Kennametal Inc (KMT) 2010 Q4 法說會逐字稿

Good morning. My name is Regina, and I will be your operator today. At this time I would like to welcome everyone to Kennametal's fourth quarter and fiscal year 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Quynh McGuire, Director of Investor Relations. Ms. McGuire, you may begin.

Thank you Regina. Welcome everyone. Thank you for joining us to review Kennametal's fourth quarter fiscal 2010 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 and prior quarterly conference calls, we have invited various members of the media to listen to this call. It is also being broadcast live on our website. A recording of this call will be available on our website through August 29th, 2010.

I am Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for our call today are Chairman, President, and Chief Executive Officer, Carlos Cardoso, Vice President and Chief Financial Officer, Frank Simpkins, and Vice President Finance and Corporate Controller, Marty Bailey. Carlos and Frank will provide further explanation 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 will contain comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause the Company's actual results, performance or achievement to differ materially from those expressed in or implied by such forward-looking statements.

Additional information regarding these risk factors and uncertainties are detailed in Kennametal's filings with the Securities and Exchange Commission. In addition, Kennametal provided the SEC with a Form 8-K, a copy of which is currently available on our website. This enables us to discuss nonGAAP financial measures during this call in accordance with SEC Regulation G. This 8-K represents GAAP financial measures that we believe are most directly comparable to nonGAAP measures, and provides a reconciliation of those measures as well.

I would now turn the call over to Carlos.

Thank you Quynh. Good morning everyone. Thank you for joining us today. As we had expected, the macroenvironment was more challenging in the first half of fiscal 2010, and showed strong growth during the second half of the year. During this time, we continued to execute our strategy, and as a result, Kennametal has been delivering strong operating results. Many of our industrial end markets are benefiting from higher volume. The [Ball Peen] market continues to lead the recovery, with improving conditions in North America, as well as Europe. From a year-over-year perspective, we had organic growth of 39% in the June quarter. In addition, we again experienced sequential revenue growth from the March quarter, the fourth consecutive quarter of sequential growth.

Our customers continue to cautiously replenish their inventories. This activity is not fully restocking, but instead represents customers buying for their near-term needs. In addition, Kennametal will continue to focus on our value sell approach, which has always been a competitive advantage for our products. Currently, raw material costs are trending relatively flat. However, if those costs increase substantially due to demand growth, then it will benefit the overall economic environment, and in that case, higher volumes would provide a partial offset to improved manufacturing absorption. In addition, we are confident in our ability to pass through necessary pricing and maintain the margin discipline.

During the quarter, we also continued to execute our strategy to resize the Company and lower our fixed costs. We continue to implement our restructuring initiatives, and we remain normally on track to realize $155 million to $160 million of permanent annual savings. Those represent permanent savings, and they are increasing in momentum. For fiscal year 2010, our restructuring savings were approximately $137 million. Our adjusted earnings per share of $0.61 for the June quarter reflect sequential improvement of $0.22, or 56% from the March quarter. Sequential improvement in EPS was driven by higher sales volume, as well as continued strong operating leverage.

As demonstrated by the June quarter, we are realizing continuing sales growth, as well as higher incremental margins due to our much lower cost structure. I would like to thank our employees for all their hard work. Those accomplishments are driven by the dedication and efforts of our global work force. While the economic climate continues to be somewhat volatile, we also continue to gradually improve. Overall macro trends were in the positive territory. During the quarter, US industrial production continued to grow, and manufacturing activities around the world have steadily increased.

The environment in the euro zone continues to be uncertain, with some risks from government debt crisis. That said, I visited a number of customers in Europe during the quarter and saw growing production and sales. Within Europe, Kennametal has the most presence in Germany, which is the largest economy in that region and is a leading country. Our Company is well-positioned to continue to serve our many customers around the world, including meeting demand from emerging markets.

In Asia, we continue to see a positive momentum in order trends. I just recently visited the region and growth in that area remains strong, driven by sectors such as small automotive engines, aerospace, and railing structure. The outlook for investments in Asia continues to be bright. For instance, Volkswagen plans to build two new plants in China, and there are planned auto investments in Chennai, India by Hyundai, Ford, and Mercedes-Benz. Kennametal has continued to experience positive order trends in this region.

From a macro perspective, I would like to discuss our view of certain end markets served. In transportation, auto activity is increasing and growth is expected to continue. But may moderate somewhat over the next six months. Major manufacturers continue to promote the electric and low emissions vehicles, with some new entrants into the market, such as Celta, Fisker, and BYD. Kennametal continues to focus on those opportunities. In addition, Kennametal products bring value to customers by reducing labor content and maximizing machine utilization.

In Aerospace, the pace of orders of commercial aircraft are picking up as the economy rebounds. For example, Airbus and Boeing recently announced at the Farnborough Air Show in the UK, that they received commitments for 237-plus jetliners valued at approximately $28 billion. We are in agreement with the analysts in the segment, that this signals an upturn in the aviation industry. Regarding Kennametal's participation in this sector, we are seeing an increase in requests for quotes, specifically on recent programs that are poised to start production over the next two to three years for prototypes, certification and testing.

In Earthworks, coal stock piles are decreasing, although very slightly around the globe. We are starting to see steady base metal and ore pricing, which will benefit our surface and hard rock mining customers. In highway construction the season so far has been relatively flat compared to prior years. In addition, we feel that shortfalls in the government budgets on the reminder of calendar year 2010. In Energy, the BP oil spill is not expected to have a measured impact on Kennametal. We continue to identify opportunities related to alternative growth areas, such as shale reserves, overseas exploration, and shallow water exploration.

As a reminder, Kennametal is a major player on the natural gas part of the equation. In North America, gas inventory reserves continue to be depleted due to higher energy demands, given the favorable cooling requirements from the above normal heat wave hitting most of the region. In addition, power generation will continue to be a growth target for both fossil and emerging technologies. This fits well with our total solutions provided, and market facing structures.

Regarding our near term strategies, we expect to have reduced our manufacturing footprint by a total of 20 facilities, including divestitures when our restructuring initiatives are completed. At the same time, we have retained our operating capacity by shifting production to existing plants according to our Lean practices. Those actions, along with the strong focus of streamlining our business, have enabled us to operate profitably at $2 billion in sales, and in addition, we are scalable to handle up to $3 billion of sales without significant additional capital investments.

As we move forward into fiscal year 2011 I want to touch on the fact that Kennametal has implemented a new operating structure at the start of our new fiscal year on July 1, 2010. A key attribute to our new organization is the establishment and reporting of two new operating segments, Industrial and Infrastructure. The Industrial business is focused on customers within transportation, aerospace, defense, and general engineering sectors. The Infrastructure business is focused on customers within the energy and earthworks market. Our new structure provides an enhanced market sector approach, and a more customer-centric focus. In addition, the new enterprise provides a better platform continually improving our efficiencies and effectiveness of our operations.

Based on forecasts from Global Insight for expected industrial production for IP, rates for fiscal year 2011 our guidance correlates to 2 times IP for the developed economy and 3 times IP for emerging markets. In addition, we expect fiscal year 2011 results to be consistent with historical season patterns,with approximately 60% of the forecast earnings to be realized in the second half of the fiscal year.

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

Thank you, Carlos. I will provide some comments on our performance for the June quarter, and then I will move on to the outlook for the whole fiscal year 2011. So my comments will exclude special items, so please refer to the reconciliation schedules we provided in our earnings release and related Form 8-K. To summarize, June quarter was another solid quarter, building on the momentum of the March quarter. We executed well on many fronts and again demonstrated strong earnings leverage in both business units. The sales trend continued its positive momentum, and we achieved a 39% organic growth in the June quarter. Earnings per share were $0.61. We had solid free operating tax flow of $113 million for the full fiscal year. Also during the quarter, we entered into a new five year credit facility which enhances our liquidity and operating flexibility.

Now let me walk you through the key items in the income statement. Sales for the quarter were up 40% at $539 million, compared to $386 million in the June quarter last year. The increase in sales was driven by 39% organic growth and a 1% favorable impact from foreign currency effects. This represents the second consecutive quarter of organic sales growth, the fourth consecutive quarter sequential sales growth.

The most frequently asked questions about our current sales results have been around developments in Asia, in particular China, as well as in Europe. In Asia, sales trends continue to be positive despite tougher comparisons. You will recall that Asia was the first geography to experience growth last year. Europe's economy has likewise been the subject of considerable focus. As Carlos mentioned, the environment in Europe remains somewhat uncertain, but we are seeing positive signals from Germany, where we generate over half of our European sales. Furthermore, we do not have direct exposure to Greece, and a relatively smaller portion of our sales come from Spain and Portugal.

Turning to the business group sales performance, MSSG had another solid quarter, and its sales increased by 44% from the prior year quarter. This was driven by organic growth of 43%, and a favorable foreign currency effect of 1%. Regionally MSSG experienced improved trends in all markets and all geographies, and they all had organic growth. On an organic basis, Latin America was up 66%, Asia/Pac increased 65%, and India sales increased 64%, while by North America with an organic sales increase of 42%, and Europe with an organic sales increase of 34% compared to the prior year quarter.

MSSG sales also increased sequentially by 8% in the March quarter. Sales gains were made in all geographic markets. The majority of locations experienced double digit sequential growth as industrial production continued to improve in all regions. And this is the fourth consecutive quarter of sequential sales growth for MSSG.

AMSG also turned in another good quarter and their sales increased 34% from the prior year quarter. That was driven by 33% organic growth, and also a 1% favorable impact of foreign currency. Organic increase was primarily driven by higher sales of mining and construction products, as well as increased demand for energy-related and engineered products. Sequentially total sales increased by 11% from the March quarter, driven by better performance in all of AMSG's end markets.

Now a recap of our operating performance. Our reported gross profit margin was strong at 37%,well above the 25.6% reported in the prior year June quarter. Our gross margin also improved 250 basis points, up from 34.5% in the March quarter. I would characterize both business units as extremely doing well from a leverage standpoint.

Strong improvement in our gross profit margin was due to the excellent leverage on sales volumes including increased capacity utilization, the benefits from our restructuring initiatives, and other cost reduction actions. Furthermore, the fourth quarter margins are impressive, given that the quarter was fully loaded with the return of all temporary cost reductions, such as salary restorations, while the prior year quarter included the impact of furloughs. Our operating expenses increased year-over-year by 18.6%, or roughly $19 million to $123 million. The increase in operating expense was held at approximately half of the top line growth to 40%, despite the impact of having furloughs in the prior year. Operates expenses as a percent of sales was 29% for the quarter, down from both the prior year and prior quarter.

The change in operating companies or the increase year-over-year is mainly attributable to higher incentive compensation, higher employment costs due primarily to the impact of the furloughs of the prior year, the restoration of salaries in the current year partly offset by a restructuring benefits and higher spending on professional fees driven by the implementation of certain long term products. Our restructured programs continue to feel significant benefits with approximately $38 million of benefits achieved in the quarter, and $12 million of incremental year-over-year benefits. Charges of $13 million were incurred during the quarter related to restructuring.

We remain on track to deliver the permanent cost reductions from our combined programs of $155 million to $160 million annually. Operating income increased $61 million compared to an operating loss of $25 million in the prior year. Absent restructuring and related charges in both periods our operating income was $74 million compared to an operating loss of $3 million the prior year. Our adjusted operating margin reached 13.8% despite the cost of approximately $20 million for the restoration of salaries and other employment-related costs that had been temporarily reduced.

Our double-digit margin performance in the second half of the fiscal year was driven by sales growth, increased capacity utilization, continued permanent savings from restructuring programs, and ongoing cost discipline. In addition we also had very strong adjusted incremental margins both year-over-year at 51%, and sequentially at 55%. We maintained our incremental margins while absorbing the impact of restoring all of our temporary cost actions in the quarter. Margin performance validates our restructuring initiative as real and permanent cost savings.

Looking at the business group performance, MSSG's operating income was $45 million, compared to an operating loss of $29 million last year. Absent restructuring and related charges in both periods, MSSG's operating income was $57 million, compared with an operating loss of $16 million in the prior year quarter. The primary drivers of the increase in operating income were higher sales, better capacity utilization, restructuring benefits, and continued cost containment. MSSG's operating margin improved sequentially from the March quarter by 580 basis points to 18.1% from 12.3%.

AMSG's operating income was $43 million compared to $14 million in the same quarter last year, absent restructuring-related charges in the same periods,AMSG's operating income was $45 million in the current quarter compared to $18 million in the prior year quarter. Operating income improved due to the higher sales, cost savings from restructuring, and ongoing cost containment. AMSG again achieved a strong double-digit operating margin of 19.9% in the quarter which was higher than the 10.9% for the same quarter last year. This quarter's performance was an all-time profitability record for AMSG, and for the second consecutive quarter, AMSG's operating margin increased sequentially by 150 basis points, up from 18.4% in the March quarter.

Corporate operating loss for the quarter was $28 million compared to $9 million in the same quarter a year ago. Absent restructuring related charges for both periods. Corporate's operating loss was $27 million compared to $6 million last year. The year-over-year change was primarily due to increased incentive compensation, higher professional fees for the implementation of certain long term strategic projects, higher employee benefit costs related to the temporary cost reductions in the prior year quarter, and discretionary 401-k contributions.

Regarding our bottom line performance, reported fiscal 2010 fourth quarter diluted earnings per share were $0.49 a share, compared to the prior year quarter with a loss per share $0.45. On an adjusted basis, earnings per share were $0.61 compared to the prior year adjusted loss per share of $0.13.

Turning to the balance sheet, we continue to place a lot of effort and attention on driving working capital improvements, and we have made further progress in that regard. For example, we remain focused and diligent on Receivables collection. We further reduced our DSOs during the quarter by three days to 57 from 60 days at the end of the March quarter, and by 11 days versus the prior year. Inventory increased only slightly, approximately 2% for the quarter, despite our 9% sequential sales increase. However at the same time I am not satisfied with our Accounts Payable performance, but we are working on a program to turn this around.

Our capital expenditures were $57 million for the full fiscal year as compared to capital spending of $105 million in the prior fiscal year. Capital expenditures net of disposals represented approximately 3% of sales. At June 30, our total debt was $338 million. That's down $148 million from last year. This was driven by the application of proceeds from our equity issuance last July, as well as the strong and improved free operating cash flow. Our debt to capital ratio at June 30 was 20.2%, compared to 27.7% at June 30, 2009, and our US defined benefits pension plans remain over 100% funded.

Cash flow from operating activities for the fiscal year was $165 million, and the free operating cash flow of the full year was $113 million. Another key development for the quarter was the new five year revolving credit facility. The five year tenor extends our debt maturity and enhances our liquidity. We also negotiated favorable fees relative to our prior facility and maintained appropriate covenants. We received strong support for the refinancing from the majority of our existing members of the bank group, as well as interest from select new banks wishing to join the lending group.

As noted in our press release, I'm going to turn to the outlook now. Our outlook for the fiscal 2011 assumes the global economy and worldwide continued production will continue to gradually improve and our overall economic trends will remain in the positive territory. As a result, we are expected to experience positive growth during the fiscal year in all geographies, albeit more modest growth in our served European markets. To help you with your models, following are some additional assumptions that encompass our outlook. Global industrial production is anticipated to be in the mid-single digits for the full fiscal year, with higher growth in the first half of the fiscal year. Sales volumes and related capacity utilization are expected to yield strong incremental margins and offset cost increases for salary restoration and merit increases, as well as were pension and incentive compensation.

Our restructuring programs remain on track to deliver annual ongoing savings of $155 million to $160 million. Based upon current exchange rates, foreign currency may negatively impact results primarily due to the relationship of the US market. Seasonal patterns are expected to revert back to historical patterns with approximately 40% of our earnings occurring in the first half, and 60% in the second half of fiscal year. Under these assumed conditions we expect organic sales growth to be 14% to 17% higher than fiscal year 2010 and total sales growth should be higher by 11% to 14%. This is in line with our goal of growing at least two times the rate of global industrial production.

We expect the earnings per share to be $1.85 to $2.15 per share, excluding charges related to the previously announced restructured program. We all anticipate cash flow from operating activities of approximately $220 million to $245 million for the full fiscal year. And based on anticipated capital expenditures of $80 million, we expect to generate between $140 million to $165 million of free operating cash flow for the full fiscal year.

At this time I will turn it back to Carlos for some closing comments

Thank you, Frank. As we move forward, Kennametal is positioned to continue benefiting from the economic recovery, and meet customers' demands for innovative solutions to improve their productivity. We have the right long-term strategy and the right team of employees in place. The strong operating leverage reflected in the June quarter performance validates our strategies.

As noted previously our fiscal year 2011 guidance correlates to global industrial production activity and reflects strong operating performance. If industrial production activity increases more than is currently forecasted, they will drive continued strong incremental margins and earnings for Kennametal. We remained disciplined in our capital allocation process, while implementing strategies that will enable us to develop new products, increase customer satisfaction, market share and grow our top lines. Also we will maximize our opportunities to realize strong incremental margins and drive earnings growth. We expect to deliver incremental margins of at least 40% on average over the next several years, with higher incremental margins earlier in the cycle.

As discussed earlier we implemented a new operating structure effective July 1, in order to take additional advantage of opportunities, as well as to provide a better platform for continually improving the effectiveness of our operations. The new structure provides an enhanced strategy and focus by market segments, which in turn will allow us to grow faster. Sales execution at the regional level, with a more customer-centric focus for the sales organization, and the other markets facing functions, such as customer service, marketing management, engineering and product development. The formation of a single global integrated supply chain within the organization gives us additional opportunities to achieve higher customer satisfaction and realize lower cost to serve, more uniform management of administrative functions on a global basis, to further improve the consistency, effectiveness and efficiency of the services provided by those functions. The establishment of two new operating segments by market sector, Industrial and Infrastructure, would replace the two previous operating segments that were based on a product focus.

The Industrial business is focused on customers within the transportation, Aerospace, defense, general engineering market, while the infrastructure focus is based on customers in the energy and earthworks industries. We have more corporate expenses that will be allocated to the new segments than were allocated to the previous segments, the remaining corporate expenses that are determined to nonallocatable will continue to be reported as corporate. So in conclusion, we have a diverse portfolio of served end markets, geographies and business mix. We have a strong balance sheet and expect to generate solid cash flow. We have a reputation of bringing technology and innovation to our customers. Our proven ability to operate efficiently in a challenging environment builds our confidence in the belief that Kennametal is a business that is capable of reaching the next milestone of 15% EBIT margin and delivering superior value to our share holders.

Thank you for your time and your interest in Kennametal. We will now take your questions.

(Operator Instructions). Your first question is from Ann Duignan.

My first question is on your guidance. I appreciate midpoint $2 and then if I do the 40/60, might imply something close to $0.40 for Q1. Can you tell me if directionally I am correct and why would we anticipate such a drop in earnings sequentially? Are you anticipating a sequential slowdown in revenues?

I'll start. From an approximation, historically I think you are in the ball park from that side. Sequentially the first half, like I said, the 40/60, we don't anticipate anything unusual, but that is more normal seasonal patterns and it's basically on the number of workdays where we have the European holiday shutdowns. I don't think they will be as severe as they have in the past. In the first half also last year at this time we didn't have merit increases, typical starts October 1, so we have those costs coming back. Nothing unusual but we didn't have it last year. From an overall historical pattern and with those additional facts, I think you're in the ball park

So we should anticipate a slowdown in operating leverage or incremental profits also,Is that a fair assessment?

No. It is just seasonality

Seasonality

Just seasonality.

None at all

Okay. And then Carlos, perhaps you could talk to us a little bit more about your decision to change the reporting structure. Just a little bit of color. Why now? What drove this decision? I appreciate that you are saying it will result in growth opportunities, but I kind of think of efficiencies and scale and I think product line, I don't think customers. Maybe you could delve deeper into that?Thanks.

Yes. I think, Ann, we have been building a foundation over the last two to three years to become more customer focused. So that we have a better connection from the customer at the market, all the way through the internal functions. And we did things like implement an SAP in all of our businesses, so that we can look at it from a global perspective, look at it from a market segment.

Quite honestly, the downturn, the economic recession, gave us an opportunity, as you know, to restructure the business, but in order for us to make those permanent costs to stick versus, this is differentiation between us and other companies. We had to fundamentally change the structure and change the way we do things, become more efficient, so that in the upturn, as the economy comes back, we don't have to add any costs. So it is both a growth focus, as well as a way for us to not only keep the permanent cost that we put in place, but to further improve our cost structure. Like having an integrated supply chain, that is focused and driven by one organization.

Carlos, if I am looking at my model, would I appropriately model then a lower SG&A run rate going forward? Is that where we will see the efficiencies?

You'll see it in the lower SG&A and as well as in our overall margin.

I'll get back in line. Thank you.

Our next question comes from the line of Eli Lustgarten.

Good morning, everyone

Hi, Eli. How are you?

Not too bad. I have got a couple of questions. One technical question for Frank. One tax rate was 28% in the quarter. I'm not sure what it was adjusted. What should be assuming for next year?

And, two, you're implying a 3% negative currency. What was the impact of currency, was there any currency gain in the quarter from earnings? Looks like about a dime for currency next year. And how much was currency for the year? So probably a pretty big swing year over year that we have to make up?

Yes. Okay. I'll start with the tax rate. Eli, on an adjusted basis, it was 26.7%. Essentially exactly what we guided to in the fourth quarter. As we get into fiscal 2011, I am going to put a range of 24 to 26, kind of getting in that midpoint, right at 25%. Just for rule of thumb in your model, if the tax rate moves by 1 percentage point up or down, it's roughly about $0.03 of earnings. Just to give you an idea. That's on the tax side.

From a foreign exchange perspective, yes. When we pull all the currencies, given the bigger exposure we have with the euro, it is about a 3% clip. We averaged in fiscal 2010, $1.40 euro. Granted it tailed off here towards the end. We probably had a negative $0.03 in the quarter. And I would say for the year it was probably positive, I don't know, $0.05 to $0.06, most of that occurring in the first half or first three quarters of the year. Not a major swing there.

To your point, yes, it will have a big point on a year-over-year. You threw out a dime. That's probably a pretty good figure. And then you have the swing. So there is a little bit of negative. That's why we try to highlight that fact in our assumptions in the release.

Okay. The volume gains you have are pretty reasonable. You've had outstanding profitability in the fourth quarter and very good in the second half of the year. And now we're going to report the numbers completely differently from now on and it will drive us crazy and all that stuff, but if we were looking at the Company as it exists today, how sustainable are the kind of margins that we saw not only in the fourth quarter, but maybe the second half of the year for both kinds of operations? I mean, that's sort of what you're expecting it to be the average of the half, as opposed to the fourth quarter, which was just seasonally outstanding?

Yes. I mean, again, just like Ann asked, I think we have the normal seasonal pattern coming into play. Because if you go back and pull our numbers, sometimes we're as low as 35% of earnings in the first half and as high as 40%. So I mean, just the number of days. We're not done with the restructuring programs. We're still wrapping up a couple of those facilities, so when we talk about our long-term goal to get to that 15%, we're in the right trajectory. I think the corporate side, we've taken a lot of costs out of there so we're back to a normal. We had some catch-up obviously with some of incentive comp, which would be more level loaded than we had in the past, where in the first quarter last year we had none. We'll start putting some of that back assuming a normal pattern. Directionally we should continue to do well.

The restructuring benefits, like I said, will kick in. I think we'll see some additional opportunities in some of the international markets, and the ongoing discipline with the new structure, I think it provides you better visibility. So when Ann asked why now? We've been actually working on, I will call it the new structure, for over a year. We kind of did a little mini one and advanced materials. We saw how that came out. This wasn't a change overnight. This has been a lot of hard work and effort for the whole organization to get ready for the timing, we wanted to do it at the beginning of the fiscal year then midstream. We think we're going to get better visibility and interaction looking at both the costs on one hand and working with the customers better on the other

I understand there were corporate numbers. I'm trying to look at business profitability. When you had an 18% operating margin in metalworking and almost 20% in advanced materials, and even if I look at it from a half standpoint it's more like something like 16% and still like 19%. Are those levels of profitability that we saw in the second half sustainable in 2011? Not for the quarter, but for the full year, should we expect that you would be able to hold the kind of profitability levels that we got to in the second half of 2010? I realize the fourth quarter was phenomenal, but if I average the two, I'm wondering can we hold the levels of profitability that we're currently seeing?

Yes.

Yes. As you can see by our guidance, our EPS is going to be almost doubled than the EPS of last year. So I mean, that is coming from the profitability of both business. As we said before, the business has different profitability levels at the different times of the cycle. We anticipate when we look at a year average, we anticipate the AMSG to improve slightly. We anticipate, as we talked in the previous terms, metalworking to improve much better because they are coming from a much lower base.

One question. You talked a little bit about pricing going on in the market place for your products. We all expect aerospace to become a more important segment of the Company. With all of the production problems they had at Boeing. Will we finally see improvement as a contribution in 2011 from aerospace as a greater percentage of overall activity?

We are all excited about what happened last week at Farnborough. I mean, there's people in the aerospace industry that were very excited about the uptick in the number or orders, pleasantly surprised. So I think as they move and produce this aircraft, they have a higher content of composites than we're going to grow more in the area, as well as in the engines because the engine production has been sort of depressed as well. So we anticipate to see for that group to be coming back strongly.

Our next question comes from the line of Andy Casey with Wells Fargo Securities.

Good morning everybody.

Hi, Andy. How are you?

I'm doing all right. Sounds like you've been traveling a lot.

Just a little.

Yes. Couple of detailed questions on the quarter and then, just on the quarter, I guess. If you look at the corporate expenses, it had a sequential increase. It has, it did all the way through the fiscal year. And it sets up kind of a gap if you were to retain the operating structure that you had in fiscal 2010, it sets up a bit of a gap in the first quarter. How should we think about, even though you are changing it. And if you didn't change the corporate structure, would that corporate expenses stay at the Q4 levels or go down or go up?

I would say it probably would go back to about the $20 million a quarter range. As we get into the fiscal year we have obviously we have some additional incentive comp that kicks in at the end of the year. We have some projects that we're doing on our system that is going to tail off in the first half of the year. That $80 million kind of number, if we were on a like to like basis, is probably about right.

Okay. Thanks. And then on the guidance, going back to all the travels that you have done. Should we expect the normal sequential top line patterns, first quarter next year versus first quarter or fourth quarter this year, because of last year you had some really unusual things going on between the two quarters for some of your customers?

Andy, I mean, if anything, our first half may be slightly stronger than the 40/60. We may be closer to a 50/50, which is really hard to tell at this point. With everything going on. I'm very pleased to, you go to the customers and our quotations are very, very high, the quotation activity right now. And you go to the customers, they are adding production and so forth. But then you read all of this stuff about what's going on in Europe and the double dip. So it's really, really hard for us to be to the level of precision that you guys would like us to be. But at this point I would say the 40/60 is the worst case scenario and we're probably going to see a slightly stronger first half than the normal seasonality. But what we're saying is we're not reverting back to more of the typical seasonality, because there are less work days, like Frank explained earlier and so for the

The only thing I would add is, last year it was kind of once in a 25 or 30-year lifetime where we have sequentially higher sales in the September quarter versus fourth quarter. Now, I don't expect that to happen unless industrial production would all of a sudden really kick in strong. That is kind of how we got to the 40/60.

I just want to emphasize. We have a strong correlation between our sales and IP. And IP forecasts are for our current fiscal year are between 6% and 7%. And we're growing in the midpoint of 15%. So twice the IP, which is very, very consistent.

Now if industrial production gets better, I mean, we are going to continue to deliver 40% plus incremental margin. So I mean, but at this point, we're really follow, this is what we see in the market place. That's what's being forecasted is the IP between 6 and 7. We think our top line forecast is good based on the data that we have. But to the extent that things get better, we will obviously deliver the equivalent performance to that.

Okay. Thank you very much.

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

Good morning, guys.

How you doing, Henry?

Good. Could you talk about input costs versus price, the delta in the fourth quarter and then what's embedded in guidance?

Yes, Henry, This is Frank. And the fourth quarter is basically flat. Nothing unusual as far as pricing by geographies. I would say still very rational across both units. So nothing unusual on that front. And then as we go into fiscal 2011, right now with the big ease for us, between tungsten, cobalt, and steel, a couple of them are up, couple are down. Most recently steel is a little softer, but tungsten and cobalt were a little bit higher. But when we put it together It's going to be flattish. If things move, we may get a little move but nothing significant on that front

Thanks. And how did European order trends progress as you went through the quarter?

They actually progressed favorably throughout the quarter.

And one final one, if I could. What do you see as the longer term growth rates for the two new segments? And what's embedded in the 2011 guidance?

Well, again, I think on the consolidated top that Carlos just talked about industrial production. But I think right now, very similar to what we saw here in the fourth quarter. I would imagine the Industrial business to grow a little bit faster than the Infrastructure business given the type of customers that we're serving, whether it be transportation. So I expect the Industrial to grow a little bit faster than the Infrastructure business, particularly in the early, or should say in the first half. Then I would say Infrastructure maybe revert a little stronger toward the end. But for the full year I would expect Industrial to be stronger than the Infrastructure business as constructed today

And longer term, is there a difference in the growth rates beyond fiscal 2011?

I think that once we get into our normal run rates, I would say that then the industrial business will follow closer to the industrial

Our next question comes from the line of Adam Uhlman with Cleveland Research.

Hi, guys, good morning.

Hey, Adam. Good morning, how are you, Adam?

Good. Just a question on the balance sheet and the cash flow has been really strong here for some time, and I guess I'm wondering what you are seeing in the acquisition environment right now, in terms of availability of properties and price expectations that are out there?

We continue to have a strong pipeline, although we have been sort of wait and see what the market environment is going to do. And we also think that there are still some unrealistic expectations relative to the pricing. So we think that in the next six months to a year, we will probably see more activity as growth continues to increase, and I think some of the weaker companies starting to feel more pressure on their capital structure, I think that we are going to be able to get back to some good prices.

Are there any geographies that are looking more attractive from an acquisition standpoint at this time?

Unfortunately, in our case because we are looking for technology, good technology companies, typically those companies seem to be available, more available in developed economies, in the US and Europe. What we have done in the past is we have done a very good job of buying companies in developed economies, and then very, very quickly move their operations into developing economies. We have done that with Conforma Clad, we are doing that now with Tricon and very, very effectively. We probably have to continue along those terms, although we would like to buy, make some acquisitions in developing economies. It is not a fact of what we would like to do as so much as what is available.

Okay. And then earlier you guys mentioned that you were obviously getting better capacity utilization. Where would you kind of, where do you think you are today in terms of utilization rates, and it does look like CapEx is going up this year, what exactly are you spending the incremental dollars on, or where do you think your maintenance CapEx is?

Yes, I mean we probably are in the 70s relative to capacity utilization and, Frank, will--

Yes, Adam, as far as CapEx goes, it is up, but it is still below our depreciation. Depreciation is about $85 million, so we are still being very disciplined. When I take a step back, I like a strong balance sheet. A year ago, there is still some scars there, so we have got to be very prudent about how we redeploy our capital in case anything would happen from a global perspective that we are well prepared. As far as the type of investments we are making, we still have some of the systems implementation that we are wrapping up to help us with productivity. And then in international markets where we think we have some significant opportunities to grow the businesses faster, whether it is infrastructure or industrial we think strategically you will see more of that come on the international front than domestic.

And Adam we said all along that, last year that was kind of the maintenance, maintenances mode so you can look at where we spent last year in sort of the maintenance mode and we also said that we had, we would spend about depreciation until we get to $3 billion. We don't have to invest in capital equipment to get to the $3 billion goal that we talked about.

That is helpful. Thank you.

Your next question comes from the line of Chuck Murphy with Sidoti & Company.

Good morning, guys.

Hi, Chuck, how are you?

Alright. Just a couple of questions on the change in operating segments. I guess first what do you expect the impact to be on operations? I mean how many people are going to be moved around, how much is it going to cost? Is there any execution risk?

No, I mean we have pretty much have done the realignment, again for instance, the majority of the customer facing people do not change, and we have as I said been preparing for SAP. I talked like in 2003, only 60% of our sales same through SAP. Less actually. Less than 60%, where today is pretty much in the high 90s, 98% or something like that. We are taking a lot of precautions in minimizing the risks, and we feel good about our ability to just go forward with the new organization. It is much more simplified, and it is very global, so I would say that from my perspective there is even less risk.

Okay. I guess in terms of the customer facing part of your business, I mean has that kind of not, that has already been implemented for the past few quarters and really just a matter of changing the way you report it to us?

No, I mean the change of the customer face has pretty much the way it was, there is a little bit of change but not that much change. I mean the biggest change is about operating the business from a segment perspective. In other words, we were operating the business from a product perspective, so a guy in the line would be dealing, with all of these products and was not enterprised. The guy was either a metalworking guy or an advanced materials person, okay. Where today it is going to be more market focused, and it is going to be more enterprise wide. And one of the opportunities is in many cases where we were very strong in metalworking at one customer, we typically were very weak at the advanced materials in that customer. What it ended up being is the person that was the metalworking person was in front of Caterpillar, as an example, he is taking on the enterprise with the support of the market segment, because they understand now from a market perspective not just from a product, and the market segment guys are supported by the product guys. So the product management became more of a back office versus a front office.

Got you.

So it is basically the same people, just playing a slightly different role and the way we deliver to the customer and the way we listen to the customer is different.

Got you. Kind of make senses. And then my other question was just have you done the calculations to see what industrial and infrastructure sales would have been for fiscal 2010 and this past quarter?

We have not.

Okay.

We have not. I mean we are, as soon as we can put that out we are going to do that, but we want to make sure that we have a high level of confidence, and so at this point we are focused on putting together the FY 2011 plan and preparing obviously for our guidance at this point.

Chuck, this is Quynh McGuire. To the extent that we can get the restated fiscal 2010 numbers and the new segment structure by Analyst Day we will do that. But as a last resort, you will certainly get the information every quarter as we compare it to prior year. It is our hope that we can get it to you sooner rather than later.

Okay. Sounds good. Thanks.

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

Thank you, good morning.

Hey, Holden.

Was interested I guess just in exploring the corporate expense a little bit more. Seems to me like you did $100 million in corporate expense costs in 2010, and frankly the first half wasn't necessarily fully loaded with those costs, and so conceivably if they had been fully loaded that $100 million or $98 million would have been somewhat higher, and now you are arguing it is going to be something like $80 million. It seems like a big drop. Maybe some consultants fall out and some things like that, but it seems like a big drop. I want to get a little more color for why sequentially it would fall off so much?

First of all, there were restructuring charges in there. We booked the Culver stuff. Almost $9 million or $10 million just in restructuring. Take it back to 90 million and some of the other stuff that will fall off in compensation and I will call it professional fees gets you down to the 80 million, coupled with the restructuring benefits kick in a little bit stronger. The big piece Holden is kind of the restructuring one that you are missing.

Okay. Okay. And then can you also comment on I guess a couple of your specific market trends. You sound pretty confident about the China Asia market but I think in your monthly numbers, you have seen China I think uniquely among most other markets maybe decline a bit sequentially in the last couple of months. You haven't seen that in other markets. Seems to tie in with the PMI readings coming out of China. What level of confidence do you have that China is not in sort of the early stages of slowing materially, given what you have seen in the monthly data?

Well, this is the data that we have. I mean I actually was there last week, and I met with the top sales people, sales management there, and visited with some customers. I want to tell you, if we were to look just at the quoting activity for new projects, we probably, I don't remember the last time we had that much activity, right now as we speak. I mean as of last week, number one. Number two is, it is hard in China for us to look at it on a month-to-month basis because we have projects that kick in, and projects are still a good percentage of our sales there so we might have had, some sales in previous months or two months, three months ago for special, a big project that we sold and/or reversed, and I would tell you that what we found for the last few years is that the Chinese government is managing their economy for 8% to 10% GDP. So when they get closer to 8%, they start accelerating. When they get close to 10% they start decelerating, and obviously they have the ability, they have shown they have the ability to do that. So I mean I wouldn't, we have a high level of confidence that China is going to continue to do well.

Okay. And how about with regards to trends in the coal business? I guess again you had a couple of months where maybe that has been I think we have been talking about maybe things slowing down because of maintenance in the mines. Again, any greater visibility as to whether coal is kind of slowing down here and going to be a while, or whether it is going to be stepping up a bit?

Yes, I mean I think that is going to be still continues to be flattish. We don't see anything exciting one way or the other.

So issues there are more about market dynamics than they are just temporary kind of spending cuts?

Yes.

Okay. And then the businesses you have that are capital spending oriented, have you seen those begin to accelerate or, still maybe lagging the IP part of your business? How are you viewing the capital spending trends?

The capital spending is starting to do better. I mean and that would say that I would rank them among like maybe the third group, relative to the growth, like they are in third place as far as from highest growth to lowest growth.

So even, see, with on the other side when we were trying to buy capital equipment now, we know lead times are being extended on our side as well coming at it from another way, Holden.

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

Hi, good morning.

How are you doing, Steve?

Good. I want to go back to a guidance question. As I think about the revenue sensitivity to your plan, if sales do end up trending towards the low end of the range, do you think you still have the flexibility to hit the mid point or higher of your EPS guidance? I guess how flexible are you on costs at these revenue and employment levels?

I think on the low side. It would be a little bit, it would be more challenging than obviously the midpoint. But obviously we, counteract that, and then you would have less incentive compensation and other factors so it would be close.

So the midpoint at least is achievable at the low end of revenue?

That is tough, Steve. I wouldn't go that far. I said it would be close.

Just trying to get an idea for revenue sensitivity for the plan. You have a good cash position right now, good strong free cash flow guidance. If the year does unfold the way you think it is, which is, two times IP growth and we have good overall environment, what is the appropriate debt to cap as you look forward, and is there is price where you would start to look more favorably at share buyback?

We always talked under normal conditions the good environment, economic environment, that our debt to cap should be in the 30s, right. So yes, we have a lot of room, and certainly we would be looking at our normal uses of cash, things that we have done in the past from acquisitions to buybacks to dividends, and so forth.

Kind of in that order?

I mean probably already, if we had the wish list it would be inorganic first, CapEx, repurchases, and then dividends. And it could flip one or the other, but I mean Steve that is the way I see it.

Okay. Thanks.

Thank you.

Our next question comes from the line of Joel Tiss with Buckingham Research.

Hi, guys. Most of them have been answered. Which part of the transportation business are you expecting to slow down a little bit? Can you be a little more specific there?

Well, it is not so much a slowdown as it is, I mean they are coming along some really good comps, but let me just look at, I think that we are going to continue to, I don't think the acceleration in the US is going to be at the same level going forward than it has been in the last year. And that is primarily one of the bigger drivers.

More auto or truck?

More auto, yes.

Okay.

We don't have a lot, I mean our truck exposure is not that high.

Okay. So it is mostly auto then.

Yes, our exposure, yes.

Can you also just outline some of the factors that could get you from mid single digit industrial production growth, and I appreciate you talked a little bit about international as well, but just some of the like business side factors of getting that kind of a growth rate up to the 14% to 17% range, new products, pricing, and those sorts of things? Thank you.

I would say that one of the characteristics, one of the things that we have done well, I believe during the down cycle is we continue to develop new products. IMTS is coming up in the next couple of months here, we are going to introduce some high technology products and so forth. One of the growth drivers is new products, above and beyond the normal IPI. And the second one was we launched this Widia brand that is aimed at the indirect channel, and we launched that about six months ago and it is taking traction, it is doing a lot better than what we thought it was going to do, and we are very excited about that and again with IMTS coming out it is going to be another kick that would help us. And then the third piece is that we are focusing again on this market segment with the new structure. So I would say there are three major elements that are helping us grow at two or three times in some cases the industrial production, and these new products, there is Widia and there is this market segment focus.

Okay. And just last one quick, can you talk very fast about the competitive landscape? Seeing anybody getting more aggressive or people maybe losing their focus a little bit?

No, I think that I think the, Sandvik and us are pretty much on the same boat, and again we continue to, in the downturn we continue to see the small players getting eaten, or struggling, but as the economy goes up, those that survive will continue to give us fits. And the big players are coming out of this downturn strongly.

Great, thank you very much.

There are no further questions at this time. I will turn the conference back over to management for any closing remarks.

This concludes our discussion. Please contact me, Quynh McGuire, at 724-539-6559 for any follow-up questions. And thank you for joining us.

Today's conference will be available for replay beginning today at 1.00 PM Eastern Standard Time through midnight Eastern Time on August 29, 2010. The number to dial to access the replay is 1-800-642-1687 for US callers, and 706-645-9291 for international callers. The conference ID number to access the replay is 82356133. This concludes today's conference call. Thank you all for participating, and you may now disconnect.