentially.

Now we will adjust for the seasonal effect a little bit here in the month of July and then it seems like we're basically bouncing around the bottom.

Yes, that's what I would say.

And August is always the worst month for us.

So again, the good news is that we are tracking so far to our guidance.

The bad news is that we are really in the fourth week into the year.

This concludes the question-and-answer session of today's conference.

This concludes our discussion.

Please contact me, Quynh Maguire, at 724-539-6559 for any follow-up questions that you may have.

Thank you for joining us.

Today's call will be available for replay beginning at 12 PM Eastern time today and lasting through midnight on August 30, 2009.

The conference ID number for the replay is 16017841.

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

This concludes today's discussion, thank you for your participation.

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