Kennametal Inc (KMT) 2011 Q1 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 first quarter fiscal year 2011 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).

I would like to turn the conference over for Quynh McGuire, Director of Investor Relations.

Ms.

McGuire, you may begin the conference.

Thank you, Regina.

Welcome everyone.

Thank you for joining us to review Kennametal's first quarter fiscal 2011 results.

We issued a quarterly earnings press release earlier today.

You may access this announcement via our website at www.kennametal.com.

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

It is also being broadcast live on our website and a recording of the call will be available for replay through November 28, 2010.

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 and Vice President, and Chief Financial Officer Frank Simpkins, and Vice President of Finance and Corporate Controller Marty Bailey.

Carlos and Frank will provide further explanation on the quarter financial performance.

After the remarks we will be happy to answer your questions.

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

The discussions 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 achievement to differ materially from those expressed in or implied by such forward-looking statements.

Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission.

In addition, Kennametal has provided the SEC with a form 8-K, a copy of which is currently available on our website.

This enables us to discuss non-GAAP financial measures during the call.

In accordance with SEC Regulation G, this 8-K presents GAAP financial measures that we believe are most directly comparable to the non-GAAP financial measures and provides a reconciliations of those measures as well.

I would now turn the call over to Carlos.

Thank you, Quynh.

Good morning everyone.

And thank you for joining us today.

During the September quarter we saw continued improvement in the global economy.

Our industrial end markets are benefiting from an increase in manufacturing activities.

The developing markets continue to show the strongest growths with North America as well as Europe reflecting ongoing activity.

The first quarter of fiscal year 2011 reflected excellent performance by Kennametal at many levels.

We realized organic sales growth of 34% compared with prior year quarter.

We achieved record operating margin performance for any first or second quarter.

Our adjusted earnings per share of $0.47 reflects an improvement of $0.51 per share compared with prior year period.

The year-over-year improvement in EPS was driven by increased sales volume and higher incremental margins.

We continue to realize significant year-over-year sales growth as well as strong operating leverage.

Restructuring has been an important driver in enabling Kennametal to further streamline our cost structure and we continue to implement those initiatives.

We currently have four plant closures underway and we are on track to realize $165 million of permanent savings on an annualized basis.

That is up $5 million from our previous guidance.

When those efforts are complete, we will have reduced our manufacturing footprint by a total of 20 facilities, including divestitures.

At the same time we will have retained much of our operating capacity as a result of utilizing our lean practices to shift production to our other plants.

As we continue to focus on top line growth, we retain our value selling approach for the end markets we serve.

We have begun notifying our customers of price increases effective on October 1 and we will continue to implement pricing actions this throughout fiscal year 2011 as appropriate.

From a macro perspective, we continue to see growth on a global basis.

North America and Europe are positive, with emerging markets showing the greatest strength.

Currently we generate 52% of sales outside of North America with 26% coming from the rest of the world regions.

While we expect that customers will remain cautious, overall demand continues to rise.

We experienced that first hand in early September at the International Manufacturing and Technology Show or IMTS held in Chicago, where we showcased our innovative new products for Kennametal and NVIDIA brand.

Attendance at the show was good and machine tool builders reported seeing a healthy level of customer demand.

In addition, we generated many new leads from the Kennametal NVIDIA booths combined -- Five times the number of leads that we received in the previous IMTS in 2008.

We believe those are encouraging indicators of overall customer sentiment.

The transportation the growth trend seems to be decelerating in the US.

In Europe, Germany's sales are increasing and demand is being driven primarily by export markets.

China and India both continue to see growth in this sector.

In aerospace, order backlogs are growing.

The suppliers are maintaining a high focus on low inventories.

As commercial revenues passenger miles continue to trend upwards, this will benefit long-term cost of market sales.

In energy on a year-over-year basis US rig count increased 62%.

Canada rig count grew 24% and international rig count is higher by 16%.

In addition, natural gas and storage is 6% above the five year average which is a more favorable level than a year ago.

In the Earth Works business, gross construction customers still remain conservative due to the uncertainty related to funding for public works projects.

On a favorable note, coal stockpiles have continued to decrease, which leads to increased volumes in mining activities.

From a raw materials cost perspective we expect that market conditions may be volatile into the near term, especially related to tungsten prices.

But because our products provide tremendous value to our customers we are confident that we can maintain margin discipline.

As a result of better visibility across our business as well as our continued confidence in sustaining strong operating leverage, we have significantly increased our guidance for sales growth, earnings per share and cash flow for fiscal year 2011.

We remain committed to further balancing our mix in end markets served, geographic presence, and portfolio of business.

September quarter results demonstrate that Kennametal global team can effectively execute our strategies.

We are a resilient company as proven by our ability to weather one of the deepest recessions in history and remerge an even better company.

By maximizing opportunities that the downturn provided, we improved our cost structure, further implemented our channel strength strategy, and realigned our organization.

We strengthened our foundation, positioned Kennametal to benefit during the economic upturn in front of us and placed our company in a path to becoming a breakaway company.

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

Frank?

Thank you, Carlos.

I will provide some comments on our performance for the September quarter and then move to the updated outlook for the remainder of fiscal 2011.

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

To start, the September quarter started off the new fiscal year on a very positive note.

We had a stronger than expected top line performance.

That was across all markets and all geographies.

We are also pleased with the exceptional operating performance and leverage delivered by both of our business segments and our operating adjusted margins of 11.7% was a September quarter record.

And as a result of our per former performance we are increasing our annual sales and earnings guidance for fiscal 2011.

As you know , in order to take advantage of growth opportunities as well as provide a better platform for continually improving efficiency and effectiveness of our operations, we implemented a new operating structure at the start of the new fiscal year on July 1, 2010.

This was highlighted at a recent analyst day in New York.

As a reminder, the key attribute of the new structure is the establishment of two operating segments by market sector which replaces two operating segments which were based on a product focus.

The prior two segments were MSSG and AMSG.

The two new operating segments are named Industrial and Infrastructure.

The Industrial business is focused on customers within the transportation, aerospace, defense, and general engineering market sectors while the Infrastructure business is focused on customers with the energy and earth works industries.

Additionally more corporate expenses are a now allocated to the segment so you will see a smaller portion in the corporate line as the new segments are fully loaded with all related costs.

Now, I will walk you through the key items in the income statement.

Sales for the quarter increased 29% to $529 million.

This compares to $409 million in the September quarter last year.

The increase in sales driven by a 34% organic growth partly offset by 3% unfavorable impact of foreign currency effect and 2% unfavorable impact on fewer business days.

This represented the third consecutive quarter of year-over-year organic sales growth.

As Carlos mentioned looking at our sales by geographic area, 52% of our sales are generated outside of North America and in the quarter our rest of the world grew to 26% of sales the same as our sales in western Europe.

Further, compared to last year rest of world grew from 23% to 26% of total sales.

Turning to the business group sales performance.

The Industrial segment sales increased by about 33% from the prior year quarter.

And that was driven by or organic growth of 39% partly offset by unfavorable currency effect of 4% and 2% unfavorable impact due to fewer business days.

On an organic basis sales increased in all market sectors, led by growth in general engineering and transportation with increases of 46% and 39% respectively.

And from a regional view, sales increased by approximately 40% in Asia, 30% in the Americas, and 22% in Europe.

We did see sales trends revert a bit to normal seasonality but a few markets mainly general engineering did do better sequentially from the June quarter.

Infrastructure segment sales increased 23% from the prior year quarter and that was driven by a 25% organic growth, slightly offset by 1% unfavorable foreign currency effect and 1% impact due to fewer business days.

The organic increase was primarily driven by 46% higher sales of energy and related products as well as increased demand for earth works products.

And there from a regional view sales increased also in Asia, 22% in the Americas and 13% in Europe.

Now, a recap of our operating performance.

Our reported gross profit margin strong at 35.7%, well above the 28.8% reported in the prior year September quarter.

The improvement in our gross profit margin was the direct result of higher sales and related increased capacity utilization, higher restructuring benefits and ongoing cost discipline.

The business levered well in the quarter.

As Carlos mentioned we did experience slightly higher raw material costs in the quarter, that is both year-over-year and sequentially.

The main driver is higher costs for tungsten.

We already initiated pricing action to address this issue.

In addition, the prior year quarter benefited from temporary cost measures such as salary cuts and suspension of the 401(k) match.

We had previously advised that the total impact of salary reductions was approximately $7 million per quarter and the 401(k) match impact was an additional $2 million for a total of $9 million.

Turning to operating expense.

It increased year-over-year by 7.6% or $9 million to $125 million.

Approximately half the year over year increase was due to the restoration of the temporary employment cost actions taken in the prior year.

The remaining increase is mostly due to higher professional fees for strategic projects.

Operating expense as a percent of sales 23.6% for the quarter, down 480 basis points from the prior year percentage of 28.4.

Our operating income increased to $58 million compared to an operating loss of $10 million in the prior year.

Absent restructuring and related charges operating income was $62 million, compared with an operating loss of $1 million in the prior year.

We levered well again this quarter with a strong incremental margin of 52%.

Adjusted operating margin reached 11.7 despite the restoration of salary and other related costs that had been temporarily reduced in the prior year quarter.

Looking at the business segment performance.

The industrial segment operating income of $36 million compared with an operating loss of $18 million for the same quarter of the prior year.

Absent restructuring and related charges in both periods, industrial's operating income of $39 million compared with an operating loves of $11 million from the prior year quarter.

The main drivers of the increase were higher sales volume, increased capacity utilization and incremental restructuring balance.

And industrial's adjusted operating margin increased substantially from the prior year quarter to 11.8% from a negative 4.6.

The infrastructure segment operating income was $27 million.

And that compares with $12 million in the same quarter of the prior year.

Absent restructuring and related charges in both periods, infrastructure's top rate income was $28 million in the current quarter compared with $14 million last year.

The operating income improved primarily also due to higher sales volume, improved capacity utilization, and incremental restructuring benefit.

Infrastructure's adjusted operating margin increased to 14% from 8.5% in the prior year quarter.

Keep in mind that both business segments results include a higher portion of operating costs than we have previously.

The corporate operating loss for the quarter was $5 million compared to $3 million in the same quarter last year.

The year-over-year change was primarily due to higher professional fees for the upgrade to our new enterprise system.

Regarding our overall bottom line performance reported first quarter fiscal 2011 diluted earnings per share $0.42 compared to the prior year quarter diluted loss per share of $0.12.

And adjusting for special item items earnings per share were $0.47 compared to the prior year quarter adjusted loss per share of $0.04.

Turning to the balance sheet.

We continue to focus on driving working capital improvements while investing in our business.

We remain focused and diligent on receivable collection.

We further reduced our days sales outstanding by one day during the quarter to 56 and by 12 days compared to the prior year.

Inventory increased 9% compared to June 30 and our turns remain at 3.4 turns.

The increase in inventory was two fold.

We added additional strategic law materials and finished with goods inventory to support future sales growth.

Our capital expenditures of $10 million were about the same as the capital spending of $9 million in the prior year quarter.

Capital expenditures net of disposals represent approximately 2% of sales.

At quarter end, our total debt was $319 million down $49 million from September 30 last year.

The debt to cap ratio at September 30 of 18.2% compared to 20.8% at September 30, 2009.

Furthermore, our US defined benefit plans remain over 100% funded and were also rated by Fitch to BBB class.

And all rating agencies have [inaudible] investment grade ratings.

And consistent with our capital structure of principles in our priority to invest in our business and increase shareholder value, our board of directors has directed us to authorize a new share repurchase program of up to 8 million shares of our outstanding common stock.

This will be used primarily to offset dilution from the equity issued under the employee benefits program.

This is a multi-year program and as you know we have not had a program in place since September 2008.

This will be consistent with our capital structure principles and our priority uses of cash.

Now let me update everybody on our current outlook.

First, we expect economic conditions, including global industrial production, to continue to improve at a gradual rate with the first half of our fiscal year stronger than the second half.

As a result of our first quarter performance and slightly better visibility we expect the annual organic sales growth rates to be better than our previous guidance by more than 400 basis points.

Currency will still be a drag year-over-year and given the recent trends and of volatility in the currency market we expect the euro to average $1.35 versus $1.40 we realized last year.

This is up from our previous guidance of $1.30.

We still anticipate that sales volumes and related capacity utilization as well as further incremental restructuring benefits will yield strong incremental margins and more than offset year over year cost increase for items such as the salary, restoration, merit pensions and other compensation.

Here are other factors we have considered in arriving at our outlook.

Raw material costs have increased and we have initiated cost increases to offset those.

Restructuring benefits are running favorable to our plan and we now expect to reach $165 million in annual savings, up $5 million from the prior guidance and given the mix of our business we now expect a slightly higher effective tax rate.

And finally, seasonality patterns appear to be in line with historical ranges, and we still expect approximately 40% of our earnings in the first half and 60% in the second half.

And under these assumed conditions, we expect organic sales growth for the fiscal year to be 19% to 21% and total sales to be 18% to 20%.

This is in line with our goal of growing rate of at least two times the rate of industrial production.

We expect our earnings per share -- our adjusted earnings per share for fiscal 2011 to be in the range of $2.25 to $2.45 a shares excluding the charges for the previously announced restructuring program.

We also anticipate cash flow from operating activities to be approximately $240 million to $260 million for fiscal 2011.

Based on anticipated capital expenditures of $80 million we expect to generate $160 million or $180 million of free operating cash flow for the full fiscal year.

Now, I would like to turn it pack to Carlos for some closing

Thank you, Frank.

Moving ahead, Kennametal is well positioned to benefit from the economic upturn and we are prepared to serve customer demand.

We have made the necessary changes to increase position in this company and emerge in better condition than ever.

We already resized the company and have aggressively lowered the fixed costs.

Kennametal is new capable of up to $2 billion of sales, a goal we can achieve without making any significant additional capital investments.

Based on an ongoing improvements and worldwide industrial production and our ability to maintain strong operating leverage, we have increased our guidance as Frank said for fiscal year 2011 accordingly.

Our revised guidance is in the range of $2.25 per share to $2.45 per share compared with previous range of $1.85 to $2.15 per share, represents an increase of 18% in the mid point.

During the current cycle we expect to achieve higher incremental margins than in the past periods.

We believe we can realize 40% incremental margin over the cycle with higher levels earlier in the cycle.

In the meantime, our strategies remain consistent.

We continue to focus on customers in their respective end markets, develop new core products and drive top line growth.

Over the long-term, we will continue to balance our served end markets, business mix and geographic presence to improve your exposure to fast-growing margins and regions.

In addition, we will maintain a disciplined approach to capital allocation in order to further build shareholders value.

We have always been student in our uses of cash which includes reinvesting to add value, making definitions, paying dividends and repurchase shares to offset dilutions.

If fact, the board just authorized a share repurchase program of up to 8 million shares which we will use primarily to offset share dilution from equity issued under the employee benefit programs.

The foundational work to advance our mission has been done.

Now, we are transforming Kennametal to a market facing organization to grow our top line and increase our profitability.

We are driving a sharper customer focus and delivering improved productivity.

In summary, we are in excellent position to achieve the next milestone target of 15% EBIT margins and 15% return on invested capital for fiscal year 2013, and delivering superior value to our shareholders.

Thank you for your time and your interest in Kennametal.

We will now take your questions.

(Operator Instructions).

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

Good morning, nice quarter.

Thank you, Eli.

How are yew doing?

Very well.

One technicality -- one second you said the tax rate will be some what higher.

I guess the adjusted tax rate I think was 24.25% if I did it correctly.

Are we talking like 26% or 28% or something like that?

The reported rate as you know in the release is 27.6%.

About 100 basis point, a little less than that, Eli and that is why we guided I would say 26% to 28%.

The only potential there obviously will be the mix of business, and that's all jurisdictional.

If the government in the US plans to tax the R&D and not go into a lame duck session we could get a little bit of a benefit there.

But you can't fill that in until it becomes effective litigation.

And, yes, in the guidance you just gave us 40% in the first half which the implied quarter is relatively flat with the first quarter of some where between $0.43 and $0.51 I think if we were true to your guidance.

Can you give us some idea how volume flows for the rest of the year.

I know the second quarter gains will still in the low to mid 20s but you will be trading downward.

But more importantly, because we have now margin to go through how do you see the operating profitability averaging for the year for the Industrial and Infrastructure sector?

I think the margins, you know, if the first half, the $0.46, that is an approximation, and that is the best we can give you at this point.

I would imagine the second the margins will be better that there will be more the work days, and we have those incremental restructuring benefits in the second half.

We feel good about that.

And then from an incremental margin we will still get 40% for the year.

The one thing I remind everybody is you don't get 40% leverage of the benefit on the foreign currency translation benefit.

It doesn't fall -- if you exclude that out of the number we will be down and back where we need to be.

I guess I was kind of driving more the operating margins were 14s in the first quarter.

What kind of margins do you think you can do in each of those sectors baited on the new segments and -- based on the new segments and putting the corporate numbers up there?

What kind of profitability should we -- you know, what kind of range possibility should we expect in the sector?

You have to look at the performance in the past.

The first half profitability to your point is similar for the most case and then we will get a little bit of a step up in the second half.

From the seasonality perspective, infrastructure will have some seasonality in the second quarter, particularly in Europe because of the construction business and that is typically routine.

That obviously is stronger in the third and fourth quarter and I would imagine the industrial business will continue to progress on a positive trend for the rest of the fiscal year.

Is there an implication is that the infrastructure will be second quarter margin will be probably a little lower than the first quarter?

Yes, that's potentially due to some of the seasonality.

Yes.

And one final question.

Can you talk about the impact of restructuring on the rest of quarters?

We got a $0.05 in this quarter.

How much is left for the rest of the year?

From a restructuring standpoint as we pointed out we will have an additional $5 million.

I would imagine the first quarter, in which we added $39 million, that will continue to ramp up each consecutive quarter.

I would expect $1 million plus in the second quarter and a couple million more in the opposite quarters going forward.

What about those restructuring charges?

Eli we are still going hit the 165 I would say.

We were anticipating to have a little bit more of those costs in the second quarter but given some of the delays with some of the issues in Europe some of those costs are left in the third quarter.

I'll have Quynh get back to you.

$5 million in the first quarter.

Is that similar to the second, third and fourth?

How much more -- trying to get the impact per quarter is all.

I don't have that with me right here.

Eli, I can follow-up with you on that offline.

No problem, thank you.

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

Hi, guys, good morning.

How are you doing Adam?

Good.

I was wondering if you could talk about the increase of the organic revenues growth outlook for the year -- where are you guys feeling better about the business and the full year outlook it seems to have encountered some of the bigger picture macro indicators that we are seeing a little bit of softness.

Where are you feeling better about the markets and then about Kennametal's own execution?

Yes, Adam, we basically had a very good first quarter above our expectations and we really did not change much for the rest of the year from the original expectations that we had.

So we dropped all of the benefits we had in the first quarter, you know, increased that for the year.

I want to remind everyone and we talked about this in New York if you look at IPI -- our plan and our current forecast was based on continually decreased of IPI from our first quarter all the way through the fourth quarter.

And if you look at, you know, from our plan perspective the decreasing IPI from the first quarter to the forecasted fourth quarter it is like a 40% increase in IPI.

So what we are seeing in the marketplace where you have seen so far is consistent with our guidance and forecast.

But, you know, we saw better results out of Europe than we anticipated, slightly better out of North America, and the developing economies continued to be very, very strong.

Okay.

And then secondly on this -- the raw material outlook costs going up.

Could you talk a little bit about that?

And then, you know, related to that, the rare earth industry is it seems some tight supply out of China.

Is that starting to happen in tungsten now?

And then is there any concern about supply?

No, there is no concern about supply.

We haven't really seen tightening and I also remind those of you that have followed Kennametal for awhile when the raw materials when tungsten went up significantly back in 2005 through until now, we never have seen a -- never had an issue with supply.

You know, as then the primarily I would say it price increase I think there is some manipulation as, you know, in the tungsten because it is thinly traded, so it is going to moderate.

We believe that we can offset any costs of raw material increases with price increases and we are doing just that.

Could you help just quantify how much price you need to offset the material cost increases?

Is it a big number or a small number?

I would -- I mean I would say that it is probably a relatively small number.

At this point.

I'll get back in queue, thanks .

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

Thank you.

Good morning.

Good morning, Holden.

Trying to get a sense of you increased your expectations for the restructuring from $155 million to $160 million up to $165 million.

You kind of increased that number around $5 million to $10 million but you still have four plants in the process of being shut and just sort of thinking along the lines of how many dollars you saved per plant it seems like it is a pretty modest number when you consider so many plants you shut during the downturn and what your original cut of the savings are.

It seems like a relatively small number in light of the four plant that are still underway.

Want to make some comments on that?

Many so of the plants are smaller obviously and depending on the quarter when they actually close some of those benefits could spill in the next fiscal year.

The number could be higher, just you are not going to get it all during fiscal 2011.

Right.

And back to the pricing question, if I could -- I think historically you tried to make it your policy that your first goal is to offset raw material increases with productivity and to the extent that you can't do the productivity then you sort of turn to the price increases.

Seems like you have been a little bit more aggressive with respect to price increases and getting great productivity gains but sort of going to the price well like a lot of companies have been doing a bit.

Have you kind of changed the philosophy about pricing and if you have what is behind that?

Is it greater capability on your part to market or things like that?

Actually we had maintained our philosophy is a little different than you mentioned.

It has been that we for the last five years that we want to offset the raw material with police increase and we always say it takes us about 12 months to do that.

And as you know with our philosophy, our productivity -- we want to keep that productivity, to be honest with you, so nothing changed.

I mean I think we are still operating in -- within that philosophy.

I think you are correct in your in your assertion that we have been effective in realizing the price in the marketplace.

I should mention that we have had now seven years of new products, sales from new product to be about 40% of our total sales.

So that is paying off good dividends because the new products come with higher productivity for the customer so, you know, getting more margin out of those products is not a difficult sell.

And I think that this year is turning out to be probably one of the most innovative years for us, for Kennametal.

So we are putting a lot of new products out there in the marketplace.

We didn't slow down during the recession our R&D efforts.

And I think that we are going to get a good payback from that.

Great.

Thank you.

Your next question comes from the line of Ann Duignan with JPMorgan .

Good morning.

Ingrid standing in for Ann.

Just to get back to the cost savings -- I'm assuming that this is a gross number and some of the costs will creep back into the system over the years.

Where would you expect cost increases over the next two years?

We have been consistent to say the $160 million was mixed costs.

We went to a great deal of paying to separate fixed permanent costs and temporary costs.

We said out of $160 million of fixed costs which is now $165 million, and $30 million of temporary costs that would come back to the business and those costs are at this point in the run rate all in.

This is 20 plants that disappeared.

They are no longer here.

That cost cannot come back to the business.

That cost is gone.

Okay.

Versus the temporary costs we talked about which is cutting expenses, you know, not traveling, taking furlough, temporary salary cuts, all of those are in.

But this -- the 20 plants are gone.

We are not going to have them any more.

That production has moved into current facilities, current square footage that we have that brings the benefits additional benefits because of absorption and things like that.

Okay.

So I mean volume increases could it is like other costs, but the costs that you have taken out will not come back in?

The only thing you have is the typical variable costs associated with sales person commissions, freight and duty.

Raw material.

And just to go back to a prior question.

You know, for the charges by quarter, we have $4 million on the first quarter.

Probably going to go to about $8 million in 2013 and then the remaining $11 million or $12 million in the fourth quarter just to help you guys with the charges in that quarter.

Great, thanks.

On the share repurchase program, I just I wanted to clarify this is to offset equity dilution.

It is not a signal that you are deemphasizing acquisitions in any way?

Absolutely not.

This is 100% to offset dilution.

Have you started repurchasing at all?

We cannot.

We now have blackouts that we have to follow SEC rules.

Okay.

So we just got the board to approve it.

And Carlos pointed out we're in the blackout period, so.

Okay, so you're still in the blackout.

Right.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Walt Liptak with Barrington Research.

Thanks, good morning, guys.

A good quarter.

How are you doing?

Good.

Good to hear that you are steadfast about the costs not coming back.

And I wanted to ask about, you know, as business starts to improve, could there be costs that come in that are like incremental to R&D or new product or market share and things like that?

I think we would like to see the returns get to that 15%, you know, before doing that I wound hear your outlook is for incremental growth-related spending?

I mean I think that we never, relative to R&D, as I said we never slowed down our investment in R&D.

As a matter of fact, you were at the Chicago IMTS show and you saw the number of new products that we had there which I would consider massive new product introduction.

Nobody in the show had that level of new products out there.

I don't see us needing to increase that especially because the environment is going to get better.

Well, the only thing I would add, I think with the new structure, I think there is a number of opportunities that we still have on the table of the combined, all the integrated supply chain and we have better global visibility with the financial function versus the way it was in the past.

You have this great matrix organization and they could allow if costs -- if some department would need to invest in R&D, we are able to find it in another.

So we are able to off set any growth with the opportunity we have in this model.

Good.

On the guidance I was a little bit surprised that you took up guidance -- you know, I'm glad you did but a little bit surprised.

What changed from when you gave your guidance three months ago for the year?

Was it that everyone was worried about the sovereign debt and then the first quarter came through without much of a slowdown in Europe?

And you mentioned cost outlook, you know, what improved?

I will let Frank get up there.

I mean, from my comment -- we experienced a more top line growth than what we anticipated and, you know, our restructuring benefits came in at a better than we anticipated.

I think, Walt, too, remember when we -- when you are doing your plan, you know, like in June, July of last year there were still a lot of talk of double dip, a lot of concerns out in the marketplace and it is always try to -- very difficult at the June 30 year end to try to predict the new calendar year for fiscal 2011 and I think a lot of companies have the similar issues.

Going through the guidance and we had expectations that if it happened and we needed a little more time.

We just recently did a bottoms up forecast and as a result of that forecast we felt that much better and hence we pick up the number.

Got it.

Thanks very much.

The next question comes from the line of Henry Kern with UBS.

Good morning, Eric Crawford on for Henry.

Good morning.

Hi, good morning.

Hi, good, thanks.

Can you talk about how NVIDIA performed in the quarter?

Is it still 10% of the portfolio and what share of the portfolio is embedded in your guidance for the full year?

You know, it is still 10% of our portfolio.

I think that the -- we performed better than our expectations and we believe that we will continue to perform better.

We introduced the brand at in the US at IMTS in Chicago and to be honest with you, it drove a tremendous level of interest.

As a matter of fact, as I said earlier, we had five times more leads, this IMTS than we did in 2008.

And actually I'm just leaving tomorrow morning first thing in the morning to Japan to go to JIMTOF, which is the IMTS of the Asia Pacific.

And we are introducing and launching the NVIDIA brand there for Asia.

It is exciting and going to continue to grow and to grow.

We anticipated when we started it is probably going to continue to be 10% of our -- of our total sales because we expect the Kennametal business to grow just as much.

Okay.

That's helpful.

And then on the M&A front -- could we get an update as to what you are seeing there?

Are you seeing expectations relative to pricing get more attractive?

Yes, I mean we are -- we have a healthy pipeline at this point.

I think that we continued throughout the recession to talk to potential candidates and to build relationships.

I believe the companies that we have an interest in and fall within our guidelines and as you know we have been pretty disciplined about that, still have an expectation of a higher value than what they can get for it now.

So, you know, it is -- I don't know when that is going to change but it could change soon.

But we have a number of companies that we feel are very close from our relationship and knowing what they want and negotiating with them and they continue to see that, you know, they are trying to see what the economic condition is going to do and see if they can -- when is the right time for them to sell.

So there is still a little bit of hesitation out there in the marketplace.

Okay.

Thanks very much.

Thank you.

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

Good morning, everybody.

How are you doing, Andy?

I'm doing fine, thanks, Carlos.

I jumped on the call a little late so I apologize if you addressed this question.

But the gross margins suggest fairly high capacity utilization.

Is that a part of it in addition to the productivity gains that you talked about and if so does the capacity utilization some what limit the ability to flex the SG&A line?

Hi, Andy.

I wouldn't say it is a high capacity utilization.

I think there is a period we go through in the first quarter has obviously some seasonality.

I don't see any issues there.

I mean as we said if you look at our run rates, you know, we are running at $2.2 billion type of run rate.

Our capacity at this point is about [$3 billion] so.

I'll follow up then later on.

Thank you.

Thanks.

There are no further questions at this time.

I will turn the conference back over to Ms.

McGuire for any closing remarks.

This concludes our discussion.

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

Thank you for joining us today.

This concludes today's conference call.

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