Kennametal Inc (KMT) 2014 Q4 法說會逐字稿

Good morning, I would like to welcome, everyone, to Kennametal's fourth-quarter FY14 earnings call.

(Operator Instructions)

Please note that this event is being recorded.

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

Thank you, Denise.

Welcome, everyone.

Thank you for joining us to review Kennametal's fourth-quarter and FY14 results.

We issued our quarterly earnings press release earlier today.

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

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

It is also being broadcast live on a website and a recording of this call will be available on our site for replay through September 2, 2014.

I'm Quynh McGuire, Director of Investor Relations for Kennametal.

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

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

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

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

The discussion we'll have today contains comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements.

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

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

This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G. This 8-K presents GAAP financial measures that we believe our most directly comparable to the non-GAAP measures, and it provides a reconciliation of those measures as well.

I'll now turn the call over to Carlos.

Thank you, Quynh.

Hello, everyone.

Thank you for joining us today.

During the June quarter, we saw accelerated growth and ongoing strength in our served industrial markets.

However, certain sectors remain as challenging.

While transportation and general engineering benefited from higher volumes in both direct and distribution channels, underground mining activity declined further as additional US mines closed.

Growth construction projects also got a slow start this season with weather conditions, but have increased in recent months.

On a more encouraging note, relative to our infrastructure business, the energy sector showed further improvement in demands.

Our June quarter sales for the total Company increased 15% from prior year with organic growth of 5%.

By comparison, when IHS adjusts its estimate to the weighted average specific to Kennametal's markets and geographic mix, it shows relatively little growth from the prior year.

This points to mix conditions in our infrastructure markets with further weakening in underground mining, but improving demand trends in road construction and energy and an overall basis, that indicates our business out paced IPI, validating Kennametal's ability to deliver growth at 2 to 3 times the IPI over the economic cycle.

From a macro perspective, IHS estimates that global IPI increased by 3.6% for the June quarter.

Our industrial segment, which typically has a strong correlation with the index reported total sales increase of 15% year over year with a 8% organic growth in the quarter.

So, our industrial business outperformed that index as well by more than 2 times.

We expect to build on that trend as the demand cycle improves.

In addition, we continue to leverage our indirect channel strategy through both Kennametal and Widia brands.

This strength is reflected in our distribution sales growth of 9% for the June quarter and 8% for FY14.

Clearly, we are increasing our presence in industrial distribution channels, and reinforcing our market-leading technology capabilities.

For FY14 we remain sharply focused on maximizing our sales, margins and cash flows while investing selectively to develop our business.

Even though we haven't yet realized the full potential of our operating leverage, we protected our profitability and, on an adjusted basis, delivered double-digit operating margin again this year.

Also, we generated free operating cash flow of $156 million and continue to actively manage our balance sheet.

Profitable growth is a priority for Kennametal and acquisitions have been an important part of our strategy.

We have made substantial progress in the integration of TMB, our Tungsten Materials Business.

We continue to consolidate and combine the best of both businesses, including our product portfolio, facilities and headcount.

We are pleased with the progress.

Our integration plan is ahead of schedule.

As part of our portfolio initiatives, we divested Garryson brand products in June to ATI Group, a long-time Kennametal supplier.

The sale included non-core products that were part of TMB's Stellram business and a plant located in Ibstock, UK.

The divestiture allows us to focus on our core competencies and allocate resources to leverage value-added high-tech strengths.

Regarding our previously announced restructuring initiatives, we still expect to deliver annualized savings in the range of $35 million to $45 million when completed.

Additionally, innovation has always been a key competitive strength for Kennametal.

During the quarter we received industry recognition for our innovative culture.

We were named, for the second consecutive year, the CIO Magazine's CIO 100 Awards.

Kennametal was honored as one of the top innovative companies that effectively used IT to create business value.

We achieved this ranking due to the launch of our Knowledge database named NOVO.

This is a world-class technology solution unique in our industry and designed to accelerate productivity for our customers in they're manufacturing process.

Now, I would like to give an overview of the trends we are seeing in our marketplace.

In general engineering, customers are typically distributors or job shops involved in the manufacturing of machinery, industrial equipment and fabricated metal products.

Capital equipment spending is projected to grow about 5% annually in 2014 and 2015.

In addition, more distributors are implementing eCommerce platforms to allow for seamless buying cycles.

As e-channel presence in B2B capabilities continues to grow, Kennametal's NOVO Knowledge Solutions will provide increased options and productivity for customers.

In the transportation market, auto makers in the US are planning fewer shutdowns and in some cases eliminating shutdown this summer due to strong sales.

Currently, 2014 light-vehicle production is estimated to be 5% higher than prior year.

The key drivers of growth include the record age of the fleet, which is averaging about 11.4 years, low interest rates and a relatively stable fuel prices.

Looking ahead, fuel economy and emission regulations are fostering industry investments in downsizing of engines, enhancing automatic transmissions, light-weighting of vehicle structures, and producing alternative powertrains.

In addition, the market for commercial trucks should continue to grow over the next 12 to 18 months.

In aerospace, commercial aircraft should continue to expand in the coming months.

Airbus and Boeing are both planning increased production of respective A350, A380 and 787 aircraft.

At the Farmborough air show earlier this month, orders and commitments reached a show record of $201 billion, a positive sign for commercial aerospace globally.

By contrast, the defense sector is expected to be lackluster, since current estimates of military spending by NATO and EU countries indicate an increase of less than 1% for 2014.

In earthworks markets, while the Energy Information Administration reported that US coal production grew slightly, more than half of that production came from the West.

Coal stockpiles have decreased due to the extremely cold winter weather and production should increase by approximately 3% for 2014.

However, the Central Appalachian mines are forecast to remain weak and decline as much as 8% for the calendar year.

In road construction, the current-year season started slow due to unfavorable weather conditions.

Road activity has been increasing sequentially as various state governments were proactive in funding repair and maintenance work.

In the months ahead, certain states may delay longer-term projects if funding for the Federal Highway Trust Fund is not in place before Congress goes on recess.

In the energy sector, US recounts are expected to be positive in 2014, but Spears and Associates is forecasting a reduction for 2015.

On the other hand, international drilling of new wells is projected to increase of 4% for 2014 from a year ago according to Spears.

We view this as an encouraged leading indicator for Kennametal, since our business has a higher correlation to drilling activity for oil and gas wells.

Separately, IHS predicts that the recent price strength of natural gas will likely renew the interest of gas-focused investment such as pipeline development.

While there is technically ample natural gas resources, challenges remain with adequate infrastructure delivering resources to the end markets, new gas processing and interstate pipeline projects to help relieve supply bottlenecks in last winter.

Overall, the global environment reflects a gradual acceleration in economic activity.

Of course, the pace and scope of recovery has been tempered by persistent uncertainties in the geopolitical and financial climates.

As a result, we expect that customers will continue to be cautious in their spending.

At Kennametal we are dedicated to serving our customers, and our business is well positioned for that.

We will maintain our focus and continue to make smart choices to manage risks and capitalize on opportunities.

With that end, we have made the necessary investments in sales and other customer-facing functions in the past year.

Know that we will execute the plans that we have outlined and tightly manage the cost structure to deliver our margin commitment.

Now, I'll turn the call over to Frank, who will discuss our financial results in greater detail.

Frank?

Thank you, Carlos.

As with prior discussions, some of my comments are related to non-GAAP measures.

Let me start by saying that the June quarter did not turn out as we had anticipated.

There were a number of factors that led to the difference in our results versus our previous guidance, and I'd like to discuss those items before we go into greater details of the quarter.

The first, on a positive side, we saw strong organic growth, as expected, in our industrial business, and that was driven by increased demand in transportation and general engineering.

Also, the indirect channel continues to show high levels of activity.

We delivered three consecutive quarters of solid growth in the industrial segment.

The two acquisitions we made in FY14 are on track to deliver significant savings over the next couple of years.

For the June quarter, the TMB acquisition, that we started last year, contributed earnings of $0.03 per share.

Also, we accelerated restructuring actions and divested a non-core business for $10 million net proceeds.

This reduced our manufacturing footprint by another location.

Our infrastructure business, as Carlos mentioned, continued to be challenging, primarily due to lower than expected growth in the mining sector.

Slowing conditions globally and additional US mine closures resulted in further declines from the prior year as well as sequentially from the March quarter.

The visibility on customer demand going forward remains limited.

In road construction activity in the US trended below our forecast due to a later start in availability of funding from certain states, however there was a sequential pickup from the March quarter.

Therefore, lower sales volumes and related product mix in the infrastructure segment had an unfavorable impact on the segment margin compared to our expectations.

In addition, we felt it appropriate to lower production activities and reduce finished goods inventory given the demand trends in the quarter.

This led to an unanticipated year-end LIFO adjustment and also negatively affected margin performance compared to our prior forecast.

Lastly, operating expenses increased in the June quarter compared with the prior year due to our higher employment costs as well as expenses related to prior investments in sales and customer-facing functions.

Regarding the acquisition of our Tungsten Materials Business, we are generally ahead of schedule on our integration plans.

We also accelerated restructuring actions during the June quarter, which I will get into more detail later.

As I previously discussed, we divested of non-core business that was previously part of the TMB acquisition for cash proceeds of approximately $10 million.

When taking into account acquisition growth, we achieved sales of $772 million.

The trend of year-over-year sales growth, which began in the month of September, continued during the June quarter.

As a result, we realized organic growth for the third consecutive quarter.

Our organic growth was led by strong demand in transportation and general engineering businesses, which tend to be early cycled markets.

Our industrial segment delivered 8% organic growth in the quarter.

In the infrastructure segment, our mining business remains challenging, and highway construction activity is lower than expected.

However, order activity for the energy business continues to improve and showed signs of further growth.

June-quarter adjusted earnings per share were $0.75.

Now, I'll walk you through the key items in the income statement followed by our outlook.

Our sales for the quarter, as I said, where $772 million and this compares with $671 million in the same quarter last year.

Our sales grew 15%, reflecting an 11% increase from TMB and a 5% organic growth, partly offset by a 1% decrease from fewer business days.

Turning to the sales performance by segments, our industrial segment had sales of $416 million an increase by 15% from the prior-year quarter due to 7% growth related to the TMB acquisition, 8% organic growth and 1% increase due to fewer FX exchange issues, partly offset by 1% decrease from fewer business days.

If you exclude TMB, our sales increased by 11% in transportation, 9% in general engineering, partly offset by 1% decline in aerospace and defense.

The transportation market benefited from increased demand in light-vehicle markets worldwide, and general engineering increased due to continued demand from distribution channels.

Sales increased in all geographies.

On a regional basis, and also excluding the acquisition, industrial sales increased 15% in Asia, 6% in the Americas and 4% in Europe.

Our infrastructure sales came in at $357 million in the June quarter.

That was up 16% from the prior year, and that was driven by 15% growth related to the TMB acquisition and 1% organic growth.

Excluding TMB, our sales increased by 10% in the energy markets largely offset by a decrease of 9% in earthworks.

Energy sales continued to improve year over year reflecting improving demand from oil and gas drilling activity coupled with continued gains in process and wear applications.

Earthworks sales decreased due to persistently weak underground coal and surface mining markets globally, as well as lower road construction activity.

On a regional basis and excluding the acquisition, infrastructure sales grew 2% in Europe and held relatively steady in the Americas and Asia.

Now, a recap of our operating performance.

Our gross profit margin was 32.7%, which included the TMB operating results and nonrecurring charges.

Excluding the impact of these items, our adjusted gross profit margin was 34%, which is relatively similar to the prior year.

The gross margin benefited from the organic sales growth, but this was offset by lower fixed cost absorption, inventory reductions and the mix in our infrastructure segments as well as higher employment costs.

Our operating expenses increased $22 million, year over year.

Excluding the acquisition of TMB, our results and nonrecurring charges, our operating expense was $9 million higher year over year, primarily driven by higher employment costs.

Our operating expenses as a percent of sales was 20%, and excluding TMB our operating expense as a percent of sales was 20.3% compared with 19.8% in the prior-year quarter.

The additional spending represents strategic investments we made earlier in the year related to headcount, productivity and growth.

Operating income was $78 million compared with $91 million in the same quarter last year.

Excluding nonrecurring charges and the results of TMB, adjusted operating income of $90 million was relatively flat to the prior year as the organic sales growth was offset by lower fixed costs absorption and mix in the Infrastructure as well as higher employment costs overall.

Our operating margin was 10.1% compared with an operating margin of 13.5% in the prior year, and adjusted, our margin was actually 12.9% in the current-year quarter.

Operating income performance by business segment now.

The industrial segment's operating income was $53 million compared with $62 million in the prior-year period.

Excluding nonrecurring charges and the result of TMB, adjusted operating income of $64 million benefited from organic growth but was largely offset by higher employment costs primarily in market-facing areas.

Industrial's adjusted operating margin was 16.5% compared with 17% in the prior year.

The infrastructure segment's operating income was $27 million compared with $30 million in the same quarter of the prior year.

Excluding nonrecurring charges and the results of TMB, the adjusted operating income was also $27 million.

Operating income and margin were impacted by lower fixed-cost absorption and mix.

The infrastructure adjusted operating margin was 8.8% compared with 9.7% in the prior year.

Our interest expense actually increased $1 million year over year on the June quarter to $8 million.

The increase was due to higher year-over-year borrowings related to acquisitions.

Our liquidity remains strong.

We had $287 million outstanding on our $600 million revolver as of June 30, 2014.

Our nearest debt maturity is April of 2018.

Reported effective tax rate was a little higher than typical at 30.5%, and this compares with 23.9% in the prior-year quarter primarily driven by the TMB restructuring charges in tax jurisdictions where tax benefit is not permitted for these charges.

Excluding TMB and the non-recurring charges, the effective tax rate for the Kennametal base business was 25.4%.

As we highlighted in the table in the press release, are reported earnings where $0.57 and this includes the TMB base operating income contribution of $0.06 per share, $0.03 charge related to the TMB depreciation/amortization step up for purchase accounting, acquisition related charges of $0.02, restructuring and related charges of $0.17 and a the loss on the divestiture of the business that we sold of $0.02, representing the adjusted earnings per share of $0.75.

Turning to cash flow, year-to-date cash flow from operating activities was $272 million compared with $284 million in the prior year.

Our net capital expenditures were $116 million compared with $80 million in prior year.

Free operating cash flow for the year was $156 million compared with $204 million in the prior year.

Free operating cash flow was impacted by higher working capital needs related to the TMB acquisition.

We remain diligent in our focus on generating strong cash flows and are committed to our capital structure principles.

Our balance sheet remains in very good shape.

At June 30, 2014 we had $80 million in short-term borrowing and total debt was approximately $1 billion, and our cash was $178 million with the majority presiding overseas.

Net debt was $884 million at June 30, compared with $371 million in the prior year.

The increase primarily driven by the Tungsten Materials Business acquisition.

Our debt-to-cap ratio at June 30 was 35.1% compared with 29.2% at June 30, 2013.

As an update on our out acquisition of the Tungsten Materials Business, the integration has been progressing very well overall.

Effective July 1, the entire TMB organization has been operationally integrated within the Kennametal structure.

The integration team continues to successfully drive critical work streams to ensure a smooth transition and is currently progressing ahead of schedule.

In May, the first phase of SAP implementation was completed.

It went well globally.

The next phase of SAP will occur in August, and we expect to be fully done with the systems implementation by December of 2014.

We believe that our combined organizational structure and our go-to-market strategy will drive future value to the enterprise.

The impact of the TMB ongoing operations in the June quarter, as I said earlier, was $0.03 accretive.

That consisted of a $0.06 per share base operating income and a $0.03 impact related to the depreciation and amortization step up related to purchase accounting.

As I also mentioned, we did complete the sale of a small non-core business that we acquired as part of the TMB acquisition, and the cash proceeds at divestiture were approximately $10 million with a pretax loss and related charges, $1 million or $0.02 per share.

Also as we previously outlined, restructuring actions that we expect to complete by the end of FY16.

We have estimated pretax restructuring charges of approximately $50 million for all of these initiatives.

During the June quarter we incurred $14 million of restructuring charges, or $0.17 per share, and realized approximate $3 million benefits year to date.

To date, through these restructuring initiatives, we have reduced our footprint by four locations with three facility closures and one divestiture.

As we previously stated, we expect to generate annual savings of approximately $35 million to $45 million once these initiatives are fully implemented.

As a reminder, they consist of concentrating our footprint by consolidating operations and driving productivity improvements with standard processes, reducing administrative overhead, and leveraging our global supply chain, including raw material costs, procurement and streamlined manufacturing and distribution.

For FY15, our outlook reflects ongoing market uncertainties as well as limited visibility related to customer demand trends.

Our current assumptions include expectations of continued macroeconomic improvement driven primarily by our industrial end markets.

While underground coal mining activity will likely remain at relatively low levels globally, we believe manufacturing activity is projected to grow over the next 12 months.

Given these factors we expect our organic sales growth to range from 3% to 5%, and total sales to grow between 5% and 7%.

Our FY15 outlook is based, in addition, on the following assumptions.

For projection 3% to 5% organic growth.

This forecast is based on expectations that demand momentum will continue in our industrial end markets, while infrastructure markets remained mixed.

We are committed to maintaining our operating expenses at 20% of sales and demonstrate our ongoing cost discipline.

We have already made investments in the prior year to expand our sales force and customer-facing functions.

In FY15 we are focused on attaining the full potential from the resources that we added previously.

I also need to point out that our guidance includes approximately $15 million to $20 million of higher incentive compensation than the prior FY14.

This assumes that incentive compensation to be fully restored to levels in FY15.

Restructuring benefits from the combined businesses, including TMB, are estimated to be approximately $20 million in FY15 with approximately 40% of savings expected in the first half and the remainder in the second half of the fiscal year.

Our effective tax rate for 2015 is forecasted to be between 26% and 27%.

Additionally, we're expecting the September quarter will actually have a higher tax rate than the full year.

The year-over-year increase in the tax rate is party driven by a more unfavorable geographic mix in FY15.

It is also partly due to certain favorable IRS provisions that expired, such as the RD&E tax credit as well as other items related to the taxation of international income.

If these are extended, these benefits would lower our effective tax rate, but are not currently factored into our guidance.

We will continue to look for ways to balance our geographic presence and minimize our tax rate.

Earnings are expected to be somewhat lower than historical season patterns with approximately 35% to 40% of earnings in the first half and 60% to 65% in a second half of the fiscal year.

Note that the second half of the fiscal year is expected to benefit from the increased restructuring savings.

Consistent with our capital allocation principles, we plan to reinvest back in the business between $110 million to $120 million of capital spending.

This is in line with our historical trends of spending 3% to 4% of sales on capital expenditures.

Based on these highlight factors, we expect EPS to range from $2.90 to $3.20 in FY15, and this guidance includes the contribution from TMB.

Turning to cash flow we expect to generate, from operating activities, anywhere ranging from $290 million to $320 million in FY15.

Based on our anticipated capital expenditures of $110 million to $120 million, the Company expects to generate between $180 million and $200 million of free operating cash flow for the fiscal year.

This level of free operating cash flow represents 79% of net income, working toward our long-term objective of realizing 100% conversion from net income.

We will continue to manage our business for the factors we can control to deal with in the near term as well as market headwinds as needed.

We are focused on protecting our profitability as well as maximizing our cash flows and returns.

We will remain focused on many growth opportunities and our consistent execution of our strategies.

Now, I'll turn it back to Carlos for a few closing comments.

Thank you, Frank.

As we go forward, we will continue to leverage digital technology, such as our NOVO platform, to better serve customers and drive growth.

We will execute strategies that are consistent with our long-term growth goals, while maintaining a sharp focus on profitability.

We will seek to maximize growth in top-line earnings and cash flows.

At the same time, we will further balance our global presence to generate revenues in equal turrets from North America, Western Europe and rest of the world regions.

We will also diversify our served end markets and business mix to lessen volatility throughout the economic cycles.

As always, we will seek to protect our profitability and elevate our base performance.

In addition, will streamline our cost structure and balance our global manufacturing footprints to better serve shifting demand patterns.

Along those lines, we'll continue to integrate the Tungsten Materials Business and implement restructuring initiatives to deliver promised costs savings.

We will continue to manage our business and control what factors we can.

As we enter FY15, we believe that Kennametal is well positioned and we are cautiously optimistic that the global economy will continue to improve.

In the meantime, Kennametal has an excellent business model and a management team that is committed to disciplined operating principles.

Thank you for your continued support.

We will now take questions.

Thank you.

(Operator Instructions)

Samuel Eisner, Goldman Sachs.

Maybe you can talk a little bit about the cadence of, particularly, industrial growth throughout the quarter.

Curious how that moved, particularly in June.

Then also, what are the early looks that you're seeing on July?

Well, let me start and Frank will pipe in.

I think as we said earlier, we are being consistent growing to 2 to 3 times the IPI.

The IPI health -- when we look at the IPI forecasted it is consistent.

Again, the thing that makes us excited about the industrial growth is the fact that we see some really positive numbers out of the distribution, which is typically a leading indicator for us.

So, it really is showing us that the industrial, the strength, is going to continue forward.

Yes.

Sam, I'll add, I think it got progressively better throughout the quarter, April, May and June.

June obviously is a key month for us.

That came in as expected.

I think there's two factors.

I think there was probably some pent-up demand from the prior quarter, but our own internal initiatives by focusing on the fill rates and as Carlos mentioned, on the indirect channel.

The indirect channel was up 9%, again, which is very strong.

I think there's a nice correlation now in the industrial side with the fill rates for our high movers, the As, the Bs in the First Choice program.

But I think our distributions -- distributor and our customers are more comfortable now.

So we like that trend.

I think on the industrial side, that's carrying through into July.

Understood.

Then you mentioned that, I guess, you did your own destocking this quarter.

What were production rates on the infrastructure side throughout the course of the quarter?

How do you see that playing out through both the first and second half of next year?

Yes.

If I had -- it is like a tale of two segments, right?

Where we have probably high 70%s close to 80% on the industrial, with much lower ones on the infrastructure side.

We took $10 million of finished goods out, as well as some raw materials.

That had about a $2 million impact just on the reduction of inventory in Q4.

Then just lastly in terms of restructuring, I believe if you're going to spend about $50 million in total, I believe you have about $30 million remaining through FY16.

Is that all expected to go in 2015?

How do you see that playing out over the next three years?

I would say, Sam, what we are trying to do here, we're going try to front load and get this thing done.

I probably would say two-thirds of the cost will happen in the first half, with one-third in the second half.

I would say we'd be about 95% done.

There could be a small spillover, the way we have it laid out now.

But obviously, we're going to try to get it all wrapped up, the cost in this year, as much as we can.

So small carryover potentially into the following year.

Great.

Thanks so much.

Julian Mitchell, Credit Suisse.

This is John Shaffer for Julian.

I was just wondering if you could talk a little, just longer-term as to when the balance sheet moves into a position where you begin to consider more buyback or acquisition?

If there's some kind of internal target, debt to cap at 30% or 35% that you are looking at?

Yes.

I think our long-term goal is always to maintain.

We go back to our capital structure principles, where we want to be maintaining our investment-grade rating.

That 30% to 35% is probably in the sweet spot.

At times like we are at right now, we will go a little bit higher.

As we continue to generate cash, we will pay down debt.

I think the near-term focus is on debt reduction.

I think that needs to be front and center.

Then as that comes back in line, we'll look at the performance.

We'll evaluate the other options available to us from a balance sheet perspective.

But that's the main focus right now is debt reduction.

Then we will evaluate as we continue to try to increase our cash flow to see what other opportunities we can do.

Sure.

Then just as quick follow-up.

As cash flow comes back up and the debt goes down, are there any particular -- if you were to pursue acquisitions as opposed to buyback or increasing the dividend, are there any particular areas that you think you would continue to focus on?

Yes.

Our focus continues to be on the components business, investment castings and bolt-ons just like TMB, if we have an opportunity to get more.

So the strategy is consistent to the strategy that we've been executing.

In the industrial space, there is a lot less available than -- there's been a lot of consolidation in the past decade in the industrial space.

So the opportunities really lie more on the infrastructure side of the business at this point.

Thank you very much guys.

Eli Lustgarten, Longbow Securities.

Can we talk a little bit about the two sectors separately as far as 2014 and how you're looking at them in 2015?

In both cases, it looks like the contribution from TMB was less than I had expected versus that at $72 million I guess, it was probably a little I didn't expect.

When we talk in the industrial sector, what's going on, with 3% to 5% organic growth rate for 2015, I assume that the industrial sector you're projecting is in the 7%, 8% or some number like that for 2015?

Will margins be similar in 2015 to 2014, or are you expecting improvement in profitability in the industrial sector?

We are definitely expecting improvement in both businesses.

Then Eli, to the organic -- yes, you're right, directionally, we expect the industrial to be quicker and grow stronger based upon what we've seen.

Then we expect the infrastructure to continue to lag, given the underground mining application.

Then we're trying to make sure that we leverage the business and the service opportunities or international markets, because we expect the US to be flat for awhile to down, then eventually the international market's picking up a little bit but offsetting other parts of the business.

Without getting into the specific numbers, we expect industrial to be stronger than infrastructure.

We expect profitability to be up.

I'm sure there was some impact on the TMB from a sales perspective.

As far as we know, nothing unusual.

The profitability of that base business, which is in the -- if you take out the D&A has about 11.8% profitability.

As we continue to get some additional synergies, related to the restructuring activities, we divest that underperforming business, we like the direction for the industrial business.

Eli, I would tell you that this is consistent with historical parts of the Company.

Our industrial business has high highs and low lows.

Our infrastructure business doesn't moderate at high highs and low lows.

So what we're seeing right now is very consistent.

The industrials come from a very low base.

It is going to grow and accelerate faster than the infrastructure.

Yes.

Let me put his out, you're expecting positive organic growth in infrastructure in 2015?

Yes, slightly.

Very slightly.

So most of your growth is coming from industrial.

You have respectable margins in industrial, so you're getting better.

Do you think that it will be enough positive trends to give you modestly a bit of margins in infrastructure in the second half in 2015?

Or are we talking about very similar profitability?

Would the volatility be more level?

Or is it going to be all over the place again?

Again, that's tough to answer all over the place.

I mean, it's tough -- it's definitely going to be modestly better from what we had this year.

[I like that.] The 12-month number for TMB was what about -- a little under $200 million?

Yes.

-- or so.

I think it is what the 12- month -- the numbers look like.

How much do we -- do we expect to get for -- what kind of growth do you expect out of TMB for 2015 versus 2014?

Yes.

The number I think was $186 million-ish, which was in there.

It's tough -- as I said in the update, we've integrated these two pieces into the respective businesses.

So it is going to get tough to track and say, hey, we know the TMB sales were this.

So if we're selling to Baker Hughes, was it a legacy Kennametal sale or was it a TMB sale.

So it's going to be challenging, that's why we try to give it to you both organically.

We're going to provide the synergies going forward, but when you're integrating the business, it becomes too hard to pull it out.

I think it is going to be consistent with the Kennametal base business.

Yes.

This is a mini Kennametal when you really think of it.

Yes.

All right, thank you very much.

Thank you, Eli.

Adam Uhlman, Cleveland Research.

Could you talk to your price realization expectations, as well as material cost expectations for this coming year?

Yes.

If we bifurcate the number, I would say in total it will be slightly positive with maybe around 1% in industrial and slightly negative in infrastructure.

So I think it's the way it's planned out right now.

Then as far as, I'll call it, raw materials, with the biggest being the tungsten.

That's been relatively stable to down slightly.

So there could be, if it stays this way, maybe a little bit out a little bit favorability, potentially with some raw materials.

But right now, that's looking like pretty good shape.

Yes, the raw materials will be consistent with the level of growth.

If we grow at the -- if the economy's going to grow at the projected rates that we have, we'll probably stay the same and/or slightly better.

If all of a sudden, we see a higher demand than that will change little bit.

Okay, got you.

Then I was wondering if we can dig into the industrial segment performance in Asia, the 15% growth is pretty strong.

I'm wondering what your conviction is and maintaining a decent level of growth going forward.

Many markets in China, starting to weaken quite a bit, maybe you could discuss that a bit?

Yes, I think if you go back a year, a year-and-a-half ago the strength was coming from the infrastructure.

In other words, the Chinese Government was building on infrastructure because the rest of the world industrial markets were weak.

They were trying to get more of a domestic consumption going.

I would anticipate that the infrastructure related businesses will not be -- the growth would not be as higher; however, the industrial -- the manufacturing sector is going to grow.

It looks like it is going to grow in the double-digit area going forward.

Okay.

Thank you.

Andy Casey, Wells Fargo Securities.

On the FY15 outlook, could you repeat -- I couldn't scribble down fast enough, is the $20 million restructuring, is that a cost headwind or a savings?

Savings.

The restructuring -- I called the restructuring benefits I said for the combined, those were approximately $20 million in our 2015.

Okay.

So when we look at 2015, that is largely being offset by higher incentive comp.

Then outside of that, what are you including for TMB accretion?

You can obviously look to the fourth quarter and try to get a run rate off of that.

As I said earlier, Andy, it is kind of integrated into the both businesses.

But we expect it to be pretty much inline with our overall margin contribution for the total Company.

Similar.

Okay, thanks.

Then on the infrastructure, first on the flattish outlook, you mentioned some concern about road building, continued mining weakness, what are you looking for in the other pieces of that business?

We have surface mining, foundational trenching work and a couple other areas.

The construction business -- the highway construction, it was up.

It grew sequentially nicely, it was down a little bit but that should pick up here into the September quarter than we had in the prior.

So that will offset I think a little bit of it.

Then it's us really looking at other areas within the underground mining area, not just focused on underground mining, but getting it to more ware applications, and coatings and a couple other areas in the Stellite materials to help us offset some of that weakness.

Okay.

Then if we can dig into the quarter little bit, the infrastructure margin performance, last quarter you had what appeared to be a positive mix shift from energy.

I'm wondering why that didn't carry through with a 10% growth that you saw in Q4?

I think you mentioned a $10 million inventory reduction, was that revenue or EBIT?

Was most of that in infrastructure or was it equally split?

Yes, the $10 million, that was the finished goods inventory reduction that I talked about with about a $2 million impact.

So, I don't know the exact percent but it is close to be 50/50 for that perspective.

But last quarter, to your point, yes, the oil and gas was up double-digits, it was quite nice.

We didn't see the same level of growth.

I think Stellite had a great quarter last time on the top line.

Then grew as well this quarter, but not as much.

There was some relatively easier comps on a year-over-year in the third quarter.

Then we had some incentive comp and some investments that we made early that cut across both businesses.

Okay.

Then you mentioned a LIFO charge in the quarter?

How much was that?

The LIFO was combined.

We call LIFO and E&O combined.

It was little less than $3 million.

Now from a year-over-year basis, it's in there, but we did not anticipate that when we provided our prior outlook.

So that was -- kind of a, I don't want to call it a non-recurring -- we typically do LIFO at the end of the year.

That kind of just -- there's a little bit of a surprise on that one.

Okay.

Thank you.

Then lastly, the customer facing headwinds year-over-year because of the investments.

Is it fair to assume that's going to dissipate beginning fiscal Q2?

Or is it more second half dissipation?

No.

We don't have -- the cost is over.

So there's no cost in 2015.

No, No.

What I mean Carlos is the year-over-year headwind?

Yes, I think your latter comment's right, Andy.

Okay.

All right.

Thank you very much.

Thank you, Andy.

Joe Tiss, BMO Capital Markets.

We've been hearing from a bunch of other companies that mining flattening out.

They are getting optimistic about the future.

I just wondered if you could give us a little comparative about what you're hearing from the customers?

Right now, as we said earlier, I think that the Appalachian region is going to continue to decline in 2015.

I think that when you look from a global perspective, we anticipate the overall mining may be flattish to slightly down.

I think that's -- we're looking at it from a production point of view, Joel.

So, I think that we have to distinguish between production and equipment manufacturing.

The equipment manufacturers may be thinking or seeing some growth in the area that eventually is a leading indicator for us that we can grow further down.

Joel, it wasn't like an accelerating decline like in 2013 versus 2014, so it is trying to find a base here.

It is maybe a decelerating decline versus an accelerating decline but at a relatively somewhat stable basis now.

Then is there any way for you to clear away some of the noise for us and give us the core incremental margins for 2014 and what you are thinking for 2015?

Say that again, Joel.

Just to clear away, like you take out the noise from the inventory reductions and the cost savings and you mentioned something about SAP also.

Just to give us what you think the core incremental margins were in the fourth quarter?

What's implied for 2015?

Are you still on track?

It seems a little bit light.

That's all, that's why I'm asking.

Yes.

It was a little bit light definitely in the fourth quarter.

But I think it would have been double-digits, if you adjust for those.

Not quite the 30% that we had in the past.

But depending -- we think the restructuring benefits and the mix we've got going into the 2015 plan, that we think the all-in independent number, it should be in the 30% to 35% range going forward.

Depending what you're starting.

I'm using a base of the $2.50 and the $0.03 accretion.

So from a $2.53 basis to the midpoint, you're in the 30% incremental margins as we get into FY15.

So it's always this consistent.

The 2015 is consistent with past experience and with the expectations.

All right.

Great.

Thank you for all the info.

Thank you.

Walter Liptak, Global Hunter.

I wanted to ask about the SAP.

If you've been able to quantify either or any of the organic volume opportunities or the cost out related to SAP?

Because we should be pretty close to getting those benefits.

Yes, I think that's the synergies we've talked about, the $35 million to $45 million.

The first wave basically in May that we did.

We'll start -- you'll start seeing a step-up in the first quarter as far as the restructuring, I think I said on the call -- in the prepared remarks, about 40% of the benefits will happen from the synergies in the first half and 60, it will continue to accelerate from where we finished for Q4.

It will step-up nicely.

We are wrapping up as we said, I think, on the last call, the closure of the Guam facility, where I believe we said that would be done by August.

That's the biggest project.

That's the combination of both facilities, as well as a lot of back-office.

So we expect to have a lot of the back-office stuff completed, hopefully, by the end of the first quarter.

Maybe some of that, spilling into the second half -- second quarter, sorry

Okay.

All right, great.

I wanted to ask about the annual -- is there an annualized incremental employment cost number?

How much have we invested in new employees?

I guess the question is, why aren't we expecting that in 2015 we're going to get more organic growth out of those employees?

As far as a certain number, I think last year, we said the investment that we were going to make was about $10 million.

But we will start seeing as Carlos said, the benefits from the ads that we had and what we talked with Andy earlier.

Then we should start to see -- we should start to get the productivity from the Novo application for our sales force.

So that should give them an added benefit or capacity to sell further.

But given the visibility, that we have in the marketplace, we feel that, hey, yes, could we do better if the market gets a little bit stronger?

Absolutely.

But where we're at this time, given the visibility in some of the mining side, this is where we landed for the guidance.

Yes.

The current guidance, the sales guidance is consistent with historicals of us growing 2 times the market.

So as Frank said, to the extent that the market gets better then we could do better.

But at this point, I think our growth is where it should be.

We've listened to some of our peers and what they are projecting for growth, it's very consistent.

Okay, great.

Okay.

Thanks for the color.

Thank you.

Steve Volkmann, Jefferies.

It is Chirag Patel stepping in for Steve here for moment.

Just wanted to circle back to, I think it was Andy's question.

Frank, you were talking about the highway construction picking up in the September period.

Just wanted to get a sense if you are assuming something for the highway built being approved or something like that?

Or could that potentially add a little upside as we look into FY15?

I would say, that could add upside.

We felt that there was some delays -- weather-related and seasonality factors that probably didn't get implemented or reflected in the June quarter.

I would agree, there could be a little bit upside into the next quarter and pending on how long the season goes relative to that bill.

We did see an uptick in this quarter in the Road Construction.

Very good.

Thanks.

Thank you.

Ladies and gentlemen, this will conclude the question-and-answer session.

I would like to hand the conference back over to Quynh McGuire for closing remarks.

This concludes our discussion today.

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